ATENEO DE MANILA LAW SCHOOL

OUTLINE ON PHILIPPINE CORPORATE LAW

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DEAN CESAR L. VILLANUEVA 2ND SEMESTER, SY 2008-2009

I.

HISTORICAL BACKGROUND
1. Ph ! "" #$ C%&"%&'($ L')* 2 S%&( %+ C%, + -'( %# %+ A.$& -'# C%&"%&'($ L') Under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion of a "corporation" in English and American law; the Philippine ommission enacted the orporation !aw "Act #o$ 1%&'(, to introd)ce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad annima of the Spanish law wo)ld *e o*solete$ +he stat)te is a sort of codification of American orporate !aw$ Harden v. Benguet Consolidated Mining, &, Phil$ 1%1 "1'--($ 2. Th$ C%&"%&'( %# L') +he first corporate stat)te, the orporation !aw, or Act #o$ 1%&', *ecame effective on 1 April 1'./$ 0t had vario)s piece1meal amendments d)ring its 2%1year history$ 0t rapidly *ecame anti3)ated and not adapted to the changing times$ /. Th$ C%&"%&'( %# C%,$ +he orporation ode "Batas Pambansa Blg$ /,( too4 effect on 1 5ay 1',.$ 0t adopted vario)s corporate doctrines en)nciated *y the S)preme o)rt )nder the old orporation !aw$ 0t clarified the o*ligations of corporate directors and officers, expressed in stat)tory lang)age esta*lished principles and doctrines, and provided for a chapter on close corporations$ orporation ode provisions apply even to corporations organi6ed )nder the old !aw$ xCastillo v. Balinghasay, %%. S 7A %%2 "2..%($ orporation

0. P&%"$& T&$'(.$#( %+ Ph ! "" #$ C%&"%&'($ L') Philippine orporate !aw comes from the common law system of the United States$ +herefore, altho)gh we have a orporation ode that provides for stat)tory principles, orporate !aw is essentially, and contin)es to *e, the prod)ct of commercial developments$ 5)ch of this development can *e expected to happen in the world of commerce, and some expressed 8)rispr)dential r)les that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world$

II. CONCEPTS
1. D$+ # ( %# "S$-. 2; Articles %%"-(, %&, %/, and 122&, ivil ode( A corporation is an artificial *eing created *y operation of law$ 0t has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may *e related$ PNB v. Andrada Electric & Eng ring Co., -,1 S 7A 2%% "2..2($ A corporation, )pon coming into existence, is invested *y law with a personality separate and distinct from those persons comprising it as well as from any other legal entity to which it may *e related$ Construction & !ev. Cor". o# the Phils. v. Cuenca , %// S 7A 21% "2..&($ Corporation is a Creature of Limited Powers 9 Except for the powers which are expressly conferred on it *y the orporation ode and those that are implied *y or are incidental to its existence, a corporation has no powers$ 0t exercises its powers thro)gh its *oard
Unless otherwise indicated, all references to sections pertain to +he orporation ode of the Philippines$ +he whole *ody of stat)tory and 8)rispr)dential r)les pertaining to corporations is referred to as " orporate !aw" to differentiate it from the old stat)te 4nown as "+he orporation !aw," or Act #o$ 1%&'$
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of directors and:or its d)ly a)thori6ed officers and agents$ Pascual and $antos% &nc. v. 'he Members o# the 'ramo (a)as Neighborhood Association% &nc. , %%2 S 7A %-, "2..%($-

!e *iano v. Court o# A""eals, -2. S 7A -%' "2..1(; Mon#ort Hermanos Agricultural !ev. Cor". v. Mon#ort &&&, %-% S 7A 22 "2..%(; +nited Paragon Mining Cor". v. Court o# A""eals, %'2 S 7A /-, "2../($

2. 1OUR CORPORATE ATTRIBUTES BASED ON SECTION 2* 2'3 A CORPORATION IS AN ARTI1ICIAL BEING ";Ability to Contract and 'ransact <( 243 CREATED BY OPERATION O1 LAW ";Creature o# the *a,<( 2-3 WITH RIGHT O1 SUCCESSION ";$trong -uridical Personality<( 2,3 HAS THE POWERS, ATTRIBUTES AND PROPERTIES E5PRESSLY AUTHORI6ED BY INCIDENT TO ITS E5ISTENCE ";Creature o# *imited Po,ers <( /. T RI-LEVEL E5ISTENCE O1 THE CORPORATION 2'3 AGGREGATION O1 ASSETS AND RESOURCES 243 BUSINESS ENTERPRISE OR ECONOMIC UNIT 2-3 7URIDICAL ENTITY 0. RELATIONSHIPS INVOLVED IN A CORPORATE SETTING 2'3 7URIDICAL ENTITY LEVEL, which views the State1corporation relationship 243 INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contract)al relationship on fo)r "%( levels= >etween the corporation and its agents:representatives to act in the real world, s)ch as its directors and officers, which is governed also *y the !aw on Agency >etween the corporation and its shareholders or mem*ers >etween and among the shareholders in a common vent)re 2-3 E5TRA-CORPORATE LEVEL, which views the relationship *etween the corporation and third1parties or ;o)tsiders<, essentially governed *y ontract !aw and !a*or !aw$ 8. T HEORIES ON THE 1ORMATION O1 CORPORATION* 2'3 Th$%&9 %+ C%#-$:: %# "Tayag v. Benguet Consolidated , 2; SCRA 202 <19;8=($ +o organi6e a corporation that co)ld claim a 8)ridical personality of its own and transact *)siness as s)ch, is not a matter of a*sol)te right *)t a privilege which may *e en8oyed only )nder s)ch terms as the State may deem necessary to impose$ c#. Ang Pue & Co. v. $ec. o# Commerce and &ndustry, & S 7A /%& "1'/2( ;0t is a *asic post)late that *efore a corporation may ac3)ire 8)ridical personality, the State m)st give its consent either in the form of a special law or a general ena*ling act,< and the proced)re and conditions provided )nder the law for the ac3)isition of s)ch 8)ridical personality m)st *e complied with$ Altho)gh the stat)tory grant to an association of the powers to p)rchase, sell, lease and enc)m*er property can only *e constr)ed the grant of a 8)ridical personality to s)ch an association $ $ $ nevertheless, the fail)re to comply with the stat)tory proced)re and conditions does not warrant a finding that s)ch association ac3)ired a separate 8)ridical personality, even when it adopts sets of constit)tion and *y1laws$ &nt l Ex"ress 'ravel & 'our $ervices% &nc. v. Court o# A""eals% -%- S 7A /2% "2...($ ?hen the law vests in a government instr)mentality corporate powers, the instr)mentality does not *ecome necessarily a corporation$ Unless the government instr)mentality is organi6ed as a stoc4 or non1stoc4 corporation, it remains a government instr)mentality exercising not only governmental *)t also corporate powers$ Manila &nternational Air"ort Authority v. Court o# A""eals, %'& S 7A &'1 "2../($ Since all corporations, *ig or small, m)st a*ide *y the provisions of the orporation ode, then even a simple family corporation cannot claim an exemption nor can it have r)les and practices other than those esta*lished *y law$ 'orres v. Court o# A""eals, 22, S 7A 2'"1''2($ 243 Theory of Enterprise Entity ">E7!E, %2
@!$

LAW OR

!$ 7EA$ -%- B1'%2C(

A corporation is *)t an association of individ)als, allowed to transact )nder an ass)med corporate name, and with a distinct legal personality$ 0n organi6ing itself as a collective *ody, it waives no constit)tional imm)nities and per3)isites appropriate to s)ch a *ody$ P$E v. Court o# A""eals% 2,1 S 7A 2-2 "1''2($

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orporations are composed of nat)ral persons and the legal fiction of a separate corporate personality is not a shield for the commission of in8)stice and ine3)ity, s)ch as to avoid the exec)tion of the property of a sister company$ 'an Boon Bee & Co.% &nc. v. -arencio, 1/- S 7A 2.& "1',,($ ;. ADVANTAGES AND DISADVANTAGES O1 CORPORATE 1ORM* 2'3 1%>& B': - A,?'#('@$%>: Ch'&'-($& :( -: %+ C%&"%&'($ O&@'# A'( %#* 2 3 STRONG LEGAL PERSONALITY ;A corporation is an entity separate and distinct from its stoc4holders$ ?hile not in fact and in reality a person, the law treats the corporation as tho)gh it were a person *y process of fiction or *y regarding it as an artificial person distinct and separate from its individ)al stoc4holders$< .emo% -r. v. &AC, 122 S 7A %.& "1','($ +he transfer of the corporate assets to the stoc4holder is not in the nat)re of a partition *)t is a conveyance from one party to another$ Stockholders of F. uan!on and Sons" #nc. v. $egister of %eeds of &anila , ; SCRA /B/ 219;23$ Exec)tion pending appeal was allowed in Bor/a v. Court o# A""eals, 1'/ S 7A ,%2 "1''1( only *eca)se ;the prevailing party is already of advanced age and in danger of extinction,< *)t not in this case where the winning party is a corporation$ ;BAC 8)ridical entityDs existence cannot *e li4ened to a nat)ral personEits precario)s financial condition is not *y itself a compelling circ)mstance warranting immediate exec)tion and does not o)tweigh the long standing general policy of enforcing only final and exec)tory 8)dgment$< Manaco" v. E0uitable PC&Ban), %/, S 7A 2&/ "2..&($ 2 3 CENTRALI6ED MANAGEMENT As can *e gleaned from Sec$ 2- of orporation ode ;0t is the *oard of directors or tr)stees which exercises almost all the corporate powers in a corporation$< 1irme v. Bu)al Enter"rises and !ev. Cor"., %1% S 7A 1'. "2..-($ +he exercise of the corporate powers of the corporation rest in the >oard of Firectors save in those instances where the orporation ode re3)ires stoc4holdersD approval for certain specific acts$ 2reat Asian $ales Center Cor". v. Court o# A""eals , -,1 S 7A &&2 "2..2($ 2 3 LIMITED LIABILITY TO INVESTORS AND O11ICERS @ne of the advantages of the corporation is the limitation of an investorDs lia*ility to the amo)nt of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stoc4holders$ $an -uan $tructural and $teel 1abricators% &nc. v. Court o# A""eals, 2'/ S 7A /-1 "1'',($ 0t is horn*oo4 law that corporate personality is a shield against personal lia*ility of its officersEa corporate officer and his spo)se cannot *e made personally lia*le )nder a tr)st receipt where he entered into and signed the contract clearly in his official capacity$ Consolidated Ban) and 'rust Cor". v. Court o# A""eals% -&/ S 7A /21 "2..1($ @*ligations inc)rred *y the corporation acting thro)gh its directors, officers and employees, are its sole lia*ilities$ Malayang $amahan ng mga Manggaga,a sa M. 2reen#ield v. .amos% -&2 S 7A 22 "2..1($ 2 ?3 1REE T RANS1ERABILITY O1 UNITS O1 OWNERSHIP 1OR INVESTORS 0t is the inherent right of the stoc4holder to dispose of his shares of stoc4 anytime he so desires$ .emo% -r. v. &AC, 122 S 7A %.& "1','(; PNB v. .itratto 2rou"% &nc., -/2 S 7A 21/ "2..1($ A)thority granted to corporations to reg)late the transfer of its stoc4 does not empower the corporation to restrict the right of a stoc4holder to transfer his shares, *)t merely a)thori6es the adoption of reg)lations as to the formalities and proced)re to *e followed in effecting transfer$ 'homson v. Court o# A""eals, 2', S 7A 2,. "1'',($ 243 D :',?'#('@$:*

& 213 A4>:$ %+ -%&"%&'($ .'#'@$.$#( 223 A4>:$ %+ ! . ($, ! '4 ! (9 +$'(>&$ 2/3 H @h -%:( %+ .' #($#'#-$ 203 D%>4!$ ('C'( %# Fividends received *y individ)als from domestic corporations are s)*8ect to final 1.G tax for income earned on or after 1 Han)ary 1'', "Sec$ 2%">("2(, 1''2 #07 ( 0nter1corporate dividends *etween domestic corporations, however, are not s)*8ect to any income tax "Sec$ 22"F("%(, 1''2 #07 ( +here is re1imposition of the 1.G ;improperly acc)m)lated earnings tax< for holding companies "Sec$ 2', 1''2 #07 ( B.

COMPARED WITH OTHER BUSINESS MEDIA

<%istri'ution of $isk" Profits and Control = 2'3 S%!$ P&%"& $(%&:h ": 243 P'&(#$&:h ": '#, O(h$& A::%- '( %#: "Arts$ 12/, and 122&, ivil ode( Can a defective attempt to form a corporation result at least in a partnership( Pioneer #nsurance v. Court of )ppeals, 1B8 SCRA ;;8 219893D Lim Tong Lim v. Philippine Fishing ear #ndustries" #nc., /1B SCRA B28 219993. 2-3 7% #( V$#(>&$: -oint venture is an association of persons or companies 8ointly )nderta4ing some commercial enterprise; generally all contri*)te assets and share ris4s$ 0t re3)ires a comm)nity of interest in the performance of the s)*8ect matter, a right to direct and govern the policy in connection therewith, and d)ty, which may *e altered *y agreement to share *oth in profit and losses$ 3ilosbayan% &nc. v. 2uingona% -r. , 2-2 S 7A 11. "1''%($ 2,3 C%%"$&'( ?$: "Art$ -, 7$A$ #o$ /'-,( ooperatives are esta*lished to provide a strong social and economic organi6ation to ens)re that the tenant1farmers will en8oy on a lasting *asis the *enefits of agrarian reforms$ Cor"u4 v. 2ros"e% --- S 7A %2& "2...($ 2$3 B>: #$:: T&>:(: "Article 1%%2, ivil ode( 2+3 Sociedades )n*nimas A sociedad annima was considered a commercial partnership ;where )pon the exec)tion of the p)*lic instr)ment in which its articles of agreement appear, and the contri*)tion of f)nds and personal property, *ecomes a 8)ridical personEan artificial *eing, invisi*le, intangi*le, and existing only in contemplation of lawEwith power to hold, *)y, and sell property, and to s)e and *e s)edEa corporationEnot a general copartnership nor a limited copartnership $ $ $ +he inscri*ing of its articles of agreement in the commercial register was not necessary to ma4e it a 8)ridical personEa corporation$ S)ch inscription only operated to show that it partoo4 of the #orm of a commercial corporation$< Mead v. McCullough, 21 Phil$ '& "1'11($ +he sociedades annimas were introd)ced in Philippine 8)risdiction on 1 Fecem*er 1,,, with the extension to Philippine territorial application of Articles 1&1 to 1&' of the Spanish ode of ommerce$ +hose articles contained the feat)res of limited lia*ility and centrali6ed management granted to a 8)ridical entity$ >)t they were more similar to the English 8oint stoc4 companies than the modern commercial corporations$ Benguet Consolidated Mining Co. v. Pineda, ', Phil$ 211 "1'&/($ @)r orporation !aw recogni6es the difference *etween sociedades annimas and corporations and will not apply legal provisions pertaining to the latter to the former$ Phil. Product Co. v. Primateria $ociete Anonyme, 1& S 7A -.1 "1'/&($ 2@3 Cuentas En Participacion A cuentas en "artici"acion as a sort of an accidental partnership constit)ted in s)ch a manner that its existence was only 4nown to those who had an interest in the same, there *eing no m)t)al agreement *etween the partners, and witho)t a corporate name indicating to

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the p)*lic in some way that there were other people *esides the one who ostensi*ly managed and cond)cted the *)siness, governed )nder Article 2-' of the ode of ommerce$ +hose who contract with the person )nder whose name the *)siness of s)ch partnership of cuentas en "artici"acion is cond)cted, shall have only a right of action against s)ch person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager )nless s)ch manager formally transfers his right to them$ Bourns v. Carman, 2 Phil$ 112 "1'./($

III. NATURE AND ATTRIBUTES O1 A CORPORATION

1. N'(>&$ %+ P%)$& (% C&$'($ ' C%&"%&'( %# "Sec$ 1/, Article I00, 1',2 onstit)tion( @)r constit)tion explicitly prohi*its the reg)lation *y special laws of private corporations, with the exception of government1owned or controlled corporations "J@ s($ 5eterans 1ederation o# the Phili""ines v. .eyes, %,- S 7A &2/ "2../($ ongress cannot enact a law creating a private corporation with a special charter, and it follows that ongress can create corporations with special charters only if s)ch corporations are J@ s$ 1eliciano v. Commission on Audit, %1' S 7A -/- "2..%($ P$F$ 1212 creating #ew Agrix, 0nc$ violates the onstit)tion which prohi*its the formation of a private corporation *y special legislative act which is not a J@ , since #F was merely re3)ired to extend a loan to the new corporation, and the new stoc4s of the corporation were to *e iss)ed to the old investors and stoc4holders of the insolvent Agrix )pon proof of their claims against the a*olished corporation$ N!C v. Phili""ine 5eterans Ban)% 1'2 S 7A 2&2 "1''.($ 2. CORPORATION AS A PERSON * 2'3 E#( (!$, (% D>$ P&%-$:: '#, EE>'! P&%($-( %# +he d)e process cla)se is )niversal in its application to all persons witho)t regard to any differences of race, color, or nationality$ Private corporations, li4ewise, are ;persons< within the scope of the g)aranty insofar as their property is concerned$ $mith Bell & Co. v. Natividad, %. Phil$ 1-/, 1%% "1'2.($ 243 U#&$':%#'4!$ S$'&-h$: '#, S$ A>&$ A corporation is protected *y the constit)tional g)arantee against )nreasona*le searches and sei6)res, *)t its officers have no ca)se of action to assail the legality of the sei6)res, regardless of the amo)nt of shares of stoc4 or of the interest of each of them in said corporation, and whatever the offices they hold therein may *e, *eca)se the corporation has a personality distinct and separate from those of said officers$ $tonehill v. !io)no, 2. S 7A -,"1'/2($ A corporation is *)t an association of individ)als )nder an ass)med name and with a distinct legal entity$ 0n organi6ing itself as a collective *ody it waives no constit)tional imm)nities appropriate for s)ch *ody$ 0ts property cannot *e ta4en witho)t compensation; can only *e proceeded against *y d)e process of law; and is protected against )nlawf)l discrimination$ Bache & Co. 6Phil.7% &nc. v. .ui4, -2 S 7A ,2-, ,-2 "1'21(, 0uoting #rom Hale v. Hen)el% 2.1 U$S$ %-, &. !$Ed$ /&2$ 2-3 B>( N%( E#( (!$, (% P& ? !$@$ A@' #:( S$!+ #-& . #'( %# ;0t is elementary that the right against self1incrimination has no application to 8)ridical persons$< Bataan $hi"yard & Engineering v. PC22 , 1&. S 7A 1,1 "1',2($ ?hile an individ)al may lawf)lly ref)se to answer incriminating 3)estions )nless protected *y an imm)nity stat)te, it does not follow that a corporation, vested with special privileges and franchises, may ref)se to show its hand when charged with an a*)se of s)ch privilege$ Hale v. Hen)el, 2.1 U$S$ %- "1'./(; (ilson v. +nited $tates% 221 U$S$ -/1 "1'11(; +nited $tates v. (hite% -22 U$S$ /'% "1'%%($ /. P&'-( -$ %+ P&%+$:: %# orporations cannot engage in the practice of a profession since they lac4 the moral and technical competence re3)ired *y the P7 $ +*EP v. 'he *egal Clinic, 22- S 7A -2, "1''-($

2 A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry$ $amahan ng 8"tometrists v. Acebedo &nternational Cor".% 22. S 7A 2', "1''2(; Al#a#ara v. Acebedo 8"tical Com"any% -,1 S 7A 2'- "2..2($ COUNTER-REVOLUTION= Architect)ral Professional 0. L '4 ! (9 +%& T%&(: A corporation is civilly lia*le in the same manner as nat)ral persons for torts, *eca)se the r)les governing the lia*ility of a principal or master for a tort committed *y an agent or servant are the same whether the principal or master *e a nat)ral person or a corporation, and whether the servant or agent *e a nat)ral or artificial person$ +hat a principal or master is lia*le for every tort which he expressly directs or a)thori6es, is 8)st as tr)e of a corporation as a nat)ral person$ P+B v. Court of )ppeals, 8/ SCRA 2/B 219B83. @)r 8)rispr)dence is wanting as to the definite scope of ;corporate tort$< Essentially, ;tort< consists in the violation of a right given or the omission of a d)ty imposed *y law; a *reach of a legal d)ty$ +he fail)re of the corporate employer to comply with the law1imposed d)ty )nder the !a*or ode to grant separation pay to employees in case of cessation of operations constit)tes tort and its stoc4holder who was actively engaged in the management or operation of the *)siness sho)ld *e held personally lia*le$ $ergio 1. Naguiat v. N*.C, 2/' S 7A &/% "1''2($ 8. C%&"%&'($ C& . #'! L '4 ! (9 ",est Coast Life #ns. Co. v. -urd , 2B Ph !. 001 219103D People v. Tan Boon .ong , 80 Ph !. ;0B <19/0=D Sia v. Court of )ppeals, 121 SCRA ;88 <198/=; Consolidated Ban) v. Court o# A""eals , -&/ S 7A /22 "2..1(; Articles 1.2 and 1.-, 7evised Penal ode($ +he +r)st 7eceipts !aw recogni6es the impossi*ility of imposing the penalty of imprisonment on a corporation, hence, if the entr)stee is a corporation, the law ma4es the officers or employees or other persons responsi*le for the offense lia*le to s)ffer the penalty of imprisonment$ 8ng v. Court o# A""eals, %.1 S 7A /%2, "2..-($ #o criminal s)it can lie against an acc)sed who is a corporation$ 'imes% &nc. v. .eyes, -' S 7A -.- "1'21($ ?hen a criminal stat)te for*ids the corporation itself from doing an act, the prohi*ition extends to the *oard of directors, and to each director separately and individ)ally$ Peo"le v. Conce"cion% %% Phil$ 12' "1'22($ ?hile it is tr)e that a criminal case can only *e filed against the officers and not against the corporation itself, it does not follow that the corporation cannot *e a real1party1in1interest for the p)rpose of *ringing a civil action for malicio)s prosec)tion for the damages inc)rred *y the corporation for the criminal proceedings *ro)ght against its officer$ Cometa v. Court o# A""eals, -.1 S 7A %&' "1'''($ 0t has *een held that the existence of the corporate entity does not shield from prosec)tion the corporate agent who 4nowingly and intentionally ca)ses the corporation to commit the crime$ +he corporation o*vio)sly acts, and can act, only *y and thro)gh its h)man agents, and it is their cond)ct which the law m)st deter$ +he employee or agent of a corporation engaged in )nlawf)l *)siness nat)rally aids and a*ets in the carrying on of s)ch *)siness and will *e prosec)ted as principal if, with 4nowledge of the *)siness, its p)rpose and effect, he conscio)sly contri*)tes his efforts to its cond)ct and promotion Billegal recr)itment in this caseC, however slight his contri*)tion may *e$ 'he Executive $ecretary v. Court o# A""eals, %2' S 7A ,1 "2..%($ 0f the crime is committed *y a corporation or other 8)ridical entity, the directors, officers, employees or other officers thereof responsi*le for the offense shall *e charged and penali6ed for the crime, precisely *eca)se of the nat)re of the crime and the penalty therefor$ A corporation cannot *e arrested and imprisoned; hence, cannot *e penali6ed for a crime p)nisha*le *y imprisonment$ Kowever, a corporation may *e charged and prosec)ted for a crime if the imposa*le penalty is fine$ Even if the stat)te prescri*es *oth fine and imprisonment as penalty, a corporation may *e prosec)ted and, if fo)nd g)ilty, may *e fined$ Ching v. Secretary of /ustice, 081 SCRA ;02 2200;3. A crime is the doing of that which the penal code for*ids to *e done, or omitting to do what is commands$ A necessary part of the definition of every crime is the designation of the a)thor of the crime )pon whom the penalty is to *e inflicted$ ?hen a criminal stat)te designates an act of orps$ allowed )nder 7$A$ #o$ '2//$

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a corporation or a crime and prescri*es p)nishment therefor, it creates a criminal offense which, otherwise, wo)ld not exist and s)ch can *e committed only *y the corporation$ >)t when a penal stat)te does not expressly apply to corporations, it does not create an offense for which a corporation may *e p)nished$ @n the other hand, if the State, *y stat)te, defines a crime that may *e committed *y a corporation *)t prescri*es the penalty therefor to *e s)ffered *y the officers, directors, or employees of s)ch corporation or other persons responsi*le for the offense, only s)ch individ)als will s)ffer s)ch penalty$ orporate officers or employees, thro)gh whose act, defa)lt or omission the corporation commits a crime, are themselves individ)ally g)ilty of the crime$ Ching v. Secretary of /ustice , 081 SCRA ;02 2200;3. B0T SEE Consolidated Bank v. Court of )ppeals, /8; SCRA ;B1 2200/3. ;. R$-%?$&9 %+ M%&'! '#, O(h$& D'.'@$: A corporation, *eing an artificial person, cannot experience physical s)fferings, mental ang)ish, fright, serio)s anxiety, wo)nded feelings, moral shoc4 or social h)miliation which are *asis for moral damages )nder Art$ 2212 of the ivil ode$ Ho,ever% a cor"oration may have a good re"utation ,hich% i# besmirched% may be a ground #or the a,ard o# moral damages $ Mambulao *umber Co. v. Phili""ine National Ban)% 22 S 7A -&' "1'/,(; AP' v. Court o# A""eals% -.. S 7A &2' "1'',(. A corporation, *eing an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses; therefore, it cannot experience physical s)ffering and mental ang)ish$ 5ental s)ffering can *e experienced only *y one having a nervo)s system and it flows from real ills, sorrows, and griefs of lifeEall of which cannot *e s)ffered *y an artificial person$ Prime (hite Cement Cor". v. &AC, 22. S 7A 1.- "1''-(; *BC Ex"ress% &nc. v. Court o# A""eals% 2-/ S 7A /.2 "1''%(; Acme $hoe% .ubber & Plastic Cor". v. Court o# A""eals , 2/. S 7A 21% "1''/(; $olid Homes% &nc. v. Court o# A""eals , 22& S 7A 2/2 "1''2(; NPC v. Phili"" Brothers 8ceanic% &nc., -/' S 7A /2' "2..1($ +he statement in Peo"le v. Manero and Mambulao *umber Co. v. PNB , that a corporation may recover moral damages if it ;has a good rep)tation that is de*ased, res)lting in social h)miliation< is an obiter dictum. .ecovery o# a cor"oration ,ould be under Articles 9:% ;< and ;9 o# the Civil Code% but ,hich re0uires a clear "roo# o# malice or bad #aith. AB$=CBN Broadcasting Cor". v. Court o# A""eals, -.1 S 7A &,' "1'''($ !i4ewise, an ed)cational corporationDs claim for moral damages arising from li*el falls )nder Article 221'"2( of the ivil ode, which expressly a)thori6es the recovery of moral damages in cases of li*el, slander or any other form of defamation, and does not 3)alify whether the plaintiff is a nat)ral or 8)ridical person$ +herefore, a 8)ridical person can validly complain for li*el or any other form of defamation and claim for moral damages$ 1ili"inas Broadcasting Net,or) v. Ago Medical and Educational Center, %%, S 7A %1- "2..&($ B. CORPORATE

NATIONALITY* 0+%E$ ,-1SE L),S #+C1$P1$)TE% 2S$-. 12/3

E5CEPTIONS* TEST 1F C1+T$1LL#+ 1,+E$S-#P '!:% '""! $: #*

2'3 E2ploitation of +atural $esources "Sec$ 1%.; Sec$ 2, Article I00, 1',2 onstit)tion; $oman Catholic )postolic )dministrator of %avao" #nc. v. The L$C and the $egister of %eeds of %avao, 102 Ph !. 89; <198B=($ +he registration of the donation of land to an )nincorporated religio)s organi6ation, whose tr)stees are foreigners, wo)ld violate constit)tional prohi*ition and the ref)sal wo)ld not *e in violation of the freedom of religion cla)se$ +he fact that the religio)s association ;has no capital stoc4 does not s)ffice to escape the constit)tional inhi*ition, since it is admitted that its mem*ers are of foreign nationality$ $ $ and the s"irit o# the Constitution demands that in the absence o# ca"ital stoc)% the controlling membershi" should be com"osed o# 1ili"ino citi4ens $< .egister o# !eeds o# .i4al v. +ng $ui $i 'em"le, '2 Phil$ &, "1'&&($ 0f the foreign shareholdings in a landholding corporation exceed %.G, it is not the foreign stoc4holdersD ownership of the shares which is adversely affected *y the capacity of the corporation to own landEthat is, the corporation *ecomes dis3)alified to own land$ -.2. $ummit Holdings% &nc. v. Court o# A""eals, %&. S 7A 1/' "2..&($ +he prohi*ition in the onstit)tion applies only to ownership of land; it does not extend to immova*le or real property as defined )nder Article %1& of the ivil ode$ @therwise, we wo)ld

' have a strange sit)ation where the ownership of immova*le property s)ch as trees, plants and growing fr)it attached to the land wo)ld *e limited to Lilipinos and Lilipino corporations only$ -.2. $ummit Holdings% &nc. v. Court o# A""eals, %&. S 7A 1/' "2..&($ 243 Pu'lic 0tilities "Sec$ 11, Art$ I00, onstit)tion; People v. 3uasha, 9/ Ph !. ///( +he primary franchise, that is, the right to exist as s)ch, is vested in the individ)als who compose the corporation and not in the corporation itself and cannot *e conveyed in the a*sence of a legislative a)thority so to do$ +he special or secondary franchises are vested in the corporation and may ordinarily *e conveyed or mortgaged )nder a general power granted to a corporation to dispose of its property, except s)ch special or secondary franchises as are charged with a p)*lic )se$ -...$. Business Cor". v. &m"erial &nsurance, 11 S 7A /-% "1'/%($ +he onstit)tion re3)ires a franchise for the operation of a p)*lic )tility; however, it does not re3)ire a franchise *efore one can own the facilities needed to operate a p)*lic )tility so long as it does not operate them to serve the p)*lic$ +here is a clear distinction *etween ;operation< of a p)*lic )tility and the ownership of the facilities and e3)ipment )sed to serve the p)*lic$ Tatad v. arcia" /r., 20/ SCRA 0/; 219983. 2-3 M':: M$, ' "Sec$ 11"1(, Art$ IA0, 1',2 onstit)tion( S%>&-$:= P$F$ -/, amended *y P$F$s 1'1 and 1'2; F@H @pinion #o$ 12., s$ of 1',2; Sec$ 2, P$F$ &2/; SE @pinion, 2% 5arch 1',-; F@H @pinion 1/-, s$ 1'2-; SE @pinion, 1& H)ly 1''1, IIA SE MUA7+E7!N >U!!E+0#, "#o$ %EFecem*er, 1''1(, at p$ -1$ Ca'le #ndustry* ; a*le +A operations shall *e governed *y E$@$ #o$ 2.&, s$ 1',2$ 0f A+A operators offer p)*lic telecomm)nications services, they shall *e treated 8)st li4e a p)*lic telecomm)nications entity$< "#+ 5emo irc)lar #o$ ,1'1'&( a*le +A as ;a form of mass media which m)st, therefore, *e owned and managed *y Lilipino citi6ens, or corporations, cooperatives or associations, wholly1owned and managed *y Lilipino citi6ens p)rs)ant to the mandate of the onstit)tion$< "F@H @pinion #o$ '&, s$ 1''', citing Allied Broadcasting% &nc. v. 1ederal Communications Commission% %-& L$ 2d 2.($ 2,3 A,?$&( : #@ B>: #$:: "Sec$ 11"2(, Art$ IA0, 1',2 onstit)tion( 2$3 W'&-T .$ T$:( "1ili"inas Com"ania de $eguros v. Christern% Huene#eld & Co.% &nc. , ,' Phil$ &% B1'&1C; !avis (inshi" v. Phili""ine 'rust Co. , '. Phil$ 2%% B1'&2C; Ha, Pia v. China Ban)ing Cor"$, ,. Phil$ /.% B1'%,C($ 2+3 I#?$:(.$#( T$:( ': (% FPh ! "" #$ N'( %#'!:G "Sec$ -"a( O "*(, 7$A$ 2.%2, Loreign 0nvestments Act of 1''2( 2@3 G&'#,+'(h$& R>!$ "@pinion of F@H #o$ 1,, s$ 1',', 1' Han)ary 1','; SE @pinion, / #ovem*er 1',', II0A SE MUA7+E7!N >U!!E+0# "#o$ 11 5arch 1''.(; SE @pinion, 1% Fecem*er 1',', II0A SE MUA7+E7!N >U!!E+0# "#o$ 2 1H)ne 1''.( +" to ,hat level do you a""ly the grand#ather rule> Palting v. San /ose Petroleum #nc., 18 SCRA 920 219;;3$ 2h3 S"$- '! C!':: + -'( %#: "Sec$ 1%.(

1. IV. SEPARATE 7URIDICAL PERSONALITY AND DOCTRINE

O1 PIERCING THE VEIL O1 CORPORATE 1ICTION

A. MAIN DOCTRINE* A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT 1ROM ITS STOCKHOLDERS OR MEMBERS. -ardine !avies% &nc. v. -.B .ealty% &nc. , %/S 7A &&& "2..&($ 1. S%>&-$:* S$-. 2D A&( -!$ 00, C ? ! C%,$ 2. I."%&('#-$ %+ P&%($-( #@ M' # D%-(& #$ * A corporation, )pon coming into existence, is invested *y law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may *e related$ +his separate and distinct personality is, however, merely a fiction created *y law for conveyance and to promote the ends of 8)stice$ *BP v. Court o# A""eals% -/% S 7A -2& "2..1(; Martine4 v. Court o# A""eals, %-, S 7A 1-' "2..%(; Prudential Ban) v. Alviar, %/% S 7A -&- "2..&($ A corporation is an artificial *eing vested *y law with a personality distinct and separate from those of the persons composing it as well as from that of any other entity to which it may *e related$ +he first conse3)ence of the doctrine of legal entity of the separate personality of the corporation may not *e made to answer for acts and lia*ilities of its stoc4holders or those of legal entities to which it may *e connected or vice versa$ 2eneral Credit Cor". v. Alsons !ev. and &nvestment Cor". , &1- S 7A 22& "2..2(; Mc*eod v. N*.C, &12 S 7A 222 "2..2(; +y v. 5illanueva, &2/ S 7A 2- "2..2($ /. A""! -'( %#:* 2'3 &a4ority E5uity 1wnership and #nterlocking %irectorship ? @wnership of a ma8ority of capital stoc4 and the fact that ma8ority of directors of a corporation are the directors of another corporation creates no employer1employee relationship with the latterPs employees$ %BP v. +L$C, 18; SCRA 801 219903$ Also $uldao v. Cimech $ystem Construction% &nc., &./ S 7A 2&/ "2../(; +nion Ban) o# the Phili""ines v. 8ng , %'1 S 7A &,1 "2../($ 5ere ownership *y a single stoc4holder or *y another corporation of all or nearly all of the capital stoc4 of a corporation is not of itself s)fficient gro)nd for disregarding the separate corporate personality$ $unio v. N*.C , 122 S 7A -'. "1',%(; Asionics Phili""ines% &nc. v. N*.C% 2'. S 7A 1/% "1'',(; 1rancisco v. Me/ia% -/2 S 7A 2-, "2..1(; Matutina &ntegrated (ood Products% &nc. v. CA, 2/- S 7A %'. "1''/(; Manila Hotel Cor". v. N*.C, -%- S 7A 1 "2...(; $ecosa v. Heirs o# Er,in $uare4 1ancisco, %-- S 7A 22- "2..%($ A corporate defendant in a case, against whom a writ of possession has *een iss)ed, cannot )se the fact that it has o*tained controlling e3)ities in the corporate plaintiffs to s)spend enforcement of the writ, for their separate 8)ridical personality, and th)s their separate *)siness and proprietary interests remain$ $ilverio% -r. v. 1ili"ino Business Consultants% &nc., %// S 7A &,% "2..&($ 5ere s)*stantial identity of incorporators of two corporations does not necessarily imply fra)d, nor warrant the piercing of the veil of corporate fiction$ 0n the a*sence of clear and convincing evidence to show that the corporate personalities were )sed to perpet)ate fra)d, or circ)mvent the law, the corporations are to *e rightly treated as distinct and separate from each other$ *aguio v. N*.C% 2/2 S 7A 21& "1''/($ Kaving interloc4ing directors, corporate officers and shareholders is not eno)gh 8)stification to pierce the veil of corporate fiction in the a*sence of fra)d or other p)*lic policy considerations$ 5elarde v. *o"e4, %1' S 7A %22 "2..%(; $esbreno v. Court o# A""eals, 222 S 7A %// "1''-($ 243 Being Corporate 1fficer6 >eing an officer or stoc4holder of a corporation does not *y itself ma4e oneDs property also of the corporation, and vice=versa, for they are separate entities, and that shareholders who are officers are in no legal sense the owners of corporate

property which is owned *y the corporation as a distinct legal person$ Em"orium% &nc. v. CA, 1'% S 7A &%% "1''1($

11 2ood Earth

+he mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individ)al, and the corporation are separate entities$ Cru4 v. !alisay, 1&2 S 7A %,2 "1',2(; Booc v. Bantuas% -&% S 7A 22' "2..1($ 0t is horn*oo4 law that corporate personality is a shield against personal lia*ility of its officersEa corporate officer and his spo)se cannot *e made personally lia*le )nder a tr)st receipt where he entered into and signed the contract clearly in his official capacity$ &ntestate Estate o# Alexander '. 'y v. Court o# A""eals% -&/ S 7A /1 "2..1(; Consolidated Ban) and 'rust Cor". v. Court o# A""eals, -&/ S 7A /21 "2..1($ +he President of the corporation which *ecomes lia*le for the accident ca)sed *y its tr)c4 driver cannot *e held solidarily lia*le for the 8)dgment o*ligation arising from 3)asi1delict, since the fact alone of *eing President is not s)fficient to hold him solidarily lia*le for the lia*ilities ad8)dged against the corporation and its employee$ $ecosa v. Heirs o# Er,in $uare4 1ancisco, %-- S 7A 22- "2..%($ ?hen the comp)lsory co)nterclaim filed against corporate officers for their alleged fra)d)lent act indicate that s)ch corporate officers are indispensa*le parties in the litigation, the original incl)sion of the corporation in the s)it does not there*y allow the denial of a specific co)nter1claim *eing filed to ma4e the corporate officers personally lia*le$ A corporation has a legal personality entirely separate and distinct from that of its officers and cannot act for and on their *ehalf, witho)t *eing so a)thori6ed$ *a#arge Cement Phils.% &nc. v. Continental Cement Cor"., %%- S 7A &22 "2..%($ 2-3 %ealings Between Corporation and Stockholders6 +he fact that the ma8ority stoc4holder had )sed his own money to pay part of the loan of the corporation cannot *e )sed as the *asis to pierce$ ;0t is )nderstanda*le that a shareholder wo)ld want to help his corporation and in the process, ass)re that his sta4es in the said corporation are sec)red$< *BP v. Court o# A""eals% -/% S 7A -2& "2..1($ Use of a controlling stoc4holderDs initials in the corporate name is not s)fficient reason to pierce the corporate veil, since *y that practice alone does it mean that the said corporation is merely a d)mmy of the individ)al stoc4holder$ A corporation may ass)me any name provided it is lawf)l, and there is nothing illegal in a corporation ac3)iring the name or as in this case, the initials of one of its shareholders$ *BP v. Court o# A""eals% -/% S 7A -2& "2..1($ +he mere fact that a stoc4holder sells his shares of stoc4 in the corporation d)ring the pendency of a collection case against the corporation, does not ma4e s)ch stoc4holder personally lia*le for the corporate de*t, since the disposing stoc4holder has no personal o*ligation to the creditor, and it is the inherent right of the stoc4holder to dispose of his shares of stoc4 anytime he so desires$ .emo% -r. v. &AC, 122 S 7A %.& "1','(; PNB v. .itratto 2rou"% &nc., -/2 S 7A 21/ "2..1($ H)st *eca)se two foreign companies came from the same co)ntry and closely wor4ed together on certain pro8ects wo)ld the concl)sion arise that one was the cond)it of the other, th)s piercing the veil of corporate fiction$ Marubeni Cor". v. *irag% -/2 S 7A /2. "2..1($ +he creation *y F>P as the mother company of the three mining corporations to manage and operate the assets ac3)ired in the foreclos)re sale lest they deteriorate from non1)se and lose their val)e, does not indicate fra)d or wrongdoing and will not constit)te application of the piercing doctrine$ !BP v. Court o# A""eals% -/- S 7A -.2 "2..1($ +he property of the corporation is not the property of its stoc4holders or mem*ers and may not *e sold *y the stoc4holders or mem*ers witho)t express a)thori6ation from the corporationDs *oard of directors$ (oodchild Holdings% &nc. v. .oxas Electric and Construction Com"any% &nc., %-/ S 7A 2-& "2..%($ 2,3 1n Privileges En4oyed6 +he tax exemption cla)se in the charter of a corporation cannot *e extended to nor en8oyed *y even its controlling stoc4holders$ Manila 2as Cor". v. Collector o# &nternal .evenue, /2 Phil$ ,'& "1'-/($

12
2$3 1'ligations and %e'ts6 orporate de*t or credit is not the de*t or credit of the stoc4holder nor is the stoc4holderPs de*t or credit that of the corporation$ 'raders .oyal Ban) v. Court o# A""eals, 122 S 7A 2,' "1','($ A corporation has no legal standing to file a s)it for recovery of certain parcels of land owned *y its mem*ers in their individ)al capacity, even when the corporation is organi6ed for the *enefit of the mem*ers$ $ulo ng Bayan v. Araneta% &nc$, 22 S 7A -%2 "1'2/($ Stoc4holders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is p)rely inchoate$ $a, v. CA, 1'& S 7A 2%. "1''1(; and vice=versa 1rancisco Motors Cor". v. Court o# A""eals% -.' S 7A 22 "1'''($ +he ma8ority stoc4holder cannot *e held personality lia*le for the attorneyDs fees charged *y a lawyer for representing the corporation$ *a"eral !ev. Cor". v. Court o# A""eals, 22S 7A 2/1 "1''-($ Even when the foreclos)re on the corporate assets was wrongf)l done, stoc4holders have no standing to recover for themselves moral damages; otherwise, it wo)ld amo)nt to the appropriation *y, and the distri*)tion to, s)ch stoc4holders of part of the corporationDs assets *efore the dissol)tion of the corporation and the li3)idation of its de*ts and lia*ilities$ AP' v. Court o# A""eals% -.. S 7A &2' "1'',($ +he o*ligations of a stoc4holder in one corporation cannot *e offset from the o*ligation of the stoc4holder in a second corporation, since the corporation has a separate 8)ridical personality$ C3H &ndustrial and !ev. Cor" v. Court o# A""eals% 222 S 7A --- "1''2($ B.

PIERCING THE VEIL O1 CORPORATE 1ICTION*

1. S%>&-$ %+ I#-'#('( %#* 0nited States v. &ilwaukee $efrigerator Transit Co. , 102 1$,. 20B 219083. +he notion of corporate entity will *e pierced or disregarded and the individ)als composing it will *e treated as identical if the corporate entity is *eing )sed as a cloa4 or cover for fra)d or illegality; as a 8)stification for a wrong; or as an alter ego, an ad8)nct, or a *)siness cond)it for the sole *enefit of the stoc4holders$ 2ochan v. @oung, -&% S 7A 2.2 "2..1(; !BP v. Court o# A""eals, -&2 S 7A /2/, -&, S 7A &.1, -/- S 7A -.2 "2..1(; . & E 'rans"ort% &nc. v. *atag, %22 S 7A /', "2..%(;$ $ecosa v. Heirs o# Er,in $uare4 1ancisco, %-- S 7A 22- "2..%(; Martine4 v. Court o# A""eals, %-, S 7A 1-' "2..%(; Mc*eod v. N*.C, &12 S 7A 222 "2..2($ As a general r)le, a corporation will *e loo4ed )pon as a legal entity, )nless and )ntil s)fficient reason to the contrary appears$ ?hen the notion of legal entity is )sed to defeat p)*lic convenience, 8)stify wrong, protect fra)d, or defend crime, the law will regard the corporation as an association of persons$ Also, the corporate entity may *e disregarded in the interest of 8)stice in s)ch cases as fra)d that may wor4 ine3)ities among mem*ers of the corporation internally, involving no rights of the p)*lic or third persons$ 0n *oth instances, there m)st have *een fra)d and proof of it$ Lor the separate 8)ridical personality of a corporation to *e disregarded, the wrong1doing m)st *e clearly and convincingly esta*lished$ 0t cannot *e pres)med$ $uldao v. Cimech $ystem Construction% &nc., &./ S 7A 2&/ "2../($ 2. N'(>&$ '#, E++$-( %+ (h$ D%-(& #$ ;+he rationale *ehind piercing a corporationDs identity in a given case is to remove the *arrier *etween the corporation from the persons comprising it to thwart the fra)d)lent and illegal schemes of those who )se the corporate personality as a shield for )nderta4ing certain proscri*ed activities$ Kowever, in the case at *ar, instead of holding certain individ)als or person responsi*le for an alleged corporate act, the sit)ation has *een reversed$ 0t is the petitioner as a corporation which is *eing ordered to answer for the personal lia*ility of certain individ)al directors, officers and incorporators concerned$ Kence, it appears to )s that the doctrine has *een t)rned )pside down *eca)se of its erroneo)s invocation$< Francisco &otors Corp. v Court of )ppeals, /09 SCRA B2 219993. +he notion of separate personality, however, may *e disregarded )nder the doctrine E;piercing the veil of corporate fiction<Eas in fact the co)rt will often loo4 at the corporation as a mere collection of individ)als or an aggregation of persons )nderta4ing *)siness as a gro)p,

1disregarding the separate 8)ridical personality of the corporation )nifying the gro)p$ Traders $oyal Bank v. Court of )ppeals, 2;9 SCRA 18 2199B3$ Another form)lation of this doctrine is that when two "2( *)siness enterprises are owned, cond)cted and controlled *y the same parties, *oth law and e3)ity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entitled and treat them as identical or one and the same$ 2eneral Credit Cor". v. Alsons !ev. and &nvestment Cor"., &1- S 7A 22& "2..2($ Piercing the veil of corporation fiction is warranted only in cases when the separate legal entity is )sed to defeat p)*lic convenience, 8)stify wrong, protect fra)d, or defend crime, s)ch that in the case of two corporations, the law will regard the corporation as merged into one$ 5elarde v. *o"e4, %1' S 7A %22 "2..%($ +he legal fiction of separate corporate existence is not at all times invinci*le and the same may *e pierced when employed as a means to perpetrate a fra)d, conf)se legitimate iss)es, or )sed as a vehicle to promote )nfair o*8ectives or to shield an otherwise *latant violation of the prohi*ition against for)m1shopping$ ?hile it is settled that the piercing of the corporate veil has to *e done with ca)tion, this corporate fiction may *e disregarded when necessary in the interest of 8)stice$ .ovels Enter"rises% &nc. v. 8cam"o, -'1 S 7A 12/ "2..2($ 2'3 E5uita'le $emedy6 +he doctrine of piercing the corporate veil is an e3)ita*le doctrine developed to address sit)ations where the separate corporate personality of a corporation is a*)sed or )sed for wrongf)l p)rposes$ PNB v. .itratto 2rou"% &nc.% -/2 S 7A 21/ "2..1($ ?hether the separate personality of the corporation sho)ld *e pierced hinges on the o*taining facts, appropriately pleaded or proved$ Kowever, any piercing of the corporate veil has to *e done with ca)tion, al*eit the o)rt will not hesitate to disregard the corporate veil when it is mis)sed or when necessary in the interest of 8)stice$ After all, the concept of corporate entity was not mean to promote )nfair o*8ectives$ 2eneral Credit Cor". v. Alsons !ev. and &nvestment Cor"., &1- S 7A 22& "2..2($ 243 $emedy of Last $esort6 Piercing the corporate veil is remedy of last resort and is not availa*le when other remedies are still availa*le$ 0mali v. Court of )ppeals, 189 SCRA 829 219903. "?hen Umali said that all piercing cases are to hold stoc4holders personally lia*le 9 U5A!0 ?AS K@770>!N ?7@#J( 2-3 1'4ectives for )vailing of Piercing6 Piercing is not allowed )nless the remedy so)ght is to ma4e the officer or another corporation pec)niarily lia*le for corporate de*ts$ "Q( #ndophil Te2tile &ill ,orkers 0nion7PT ,1 v. Calica , 208 SCRA ;9B 219923. Piercing is not availa*le when personal o*ligations of an individ)al are to *e enforced against the corporation "Q( .obledo v. N*.C% 2-, S 7A &2 "1''%($ Piercing doctrine is meant to prevent fra)d, and cannot *e employed when the net res)lt wo)ld *e to perpetrate fra)d or a wrong$ 2regorio Araneta% &nc. v. 'uason de Paterno and 5idal , '1 Phil$ 2,/ "1'&2($ +he theory of corporate entity was not meant to promote )nfair o*8ectives or otherwise, nor to shield them$ 5illanueva v. Adre, 122 S 7A ,2/ "1','($ +he attempt to ma4e the sec)rity agencies appear as two separate entities, when in reality they were *)t one, was a devise to defeat the law Bi$e$, in this case no avoid lia*ilities )nder la*or lawsC and sho)ld not *e permitted$ Enri0ue4 $ecurity $ervices% &nc. v. Cabota/e, %'/ S 7A 1/' "2../(; where, the fra)d was committed *y petitioners to the pre8)dice of respondent *an4$ Mendo4a v. Banco .eal !ev. Ban), %2. S 7A ,/ "2..&($ 2,3 Basis &ust Be Clear Evidence6 +o disregard the separate 8)ridical personality of a corporation, it is elementary that the wrongdoing cannot *e pres)med and m)st *e clearly and convincingly esta*lished$ +he organi6ation of the corporation at the time when the relationship *etween the landowner and the developer were still cordial cannot *e )sed as a *asis to hold the corporation lia*le later on for the o*ligations of the landowner to the developer )nder the mere allegation that the corporation is *eing )sed to evade the performance of o*ligation *y one of its ma8or stoc4holders$ *uxuria Homes% &nc. v. Court o# A""eals% -.2 S 7A -1& "1'''($

1%
+he mere assertion *y a Lilipino litigant against the existence of a ;tandem< *etween two Hapanese corporations cannot *e the *asis for piercing, which can only *e applied *y showing wrongdoing *y clear and convincing evidence$ Marubeni Cor". v. *irag% -/2 S 7A /2. "2..1($ +o disregard the separate 8)ridical personality of a corporation, the wrongdoing m)st *e clearly and convincingly esta*lished$ 0t cannot *e pres)med$ 0n this case, the o)rt finds that the 7emington failed to discharge its *)rden of proving *ad faith on the part of 5arind)3)e 5ining and its transferees in the mortgage and foreclos)re of the s)*8ect properties to 8)stify the piercing of the corporate veil$ !BP v. Court o# A""eals , -/- S 7A -.2 "2..1($ Also Mc*eod v. N*.C, &12 S 7A 222 "2..2(; +y v. 5illanueva, &2/ S 7A 2- "2..2($ +he party see4ing for the piercing of the corporate veil has the *)rden of presenting clear and convincing evidence to 8)stify the setting aside of the separate corporate personality r)le$ PNB v. Andrada Electric & Engineering Co. , -,1 S 7A 2%% "2..2($ Application of the doctrine of piercing the corporate veil sho)ld *e done with ca)tion$ A co)rt sho)ld *e mindf)l of the milie) where it is to *e applied$ 0t m)st *e certain that the corporate fiction was mis)sed to s)ch an extent that in8)stice, fra)d, or crime was committed against another, in disregard of its rights$ +he wrongdoing m)st *e clearly and convincingly esta*lished; it cannot *e pres)med$ @therwise, an in8)stice that was never )nintended may res)lt from an erroneo)s application$ PNB v. Andrada Electric & Engineering Co. , -,1 S 7A 2%% "2..2($ 2$3 +ot )pplica'le to Theori!ing6 Piercing of the veil of corporate fiction is not allowed when it is resorted )nder a theory of co1ownership to 8)stify contin)ed )se and possession *y stoc4holders of corporate properties$ Boyer7$o2as v. Court of )ppeals, 211 SCRA 0B0 219923$ +he piercing doctrine cannot *e availed of to dislodge from SE Ds 8)risdiction a petition for s)spension of payments filed )nder P$F$ '.21A, on the gro)nd that the petitioning individ)als sho)ld *e treated as the real petitioners to the excl)sion of the petitioning corporate de*tor$ ;+he doctrine of piercing the veil of corporate fiction heavily relied )pon *y the petitioner is entirely misplaced, as said doctrine only applies when s)ch corporate fiction is )sed to defeat p)*lic convenience, 8)stify wrong, protect fra)d or defend crime$< +nion Ban) v. Court o# A""eals% 2'. S 7A 1', "1'',($ Application of the piercing the veil of separate fiction of the s)*sidiary company to merge it with the holding company was not allowed to s)pport a theory of set1off or compensation, there *eing no allegation m)ch less any proof of fra)d$ Nisce v. E0uitable PC& Ban)% &nc., &1/ S 7A 2-1 "2..2($ 2+3 )pplica'le to 8Third7Parties96 +hat respondents are not stoc4holders of the sister corporations does not ma4e them non1parties to this case, since it is alleged that the sister corporations are mere alter egos of the directors1petitioners, and that the sister corporations ac3)ired the properties so)ght to *e reconveyed to LJS7 in violation of directors1 petitionersD fid)ciary d)ty to LJS7 $ +he notion of corporate entity will *e pierced and the individ)als composing it will *e treated as identical if the corporate entity is *eing )sed as a cloa4 or cover for fra)d or illegality; as a 8)stification for a wrong; or as an alter ego, an ad8)nct, or a *)siness cond)it for the sole *enefit of the stoc4holders$ ochan v. :oung , /80 SCRA 20B 220013. 2@3 Piercing is a power *elonging to the co)rt and cannot *e ass)med improvidently *y a sheriff "Q($ Cru4 v. !alisay, 1&2 S 7A %,2 "1',2(; !... CA'C $ervices% &nc. v. .amos , %22 S 7A 1, "2..&($ 2h3 Conse5uences )pplication of Piercing %octrine6 Application of the doctrine to a partic)lar case does not deny the corporation of legal personality for any and all p)rposes, *)t only for the partic)lar transaction or instance, or the partic)lar o*ligation for which the doctrine was applied$ 3o""el 6Phil.7 &nc. v. @atco, 22 Phil$ %'/ "1'%/(; 'antoco v. 3aisahan ng Mga Manggaga,a sa *a Cam"ana, 1./ Phil$ 1', "1'&'(; 1rancisco v. Me/ia, -/2 S 7A 2-, "2..1($ /. C!':: + -'( %# %+ P $&- #@ C':$:* 2'3 1&'>, P $&- #@* ?hen corporate entity )sed to commit fra)d or do a wrong

1& 243 A!($&-$@% P $&- #@* ?hen corporate entity merely a farce since the corporation is merely the alter ego, *)siness cond)it, or instr)mentality of a person or another entity 2-3 EE> (9 C':$:* ?hen piercing the corporate fiction is necessary to achieve 8)stice or e3)ity$ A)thorities are agreed on at least three "-( *asic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may *e related, is allowed$ +hese are= 1( defeat of p)*lic convenience, as when the corporation is )sed as vehicle for the evasion of existing o*ligation; 2( fra)d cases or when the corporate entity is )sed to 8)stify wrong, protect fra)d, or defend a crime; or -( alter ego cases, where the corporation is merely a farce since it is a mere alter ego or *)siness cond)it of a person, or where the corporation is so organi6ed and controlled and its affairs are so cond)cted as to ma4e it merely an instr)mentality, agency, cond)it or ad8)nct of another corporation$ eneral Credit Corp. v. )lsons %ev. and #nvestment Corp. , 81/ SCRA 228 2200B3, citing A0!!A#UEAA, @55E7 0A! !A? 7EA0E? "2..% ed(, at p$ &2/$ $undown on Piercing )pplication6 +his o)rt pierced the corporate veil to ward off a 8)dgment credit, to avoid incl)sion of corporate assets as part of the estate of the decedent, to escape lia*ility arising for a de*t, or to perpet)ate fra)d and:or conf)se legitimate iss)es either to promote or to shield )nfair o*8ectives to cover )p an otherwise *latant violation of the prohi*ition against for)m shopping$ @nly is these and similar instances may the veil *e pierced and disregarded$ PNB v. Andrada Electric & Engineering Co., -,1 S 7A 2%% "2..2($ S>..'&9 %+ P&%4'( ?$ 1'-(%&:* Concept Builders" #nc. v. +L$C, 28B SCRA 109 2199;3; PNB v. .itratto 2rou"% &nc., -/2 S 7A 21/ "2..1(; 5elarde v. *o"e4, %1' S 7A %22 "2..%(; -ardine !avies% &nc. v. -.B .ealty% &nc., %/- S 7A &&& "2..&($ +he a*sence of these elements prevents piercing the corporate veil$ *im v. Court o# A""eals, -2- S 7A 1.2A Child *earning Center% &nc. v. 'agorio , %2& S 7A 2-/ "2..&(; 2eneral Credit Cor". v. Alsons !ev. and &nvestment Cor". , &1- S 7A 22& "2..2(; Nisce v. E0uitable PC& Ban)% &nc., &1/ S 7A 2-1 "2..2($ 0. 1&'>, C':$:* ?hen the legal fiction of the separate corporate personality is a*)sed, s)ch as when the same is )sed for fra)d)lent or wrongf)l ends, the co)rts have not hesitated to pierce the corporate veil$ Francisco v. &e4ia" /;2 SCRA B/8 220013. +he general r)le is that o*ligations inc)rred *y a corporation, acting thro)gh its directors, officers or employees, are its sole lia*ilities$ Kowever, the veil with which the law covers and isolates the corporation from its directors, officers or employees will *e lifted when the corporation is )sed *y any of them as a cloa4 or cover for fra)d or illegality or in8)stice$ Kere, the fra)d was committed *y petitioners to the pre8)dice of respondent *an4$ Mendo4a v. Banco .eal !ev. Ban), %2. S 7A ,/ "2..&($ Lra)d and *ad faith on the part of certain corporate officers or stoc4holders may warrant the piercing of the veil of corporate fiction so that the said individ)al may not see4 ref)ge therein, *)t may *e held individ)ally and personally lia*le for his or her actions$ *a#arge Cement Phils.% &nc. v. Continental Cement Cor". , %%- S 7A &22 "2..%($ Kowever, mere allegation of fra)d or *ad faith, witho)t evidence s)pporting s)ch claims cannot warrant the piercing of the corporate veil$ !BP v. Court o# A""eals, -&2 S 7A /2/, -&, S 7A &.1, -/- S 7A -.2 "2..1($ 2'3 )cts 'y Controlling Shareholder6 ?here a stoc4holder, who has a*sol)te control over the *)siness and affairs of the corporation, entered into a contract with another corporation thro)gh fra)d and false representations, s)ch stoc4holder shall *e lia*le soidarily with co1 defendant corporation even when the contract s)ed )pon was entered into on *ehalf of the corporation$ +amarco v. )ssociated Finance Co. , 19 SCRA 9;2 219;B3. ?here the corporation is )sed as a means to appropriate a property *y fra)d which property was later resold to the controlling stoc4holders, then piercing sho)ld *e allowed$ Heirs o# .amon !urano% $r. v. +y, -%% S 7A 2-, "2...($ 243 )voidance of Ta2es6 +he plea to pierce the veil of corporate fiction on the allegation that the corporations tr)e p)rpose is to avoid payment *y the incorporating spo)ses of the estate taxes on the properties transferred to the corporations= ;?ith regard to their claim

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that Bthe companiesC Ellice and 5argo were meant to *e )sed as mere tools for the avoidance of estate taxes, s)ffice it to say that the legal right of a taxpayer to red)ce the amo)nt of what otherwise co)ld *e his taxes or altogether avoid them, *y means which the law permits, cannot *e do)*ted$< 2ala v. Ellice Agro=&ndustrial Cor". , %1, S 7A %-1 "2..-($ 2-3 )voidance of Contractual Commitments or Civil Lia'ilities6 @ne cannot evade civil lia*ility *y incorporating properties or the *)siness$ Palacio v. Fely Transportation Co. , 8 SCRA 1011 219;23$ Also Mendo4a and @oto)o v. Banco .eal !ev. Ban), %2. S 7A ,/ "2..&($ ?hen )sed to avoid a contract)al commitment against non1competition$ ;illa $ey Transit" #nc. v. Ferrer, 28 SCRA 808 219;83$ ?here a de*tor registers his residence to a family corporation in exchange of shares of stoc4 and contin)es to live therein, then the separate 8)ridical personality may *e disregarded$ PBCom v. CA, 1'& S 7A &/2 "1''1($ 2,3 )voiding Legal $estrictions6 +he corporate veil cannot *e )sed to shield an otherwise *latant violation of the prohi*ition against for)m1shopping$ Shareholders, whether s)ing as the ma8ority in direct actions or as the minority in a derivative s)it, cannot *e allowed to trifle with co)rt processes, partic)larly where the corporation itself has not *een remiss in vigoro)sly prosec)ting or defending corporate ca)ses and in )sing and applying remedies availa*le to it$ 1irst Phili""ine &nternational Ban) v. Court o# A""eals , 2&2 S 7A 2&' "1''/($ 2$3 Thinly7capitali!ed corporations6 &cConnel v. C), 1 SCRA B22 219;13. 2+3 Parent7Su'sidiary $elations< )ffiliates* "Commissioner o# &nternal .evenue v. Norton and Harrison, 11 S 7A 2.%, B1'&%C; 'omas *ao Construction v. N*.C, 22, S 7A 21/ B1''2C($ +he fact that a corporation owns all of the stoc4s of another corporation, ta4en alone, is not s)fficient to 8)stify their *eing treated as one entity$ 0f )sed to perform legitimate f)nctions, a s)*sidiaryDs separate existence shall *e respected, and the lia*ility of the parent corporation, as well as the s)*sidiary shall *e confined to those arising in their respective *)siness$ A corporation has a separate personality distinct from its stoc4holders and from other corporations to which it may *e cond)cted$ +his separate and distinct personality of a corporation is a fiction created *y law for convenience and to prevent in8)stice$ Nisce v. E0uitable PC& Ban)% &nc. , &1/ S 7A 2-1 "2..2($ Kowever, mere ownership *y a single stoc4holder or *y another corporation of all or nearly all of the capital stoc4s of a corporation is not *y itself a s)fficient gro)nd to disregard the separate corporate personality$ +he s)*stantial identity of the incorporators of two or more corporations does not warrantly imply that there was fra)d so as to 8)stify the piercing of the writ of corporate fiction$ +o disregard the said separate 8)ridical personality of a corporation, the wrongdoing m)st *e proven clearly and convincingly$ Martine4 v. Court o# A""eals, %-, S 7A 1-. "2..%($ 2@3 uiding Principles in Fraud Cases* ,hy is there inordinate showing of alter7ego elements( +here m)st have *een fra)d or an evil motive in the affected transaction, and the mere proof of control of the corporation *y itself wo)ld not a)thori6e piercing; +he corporate fiction is )sed as a means to commit the fra)d or avoid the conse3)ences thereof; and +he main action sho)ld see4 for the enforcement of pec)niary claims pertaining to the corporation against corporate officers or stoc4holders$ 7espondent corporations may *e engaged in the same *)siness or even share the same address,or have interloc4ing incorporators, directors or officers, in the a*sence of fra)d or other p)*lic policy consideration, does not warrant piercing the veil of corporate fiction$ Mc*eod v.

12 N*.C, &12 S 7A 222 "2..2(, 0uoting #rom &ndo"hil 'extile Mill (or)ers +nion v. Calica , 2.& S 7A /'2 "1''2(, and !el .osario v. N*.C, 1,2 S 7A 222 "1''.($ 8. A!($&-E@% C':$:* 2'3 Factual Basis6 +he 3)estion of whether a corporation is a mere alter ego is a p)rely one of fact, and the *)rden is on the party who alleges it$ PNB v. Andrada Electric & Engineering Co., -,1 S 7A 2%% "2..2($ Also Conce"t Builders% &nc. v. N*.C% 2&2 S 7A 1%' "1''/(; Heirs o# .amon !urano% $r. v. +y% -%% S 7A 2-, "2...(; M. Holdings% *td. 5. Ba/ar, -,. S 7A /12 "2..2($ 243 0sing Corporation as Conduit or )lter Ego6 ?here the capital stoc4 is owned *y one person and it f)nctions only for the *enefit of s)ch individ)al owner, the corporation and the individ)al sho)ld *e deemed the same$ )rnold v. ,illets and Patterson" Ltd. , 00 Ph !. ;/0 2192/3$ ?hen corporation is merely an ad8)nct, *)siness cond)it or alter ego of another corporation, the fiction of separate and distinct corporation entities sho)ld *e disregarded$ 'an Boon Bee & Co. v. -arencio% 1/- S 7A 2.& "1',,($ +he o)rt agrees with the disposition of the appellate co)rt on the application of the piercing doctrine to the transaction s)*8ect of this case$ Per the o)rtDs co)nt, the trial co)rt en)merated no less than 2. doc)mented circ)mstances and transaction, which ta4en as a pac4age, indeed strongly s)pported the concl)sion that respondent EMU0+N was *)t an ad8)nct, as instr)mentality or *)siness cond)it of petitioner eneral Credit Corp. v. )lsons %ev. and #nvestment Corp. , 81/ SCRA 228 2200B3$ #either has it *een alleged or proven that 5erryland is so organi6ed and controlled and its affairs are so cond)cted as to ma4e it merely an instr)mentality, agency cond)it or ad8)nct of ardale$ Even ass)ming that the *)sinesses of ardale and 5erryland are interrelated, this alone is not 8)stification for disregarding their separate personalities, a*sent any showing that 5erryland was p)rposely )sed as a shield to defra)d creditors and third persons of their rights$ 1rancisco v. Me/ia, -/2 S 7A 2-, "2..1($ 2-3 )voidance of ta2es6 :utivo Sons -ardware v. Court of Ta2 )ppeals 1 SCRA 1;0 219;13; *iddell & Co. v. Collector o# &nternal .evenue, 2 S 7A /-2 "1'/1($ Use of nominees to constit)te the corporation for the *enefit of the controlling stoc4holder who so)ght to avoid payment of taxes$ Marvel Building v. !avid, ' Phil$ -2/ "1'&1($ 2,3 &i2ing7up 1perations< %isrespect to the Corporate Entity6 Employment of same wor4ers; single place of *)siness, etc$, may indicate alter ego sit)ation$ La Campana Coffee Factory v. .aisahan ng &anggagawa , 9/ Ph !. 1;0 2198/3D Shoemart v. +L$C" 228 SCRA /11 2199/($ +he facts that two corporations may *e sister companies, and that they may *e sharing personnel and reso)rces, witho)t more, is ins)fficient to prove that their separate corporate personalities are *eing )sed to defeat p)*lic convenience, 8)stify wrong, protect fra)d, or defend crime$ Padilla v. Court of )ppeals, /B0 SCRA 208 220013. ?here two *)siness enterprises are owned, cond)cted, and controlled *y the same parties, *oth law and e3)ity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical$ $ibagat 'imber Cor". v. 2arcia, 21/ S 7A 2. "1''2($ 5ixing of personal acco)nts with corporate *an4 deposit acco)nts$ .amire4 'ele"hone Cor". v. Ban) o# America, 2' S 7A 1'1 "1'/'($ 2,3 Parent7su'sidiary< )ffiliated Companies6 3o""el 6Phil.7% &nc. v. @atco , 22 Phil$ '2 "1'%/(; PH&5&!EC v. Court o# A""eals, 1,1 S 7A //' "1''.($ A s)*sidiary corporation has an independent and separate 8)ridical personality, distinct from that of its parent company, hence, any claim or s)it against the latter does not *ind the former and vice1versa$ -ardine !avies% &nc. v. -.B .ealty% &nc., %/- S 7A &&& "2..&($

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A*sence of proof that control over a corporation is *eing )sed *y a mother company to commit fra)d or wrong, there wo)ld *e no *asis to disregard their separate 8)ridical personalities$ .amoso v. Court o# A""eals% -%2 S 7A %/- "2...(; 2uatson &nt l 'ravel and 'ours% &nc. v. N*.C% 2-. S 7A ,1& "1''.($ 0f )sed to perform legitimate f)nctions, a s)*sidiaryDs separate existence shall *e respected, and the lia*ility of the parent corporation as well as the s)*sidiary will *e confined to those arising in their respective *)sinesses$ Even when the parent corporation agreed to the terms to s)pport a stand*y credit agreement in favor of the s)*sidiary, does not mean that its personality has merged with that of the s)*sidiary$ M.. Holdings% *td. 5. Ba/ar , -,. S 7A /12 "2..2($ 2$3 uiding Principles in )lter7Ego Cases6 Foctrine applies even in the a*sence of evil intent, *eca)se of the direct violation of a central corporate law principle of separating ownership from management; Foctrine in s)ch case is *ased on estoppel= if stoc4holders do not respect the separate entity, others cannot also *e expected to *e *o)nd *y the separate 8)ridical entity; Piercing in alter ego cases may prevail even when no monetary claims are so)ght to *e enforced against the stoc4holders or officers of the corporation$ 2+3 %istinction Between Fraud Piercing and )lter7ego Piercing6 Lipat v. Pacific Banking Corp., 002 SCRA //9 2200/3$ ;. EE> (9 C':$:* 2'3 ?hen )sed to conf)se legitimate iss)es$ 'ele"hone Engineering and $ervice Co.% &nc. 5. (CC, 1.% S 7A -&% "1',1($ ?here corporate fiction was )sed to perpetrate social in8)stice or as a vehicle to evade o*ligations or conf)se the legitimate iss)es "as in this case where the actions of management of the two corporations created conf)sion as to the proper employer of claimants(, it wo)ld *e discarded and the two corporations wo)ld *e merged as one$ A4cor Manu#acturing% &nc. v. N*.C% -.- S 7A 2/ "1'''($ 243 ?hen )sed to raise technicalities$ Emilio Cano Ent. v. C&., 1- S 7A 2'1 "1'/&($ B. D>$ P&%-$:: C!'>:$ 2'3 #eed to *ring a new case against the officer$ McConnel v. Court o# A""eals, 1 S 7A 22"1'/1($ A s)it against individ)al shareholders in a corporation is not a s)it against the corporation$ Lail)re to implead the corporations as defendants and merely annexing a list of s)ch corporations to the complaints is a violation of d)e process for it wo)ld in effect *e disregarding their distinct and separate personality witho)t a hearing$ PC22 v. $andiganbayan% -/& S 7A &-, "2..1($ Altho)gh *oth lower co)rts fo)nd s)fficient *asis for the concl)sion that PRA and Phoenix @mega were one and the same, and the former is merely a cond)it of the other the S)preme o)rt held void the application of a writ of exec)tion on a 8)dgment held only against PRA, since the 7+ o*tained no 8)risdiction over the person of Phoenix @mega which was never s)mmoned as formal party to the case$ +he general principle is that no person shall *e affected *y any proceedings to which he is a stranger, and strangers to a case are not *o)nd *y the 8)dgment rendered *y the co)rt$ Padilla v. Court of )ppeals, /B0 SCRA 208 220013$ 243 ?hen corporate officers are s)ed in their official capacity when the corporation was not made a party, the corporation is not denied d)e process$ Emilio Cano Enter"rises v. C&., 1- S 7A 2'1 "1'/&($ 2-3 Provided that evidential *asis has *een add)ced d)ring trial to apply the piercing doctrine$ /acinto v. Court of )ppeals, 198 SCRA 211 219913; Arcilla v. Court o# A""eals, 21& S 7A 12. "1''2($

1'

V. 2CLASSI1ICATIONS O1 CORPORATIONS
1. I# R$!'( %# (% (h$ S('($* 2'3 Pu'lic Corporation "Sec$ -, Act #o$ 1%&'($ 243 3uasi7pu'lic Corporation. Marilao (ater Consumers Associates v. &AC , 2.1 S 7A %-2 "1''1(; 2-3 Private Corporation "Sec$ -, Act 1%&'($ JovernmentDs ma8ority shares does not ma4e an entity a p)*lic corporation$ National Coal Co.% v. Collector o# &nternal .evenue, %/ Phil$ &,- "1'2%($ A corporation is created *y operation of law )nder the orporation ode while a government corporation is normally created *y special law referred to often as a charter$ Bliss !ev. Cor". Em"loyees +nion v. Calle/a% 2-2 S 7A 221 "1''%($ +he test to determine whether a corporation is government owned or controlled, or private in nat)re is simple$ 0s it created *y its own charter for the exercise of a p)*lic f)nction, or *y incorporation )nder the general corporation lawQ +hose with special charters are government corporations s)*8ect to its provisions, and its employees are )nder the 8)risdiction of the ivil Service ommission, and are comp)lsory mem*ers of the JS0S$ Cam"aredondo v. N*.C, -12 S 7A %2 "1'''( ?hile p)*lic *enefit and p)*lic welfare may *e attri*)ta*le to the operation of the >ases onversion and Fevelopment A)thority "> FA(, yet it is certain that the f)nctions it performs are *asically proprietary in nat)reEthe promotion of economic and social development of entral !)6on, partic)larly, and the co)ntryDs goal for enhancement$ +herefore, the r)le that prescription does not r)n against the State will not apply to > FA, it *eing said that when title of the 7ep)*lic has *een divested, its grantees, altho)gh artificial *odies of its own creation, are in the same category as ordinary persons$ $hi"side &nc. v. Court o# A""eals% -&2 S 7A --% "2..1($ Altho)gh >oy Sco)ts of the Philippines does not receive any monetary or financial s)*sidy from the Jovernment, and its f)nds and assets are not considered government in nat)re and not s)*8ect to a)dit *y the @A, the fact that it received a special charter from the government, that its governing *oard are appointed *y the Jovernment, and that its p)rpose are of p)*lic character, for they pertain to the ed)cational, civic and social development of the yo)th which constit)te a very s)*stantial and important part of the nation, it is not a p)*lic corporation in the same sense that m)nicipal corporation or local governments are p)*lic corporation since its does not govern a portion of the state, *)t it also does not have proprietary f)nctions in the same sense that the f)nctions or activities of government1owned or controlled corporations, is may still *e considered as s)ch, or )nder the 1',2 Administrative ode as an instr)mentality of the Jovernment, and it employees are s)*8ect to the ivil Service !aw$ Boy $couts o# the Phili""ines v. N*.C, 1'/ S 7A 12/ "1''1($ >)t *eing a J@ ma4es it lia*le for laws and provisions applica*le to the Jovernment or its entities and s)*8ect to the control of the Jovernment$ Cervantes v. Auditor 2eneral, '1 Phil$ -&' "1'&2($ A government1owned or controlled corporation m)st *e organi6ed as a stoc4 or non1stoc4 corporation$ +he 50AA is not a government1owned or controlled corporation *eca)se it is not constit)ted of capital divided into shares of stoc4, and neither is it a nonstoc4 corporation *eca)se it has no mem*ers$ 50AA is a government instr)mentality vested with corporate powers to perform efficiently its government f)nctions$ Manila &nternational Air"ort Authority v. Court o# A""eals, %'& S 7A &'1 "2../($ >eyond cavil, a J@ has a personality of its own, distinct and separate from that of the government, and the intervention in a transaction of the @ffice of the President thro)gh the Exec)tive Secretary does not change the independent existence of a government entity as it deals with another government entity$ P+P v. Court o# A""eals, -/, S 7A /'1 "2..1($ +he doctrine that employees of J@ s, whether created *y special law or formed as s)*sidiaries )nder the general corporation law are governed *y the ivil Service !aw and not *y the !a*or ode, has *een s)pplanted *y the 1',2 onstit)tion$ +he present doctrine in determining whether a J@ is s)*8ect to the ivil Service !aw is the manner o# its creation , s)ch that government corporations created *y special charter are s)*8ect the ivil Service !aw,

2.
while those incorporated )nder the general corporation law are governed *y the !a*or ode$ PN8C=Energy !evelo"ment Cor". v. N*.C, 2.1 S 7A %,2 "1''1(; !avao City (ater !istrict v. Civil $ervice Commission, 2.1 S 7A &'- "1''1($ Section -1 of orporation ode " *iability o# !irectors and 8##icers ( is applica*le to corporations which have *een organi6ed *y special charters since Sec$ % of orporation ode renders the provisions s)pplementarily applica*le to all corporations, incl)ding those with special or individ)al charters, s)ch as cooperatives organi6ed )nder P$F$ 2/', so long as those provisions are not inconsistent with s)ch charters$ Benguet Electric Coo"erative% &nc. v. N*.C, 2.' S 7A && "1''2($ ?ater districts can validly exists as corporate entities )nder PF 1',, and provided they are government1owned or controlled, and their *oard of directors and other personnel are government employees s)*8ect to civil service laws and anti1graft laws$ 1eliciano v. Commission on Audit, %1' S 7A -/- "2..%($ 2. A: (% P!'-$ %+ I#-%&"%&'( %#* 2'3 %omestic Corporation 243 Foreign Corporation "Sec$ 12-( /. A: (% P>&"%:$ %+ I#-%&"%&'( %#* 2'3 &unicipal Corporation 243 $eligious Corporation "Secs$ 1.' and 11/( Since in matters p)rely ecclesiastical the decisions of the proper ch)rch tri*)nals are concl)sive )pon the civil tri*)nals, then a ch)rch mem*er who is expelled from the mem*ership *y the ch)rch a)thorities, or a priest or minister who is *y them deprived of his sacred office, is witho)t remedy in the civil co)rts$ *ong v. Basa, -// S 7A 11- "2..1($ 2-3 Educational Corporations "Secs$ 1./, 1.2 and 1.,; Sec$ 2&, >$P$ >lg$ 2-2( 2,3 Charita'le" Scientific or ;ocational Corporations 2$3 Business Corporation 0. A: (% N>.4$& %+ M$.4$&:* 2'3 )ggregate Corporation 243 Corporation Sole "Secs$ 11. to 11&; .oman Catholic A"ostolic Administrator o# !avao% &nc. v. *.C and the .egister o# !eeds o# !avao City , 1.2 Phil$ &'/ B1'&2C($ +he doctrine in .e"ublic v. 5illanueva, 11% S 7A ,2& "1',2( and .e"ublic v. &glesia ni Cristo, 122 S 7A /,2 "1',%(, that a corporation sole is dis3)alified to ac3)ire:hold aliena*le lands of the p)*lic domain, *eca)se of the constit)tional prohi*ition 3)alifying only individ)als to ac3)ire land and the provision )nder the P)*lic !and Act which applied only to Lilipino citi6ens or nat)ral persons, has *een e2pressly overturned in !irector o# *and v. &AC, 1%/ S 7A &.' "1',/($1 8. A: (% L$@'! S('(>:* 2'3 %e /ure C%&"%&'( %# 243 %e Facto C%&"%&'( %# "Sec$ 2.( 2-3 C%&"%&'( %# 49 E:(%""$! "Sec$ 21( ;. A: (% EC :($#-$ %+ Sh'&$: "Secs$ - and &(= 2'3 Stock Corporation 243 +on7Stock Corporation

8verturning a##irmed in .e"ublic v. &glesia ni Cristo, 122 S 7A /,2 "1',%(; .e"ublic v. &AC, 1/, S 7A 1/& "1',,($

21

VI. CORPORATE CONTRACT LAW

1$ P&$-I#-%&"%&'( %# C%#(&'-(: 2'3 ,ho )re Promoters( ;Promoter< is a person who, acting alone or with others, ta4es initiative in fo)nding and organi6ing the *)siness or enterprise of the iss)er and receives consideration therefor$ "Sec$ -$1., Sec)rities 7eg)lation ode B7$A$ ,2''C( 243 +ature of Pre7incorporation )greements "Secs$ /. and /1; Bayla v. $ilang 'ra##ic Co.% &nc., 2- Phil$ &&2 B1'%2C($ 2-3 Theories on Lia'ilities for Promoter=s Contracts "Cagayan Fishing %ev. Co." #nc. v. Teodoro Sandiko , ;8 Ph !. 22/ <19/B=D $i!al Light > #ce Co." #nc. v. Pu'lic Service Comm., 28 SCRA 288 <19;8=D Caram" /r. v. C), 181 SCRA /B2 <198B=($ 2. %e Facto C%&"%&'( %# "Sec$ 2.( 2'3 Elements6 )rnold -all v. Piccio , 8; Ph !. ;/0 219803. >y its fail)re to s)*mit its *y1laws on time, the A00>P may *e considered a de #acto corporation whose right to exercise corporate powers may not *e in3)ired into collaterally in any private s)it to which s)ch corporations may *e a party$ $a,ad/aan v. Court o# A""eals , %&' S 7A &1/ "2..&($ /. C%&"%&'( %# 49 E:(%""$! "Sec$ 21; Salvatierra v. arlitos, 10/ Ph !. B8B <1988=< )l'ert v. 0niversity Pu'lishing Co. , 1/ SCRA 80 <19;8=D Asia Ban)ing Cor". v. $tandard Products , %/ Phil$ 1%& B1'2%C; Madrigal $hi""ing Co.% v. 8gilvie, && @$J$ #o$ -&, p$ 2--1( 2'3 +ature of %octrine Lo)nded on principles of e3)ity and designed to prevent in8)stice and )nfairness, the doctrine applies when persons ass)me to form a corporation and exercise corporate f)nctions and enter into *)siness relations with third persons$ ?here no third person is involved in the conflict, there is no corporation *y estoppel$ A failed consolidation therefore cannot res)lt in a consolidated corporation *y estoppel$ *o4ano v. !e *os $antos, 22% S 7A %&2 "1''2( A party cannot challenge the personality of the plaintiff as a d)ly organi6ed corporation after having ac4nowledged same when entering into the contract with the plaintiff as s)ch corporation for the transportation of its merchandise$ 8hta !ev. Co. v. $teamshi" Pom"ey% %' Phil$ 112 "1'2/($2 A person who accepts employment in an )nincorporated charita*le association is estopped from alleging its lac4 of 8)ridical personality$ Christian Children s 1und v. N*.C% 12% S 7A /,1 "1','($ @ne who deals with an )nincorporated association which is not d)ly incorporated is not estopped to deny its corporate existence when his p)rpose is not to avoid lia*ility, *)t precisely to enforce the contract against the action for the p)rported corporation$ #nt?l E2press Travel v. Court of )ppeals" /0/ SCRA ;B0 220003. Under the law on estoppel incl)ding that )nder Sec$ 21 of orporation ode, those acting on *ehalf of an ostensi*le corporation and those bene#ited by it% )no,ing it to be ,ithout valid existence% are held lia*le as general partners$ Lim Tong Lim v. Philippine Fishing ear #ndustries" #nc., /1B SCRA B28 219993$ 243 T)% L$?$!:* 2 3 W (h F1&'>,DG '#, 2 3 W (h%>( F1&'>,G ?hen the incorporators represent themselves to *e officers of the corporation which was never d)ly registered with the SE , and engage in the name of the p)rported corporation in illegal recr)itment, they are estopped from claiming that they are not lia*le as corporate officers )nder Sec$ 2& of orporation ode which provides that all persons who ass)me to act as a corporation 4nowing it to *e witho)t a)thority to do so shall *e lia*le as general partners for all
2 +he same principle applied in Com"ania Agricole de +ltramar v. .eyes , % Phil$ 1 B1'11C *)t that case pertained to a commercial partnership which re3)ired registration in the registry )nder the terms of the ode of ommerce($

22
the de*ts, lia*ilities and damages inc)rred or arising as a res)lt thereof$ Peo"le v. 2arcia, 221 S 7A /21 "1''2(; Peo"le v. Pineda, J$7$ #o$ 112.1., 1, April 1''2 ")np)*($ 0. T RUST

1UND DOCTRINE
ivil ode(

2'3 Commercial@Common Law Premise6 E5uity versus %e'ts "Art$ 22-/, 243 +ature of %octrine6

Under the tr)st f)nd doctrine, the capital stoc4, property and other assets of the corporation are regarded as e3)ity in tr)st for the payment of the corporate creditors$ Comm. o# &nternal .evenue v. Court o# A""eals% -.1 S 7A 1&2 "1'''($ +he ;tr)st f)nd< doctrine considers the s)*scri*ed capital stoc4 as a tr)st f)nd for the payment of the de*ts of the corporation, to which the creditors may loo4 for satisfaction$ Until the li3)idation of the corporation, no part of the s)*scri*ed capital stoc4 may *e t)rned over or released to the stoc4holder "except in the redemption of the redeema*le shares( witho)t violating this principle$ +h)s dividends m)st never impair the s)*scri*ed capital stoc4; s)*scription commitments cannot *e condoned or remitted; nor can the corporation *)y its own shares )sing the s)*scri*ed capital as the consideration therefore$ N'C v. Court o# A""eals% -11 S 7A &., "1'''($ +he re3)irement of )nrestricted retained earnings to cover the shares is *ased on the tr)st f)nd doctrine which means that the capital stoc4, property and other assets of a corporation are regarded as e3)tiy in tr)st for the payment of corporate creditors$ +he reason is that creditors of a corporation are preferred over the stoc4holders in the distri*)tion of corporate assets$ +here can *e no distri*)tion of assets among the stoc4holders witho)t first paying corporate creditors$ Kence, any disposition of corporate f)nds to the pre8)dice of creditors is n)ll and void$ Boman Environmental !ev. Cor". v. CA, 1/2 S 7A &%. "1',,($ 2-3 T% P>&-h':$ O)# Sh'&$: "Secs$ ,, %1, %- and 122, last paragraph; Phil. 'rust Co. v. .ivera, %% Phil$ %/' B1'2-C; $teinberg v. 5elasco, &2 Phil$ '&- B1'2'C( 2,3 R$:- :: %# %+ S>4:-& "( %# A@&$$.$#( B':$, %# B&$'-h +he violation of terms em*odied in a s)*scription agreement, with are personal commitments, do not constit)te legal gro)nd to rescind the s)*scription agreement since s)ch wo)ld violate the +r)st L)nd Foctrine and the proced)res for the valid distri*)tion of assets and property )nder the orporation ode$ ;0n the instant case, the rescission of the Pre1S)*scription Agreement will effectively res)lt in the )na)thori6ed distri*)tion of the capital assets and property of the corporation, there*y violating the +r)st L)nd Foctrine and the orporation ode, since the rescission of a s)*scription agreement is not one of the instances when distri*)tion of capital assets and property of the corporation is allowed$< 1ng :ong v. Tiu , 001 SCRA 1 2200/3. 2$3 D :(& 4>( %# %+ C%&"%&'($ A::$(: ;+he distri*)tion of corporate assets and property cannot *e made to depend on the whims and caprices of the stoc4holders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the co)rt a 0uo Sto prevent f)rther s3)a**les and f)t)re litigationsD )nless the indispensa*le conditions and proced)res for the protection of the corporate creditors are followed$ @therwise, the Scorporate peaceD la)da*ly hoped for *y the co)rt will remain nothing *)t a dream *eca)se this time, it will *e the creditorsD t)rn to engage in Ss3)a**les and litigationsD sho)ld the co)rt order an )nlawf)l distri*)tion in *latant disregard of the +r)st L)nd Foctrine$< 1ng :ong v. Tiu , 001 SCRA 1 2200/3$

2-

VII. ARTICLES O1 INCORPORATION

1. N'(>&$ %+ Ch'&($&* +he charter is in the nat)re of a contract *etween the corporation and the government$ 2overnment o# P.&. v. Manila .ailroad Co$, &2 Phil$ /'' "1'2'($ +he articles of incorporation has *een descri*ed as one that defines the charter of the corporation and the contract)al relationships *etween the state and the corporation, the stoc4holders and the State, and *etween the corporation and its stoc4holders$ *anu4a v. Court o# A""eals, %&% S 7A &% "2..&($ 2. P&%-$,>&$ '#, D%->.$#('&9 R$E> &$.$#(: "Sec$ 1% and 1&( 2'3 )s to +um'er and $esidency of #ncorporators "Sec$ 1.( 0t is possi*le for a *)siness to *e wholly owned *y one individ)al, and the validity of its incorporation is not affected when he gives nominal ownership of only one share of stoc4 to each of the other fo)r incorporators$ +his arrangement is not necessarily illegal, *)t it valid only *etween and among the incorporators privy to the agreement$ 0t does not *ind the corporation which will consider all stoc4holders of record as the lawf)l owners of their registered shares$ As *etween the corporation on the one hand, and its stoc4holders and third persons on the other, the corporation loo4s only to its *oo4s for the p)rpose of determining who its shareholders are$ Nautica Canny Cor". v. @umul, %2- S 7A %1& "2..&($ 243 Corporate +ame "Secs$ 1,, 1%"1( and %2; .ed *ine 'rans. v. .ural 'ransit, /. Phil$ &%'($ Parties organi6ing a corporation m)st choose a name at their peril; and the )se of a name similar to one adopted *y another corporation, ,hether a business or a non"ro#it organi4ation, if misleading or li4ely to in8)re the exercise of its corporate f)nctions, regardless of intent, may *e prevented *y the corporation having a prior right$ Ang Mga 3aanib sa &glesia ng !ios 3ay 3risto Hesus v. &glesia ng !ios 3ay !risto -esus, -22 S 7A 121 "2..1($ Similarity in corporate names *etween two corporations wo)ld ca)se conf)sion to the p)*lic especially when the p)rposes stated in their charter are also the same type of *)siness$ +niversal Mills Cor". v. +niversal 'extile Mills &nc. , 2, S 7A /2 "1'22($ Section 1, of orporation ode expressly prohi*its the )se of a corporate name which is ;identical or dece"tively or con#usingly similar to that o# any existing cor"oration or to any other name already "rotected by la, or is "atently dece"tive% con#using or contrary to existing la,s.B +he policy *ehind the foregoing prohi*ition is to avoid fra)d )pon the p)*lic that will occasion to deal with the entity concerned, the evasion of legal o*ligations and d)ties, and the red)ction of diffic)lties of administration and s)pervision over corporations$ &ndustrial .e#ractories Cor". v. Court o# A""eals, -'. S 7A 2&2 "2..2(; *yceum o# the Phili""ines v. Court o# A""eals% 21' S 7A /1., /1& "1''-($ A corporation has no right to intervene in a s)it )sing a name, not even its acronym, other than its registered name, as the law re3)ires and not another name which it had not registered$ *aureano &nvestment and !ev. Cor". v. Court o# A""eals , 222 S 7A 2&- "1''2($ +here wo)ld *e no denial of d)e process when a corporation is s)ed and 8)dgment is rendered against it )nder its )nregistered trade name, holding that ;BaC corporation may *e s)ed )nder the name *y which it ma4es itself 4nown to its wor4ers$< Pison=Arceo Agricultural !ev. Cor". v. N*.C% 22' S 7A -12 "1''2($ A corporation may change its name *y the amendment of its articles of incorporation, *)t the same is not effective )ntil approved *y the SE $ Phili""ine 1irst &nsurance Co. v. Hartigan, -% S 7A 2&2 "1'2.($ A change in the corporate name does not ma4e a new corporation, and has no effect on the identity of the corporation, or on its property, rights, or lia*ilities$ .e"ublic Planters Ban) v. Court o# A""eals, 21/ S 7A 2-, "1''2(; P.C. -avier & $ons% &nc. v. Court o# A""eals , %/2 S 7A -/ "2..&($ 2-3 P>&"%:$ C!'>:$ "Secs$ 1%"2( and %2; +y $iuliong v. !irector o# Commerce and &ndustry , %. Phil$ &%1 B1'1'C(

2%
;+he *est proof of the p)rpose of a corporation is its articles of incorporation and *y1laws$ +he articles of incorporation m)st state the primary and secondary p)rposes of the corporation, while the *y1laws o)tline the administrative organi6ation of the corporation, which, in t)rn, is s)pposed to ins)re or facilitate the accomplishment of said p)rpose$< +herefore, the o)rt *r)shed aside the contention that the corporations were organi6ed to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as *eing prohi*ited collateral attac4$ 2ala v. Ellice Agro=&ndustrial Cor"., %1, S 7A %-1 "2..-($ 2,3 C%&"%&'($ T$&. "Sec$ 11( #o extension of term can *e effected once dissol)tion stage has *een reached, as it constit)tes new *)siness$ Alhambra Cigar v. $EC, 2% S 7A 2/' "1'/,($ Article /.& of the ivil ode ;clearly limits any )s)fr)ct constit)ted in favor of a corporation or association to &. years$ A )s)fr)ct is meant only as a lifetime grant$ Unli4e a nat)ral person, a corporation or associationDs lifetime may *e extended indefinitely$ +he )s)fr)ct wo)ld then *e perpet)al$ +his is especially invidio)s in cases where the )s)fr)ct given to a corporation or association covers p)*lic land$< NHA v. Court o# A""eals, %&/ S 7A 12 "2..&($ 2$3 P& #- "'! P!'-$ %+ B>: #$:: "Sec$ &1( ?ell esta*lished in o)r 8)rispr)dence is the r)le that the residence of a corporation is the place where its principal office is located, as stated in its Articles of 0ncorporation$ $ $ $ 0t now *ecomes apparent that the residence or domicile of a 8)ridical person is fixed *y ;the law creating or recogni6ing< it$ Under Section 1%"-( of the orporation ode, the place where the principal office of the corporation is to *e located is one of the re3)ired contents of the articles of incorporation, which shall *e filed with the Sec)rities and Exchange ommission "SE ($ Hyatt Elevators and Escalators Cor". v. 2oldstar Elevators% Phils.% &nc. , %2- S 7A 2.& "2..&($ Altho)gh the 7)les of o)rt do not provide that when the plaintiff is a corporation, the complaint sho)ld *e filed in the location of its principal office as indicated in its articles of incorporation, 8)rispr)dence has, however, settled that the place where the principal office of a corporation is located, as stated in the articles, indeed esta*lishes its residence$ +his r)ling is important in determining the ven)e of an action *y or against a corporation, as in the present case$ Hyatt Elevators and Escalators Cor". v. 2oldstar Elevators% Phils.% &nc. , %2- S 7A 2.& "2..&(, citing A0!!A#UEAA, PK0!0PP0#E @7P@7A+E !A? "1'',(, p$ 1/2$ Place of residence of the corporation is the place of its principal office$ Clavecilla .adio $ystem v. Antillon, 1' S 7A -2' "1'/2( +he residence of its president is not the residence of the corporation *eca)se a corporation has a personality separate and distinct from that of its officers and stoc4holders$ $y v. 'yson Enter"rises% &nc., 11' S 7A -/2 "1',2($ 2+3 M # .>. C'" ('! A'( %# "Sec$ 12( - ,hy is ma2imum capitali!ation re5uired to 'e indicated( 2@3 S>4:-& "( %# '#, P' ,->" R$E> &$.$#(: "Sec$ 1-( +he entries in the articles of incorporation of the original iss)ances of shares of stoc4 has a stronger weight that the stoc4 and transfer *oo4 in determining the validity and iss)ance of s)ch shares$ *anu4a v. Court o# A""eals, %&% S 7A &% "2..&($ 2h3 S($": '#, D%->.$#(: R$E> &$, # SEC /. G&%>#,: +%& D :'""&%?'! "Sec$ 12( ?hen the proposed articles show that the o*8ect is to organi6e a *arrio into a separate corporation for the p)rpose of ta4ing possession and having control of all m)nicipal property within the incorporated *arrio and administer it excl)sively for the *enefit of the residents, the o*8ect is )nlawf)l and the articles can *e denied registration$ Asuncion v. !e @riarte , 2, Phil$ /2 "1'1%($ 0t is well to note that, if a corporationDs p)rpose, as stated in the Articles of 0ncorporation, is lawf)l, then the SE has no a)thority to in3)ire whether the corporation has p)rposes other

2& than those stated, and mandam)s will lie to compel it to iss)e the certificate of incorporation$< 2ala v. Ellice Agro=&ndustrial Cor"., %1, S 7A %-1 "2..-($ 0. A.$#,.$#(: (% (h$ A&( -!$: %+ I#-%&"%&'( %# "Sec$ 1/($ 8. C%..$#-$.$#( %+ C%&"%&'($ EC :($#-$ "Sec$ 1'($

VIII. BY-LAWS
1. N'(>&$ '#, 1>#-( %#: " okongwei v. SEC, 89 SCRA //B <19B9=D PeAa v. C), 19/ SCRA B1B <1991=( >y1laws has traditionally *een defined as reg)lations, ordinances, r)les or laws adopted *y an association or corporation or the li4e for its internal governance, incl)ding r)les for ro)tine matters s)ch as calling meetings and the li4e$ 0f those 4ey *y1law provisions on matters s)ch as 3)or)m re3)irements, meetings, or on the internal governance of the local:chapter are themselves already provided for in the constit)tion, then it wo)ld *e feasi*le to overloo4 the re3)irements for *y1laws$ 0ndeed in s)ch an event, to insist on the s)*mission of a separate doc)ment denominated as ;>y1!aws< wo)ld *e an )nd)e technicality, as well as a red)ndancy$ $an Miguel Cor". v. Mandaue Pac)ing Products Plants +nion=11( , %/2 S 7A 1.2 "2..&($ As the ;r)les and reg)lations or private laws enacted *y the corporation to reg)late, govern and control its own actions, affairs and concerns and its stoc4holders or mem*ers and directors and officers with relation thereto and among themselves in their relation to it,< *y1laws are indispensa*le to corporations$ +hese may not *e essential to corporate *irth *)t certainly, these are re3)ired *y law for an orderly governance and management of corporations$ *oyola 2rand 5illas Homeo,ners v. CA% 22/ S 7A /,1 "1''2($ 2'3 Common Law Limitations on By7Laws 2 3 B9-L'): C'##%( B$ C%#(&'&9 (% L') '#, Ch'&($& A *y1law provision granting to a stoc4holder permanent seat in the >oard of Firectors is contrary to the provision in orporation ode re3)iring all mem*ers of the >oard to *e elected *y the stoc4holders$ Even when the mem*ers of the association may have formally adopted the provision, their action wo)ld *e of no avail *eca)se no provision of the *y1laws can *e adopted if it is contrary to law$ 2race Christian High $chool v. Court o# A""eals% 2,1 S 7A 1-- "1''2($ 2 3 B9-L') P&%? : %#: C'##%( B$ U#&$':%#'4!$ %& B$ C%#(&'&9 (% (h$ N'(>&$ %+ B9!'):. 2overnment o# P.&. v. El Hogar 1ili"ino, &. Phil$ -'' "1'22($ A)thority granted to a corporation to reg)late the transfer of its stoc4 does not empower the corporation to restrict the right of a stoc4holder to transfer his shares, *)t merely a)thori6es the adoption of reg)lations as to the formalities and proced)re to *e followed in effecting transfer$ 'homson v. Court o# A""eals% 2', S 7A 2,. "1'',($ >y1laws are intended merely for the protection of the corporation, and prescri*e reg)lation, not restriction; they are always s)*8ect to the charter of the corporation$ .ural Ban) o# $alinas% &nc. v. CA, 21. S 7A &1. "1''2($ 2 3 B9-L') "&%? : %#: -'##%( , :-& . #'($ 243 Binding Effects on By7laws6China Banking Corp. v. Court of )ppeals, 2B0 SCRA 80/ ;#either can we concede that s)ch contract wo)ld *e invalid 8)st *eca)se the signatory thereon was not the hairman of the >oard which allegedly violated the corporationDs *y1laws$ Since *y1laws operate merely as internal r)les among the stoc4holders, they cannot affect or pre8)dice third persons who deal with the corporation, )nless they have 4nowledge of the same$< PM& Colleges v. N*.C, 222 S 7A %/2 "1''2($ 2. A,%"( %# P&%-$,>&$ "Sec$ %/( +here can *e no automatic dissolution simply *eca)se the incorporators failed to file the re3)ired *y1laws )nder Sec$ %/ of orporation ode$ +here is no o)tright ;demise< of corporate

2/
existence$ Proper notice and hearing are cardinal components of d)e process in any democratic instit)tion, agency or society$ 0n other words, the incorporators m)st *e given the chance to explain their neglect or omission and remedy the same$< *oyola 2rand 5illas Homeo,ners v. CA% 22/ S 7A /,1 "1''2($ A corporation which has failed to file its *y1laws within the prescri*ed period does not i"so #acto lose its powers as s)ch, and may *e considered a de #acto corporation whose right to exercise corporate powers may not *e in3)ired into collaterally in any private s)it to which s)ch corporations may *e a party$ $a,ad/aan v. Court o# A""eals, %&' S 7A &1/ "2..&($ $a,ad/aan v. Court o# A""eals, %&' S 7A &1/ "2..&($ /. C%#($#(: "Sec$ %2( 0. A.$#,.$#(: "Sec$ %,( ;Admittedly, the right to amend the *y1laws lies solely in the discretion of the employer, this *eing in the exercise of management prerogative or *)siness 8)dgment$ Kowever this right, extensive as it may *e, cannot impair the o*ligation of existing contracts or rights$ $ $ 0f we were to r)le otherwise, it wo)ld ena*le an employer to remove any employee from his employment *y the simple expediency of amending its *y1laws and providing that his:her position shall cease to exist )pon the occ)rrence of a specified event$< $ala#ranca v. Philamli#e 6Pam"lona7 5illage Homeo,ners% -.. S 7A %/' "1'',($

I5. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. C%&"%&'($ P%)$& '#, C'"'- (9 "Art$ %/, ivil ode; Secs$ -/ and %&; *and Ban) o# the Phili""ines v. C8A, 1'. S 7A 1&% B1''.C( A corporation has only s)ch powers as are expressly granted to it *y law and *y its articles of incorporation, those which may *e incidental to s)ch conferred powers, those reasona*ly necessary to accomplish its p)rposes and those which may *e incident to its existence$ Pili"inas *oan Com"any v. $EC% -&/ S 7A 1'- "2..1($ 2'3 C!':: + -'( %# %+ C%&"%&'($ P%)$&:* E2press< #mplied< and #ncidental 243 Wh$&$ C%&"%&'($ P%)$& L%,@$, A corporation has no power except those expressly conferred on it *y the orporation ode and those that are implied or incidental to its existence$ 0n t)rn, a corporation exercises said powers thro)gh its *oard of directors and:or its d)ly a)thori6ed officers and agents$ $ $ 0n t)rn, physical acts of the corporation, li4e the signing of doc)ments, can *e performed only *y nat)ral persons d)ly a)thori6ed for the p)rpose *y corporate *y1laws or *y a specific act of the *oard of directors$ $hi"side &nc. v. Court o# A""eals, -&2 S 7A --% "2..1($ Unless otherwise provided *y the orporation ode, corporate powers are exercised *y the >oard of Firectors, which they may delegate to either an exec)tive committee, officers or contracted managers$ +he delegation, except for the exec)tive committee, m)st *e for specific p)rposes, which ma4es the officers the agents of the corporation, and accordingly the general r)les of agency as to the *inding effects of their acts wo)ld apply$ Lor s)ch officers to *e deemed f)lly clothed *y the corporation to exercise a power of the >oard, the latter m)st specially a)thori6e them to do so$ AB$=CBN Broadcasting Cor". v. Court o# A""eals , -.1 S 7A &22 "1'''($ 2. 0LT$) ;#$ES %1CT$#+E 2'3 Concept ontracts or acts of a corporation m)st *e made either *y the *oard of directors or *y a corporate agent d)ly a)thori6ed *y the *oardEa*sent s)ch valid delegation:a)thori6ation, the r)le is that the declaration of an individ)al directors relating to the affairs of the corporation, *)t not in the co)rse of, or connected with the performance of a)thori6ed d)ties of s)ch director, are held not *inding on the corporation$ Manila Metal Container Cor". v. PNB , &11 S 7A %%% "2../($ 243 Types of 0ltra;ires )cts "Sec$ %&(

22 A corporation has no power except those expressly conferred on it *y the orporation ode and those that are implied or incidental to its existence$ 0n t)rn, a corporation exercises said powers thro)gh its >oard of Firectors and :or its d)ly a)thori6ed officers and agents$ Mon#ort Hermanos Agricultural !ev. Cor". v. Mon#ort &&&, %-% S 7A 22 "2..%($ First Type 0ltra ;ires6 An ultra vires act is one committed o)tside the o*8ect for which a corporation is crated as defined *y the law of its organi6ation and therefore *eyond the power conferred )pon it *y law$ +he term ; ultra vires; is ;disting)ished from an illegal act for the former is merely voida*le which may *e enforced *y performance, ratification, or estoppel, while the latter is void and cannot *e validated$< )trium &anagement Corp. v. Court of )ppeals, /8/ SCRA 2/ 220013. Second Type 0ltra ;ires6 ?hen the President enters into spec)lative contracts, witho)t prior *oard approval, and witho)t s)*se3)ent s)*mission of those contracts to the >oard for approval or ratification, nor were the transactions incl)ded in the reports of the corporation, s)ch contracts do not *ind the corporation$ 0t m)st *e pointed o)t that the >oard of Firectors, not the President, exercises corporate powers$ $a#ic Alcan & Cie v. &m"erial 5egetable 8il Co.% &nc., -&& S 7A &&' "2..1($ Jenerally, the acts of the corporate officers within the scope of their a)thority are *inding on the corporation$ Kowever, )nder Article 1'1. of the #ew ivil ode, acts done *y s)ch officers *eyond the scope of their a)thority cannot *ind the corporation )nless it has ratified s)ch acts expressly or tacitly, or is estopped from denying them$ $ $ $ +h)s, contracts entered into *y corporate officers *eyond the scope of a)thority are )nenforcea*le against the corporation )nless ratified *y the orporation$ (oodchild Holdings% &nc. v. .oxas Electric Constructions Com"any% &nc., %-/ S 7A 2-& "2..%($ 2-3 $atification of 0ltra ;ires )cts6 "Pirovano v. %e la $ama Steamship Co." #nc. , 9; Ph !. //8 <1980=; Carlos v. Mindoro $ugar Co., &2 Phil$ -%- B1'-2C; .e"ublic v. Aco/e Mining Co., - S 7A -/1 B1'/-C; Crisologo -ose v. Court o# A""eals, 122 S 7A &'% B1','C; -arden v. Benguet Consolidated &ining Co. , 88 Ph !. 100 <19//=3$ Acts done in excess of corporate officersD scope of a)thority cannot *ind the corporation$ Kowever, when s)*se3)ently a compromise agreement was on *ehalf of the corporation *eing represented *y its President acting p)rs)ant to a >oard of FirectorsD resol)tion, s)ch constit)ted as a confirmatory act signifying ratification of all prior acts of its officers$ National Po,er Cor". v. Alon4o=*egasto, %%- S 7A -%2 "2..%($ /. EC"&$:: P%)$&: 2'3 Enumerated Powers 2S$-:. /;3 243 E2tend or Shorten Corporate Term "Secs$ -2 and ,1 B1C( 2-3 #ncrease or %ecrease Capital Stock "Sec$ -,( Fespite the *oard resol)tion approving the increase in capital stoc4 and the receipt of payment on the f)t)re iss)es of the shares from the increased capital stoc4, s)ch f)nds do not constit)te part of the capital stoc4 of the corporation )ntil approval of the increase *y SE $ Central 'extile Mills% &nc. v. N(PC, 2/. S 7A-/, "1''/($ A red)ction of capital to 8)stify the mass layoff of employees, especially of )nion mem*ers, amo)nts to nothing *)t a premat)re and plain distri*)tion of corporate assets to o*viate a 8)st sharing to la*or of the vast profits o*tained *y its 8oint efforts with capital thro)gh the years, and wo)ld constit)te )nfair la*or practice$ Madrigal & Co. v. Camora, 1&1 S 7A -&& "1',2($ 2,3 #ncur" Create or #ncrease Bonded #nde'tedness "Sec$ -,( 2$3 Sell or %ispose of )ssets "Sec$ %.( +he property of the corporation is not the property of the stoc4holders or mem*ers, and as s)ch, may not *e sold witho)t express a)thority from the *oard of directors$ *iton/ua v. Eternit Cor"., %'. S 7A 2.% "2../($ +he disposition of the assets of a corporation shall *e deemed to cover s)*stantially all the corporate property and assts, if there*y the corporation wo)ld *e rendered incapa*le of contin)ing the *)siness or accomplishing the p)rposes for which it was incorporated$ S)ch a

2,
sale or disposition m)st *e )nderstood as valid only if it does not pre8)dice the creditors of the assignor, which necessarily implies that the assignee ass)mes the de*ts of the assignor$ Caltex 6Phils.7% &nc. v. PN8C $hi""ing and 'rans"ort Cor". , %', S 7A %.. "2../($ Sale *y >oard of +r)stees of the only corporate property witho)t compliance with Sec$ %. of orporation ode re3)iring ratification of mem*ers representing at least two1thirds of the mem*ership, wo)ld ma4e the sale n)ll and void$ &slamic !irectorate v. Court o# A""eals , 222 S 7A %&% "1''2(; PeDa v. CA, 1'- S 7A 212 "1''1($ 2+3 #nvest Corporate Funds for +on7Primary Purpose Endeavor "Sec$ %2;%e la $ama v. &a7ao Sugar Central Co., 2B SCRA 20B <19;9=( 2@3 %eclare %ividends "Sec$ %-;+ielson > Co. v. Lepanto Consolidated &ining Co. , 2; SCRA 800 <19;8=( Stoc4 dividend is the amo)nt that the corporation transfers from its s)rpl)s profit acco)nt to its capital acco)nt$ 0t is the same amo)nt that can loosely *e termed as the ;tr)st f)nd< of the corporation$ N'C v. CA% -11 S 7A &., "1'''($ 2h3 Enter into &anagement Contracts "Sec$ %%;+ielson > Co." #nc. v. Lepanto Consolidated &ining , 2; SCRA 800 <19;8=; .ica#ort v. Moya, 1'& S 7A 2%2 B1''1C($ (hy the di##erence in rule bet,een entity and individual> 0. I."! $, P%)$&: ?hen the articles expressly provide that the p)rpose of the corporation was to ;engage in the transportation of person by ,ater,< s)ch corporation cannot engage in the *)siness of land trans"ortation, which is an entirely different line of *)siness, and, for which reason, may not ac3)ire any certificate of p)*lic convenience to operate a taxica* service$ *uneta Motor Co. v. A.!. $antos% &nc$, & S 7A ,.' "1'/2($ A corporation whose primary p)rpose is to generate electric power has no a)thority to )nderta4e stevedoring services to )nload coal into its pier since it is not reasona*ly necessary for the operation of its power plant$ NPC v. 5era% 12. S 7A 221 "1','($ A corporation organi6ed to engage as a lending investor cannot engage in paw*ro4er$ Phili"inas *oan Co. v. $EC, -&/ S 7A 1'- "2..1($ A mining company has not power to engage in real estate development$ Heirs o# Antonio Pael v. Court o# A""eals% -22 S 7A &,2 "2..1($ An officer who is a)thori6ed to p)rchase the stoc4 of another corporation has implied power to perform all other o*ligations arising therefrom s)ch as payment of the shares of stoc4$ &nter=Asia &nvestments &ndustries v. Court o# A""eals, %.- S 7A %&2 "2..-($ 8. I#- ,$#('! P%)$&: +he act of iss)ing chec4s is within the am*it of a valid corporate act, for it as for sec)ring a loan to finance the activities of the corporation, hence, not an ultra vires act$ Atrium Management Cor". v. CA, -&- S 7A 2- "2..1($ ;. O(h$& P%)$&: 2'3 Sell Land and 1ther Properties ?hen the corporationDs primary p)rpose is to mar4et, distri*)te, export and import merchandise, the sale of land is not within the act)al or apparent a)thority of the corporation acting thro)gh its officers, m)ch less when acting thro)gh the treas)rer$ !i4ewise Articles 1,2% and 1,2, of ivil ode re3)ires that when land is sold thro)gh an agent, the agentDs a)thority m)st *e in writing, otherwise the sale is void$ $an -uan $tructural v. CA , 2'/ S 7A /-1 "1'',(; A1 .ealty & !ev.% &nc. v. !ieselman 1reight $ervices Co.% -2- S 7A -,& "2..2(; 1irme v. Bu)al Enter"rises and !ev. Cor"., %1% S 7A 1'. "2..-($ 243 Borrow Funds

2' +he power to *orrow money is one of those cases where even a special power of attorney is re3)ired )nder Art$ 1,2, of ivil ode$ +here is invaria*ly a need of an ena*ling act of the corporation to *e approved *y its >oard of Firectors$ +he arg)ment that the o*taining of loan was in accordance with the ordinary co)rse of *)siness )sages and practices of the corporation is devoid of merit *eca)se the prevailing practice in the corporation was to explicitly a)thori6e an officer to contract loans in *ehalf of the corporation$ China Ban)ing Cor". v. Court o# A""eals, 22. S 7A &.- "1''2($ 2-3 Power to Sue Under Sec$ -/ of orporation ode, in relation to Sec$ 2-, where a corporation is an in8)red party, its power to s)e is lodged with its >oard of Firectors$ A minority stoc4holder who is a mem*er of the >oard has no s)ch power or a)thority to s)e on the corporationDs *ehalf$ 'am (ing 'a) v. Ma)asiar, -&. S 7A %2& "2..1(; $hi"side &nc. v. Court o# A""eals% -&2 S 7A --% "2..1(; $$$ v. C8A , -,% S 7A &%, "2..2(; +nited Paragon Mining Cor". v. Court o# A""eals , %'2 S 7A /-, "2../($ ?here the corporation is real party1in1interest, neither administrator or a pro8ect manager co)ld sign the certificate against for)m1shopping witho)t *eing d)ly a)thori6ed *y resol)tion of the >oard of Firectors " Esteban% -r. v. 5da. de 8norio% -/. S 7A 2-. B2..1C(, nor the Jeneral 5anager who has no a)thority to instit)te a s)it on *ehalf of the corporation even when the p)rpose is to protect corporate assets$ Central Coo"erative Exchange &nc. v. Enciso , 1/2 S 7A 2./ "1',,($ ?hen the power to s)e is delegated *y the *y1laws to a partic)lar officer, s)ch officer may appoint co)nsel to represent the corporation in a pre1trial hearing witho)t need of a formal *oard resol)tion$ Citiban)% N.A. v. Chua% 22. S 7A 2& "1''-($ Lor co)nsel to sign the certification for the corporation, he m)st specifically *e a)thori6ed *y the >oard of Firectors$ BP& *easing Cor". v. CA, %1/ S 7A % "2..-(; Mariveles $hi"yard Cor". v. CA, %1& S 7A &2- "2..-($ 0f the petitioner is a corporation, a *oard resol)tion a)thori6ing a corporate officer to exec)te the certification against for)m shopping is necessaryEa certification not signed *y a d)ly a)thori6ed person renders the petition s)*8ect to dismissal$ 2on4ales v. Climax Mining *td., %&2 S 7A /.2 "2..&(; !BP v. Court o# A""eals, %%. S 7A 2.. "2..%(; Public Estates Authority v. +y, -22 S 7A 1,. "2..1(; Metro !rug !istribution% &nc. v. Narcisco , %'& S 7A 2,/ "2.../($ 2,3 Provide ratuity Pay for Employees Providing grat)ity pay for employees is an express power of a corporation )nder the orporation ode, and cannot *e considered to *e ultra vires to avoid any lia*ility arising from the iss)ance of resol)tion granting s)ch grat)ity pay$ *o"e4 .ealty v. 1ontecha, 2%2 S 7A 1,-, 1'2 "1''&($ 2$3 %onate 2+3 Enter Partnership or /oint ;enture $ Tuason > Co. v. Bolanos , 98 Ph !. 10; 219803; SE @pinion, dated 2' Le*r)ary 1',.$

5. DIRECTORS, TRUSTEES AND O11ICERS

1. D%-(& #$ %+ CENTRALI6ED MANAGEMENT * P%)$&: %+ B%'&, %+ D &$-(%&: "Sec$ 2-; 2amboa v. 5ictoriano, '. S 7A %. B1'2'C($ Section 2- expressly provides that the corporate powers of all corporations shall *e exercised *y the *oard of directors$ H)st as a nat)ral person may a)thori6e another to do certain acts in his *ehalf, so may the *oard of directors of a corporation validly delegate some of its f)nctions to individ)al officers or agents appointed *y it$ +h)s, contracts or acts of a corporation m)st *e made either *y the *oard of directors or *y a corporate agent d)ly a)thori6ed *y the *oard$ A*sent s)ch valid delegation:a)thori6ation, the r)le is that the declarations of an individ)al director relating to the affairs of the corporation, *)t not in the

-.
co)rse of, or connected with the performance of a)thori6ed d)ties of s)ch director, are held not *inding on the corporation$ &anila &etal Container Corp. v. P+B, 811 SCRA 000 2200;3$1 $ationale for 8Centrali!ed &anagement9 %octrine . E Section 2- of the orporation ode explicitly provides that )nless otherwise provided therein, the corporate powers of all corporations formed )nder the ode shall *e exercised, all *)siness cond)cted and all property of the corporation shall *e controlled and held *y a *oard of directors$ +he raison d etre *ehind the conferment of corporate powers on the *oard of directors is not lost on the o)rtEindeed, the concentration in the *oard of the powers of control of corporate *)siness and appointment of corporate officers and managers is necessary for efficiency in any large organi6ation$ Stoc4holders are too n)mero)s, scattered and )nfamiliar with the *)siness of a corporation to cond)ct its *)siness directly$ And so the plan of corporate organi6ation is for the stoc4holders to choose the directors who shall control and s)pervise the cond)ct of corporate *)siness$ Filipinas Port Services v. o , 818 SCRA 08/ 2200B3$ ;>oard of Firectors< is the *ody which "1( exercises all powers provided for )nder the orporation ode; "2( cond)cts all *)siness of the corporation; and "-( controls and holds all property of the corporation$ 0ts mem*ers have *een characteri6ed as tr)stees or directors clothed with a fid)ciary character$ 0t is clearly separate and distinct from the corporate entity itself$ Hornilla v. $alunat, %.& S 7A 22. "2..-($ A corporation is an artificial *eing and can only exercise its powers and transact its *)siness thro)gh the instr)mentalities of its >oard of Firectors, and thro)gh its officers and agents, when a)thori6ed *y resol)tion or *y its *y1laws$ onse3)ently, when legal co)nsel was clothed with a)thority thro)gh formal *oard resol)tion, his acts *ind the corporation which m)st *e held *o)nd the act)ations of its co)nsel of record$ !e *iano v. Court o# A""eals , -2. S 7A -%' "2..1($ ;+he physical acts of the corporation, li4e the signing of doc)ments, can *e performed only *y nat)ral persons d)ly a)thori6ed for the p)rpose *y corporate *y1laws or *y a special act of the *oard of directors$< 1irme v. Bu)al Enter"rises and !ev. Cor"., %1% S 7A 1'. "2..-(; $hi"side &nc. v. Court o# A""eals, -&2 S 7A --% "2..1($ 2'3 Theories on Source of Board Power ")ngeles v. Santos, ;0 Ph !. ;9B <19/B=($ @ne of the most important rights of a 3)alified shareholder or mem*er is the right to voteE either personally or *y proxyEfor the directors or tr)stees who are to manage the corporate affairs$ +he right to choose the persons who will direct, manage and operate the corporation is significant, *eca)se it is the main way in which a stoc4holder can have a voice in the management of corporate affairs, or in which a mem*er in a nonstic4 corporation can have a say on how the p)rposes and goals of the corporation may *e achieved$ @nce the directors or tr)stees are elected, the stoc4holders or mem*ers relin3)ish corporate powers to the *oard in accordance with law$ Tan v. Sycip, 099 SCRA 21; 2200;3$ 243 Board &ust )ct )s a Body "Sec$ 2&; Board of Li5uidators v. -eirs of &a2imo &. .alaw, 20 SCRA 98B <19;B=; .amire4 v. 8rientalist Co., -, Phil$ /-% B1'1,C; AcuDa v. Batac Producers Coo"erative Mar)eting Assn. , 2. S 7A &2/ B1'/2C($ A corporation, thro)gh its >oard of Firectors, sho)ld act in the manner and within the formalities prescri*ed *y its charter or *y the general law$ +h)s, directors m)st act as a *ody in a meeting called p)rs)ant, otherwise, any action ta4en therein may *e 3)estioned *y any o*8ecting director or shareholder$ >e that as it may, 8)rispr)dence tells )s that an action of the *oard of directors d)ring a meeting, which was illegal for lac4 of notice, may *e ratified either expressly, *y the action of the directors in s)*se3)ent legal meeting, or impliedly, *y the corporationPs s)*se3)ent co)rse of cond)ct$ *o"e4 .ealty v. 1ontecha, 2%2 S 7A 1,- "1''&($ 2-3 Effects of 8Bogus9 Board 9 +he acts or contracts effected *y a *og)s *oard wo)ld *e void p)rs)ant to Art$ 1-1, of ivil ode *eca)se of the lac4 of ;consent<$ &slamic !irectorate o# the Phili""ines v. Court o# A""eals, 222 S 7A %&% "1''2($ 2,3 E2ecutive Committee "Sec$ -&;Filipinas Port Services" #nc. v. 2200B3 o , 818 SCRA 08/

1 Also .eyes v. .CP& Em"loyees Credit +nion% &nc., %'' S 7A -1' "2../(; @asuma v. Heirs o# Cecilio $. !e 5illa, %'' S 7A %// "2../(; .aniel v. -ochico, &12 S 7A 221 "2..2($

-1 2.

BUSINESS 7UDGMENT RULE "&onteli'ano v. Bacolod7&urcia &iling Co." #nc. , 8 SCRA

/; <19;2=D PSE v. Court of )ppeals" 281 SCRA 2/2 <199B=( 0f the ca)se of the losses is merely error in *)siness 8)dgment, not amo)nting to *ad faith or negligence, directors and:or officers are not lia*le$ Lor them to *e held acco)nta*le, the mismanagement and the res)lting losses on acco)nt thereof are not the only matters to *e proven; it is li4ewise necessary to show that the directors and:or officers acted in *ad faith and with malice in doing the assailed acts$ >ad faith does not simply connote *ad 8)dgment or negligence; it imports a dishonest p)rpose or some moral o*lig3)ity and conscio)s doing of a wrong, a *reach of a 4nown d)ty thro)gh some motive or interest or ill1will parta4ing of the nat)re of fra)d$ 1ili"inas Port $ervices% &nc. v. 2o, &1, S 7A %&- "2..2($ #o co)rt can, as an integral part of resolving the iss)es *etween s3)a**ling stoc4holders, order the corporation to )nderta4e certain corporate acts, since it wo)ld *e in violation of the *)siness 8)dgment r)le$ 1ng :ong v. Tiu , 001 SCRA 1 2200/3. Firectors and officers who p)rport to act for the corporation, 4eep within the lawf)l scope of their a)thority and act in good faith, do not *ecome lia*le, whether civilly or otherwise, for the conse3)ences of their acts, which are properly attri*)ted to the corporation alone$ Benguet Electric Coo"erative% &nc. v. N*.C, 2.' S 7A && "1''2($

/. COUNTER-VEILING DOCTRINES TO PROTECT CORPORATE CONTRACTS 2'3 Theory of Estoppel or $atification +he principle of estoppel precl)des a corporation and its >oard of Firectors from denying the validity of the transaction entered into *y its officer with a third party who in good faith, relied on the a)thority of the former as manager to act on *ehalf of the corporation$ Lipat v. Pacific Banking Corp." 002 SCRA //9 2200/3. 0n order to ratify the )na)thori6ed act of an agent and ma4e it *inding on the corporation, it m)st *e shown that the governing *ody or officer a)thori6ed to ratify had f)ll and complete 4nowledge of all the material facts connected with the transaction to which it relates$ 7atification can never *e made on the part of the corporation *y the same person who wrongf)lly ass)me the power to ma4e the contract, *)t the ratification m)st *e *y the officer or governing *ody having a)thority to ma4e s)ch contract$ 5icente v. 2eralde4, &2 S 7A 21. "1'2-($ +he admission *y co)nsel on *ehalf of the corporation of the latterDs c)lpa*ility for personal loans o*tained *y its corporate officers cannot *e given legal effect when the admission was ;witho)t any ena*ling act or attendant ratification of corporate act,< as wo)ld a)thori6e or even ratify s)ch admission$ 0n the a*sence of s)ch ratification or a)thority, s)ch admission does not *ind the corporation$ Aguen4a v. Metro"olitan Ban) and 'rust Co.% 221 S 7A 1 "1''2($ %octrine of Laches or 8Stale %emands96 +he principle of laches or ;stale demands< provides that the fail)re or neglect, for an )nreasona*le and )nexplained length of time, to do that which *y exercising d)e diligence co)ld or sho)ld have *een done earlier, or the negligence or omission to assert a right within a reasona*le time, warrants a pres)mption that the party entitled to assert it either has a*andoned it or declined to assert it$ .ovels Enter"rises% &nc. v. 8cam"o, -'1 S 7A 12/ "2..2($ 243 Theory of )pparent )uthority "Art$ 1,,-, ivil ode; ,oodchild -oldings" #nc. v. $o2as Electric Constructions Company" #nc. , 0/; SCRA 2/8 220003D Francisco v. S#S, B SCRA 8BB <19;/=D Prime ,hite Cement Corp. v. #)C, 220 SCRA 10/, 11/110 <199/=D :ao .a Sin Trading v. C), 209 SCRA B;/ <1992=3. 0f a corporation 4nowingly permits one of its officers to act within the scope of an apparent a)thority, it holds him o)t to the p)*lic as possessing the power to do those acts, the corporation will, as against anyone who has in good faith dealt with it thro)gh s)ch agent, *e estopped from denying the agentDs a)thority$ $oler v. Court o# A""eals, -&, S 7A &2 "2..1($ +he a)thority of a corporate officer dealing with third persons may *e act)al or apparent $ $ $ the principal is lia*le for the o*ligations contracted *y the agent$ +he agentD apparent representation yields to the principalPs tr)e representation and the contract is considered as entered into *etween the principal and the third person$ 1irst Phili"ine &nternational Ban) v. Court o# A""eals, 2&2 S 7A 2&' "1''/($

-2
Persons who deal with corporate agents within circ)mstances showing that the agents are acting in excess of corporate a)thority, may not hold the corporation lia*le$ 'raders .oyal Ban) v. Court o# A""eals, 2/' S 7A /.1 "1''2($ Apparent a)thority may *e ascertained thro)gh "1( the general manner in which the corporation holds o)t an officer or agent as having the power to act, or, in other words the apparent a)thority to act in general with which is clothes them; or "2( the ac3)iescence in his acts of a partic)lar nat)re, with act)al or constr)ctive 4nowledge thereof, within or *eyond the scope of his ordinary powers$ &nter=Asia &nvestment &ndustries v. Court o# A""eals% %.- S 7A %&2 "2..-($ ?hen a *an4ing corporation, when an officers arranges a credit line agreement and forwards the same to the legal department at its head officer, and the *an4 did no disaffirm the contract, then it is *o)nd *y it$ Premier !ev. Ban) v. Court o# A""eals, %22 S 7A /,/ "2..%$ A corporation cannot disown its PresidentDs act of applying to the *an4 for credit accommodation, simply on the gro)nd that it never a)thori6ed the President *y the lac4 of any formal *oard resol)tion$ +he following placed the corporation and its >oard of Firectors in estoppel in "ais= Lirstly, the *y1laws provides for the powers of the President, which incl)des, exec)ting contracts and agreements, *orrowing money, signing, indorsing and delivering chec4s; secondly, there were already previo)s transaction of disco)nting the chec4s involving the same personalities wherein any ena*ling resol)tion from the >oard was dispensed with and yet the *an4 was a*le to collect from the corporation$ +yco Sales Corp. v. B) Finance Corp." 200 SCRA ;/B 219913$ Per its SecretaryDs ertificate, the fo)ndation had given its President ostensi*le and apparent a)thority to inter alia deal with the respondent >an4, and therefore the fo)ndation is estopped from 3)estioning the PresidentDs a)thority to o*tain the s)*8ect loans from the respondent >an4$ *a"ula"u 1oundation% &nc.% v. Court o# A""eals, %21 S 7A -2, "2..%($ A ver*al promise given *y the hairman and President of the company to the general manager and chief operating officer to give the latter )nlimited sic4 leave and vacation leave *enefits and its cash conversion )pon his retirement or resignation, when not an integral part of the companyDs r)les and policies, is not *inding on the company when it is witho)t the approval of the >oard of Firectors$ 3,o) v. Phili""ine Car"et Manu#acturing Cor". , %&2 S 7A %/& "2..&($ orporate policies need not *e in writing$ ontracts entered into *y a corporate officer or o*ligations or prestations ass)med *y s)ch officer for and in *ehalf of s)ch corporation are *inding on the said corporation only if s)ch officer acted within the scope of his a)thority or if s)ch officer exceeded the limits of his a)thority, the corporation has ratified s)ch contracts or o*ligations$ 3,o) v. Phili""ine Car"et Manu#acturing Cor". , %&2 S 7A %/& "2..&($ +he acceptance of the offer to p)rchase *y the cler4 of the *ranch of the *an4, and the representation that the manager had already approved the sale "which in fact was not tr)e(, cannot *ind the *an4 to the contract of sale, it *eing o*vio)s that s)ch a cler4 is not among the *an4 officers )pon whom p)tative a)thority may *e reposed *y a third party$ +here is, th)s, no legal *asis to *ind the *an4 into any valid contract of sale with the *)yers, given the a*sol)te a*sence of any approval or consent *y any responsi*le officer of the *an4$ !BP v. 8ng, %/. S 7A 12. "2..&($ Acts done in excess of corporate officersD scope of a)thority cannot *ind the corporation$ Kowever, when s)*se3)ently a compromise agreement was on *ehalf of the corporation *eing represented *y its President acting p)rs)ant to a >oard of FirectorsD resol)tion, s)ch constit)ted as a confirmatory act signifying ratification of all prior acts of its officers$ National Po,er Cor". v. Alon4o=*egasto, %%- S 7A -%2 "2..%($ 0. H>'! + -'( %#: %+ D &$-(%&: '#, T&>:($$: "Secs$ 2- and 22; okongwei" /r. v. SEC, 89 SCRA //; <19B9=($ 2'3 A director m)st own at least one share of stoc4$ PeDa v. CA, 1'- S 7A 212 "1''1(; !etective & Protective Bureau% &nc. v. Cloribel, 2/ S 7A 2&& "1'/'($ +he law does not re3)ire that a Aice1President *e a stoc4holder$ Baguio v. Court o# A""eals, 22/ S 7A -// "1''-($

-243 >eneficial ownership )nder voting tr)st arrangement no longer 3)alifies " Lee v. C), 208 SCRA B82 <1992=($ 8. E!$-( %# %+ D &$-(%&: '#, T&>:($$: 2'3 Firectors "Secs$ 2% and 2/; Premium Marble .esources v. Court o# A""eals% 2/% S 7A 11($ orporations are re3)ired )nder Section 2/ of the orporation ode to s)*mit to the SE within thirty "-.( days after the election the names, nationalities, and residences of the directors, tr)stees and officers of the orporation$ 0n order to 4eep stoc4holders and the p)*lic transacting *)siness with domestic corporation properly informed of their organi6ation operational stat)s, the SE has iss)ed the r)le re3)iring the filing of the Jeneral 0nformation Sheet$ Mon#ort Hermanos Agricultural !ev. Cor". v. Mon#ort &&&, %-% S 7A 22 "2..%($ ?hen the names of some of the directors who signed the *oard resol)tion does not appear in the Jeneral 0nformation Sheet filed with the SE , then there is do)*t whether they were indeed d)ly elected mem*ers of the >oard legally constit)ted to *ring s)it in *ehalf of the orporation$ Mon#ort Hermanos Agricultural !ev. Cor". v. Mon#ort &&&, %-% S 7A 22 "2..%($ 243 +r)stee "Secs$ '2 and 1-,( 2-3 CUMULATIVE VOTING "Sec$ 2%; Cumulative ;oting in Corporate Elections6 #ntroducing Strategy in the E5uation" /8 SOUTH CAROLINA L. REV. 298( ;. V'-'#-9 # B%'&, "Sec$ 2'( A *y1law provision or company practice of giving a stoc4holder a permanent seat in the >oard wo)ld *e against the provision of Secs$ 2, and 2' of orporation ode which re3)ires mem*er of the *oard of corporations to *e elected$ 2race Christian High $chool v. Court o# A""eals% 2,1 S 7A 1-- "1''2($ B. T$&. %+ O++ -$, H%!,-%?$& P& #- "!$ Firectors may lawf)lly fill vacancies occ)rring in the *oard, and s)ch officials, as well as the original directors, hold1over )ntil 3)alification of their s)ccessors$ 2overnment v. El Hogar 1ili"ino, &. Phil$ -'' "1'22($ +he remedy is 0uo ,arranto to 3)estion the legality and proper 3)alification of persons elected to the *oard$ Ponce v. Encarnacion, '% Phil$ ,1 "1'&-($ 8. R$.%?'! %+ D &$-(%&: %& T&>:($$: "Sec$ 2,; .oxas v. !e la .osa, %' Phil$ /.' B1'2/C($ @nly stoc4holders or mem*ers have the power to remove the directors or tr)stees elected *y them, as laid down in $ection ;F o# the Cor"oration Code. < .aniel v. -ochico, &12 S 7A 221, 2-. "2..2($ 9. D &$-(%&:I %& T&>:($$:I M$$( #@: "Secs$ %', &-, &% and '2( 2'3 3uorum6 Lor stoc4 corporations, the ;3)or)m< referred to in Section &2 of the orporation ode is *ased on the n)m*er of outstanding voting stoc4s$ Lor nonsto4 corporations, only those who are actual% living mem*ers with voting rights shall *e co)nted in determining the existence of a 3)or)m d)ring mem*ersD meetings$ Fead mem*ers shall not *e co)nted$ 'an v. $yci", %'' S 7A 21/ "2../($ 0n stoc4 corporations, the presence of a 3)or)m is ascertained and co)nted on the *asis of the outstanding ca"ital stoc) , as defined *y Section 1-2 of the orporation ode$ 'an v. $yci", %'' S 7A 21/ "2../($ ?hen the principle for determining 3)or)m for stoc4 corporations is applied *y analogy to nonstic4 corporations, only those who are act)al mem*ers with voting rights sho)ld *e co)nted$ 'an v. $yci", %'' S 7A 21/ "2../($ 243 )'stention6 0n a *oard meeting, an a*stention is pres)med to *e co)nted as an affirmative vote inso#ar as it may be construed as an ac0uiescence in the action o# those ,ho voted a##irmativelyA *)t s)ch pres)mption, *eing merely "rima #acie wo)ld not hold in the face of clear evidence to the contrary$ *o"e4 v. Ericta, %& S 7A &-' "1'22($

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10. C%."$#:'( %# %+ D &$-(%&: "Sec$ -.( Firectors and tr)stees are not entitled to salary or other compensation when they perform nothing more than the )s)al and ordinary d)ties of their office, fo)nded on the pres)mption that directors and tr)stees render service grat)ito)sly, and that the ret)rn )pon their shares ade3)ately f)rnishes the motives for service, witho)t compensation$ >)t they can receive rem)nerations for exec)tive officer position$ (estern &nstitute o# 'echnology% &nc. v. $alas% 22, S 7A 21/, 22- "1''2($ 11. 1IDUCIARY DUTIES O1 DIRECTORS AND O11ICERS 2'3 %irectors as Fiduciaries 1 Pre7Corporation Code6 Palting v. San /ose Petroleum" #nc., 18 SCRA 920. 1 +ature of %uties of %irectors and 1fficers6 Prime ,hite Cement Corp. v. #)C, 220 SCRA 10/ 2199/3. 243 %uty of 1'edience A corporation, thro)gh its >oard of Firectors, sho)ld act in the manner and within the formalities, if any, prescri*ed *y its charter or *y the general law$ *o"e4 .ealty% &nc. v. 1ontecha, 2%2 S 7A 1,- "1''&( 2-3 %uty of %iligence "Sec$ -1; Stein'erg v. ;elasco, 82 Ph !. 98/ <1929=D Bates v. %resser, 281 U.S. 820, ;0 L. E,. /88, 00 S. C(. 20B <1919=D Smith v. ;an orkam, 088 A.2, 888, S>"&$.$ C%>&( %+ D$!')'&$, 1988($ +o hold a director personally lia*le for de*ts of the corporation, and th)s pierce the veil of corporate fiction, the *ad faith or wrongdoing of the director m)st *e esta*lished clearly and convincingly$ >ad faith is never pres)med$ >ad faith does not connote *ad 8)dgment or negligence$ >ad faith imports a dishonest p)rpose$ >ad faith means BaC *reach of a 4nown d)ty thro)gh some ill motive or interest$ >ad faith parta4es of the nat)re of fra)d$ Carag v. N*.C, &2. S 7A 2, "2..2($ Lor wrongdoing to ma4e a director personally lia*le for de*ts of the corporation, the wrongdoing approved or assented to *y the director m)st *e a "'($#(!9 >#!')+>! '-($ 5ere fail)re to comply with the notice re3)irement of la*or laws on company clos)re or dismissal of employees does not amo)nt to a patently )nlawf)l act$ Patently )nlawf)l acts are those ,$-!'&$, >#!')+>! 49 !') which imposes penalties for commission of s)ch )nlawf)l acts$ +here m)st *e a law declaring the act )nlawf)l and penali6ing the act$ Carag v. N*.C, &2. S 7A 2, "2..2( 2,3 %uty of Loyalty "Secs$ -1 to -%; &ead v. &cCullough , 21 Ph !. 98 <1911=3. 1 D%-(& #$ %+ C%&"%&'($ O""%&(># (9 " okongwei v. SEC, 89 SCRA //; <19B9=($ 1 S$!+-,$'! #@: "Secs$ -2 and --( 1 U: #@ I#: ,$ I#+%&.'( %# "2o)ong,ei v. $EC, ,' S 7A --/ B1'2'C($ ?hen a director1ma8ority stoc4holder, who is the administrator of corporate affairs directly negotiating the sale of corporate landholdings to the Jovernment at great prices, p)rchases the stoc4s of a shareholder witho)t informing the latter of the on1going negotiations, s)ch director is deemed to have fra)d)lently ac3)ired the shareholdings *y way of deceit practiced *y means of concealing his 4nowledge of important corporate affairs$ $trong v. .e"ide, %1 Phil$ '%2 "1'.'($ 1 A""! $: (% -%#+ ,$#( '! $."!%9$$: "c#. $ing -uco v. *lorente, %- Phil$ &,' B1'22C( 2$3 %uty to Creditors and 1utsiders 2+3 Corporate %ealings with %irectors and 1fficers "Sec$ -2; 2o)ong,ei v. $EC, ,' S 7A --/ B1'2'C; Prime (hite Cement Cor". v. &AC, 22. S 7A 1.- B1''-C($ 2@3 Contracts Between Corporations with #nterlocking %irectors "Sec$ --( +he r)le )nder Sec$ -- of orporation ode allowing ann)lment of contracts *etween corporations with interloc4ing directors res)lting in the pre8)dice to one of the corporation, has no application to cases where fra)d is alleged to have *een committed to third parties$ !BP v. Court o# A""eals% -/- S 7A -.2 "2..1($

2h3 SEC Code of Corporate 12. CORPORATE O11ICERS

overnance "SE

5emorand)m$

-& irc)lar #o$ 2, series of 2..2(

+he general principles of agency govern the relation *etween the corporation and its officers or agents, s)*8ect to the articles of incorporation, *y1laws, or relevant provisions of law Ewhen a)thori6ed, their acts *ind the corporation, otherwise, their acts cannot *ind it$ @asuma v. Heirs o# Cecilio $. !e 5illa , %'' S 7A %// "2../(; *iton/ua v. Eternit Cor". , %'. S 7A 2.% "2../($ 2'3 ,ho #s a Corporate 81fficer9( "Sec$ 2&; urrea v. Le!ama, 10/ Ph !. 88/ <1988=; &ita Pardo de Tavera v. Tu'erculosis Society , 112 SCRA 20/ <1982=; P$BA v. *eaDo, 122 S 7A 22, B1',%C; !y v. N*.C, 1%& S 7A 211 B1',/C; 5isayan v. N*.C, 1'/ S 7A %1. B1''1C; Easycall Communications Phils.% &nc. v. 3ing, %2, S 7A 1.2 B2..&C($ A mere manager not so named in the *y1laws does is not an officer of the corporation$ Pam"lona Plantation Com"any v. Acosta , &1. S 7A 2%' "2../($ An officerDs removal is a corporate act, and if s)ch removal occasions an intra1corporate controversy, its nat)re is not altered *y the reason or wisdom, or lac4 thereof, with which the >oard of Firectors might have in ta4ing s)ch action$ Perforce, the matter wo)ld come within the area of corporate affairs and management, and s)ch a corporate controversy wo)ld call for SE ad8)dicative expertise, not that of #!7 $ %e $ossi v. +L$C, /10 SCRA 208 219993. ?hen the *y1laws provide for the position of ;S)perintendent: Administrator,< it is clearly a corporate officer position and iss)es of reinstatement wo)ld *e within the 8)risdiction of the SE and not the #!7 $ 8ng)ingco v. N*.C, 22. S 7A /1- "1''2($ ?hen the *y1laws provides that one of the powers of the >oard is ;BtCo appoint a 5edical Firector, omptroller:Administrator, hiefs of Services and s)ch other officers as it may deem necessary and prescri*e their powers and d)ties,< then s)ch specifically designated positions sho)ld *e considered ;corporate officers<$ +he determination of the rights and the concomitant lia*ility arising from any o)ster from s)ch positions, wo)ld *e intra1corporate controversy s)*8ect to SE Ds 8)risdiction$ 'abang v. N*.C% 2// S 7A %/2 "1''2($ +he fact that ; omptroller< is not mentioned in the *y1laws does not )ndermine the appointment to s)ch position since )nder Sec$ 2& of orporation ode, the >oard of Firectors is a)thori6ed to appoint s)ch other officers as it may deem necessary$ 0n this case the *y1 laws provided ;and s)ch other officers as the >oard of Firectors may from time to time does fit to provide for$ Said officers shall *e elected *y ma8ority vote of the >oard of Firectors$< >y1 laws may and )s)ally do provide for s)ch other officers, and that where a corporate office is not specifically indicated in the roster of corporate offices in the *y1laws of a corporation, the >oard of Firectors may also *e empowered )nder the *y1laws to create additional officers as may *e necessary$ +acpil v. #nternational Broadcasting Corp. , /B9 SCRA ;8/ 220023. 243 Powers of Corporate 1fficers6 ?hile the o)rt agrees that those who *elong to the )pper corporate echelons wo)ld have more privileges, it cannot *e pres)me the existence of s)ch privileges or *enefitsEhe who claims the same is *)rdened to prove not only the existence of s)ch *enefits *)t also that he is entitled to the same$ 3,o) v. Phili""ine Car"et Manu#acturint Cor". , %&2 S 7A %/& "2..&($ Even tho)gh a 8)dgment, decree or order is addressed to the corporation only, the officers as well as the corporation itself, may *e p)nished for contempt for diso*edience to its terms, at least if they 4nowingly diso*ey the co)rtDs mandate, since a lawf)l 8)dicial command to a corporation is in effect a command to the officers$ Heirs o# 'rinidad de *eon 5da. !e .oxas v. Court o# A""eals, %22 S 7A 1.1 "2..%($ 2 3 $ule on Corporate 1fficer?s Power to Bind Corporation E An officerDs power as an agent of the corporation m)st *e so)ght from the stat)te, charter, the *y1laws or in a delegation of a)thority to s)ch officer, from the acts of the *oard of directors formally expressed or implied from a ha*it or c)stom of doing *)siness$ 5icente v. 2eralde4, &2 S 7A 21. "1'2-(; Boyer=.oxas v. Court o# A""eals, 211 S 7A %2. "1''2($

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As a general r)le, the acts of corporate officers within the scope of their a)thority are *inding on the corporation, *)t when these officers exceeded their a)thority, their actions cannot *ind the corporation, )nless it has ratified s)ch acts or is estopped from disclaiming them$ .eyes v. .CP& Em"loyees Credit +nion% &nc., %'' S 7A -1' "2../($ 2 3 President. People?s )ircargo v. Court of )ppeals, 29B SCRA 1B0 219983. 0t is the >oard of Firectors, not the President, that exercises corporate powers$ 0t m)st *e emphasi6ed that the *asis for agency is representation and a person dealing with an agent is p)t )pon in3)iry and m)st discover )pon his peril the a)thority of the agent$ $a#ic Alcan & Cie v. &m"erial 5egetable 8il Co.% &nc.% -&& S 7A &&' "2..1($ A corporation may not distance itself from the acts of a senior officer= "the d)al roles of 7om)lo L$ S)gay sho)ld not *e allowed to conf)se the facts$" ..1. $ugay v. .eyes, 12 S 7A 2.. "1'/1($ +he President is considered as the corporationDs agent, and as s)ch, his 4nowledge of the repeal of a resol)tion in another 8)ridical person in which his corporation has an interest, is ascri*ed to his principal )nder the theory of imp)ted 4nowledge$ .ovels Enter"rises% &nc. v. 8cam"o, -'2 S 7A 12/ "2..2($ +he President of the corporation which *ecomes lia*le for the accident ca)sed *y its tr)c4 driver cannot *e held solidarily lia*le for the 8)dgment o*ligation arising from 3)asi1 delict, since the fact alone of *eing President is not s)fficient to hold him solidarily lia*le for the lia*ilities ad8)dged against the corporation and its employee$ $ecosa v. Heirs o# Er,in $uare4 1ancisco, %-- S 7A 22- "2..%($ 2 3 Corporate Secretary 0n the a*sence of provisions to the contrary, the corporate secretary is the c)stodian of corporate recordsEhe 4eeps the stoc4 and transfer *oo4 and ma4es proper and necessary entries therein$ 0t is his d)ty and o*ligation to register valid transfers of stoc4 in the *oo4s of the corporation; and in the event he ref)ses to comply with s)ch d)ty, the transferor1 stoc4holder may rightf)lly *ring s)it to compel performance$ 'orres% -r. v. Court o# A""eals% 22, S 7A 2'- "1''2($ Altho)gh the corporate secretaryDs d)ty to record transfers of stoc4 is ministerial, he cannot *e compelled to do so when the transfereeDs title to said shares has no "rima #acie validity or is )ncertain$ 5ore specifically, a pledgor, prior to foreclos)re and sale, does not ac3)ire ownership rights over the pledged shares and th)s cannot compel the corporate secretary to record his alleged ownership of s)ch shares on the *asis merely of the contract of pledge$ 5andam)s will not iss)e to esta*lish a right, *)t only to enforce one that is already esta*lished$ *im 'ay v. Court o# A""eals% 2'- S 7A /-% "1'',(; 'C* $ales Cor". v. Court o# A""eals% -%' S 7A -& "2..1($ A sale that fails to comply with Sec$ %. of orporation ode, cannot *e invalidated when the *)yer relies )pon a SecretaryDs ertificate confirming a)thority$ A secretaryDs certificate which is reg)lar on its face can *e relied )pon *y a third party who does not have to investigate the tr)ths of the facts contained in s)ch certification; otherwise *)siness transactions of corporations wo)ld *ecome tort)o)sly slow and )nnecessarily hampered$ Esguerra v. Court o# A""eals% 2/2 S 7A -,. "1''2($ 2 ?3 Corporate Treasurer A corporate treas)rerDs f)nction have generally *een descri*ed as ;to receive and 4eeps f)nds of the corporation, and to dis*)rse them in accordance with the a)thority given him *y the *oard or the properly a)thori6ed officers$< Unless d)ly a)thori6ed, a treas)rer, whose power are limited, cannot *ind the corporation in a sale of its assets, which o*vio)sly is foreign to a corporate treas)rerDs f)nction$ $an -uan $tructural v. Court o# A""eals , 2'/ S 7A /-1, /%& "1'',($ A corporate treas)rer whose negligence in signing a confirmation letter for redisco)nting of crossed chec4s, 4nowing f)lly well that the chec4s were strictly endorsed for deposit only to the payeeDs acco)nt and not to *e f)rther negotiated, may *e personally lia*le for the damaged ca)sed the corporation$ Atrium Management Cor". v. Court o# A""eals , -&- S 7A 2- "2..1($

-2 2-3 Service of Summons on Corporations Corporate Bookkeeper6 Lor p)rposes of determining proper service of s)mmons to a corporation in a 3)asi18)dicial proceeding *efore the #!7 , a *oo44eeper can *e considered as an agent of the corporation within the p)rview of the 7)les of o)rt$ +he rationale of all r)les with respect to service of process on a corporation is that s)ch service m)st *e made to an agent or a re"resentative so integrated with the corporation s)ed as to ma4e it a "riori s)pposa*le that he will reali6e his responsi*ilities and )no, ,hat he should do ,ith any legal "a"ers served on him. 'he boo))ee"er s tas) is one under consideration that his regular recording o# the cor"oration s Gbusiness accountsB and Gessential #acts about the transactions o# a business or enter"riseB sa#eguards the cor"oration #rom "ossible #raud being committed adverse to its o,n cor"orate interest $ Pabon v. N*.C% 2'/ S 7A 2 "1'',($ Prevailing $ule6 Section 11, 7)le 1% of the 1''2 7)les of ivil Proced)re )ses the term ;general manager< and )nli4e the old provision in the 7)les of o)rt, it does not incl)de the term ;agent<$ onse3)ently, the en)meration of persons to whom s)mmons may *e served is ;restricted, limited and excl)sive< following the r)le on stat)tory constr)ction ex"ressio unios est exclusion alterius. +herefore, the earlier cases that )phold service of s)mmons )pon a constr)ction pro8ect manager; 1 a corporationDs assistant manager; 2 ordinary cler4 of a corporation; - private secretary of corporate exec)tives; % retained co)nsel; & officials who had charge or control of the operations of the corporation, li4e the assistant general manager;/ or the corporationDs hief Linance and Administrative @fficer; 2 no longer apply since they were decided )nder the old r)le that allows service of s)mmons )pon an agent , of the corporation$ E.B. 5illarosa & Partners Co.% *td. v. Benito , -12 S 7A /& "1'''($ 1/.

LIABILITIES O1 CORPORATE O11ICERS* "Sec$ -1; ;a!5ue! v. Bor4a, B0 Ph !. 8;0 <1900=D Palay" #nc. v. Clave, 120 SCRA ;/8 <109/=; Pabalan v. N*.C% 1,% S 7A %'& B1''.C; $ulo ng Bayan% &nc. v. Araneta% &nc. &nc. , 22 S 7A -%2 B1'2/C; Mindanao Motors *ines% &nc. v. C&., / S 7A 21. B1'/2C($
@fficers of a corporation may *ecome lia*le for its loans when they have *reached their d)ty of diligence )nder Section -1 of the orporation ode$ )ratea v. Suico , 818 SCRA 801 2200B3D Singian" /r. v. Sandigan'ayan , 0B8 SCRA /08 220083. +o hold a director personally lia*le for de*ts of the corporation, and th)s pierce the veil of corporate fiction, the *ad faith or wrongdoing of the director m)st *e esta*lished clearly and convincingly$ >ad faith is never pres)med$ >ad faith does not connote *ad 8)dgment or negligence$ >ad faith imports a dishonest p)rpose$ >ad faith means BaC *reach of a 4nown d)ty thro)gh some ill motive or interest$ >ad faith parta4es of the nat)re of fra)d$ Carag v. N*.C, &2. S 7A 2, "2..2($ Jenerally, officers or directors )nder the old corporate name *ear no personal lia*ility for acts done or contracts entered into for the corporation, if d)ly a)thori6ed$ .e"ublic Planters Ban) v. Court o# A""eals, 21/ S 7A 2-, "1''2($ orporate officers who entered into and signed contracts on *ehalf of the corporation in their official capacities cannot *e made personally lia*le there)nder in the a*sence of stip)lation to that effect, d)e to the personality of the corporation *eing separate and distinct from the persons composing it$ (estern Agro &ndustrial Cor". v. Court o# A""eals, 1,, S 7A 2.' "1''.(; .ustan Pul" & Pa"er Mills% &nc. v. &AC, 21% S 7A //& "1''2(; Ban0ue 2enerale Belge v. (alter Bull and Co., ,% Phil$ 1/% "1'%'(.

3anlaon Construction Enter"rises Co.% &nc. v. N*.C% 22' S 7A --2 "1''2($ 2esulgon v. N*.C% 21' S 7A &/1 "1''-($ 2olden Country 1arms% &nc. v. $anvar !evelo"ment Cor"., 21% S 7A 2'& "1''2(; 2 & 2 'rading Cor". v. Court o# A""eals, 1&, S 7A %// "1',,($ % $ummit 'rading and !ev. Cor". v. AvendaDo% 1-& S 7A -'2 "1',&(; also 5lason Enter"rises Cor". v. Court o# A""eals% -1. S 7A 2/ "1'''($ & .e"ublic v. 3er & Co.% *td.% 1, S 7A 2.2 "1'//($ / 5illa .ey 'ransit% &nc. v. 1ar East Motor Cor"., ,1 S 7A 2', "1'2,($ 2 1ar Cor"oration v. 1rancisco% 1%/ S 7A 1'2 "1',/($ , 1iloil Mar)eting Cor". v. Marine !ev. Cor". o# the Phili""ines, 122 S 7A ,/ "1',2($
2

-,
A president cannot *e held solidarily lia*le personally with the corporation a*sent evidence of showing that he acted malicio)sly or in *ad faith$ EP2 Constructions Co. v. CA , 21. S 7A 2-. "1''2($ +he finding of solidary lia*ility among the corporation, its officers and directors wo)ld patently *e *aseless when the decision contains no allegation, finding or concl)sion regarding partic)lar acts committed *y said officers and director that show them to have *een individ)ally g)ilty of )nmista4a*le malice, *ad faith, or ill1motive in their personal dealings with third parties$ ?hen corporate officers and directors are s)ed merely as nominal parties in their official capacities as s)ch, they cannot *e held lia*le personal for the 8)dgment rendered against the corporation$ NPC. v. Court o# A""eals , 22- S 7A %1' "1''2(; Emilio Cano Enter"rises% &nc. v. C&., 1- S 7A 2'1 "1'/&(; Arcilla v. Court o# A""eals, 21& S 7A 12. "1''2($ An officer1stoc4holder who signs in *ehalf of the corporation to a fra)d)lent contract cannot claim the *enefit of separate 8)ridical entity= ;+h)s, *eing a party to a sim)lated contract of management, petitioner Uy cannot *e permitted to escape lia*ility )nder the said contract *y )sing the corporate entity theory$ +his is one instance when the veil of corporate entity has to *e pierced to avoid in8)stice and ine3)ity$< Paradise $auna Massage Cor"oration v. Ng, 1,1 S 7A 21' "1''.($ 2'3 $undown on 1fficer?s Lia'ilities. Tramat &ercantile" #nc. v. Court of )ppeals , 2/8 SCRA 10 219903; MAM .ealty v. N*.C% 2%% S 7A 2'2 "1''&(; N1A v. Court o# A""eals% -11 S 7A 2.. "1'''(; Atrium Management Cor". v. Court o# A""eals% -&- S 7A 2"2..1(; Malayang $amahan ng mga Mangga,ga,a sa M. 2reen#ield v. .amos , -&2 S 7A 22 "2..1(; Po,ton Conglomerate% &nc. v. Agcolicol, %.. S 7A &2- "2..-(; H.*. Carlos Construction% &nc. v. Marina Pro"erties Cor". , %21 S 7A %2, "2..%(; Mc*eod v. N*.C, &12 S 7A 222 "2..2($ ?hile the limited lia*ility doctrine is intended to protect the stoc4holder *y imm)ni6ing him from personal lia*ility for the corporate de*ts, a corporate officer may nevertheless divest himself of this protection *y vol)ntarily *inding himself to the payment of the corporate de*ts$ 'oh v. $olid Ban) Cor"., %., S 7A &%% "2..-($ +he corporate representatives signing as a solidary g)arantee as corporate representative did not )nderta4e to g)arantee personally the payment of the corporationDs de*t em*odied in the tr)st receipts$ Fe*ts inc)rred *y directors, officers and employees acting as s)ch corporate agents are not theirs *)t the direct lia*ility of the corporation they represent$ As an exception, directors or officers are personally lia*le for the corporationDs de*t if they so contract)ally agree or stip)late$ 'u"a4 &5 v. Court o# A""eals, %2/ S 7A -', "2..&($ 243 Special Provisions in La'or Laws6 Since a corporate employer is an artificial person, it m)st have an o##icer who can *e pres)med to *e the em"loyer, *eing the ;person acting in the interest of "the( employer< as defined in Art$ 2,- of the !a*or ode$ ).C. $ansom La'or 0nion7CCL0 v. +L$C , 102 SCRA 2;9 2198;3. 2 3 1verturning the ).C. $ansom $uling6 orporate officers cannot *e held personally lia*le for damages on acco)nt of the employees dismissal *eca)se the employer corporation has a personality separate and distinct from its officers who merely acted as its agents$ Malayang $amahan ng mga Mangagaga,a sa M. 2reen#ields v. .amos% -&2 S 7A 22 "2..1($ @nly the responsi*le officer of a corporation who had a hand in illegally dismissing an employee sho)ld *e held personally lia*le for the corporate o*ligations arising from s)ch act$ Maglutac v. N*.C, 1,' S 7A 2/2 "1''.(; reiterated in 2ude4 v. N*.C, 1,- S 7A /%% "1''.(; Chua v. N*.C, 1,2 S 7A -&- "1''.(; .eahs Cor". v. N*.C% 221 S 7A 2%2 "1''2(; and for the separate 8)ridical personality of a corporation to *e disregarded as to ma4e the highest corporate officer personally lia*le on la*or claims, the wrongdoing m)st *e clearly and convincingly esta*lished$ !el .osario v. N*.C, 1,2 S 7A 222 "1''.($ orporate officers are not personally lia*le for money claims of discharged employees )nless they acted with evident malice and *ad faith in terminating their employment$ AH$HPhili""ines v. Court o# A""eals% 2&2 S 7A -1' "1''/(; Nicario v. N*.C% 2'& S 7A /1' "1'',($

-' A corporation, *eing a 8)ridical entity, may act only thro)gh its directors, officers and employees and o*ligations inc)rred *y them, acting as corporate agents, are not theirs *)t the direct acco)nta*ilities of the corporation they represent$ Brent Hos"ital% &nc. v. N*.C% 2'2 S 7A -.% "1'',($ 0n la*or cases, corporate directors and officers are solidarily lia*le with the corporation for the termination of employment of corporate employees done with malice or in *ad faith$ 0n this case, it is )ndisp)ted that the corporate officers have a direct hand in the illegal dismissal of the employees$ +hey were the one, who as high1ran4ing officers and directors of the corporation, signed the >oard 7esol)tion retrenching the employees on the feigned gro)nd of serio)s *)siness losses that had no *asis apart from an )nsigned and )na)dited Profit and !oss Statement which, to repeat, had no evidentiary val)e whatsoever$ +ichico v. N*.C, 22- S 7A -& "1''2($ 2 3 Limiting the ).C. $ansom $uling to #nsolvent Corporation A.C. .ansom is not in point *eca)se there the corporation act)ally ceased operations after the decision of the o)rt was prom)lgated against it, ma4ing it necessary to enforce it against its former president$ ?hen the corporation is still existing and a*le to satisfy the 8)dgment in favor of the private respondent, the corporate officers cannot *e held personally lia*le$ *im v. N*.C, 121 S 7A -2, "1','($ A.C. .ansom will apply only where the persons who are made personally lia*le for the employeesD claims are stoc4holders1officers of employer1corporation$ 0n the case at *ar, a mere general manager while admittedly the highest ran4ing local representative of the corporation, is nevertheless not a stoc4holder and m)ch less a mem*er of the >oard of Firectors nor an officer thereof$ !e 2u4man v. N*.C, 211 S 7A 22- "1''2($ 2 3 0pholding the ).C. $ansom $uling6 Under the !a*or ode, in the case of corporations, it is the president who responds personally for violation of the la*or pay laws$ 5illanueva v. Adre, 122 S 7A ,2/ "1','($ A.C. .ansom doctrine has *een reiterated s)*se3)ently in .estuarante *as Conchas v. *lego, -1% S 7A 2% "1'''(; Carmelcra#t Cor". v. N*.C% 1,/ S 7A -'- "1''.(; 5alderrama v. N*.C, 2&/ S 7A %// "1''/($ Since a corporation is an artificial person, it m)st have an officer who can *e pres)med to *e the employer, *eing the ;person acting in the interest of the employer<Ethe corporation, in the technical sense only, is the employer$ +he manager of the corporation falls within the meaning of an ;employer< as contemplated *y the !a*or code, who may *e held 8ointly and severally lia*le for the o*ligation of the corporation to its dismissed employees$ N@3 &nternational 3nit,ear Cor". Phil. 5. N*.C, -'2 S 7A /.2 "2..-($ 2 ?3 %efinitive 1verturning of ).C. $ansom $uling6 0t is settled that in the a*sence of malice, *ad faith, or specific provisions of law, a stoc4holder or an officer of a corporation cannot *e made personally lia*le for corporate lia*ilities$ Mc*eod v. N*.C, &12 S 7A 222 "2..2(, citing *and Ban) o# the Phili""ines v. Court o# A""eals, -/% S 7A -2& "2..1(; Bogo=Medellin $ugarcane Planters Asso.% &nc. v. N*.C, 2'/ S 7A 1., "1'',(; Com"lex Electronics Em"loyees Assn. v. N*.C, -1. S 7A %.- "1'''(; Acesite Cor". v. N*.C, %%' S 7A -/. "2..&(; Coca=Cola Bottlers Phils.% &nc. v. !aniel, %/. S 7A %'% "2..&(; $uldao v. Cimech $ystem Construction% &nc. , &./ S 7A 2&/ "2../(; $u"reme $teel Pi"e Cor". v. Barda/e, &22 S 7A 1&& "2..2($ learly, in A.C. .ansom% 7A#S@5, thro)gh its President, organi6ed 7@SA70@ to evade payment of *ac4wages to the 22 stri4ers$ +his sit)ation, or anything similar showing malice or *ad faith on the part of Patricio, does not o*tain in the present case$ B?hat applies therefore is the r)ling C BiCn $antos v. N*.C, B2&% S 7A /2- "1''/(C$ Mc*eod v. N*.C, &12 S 7A 222 "2..2(; H... Carlos Construction% &nc. v. Marina Pro"erties Cor". , %21 S 7A %2, "2..%(; Pam"lona Plantation Com"any v. Acosta , &1. S 7A 2%' "2../(; Elcee 1arms% &nc. v. N*.C, &12 S 7A /.2 "2..2(; +y v. 5illanueva, &2/ S 7A 2- "2..2($

%. 5I. STOCKHOLDERS AND MEMBERS

1. Sh'&$h%!,$&: N%( C%&"%&'($ C&$, (%&:. 2arcia v. *im Chu $ing, &' Phil$ &/2 "1'-%($ 2. S>4:-& "( %# C%#(&'-( "Sec$ /. O 22; 'rillana v. Iue4on Colegialla, '- Phil$ -,- B1'&-C($ 2'3 Purchase )greement. Bayla v. Silang Traffic Co." #nc. , B/ Ph !. 88B 21902($ 243 Pre7#ncorporation Su'scription "Sec$ /1( ?hen properties were assigned p)rs)ant to a pre1incorporation s)*scription agreement, *)t the corporation fails to iss)e the covered shares, the ret)rn of s)ch properties to the s)*scri*er is a direct conse3)ence of rescission and does not amo)nt to corporate distri*)tion of assets prior to dissol)tion$ 1n :ong v. Tiu , /B8 SCRA ;10 220023. 2-3 $elease from Su'scription 1'ligation "Tan v. Sycip, 099 SCRA 21; 2200;(; 5elasco v. Poi4at, -2 Phil$ ,.2 B1'1,C; PNB v. Bitulo) $a,mill% &nc., 2- S 7A 1'/, B1'/,C; National Exchange Co. v. !exter, &1 Phil$ /.1 B1'2,C( 2,3 ,hen Condition of Payment Provided in By7laws. !e $ilva v. Aboiti4 & Co. , %% Phil$ 2&& "1'2-($ /. C%#: ,$&'( %# "Sec$ /2(= 2'3 C':h 243 P&%"$&(9 2-3 S$&? -$ 2,3 R$(' #$, E'&# #@: 2,3 Sh'&$:

Stoc4 dividends are in the nat)re of shares of stoc4, the consideration for which is the amo)nt of )nrestricted retained earnings converted into e3)ity in the corporationDs *oo4s$ *incoln Phil. *i#e v. Court o# A""eals, 2'- S 7A '2 "1'',($' 0. W'($&$, S(%-J: "Sec$ /&( 8. P'9.$#( %+ B'!'#-$ %+ S>4:-& "( %# "Secs$ // and /2; *ingayen 2ul# Electric Po,er Co. v. Balta4ar, '- Phil$ %.% B1'&-C($ A stoc4holder who is employed with the company, cannot sett1off his )npaid s)*scription against his awarded claims for wages, where there has *een no call for the payment of s)ch s)*scription$ A"odaca v. N*.C% 122 S 7A %%2 "1','($ ;. D$! #E>$#-9 %# S>4:-& "( %# "Secs$ /,, /', 2. and 21; Phili""ine 'rust Co. v. .ivera, %% Phil$ %/' B1'2-C; Miranda v. 'arlac .ice Mill Co., &2 Phil$ /1' B1'-2C( +he prescriptive period to recover on )npaid s)*scription does not commence from the time of s)*scription *)t from the time of demand *y >oard of Firectors to pay the *alance of s)*scription$ 2arcia v. $uare4, /2 Phil$ %%1 "1'-'($ 2'3 ,ho &ay 3uestion a %elin5uency Sale "Sec$ /, and /'($ B. C$&( + -'($ %+ S(%-J "Sec$ /-( 2'3 +ature of Certificate6Tan v. SEC, 20; SCRA B00 219923;%e los Santos v. $epu'lic" 9; Ph !. 8BB 219883;Ponce v. )lsons Cement Corp. , /9/ SCRA ;02 220023; Nautica Canning Cor". v. @umul, %2- S 7A %1& "2..&(; C.N. Hodges v. *e4ama, 1% S 7A 1.-. "1'/&($ +he fact that the stoc4 certificates registered in the name of one person are fo)nd in the possession of another stoc4holder does not prove that the possessor is the owner of the covered shares$ A stoc4 certificate is merely a tangi*le evidence of ownership of shares of stoc4$ 0ts presence or a*sence does not affect the right of the registered owner to dispose of the shares covered *y the stoc4 certificate$ .e"ublic v. Estate o# Hans Men4i, %2& S 7A 2. "2..&($ A stoc4 certificate is merely evidence of a share of stoc4 and not the share itself$ *incoln Phil. *i#e v. Court o# A""eals, 2'- S 7A '2 "1'',($

' +he *asis for determining the doc)mentary stamps d)e on stoc4 dividends declared wo)ld *e their *oo4 val)e as indicated in the latest a)dited financial statements of the corporation, and not the par val)e thereof$ Commissioner o# &nternal .evenue v. *incoln Phil. *i#e &nsurance Co., -2' S 7A %2- "2..2($

%1 A certificate of stoc4 co)ld not *e considered iss)ed in contemplation of law )nless signed *y the president or vice1president and co)ntersigned *y the secretary or assistance secretary$ Bitong v. Court o# A""eals% 2'2 S 7A &.- "1'',($ 243 H>': -#$@%( '4!$ Ch'&'-($& %+ C$&( + -'($ %+ S(%-J*Bachrach &otor Co. v. Lacson Ledesma, ;0 Ph !. ;81 219/B3$ 0n order for a transfer of stoc4 certificate to *e effective, it m)st *e properly indorsed and that title to s)ch certificate of stoc4 is vested in the transferee *y the delivery of the d)ly indorsed certificate of stoc4$ 0ndorsement of the certificate of stoc4 is a mandatory re3)irement of law for an effective transfer of a certificate of stoc4$ $a!on v. #)C, 20B SCRA 2/0 219923$ +he r)le is that the endorsement of the certificate of stoc4 *y the owner or his attorney1in1 fact or any other person legally a)thori6ed to ma4e the transfer shall *e s)fficient to effect the transfer of shares only if the same is co)pled with delivery$ +he delivery of the stoc4 certificate d)ly endorsed *y the owner is the operative act of transfer of shares from the lawf)l owner to the new transferee$ >)t to *e valid against third parties, the transfer m)st *e recorded in the *oo4s of the corporation$ Bitong v. Court of )ppeals" 292 SCRA 80/ 219983 Even when a formal Feed of Assignment covering the shares was d)ly exec)ted, witho)t the endorsement and delivery of the covering certificates of stoc4s, the covered shares cannot *e deemed to transferred and registered in the names of the assignees$ $ural Bank of Lipa City v. Court of )ppeals, /;; SCRA 188 220013; .ivera 5. 1lorendo, 1%% S 7A /%- "1',/($ +he a*sence of a deed of sale evidencing the sale of shares of stoc4 does not necessarily show irreg)larity since Section /- of the orporation ode itself does not re3)ire any deed for the validity of the transfer of shares stoc4, it *eing s)fficient that s)ch transfer *e effected *y delivery of the stoc4 certificates d)ly endorsed$ .e"ublic v. Estate o# Hans Men4i, %2& S 7A 2., -, "2..&($ 2-3 $ight to #ssuance "Sec$ /%; Balta4ar v. *ingayen 2ul# Elect. Po,er Co.% &nc. , 1% S 7A &22 B1'/&C($ 2,3 Lost or %estroyed Certificates "Sec$ /- and 2-( ?hile Sec$ 2- of orporation ode appears to *e mandatory, the same admits exceptions, s)ch that a corporation may vol)ntarily iss)e a new certificate in lie) of the original certificate of stoc4 which has *een lost witho)t complying with the re3)irements )nder said section$ 0t wo)ld *e an internal matter for the corporation to find meas)res in ascertaining who are the real owners of stoc4 for p)rposes of li3)idation$ 0t is well1settled that )nless proven otherwise, the ;stoc) and trans#er boo)B is the *est evidence to esta*lish stoc4 ownership$ "SE @pinion, dated 2, Han)ary 1''', addressed to 5s$ 5a$ ecilia Sala6ar1Santos($ 2$3 Forged and 0nauthori!ed Transfers. /. Santamaria v. -ong.ong and Shanghai Banking Corp. , 89 Ph !. B80 219813D +eugene &arketing" #nc. v. Court of )ppeals , /0/ SCRA 298 219993$ 8. STOCK AND T RANS1ER BOOK "Secs$ /-, 22 and 2%; Fua Cun v. Summers, 00 Ph !. B00 <192/=D &onserrat v. Ceran, 88 Ph !. 0;9 <19//=D Chua uan v. Samahang &agsasaka" #nc., ;2 Ph !. 0B2 <19/8=D 0son v. %iosomito , ;1 Ph !. 8/8 <19/8=D EscaAo v. Filipinas &ining Corporation , B0 Ph !. B1 <1900=D Bachrach &otors v. Lacson7Ledesma, ;0 Ph !. ;81 <19/B=D +ava v. Peers &arketing Corp. , B0 SCRA ;8 <19B;=($ A stoc4 and transfer *oo4 is the *oo4 which records the names and addresses of all stoc4holders arranged alpha*etically, the installments paid and )npaid on all stoc4 for which s)*scription has *een made, and the date of payment thereof, a statement of every alienation, sale or transfer of stoc4 made the date thereof and *y and to whom made, and s)ch other entries as may *e prescri*ed *y law$ A stoc4 and transfer *oo4, li4e other corporate *oo4s and records, is not in any sense a p)*lic record, and th)s is not excl)sive evidence of the matters and things which ordinarily are or sh'o)ld *e written therein$ *anu4a v. Court o# A""eals, %&% S 7A &% "2..&($ 2'3 ;alidity of Transfers6 Under Sec$ /- of orporation ode, the sale of stoc4s shall not *e recogni6ed as valid )nless registered in the *oo4s of the corporation insofar as third persons, incl)ding the corporation, are concernedEas *etween the parties to the sale, the

%2
transfer shall *e valid even if not recorded in the *oo4s of the corporation$ *aguna 'ayabas Bus Co. v. Bitanga% -/2 S 7A /-& "2..1($ Batangas +he view that )nder Section /- of the orporation ode, the sale of the stoc4s shall not *e recogni6ed as valid )nless registered in the *oo4s of the corporation is valid only insofar as third persons, incl)ding the corporation, are concernedEas *etween the parties to the sale, the transfer shall *e valid even if not recorded in the *oo4s of the corporation$ Batangas *aguna 'ayabas Bus Co. v. Bitanga% -/2 S 7A /-& "2..1($ A transferee has no right to intervene as a stoc4holder in corporate iss)e on the strength of the transfer of shares allegedly exec)ted *y a registered stoc4holder$ 0t is explicit )nder Sec$ /that the transfer m)st *e registered to affect the corporation and third persons$ Magsaysay= *abrador v. CA, 1,. S 7A 2// "1','($ +he p)rpose of registration is two1fold= to ena*le the transferee to exercise all the rights of a stoc4holder, incl)ding the right to vote and to *e voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and s)*8ect to the lia*ilities of a stoc4holder$ Until challenged in a proper proceeding, a stoc4holder of record has a right to participate in any meeting; his vote can *e properly co)nted to determine whether a stoc4holdersD resol)tion was approved, despite the claim of the alleged transferee$ @n the other hand, a person who has p)rchased stoc4, and who desires to *e recogni6ed as a stoc4holder for the p)rpose of voting, m)st sec)re s)ch a standing *y having the transfer recorded on the corporate *oo4s$ Until the transfer is registered, the transferee is not a stoc4holder *)t an o)tsider$ Batangas *aguna 'ayabas Bus Com"any% &nc. v. Bitanga , -/2 S 7A /-& "2..1($ A bona #ide transfer of shares, not registered in the corporate *oo4s, is not valid as against a s)*se3)ent lawf)l attachment of said shares, regardless of whether the attaching creditor had act)al notice of said transfer or not$ All transfers not so entered on the *oo4s of the corporation are a*sol)tely void; not *eca)se they are witho)t notice or fra)d)lent in law or fact, *)t *eca)se they are made so void *y stat)te$ 2arcia v. -omouad, -2- S 7A %2% "2...($ P)rs)ant to Sec$ /-, a transfer of shares of stoc4 not recorded in the stoc4 and transfer *oo4 is non1existent as far as the corporation is concerned$ As *etween the corporation on the one hand, and its shareholders and third persons on the other, the corporation loo4s only into its *oo4s for the p)rpose of determining who its shareholders are$ Ponce v. Alsons Cement Cor". , -'- S 7A /.2 "2..2($ 0ndeed, )ntil registration is accomplished, the transfer, tho)gh valid *etween the parties, cannot *e effective as against the corporation$ +h)s, the )nrecorded transferee, the >itanga gro)p in this case, cannot vote nor *e voted for$ +he p)rpose of registration, therefore, is two1 fold= to ena*le the transferee to exercise all the rights of a stoc4holder, incl)ding the right to vote and to *e voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and s)*8ect to the lia*ilities of a stoc4holder$ Until challenged in a proper proceeding, a stoc4holder of record has a right to participate in any meeting; his vote can *e properly co)nted to determine whether a stoc4holdersD resol)tion was approved, despite the claim of the alleged transferee$ @n the other hand, a person who has p)rchased stoc4, and who desires to *e recogni6ed as a stoc4holder for the p)rpose of voting, m)st sec)re s)ch a standing *y having the transfer recorded on the corporate *oo4s$ Until the transfer is registered, the transferee is not a stoc4holder *)t an o)tsider$ Batangas *aguna 'ayabas Bus Com"any% &nc. v. Bitanga, -/2 S 7A /-& "2..1($ <CLV- I '@&$$ ) (h (h$ , ::$#( #@ %" # %# %+ 7>:( -$ P>#%* FTh$ &>!$ <S$-( %# ;/= : #($#,$, (% "&%($-( (h$ #($&$:( %+ (h$ -%&"%&'( %# '#, (h &, "$&:%#: )h% .'9 4$ "&$K>, -$, 49 (h$ (&'#:+$& %+ (h$ :h'&$: %+ :(%-J:. #t follows" therefore" that as 'etween the parties to the sale" the transfer shall 'e valid even if not recorded in the 'ooks of the corporation.9 = +he a*sence of a deed of sale evidencing the sale of shares of stoc4 does not necessarily show irreg)larity since Section /- of the orporation ode itself does not re3)ire any deed for the validity of the transfer of shares stoc4, it *eing s)fficient that s)ch transfer *e effected *y delivery of the stoc4 certificates d)ly endorsed$ ;+he orporation ode ac4nowledges that the delivery of a d)ly indorsed stoc4 certificate is s)fficient to transfer ownership of shares of stoc4 in stoc4 corporations$ S)ch mode of transfer is valid *etween the parties$ 0n order to *ind third persons, however, the transfer m)st *e recorded in the *oo4s of the corporation$ learly then, the a*sence of a deed of assignment is not a fatal flaw which renders the transfer invalid as the

%7ep)*lic posits$ 0n fact, as has *een held in .ural Ban) o# *i"a City% &nc. v. Court o# A""eals , B-// S 7A 1,, "2..1(C the exec)tion not a deed of sale does not necessarily ma4e the transfer effective$< .e"ublic v. Estate o# Hans Men4i, %2& S 7A 2., -, "2..&($ 243 ,ho &ay &ake Entries6 Entries made on the stoc4 and transfer *oo4 *y any person other than the corporate secretary, s)ch as those made *y the President and hairman, cannot *e given any valid effect$ 'orres% -r. v. Court o# A""eals% 22, S 7A 2'- "1''2( 2-3 )ttachments6 Attachments of shares of stoc4 are not incl)ded in the term ;transfer< as provided in Sec$ /- of orporation ode$ >oth the 7evised 7)les of o)rt and the orporation ode do not re3)ire annotation in the corporationDs stoc4 and transfer *oo4s for the attachment of shares to *e valid and *inding on the corporation and third parties$ Chem"hil Ex"ort & &m"ort Cor". v. CA, 2&1 S 7A 2&2 "1''&($ 2,3 &eaning of 80npaid Claims96 ;Unpaid claims< )nder Sec$ /- refers to any )npaid s)*scription, and not to any inde*tedness which a stoc4holder may owe the corporation arising from any other transactions, li4e )npaid monthly d)es$ China Ban)ing Cor". v. CA, 22. S 7A &.- "1''2( 2$3 E5uita'le &ortgage )ssignment6 0t seems that the assignment of voting shares as sec)rity for a loan operates to give the assignee not only the right to vote on the shares, *)t wo)ld also treat the assignee as the owner of the shares "not 8)st an e3)ita*le mortgage(= ;0t is tr)e that the assignment was predicated on the intention that it wo)ld serve as sec)rity vis=J=vis F>PDs financial accommodation extended to PH0, *)t it was a valid and d)ly exec)ted assignment, s)*8ect to a resol)tory condition, which was the settlement of PH0Ds loan o*ligation with F>P$< AP' v. $andiganbayan% -%1 S 7A &&1, &/. "2...($ 9. S (>: %+ Sh'&$: %+ S(%-J: "Sec$ &&( Sit)s of shares of stoc4 is the domicile of the corporation to which they pertain to$ (ells 1argo Ban) and +nion v. Collector, 2. Phil$ -2& "1'%.(; 'ayag v. Benguet Consolidated% &nc., 2/ S 7A 2%2 "1'/,(; c#. Per)ins v. !i4on, /' Phil$ 1,/ "1'-'($

5II. RIGHTS O1 STOCKHOLDERS AND MEMBERS

1. Wh'( D%$: FSh'&$G R$"&$:$#(L ?hile shares of stoc4 constit)te personal property, they do not represent property of the corporation Bi.e.% they are properties of the stoc4holders who own themC$ A share of stoc4 only typifies an ali3)ot part of the corporationDs property, or the right to share in its proceeds to that extent ,hen distributed according to la, and e0uity% *)t the holder is not the owner of any part of the capital BpropertiesC of the corporation, nor is he entitled to the possession of any definite portion of its assets$ +he stoc4holder is not a co1owner of corporate property$ $toc)holders o# 1. 2uanson and $ons% &nc. v. .egister o# !eeds o# Manila, / S 7A -2- "1'/2($ +he registration of shares in a stoc4holderDs name, the iss)ance of stoc4 certificates, and the right to receive dividends which pertain to the shares are all rights that flow from ownership$ *im 'ay v. Court o# A""eals% 2'- S 7A /-% "1'',(; 'C* $ales Cor". v. Court o# A""eals, -%' S 7A -& "2..1($ ;As early as the case of 1isher v. 'rinidad, the o)rt already declared that ;BtChe distinction *etween the title of a corporation, and the interest of its mem*ers or stoc4holders in the property of the corporation, is familiar and well1settled$ +he ownership of that property is in the corporation, and not in the holders of shares of its stoc4$ +he interest of each stoc4holder consists in the right to a proportionate part of the profits whenever dividends are declared *y the corporation, d)ring its existence, )nder its charter, and to a li4e proportion of the property remaining, )pon the termination or dissol)tion of the corporation, after payment of its de*ts$< Mobilia Products% &nc. v. +me4a,a, %&2 S 7A 2-/ "2..&($ 2. R @h( (% C$&( + -'($ %+ S(%-J +%& 1>!!9 P' , Sh'&$: "Sec$ /%; 'an v. $EC, 2./ S 7A 2%. B1''2C( /. P&$$."( ?$ R @h(: "Sec$ -'; !atu 'agoranao Benito v. $EC , 12- S 7A 222 B1',-C; !ee v. $EC, 1'' S 7A 2-, B1''1C($ 0. R @h( (% T&'#:+$& %+ Sh'&$h%!, #@: "Sec$ /-(

%%
2'3 +on7transfera'ility of &em'ership "Secs$ '. and '1($ 243 $estriction on Transfers6 Lam'ert v. Fo2 , 2; Ph !. 888 219103. 7 $ight of $efusal* Padgett v. Ba'cock > Templeton" #nc. , 89 Ph !. 2/2 219//3$ Section /- contemplates no restriction as to whom the stoc4s may *e transferred$ 0t does not s)ggest that any discrimination may *e created *y the corporation in favor of, or against a certain p)rchaser$ +he owner of shares, as owner of personal property, is at li*erty, )nder said section to dispose them in favor of whomever he pleases, witho)t limitation in this respect, than the general provisions of law$ Fleishcher v. Botica +olasco, 0B Ph !. 88/ 219283$ +he only limitation imposed *y Sec$ /- is when the corporation holds any )npaid claim against the shares intended to *e transferred$ A corporation, either *y its *oard, its *y1laws, or the act of its officers, cannot create restrictions in stoc4 transfers, *eca)se ;7estrictions in the traffic of stoc4 m)st have their so)rce in legislative enactment, as the corporation itself cannot create s)ch impediment$ >y1laws are intended merely for the protection of the corporation, and prescri*e relation, not restriction; they are always s)*8ect to the charter of the corporation$< .ural Ban) o# $alinas v. CA, 21. S 7A &1. "1''2($ +he ;right of first ref)sal< is primarily an attri*)te of ownership$ onversely, a waiver thereof is an act of ownership$ +o allow the P JJ to vote the se3)estered shares for this p)rpose wo)ld *e sanctioning its exercise of an act of strict ownership$ PC22 v. $EC, J$7$ #o$ ,21,,, -. H)n- 1',, ")nrep$( +he agreement of co1shareholders to m)t)ally grant the right of first ref)sal to each other, *y itself, does not constit)te a violation of the provisions of the onstit)tion limiting land ownership to Lilipinos and Lilipino corporations; if the foreign shareholdings of a landholding corporation exceed %.G, it is not the foreign stoc4holdersD ownership of the shares which is adversely affected *y the capacity of the corporation to own landEthat is, the corporation *ecomes dis3)alified to own land$ +his finds s)pport )nder the *asic corporate law principle that the corporation and its stoc4holders are separate 8)ridical entities$ 0n this vein, the right of first ref)sal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation$ -.2. $ummit Holdings% &nc. v. Court o# A""eals, %&. S 7A 1/' "2..&($ 0n a landholding corporation which *y constit)tional mandate is limited to %.G foreign e3)ity, and where there exists a right of first ref)sal agreement *etween the co1shareholders, the fact that the corporations owns land cannot deprive stoc4holders of their right of first ref)sal$ #o law dis3)alifies a person from p)rchasing shares in a landholding corporation even if the latter will exceed the allowed foreign e3)ity, what the law dis3)alifies is the corporation from owning land$ -.2. $ummit Holdings% &nc. v. Court o# A""eals, %&. S 7A 1/' "2..&($ $estraint of Trade6 An agreement *y which a person o*liges himself not to engage in competitive trade for five years is valid and reasona*le and not an )nd)e or )nreasona*le restraint of trade and is o*ligatory on the parties who vol)ntarily enter into s)ch agreement$ x8llendor# v. Abrahamson% -, Phil$ &,& "1'1,(. 2-3 $emedy #f $egistration $efused6Ponce v. )lsons Cement Corp. , /9/ SCRA ;02$ 5andam)s will not lie to compel the corporate secretary to register the transfer of shares in the corporate *oo4s when the petitioner is not the registered stoc4holder nor does he hold a power of attorney from the latter$ +his is )nder the general r)le that as *etween the corporation one the one hand and its shareholders on other, the corporation loo4s only to its *oo4s for the p)rpose of determining who its shareholders are, so that a mere indorsee of a certificate of stoc4, claiming to *e the owner, will not necessarily *e recogni6ed as s)ch *y the corporation and its officers, in a*sence of express instr)ctions of the registered owner to ma4e s)ch transfer to the indorsee, or a power of attorney a)thori6ing s)ch transfer$ Hager v. Bryan, 1' Phil$ 1-, "1'11(; .ivera v. 1lorendo% 1%% S 7A /%-, /&2 "1',/($ +he claim for damages of what the shares co)ld have sold had the demand *een complied with is deemed to *e spec)lative damage and non1recovera*le Batong Buhay 2old Mines v. CA, 1%2 S 7A % "1',2( Period to Enforce6 onsidering that the law does not prescri*e a period within which the registration of p)rchase of shares sho)ld *e effected, the action to enforce the right does not

%& accr)e )ntil there has *een a demand and a ref)sal concerning the transfer$< Ponce v. Alsons Cement Cor"., -'- S 7A /.2 "2..2($ A stip)lation on the stoc4 certificate that any assignment wo)ld not *e *inding on the corporation )nless registered in the corporate *oo4s as re3)ired )nder the *y1laws and witho)t providing when registration sho)ld *e made, wo)ld mean that the ca)se of action and the determination of prescription period wo)ld *egin only when demand for registration is made and not at the time of the assignment of the certificate$ (on v. (ac) (ac) 2ol# & Country Club , 1.% Phil$ %// "1'&,($ 8. R @h(: (% D ? ,$#,: "Sec$ %-( Altho)gh stoc4 certificates grant the stoc4holder the right to receive 3)arterly dividends of 1G, c)m)lative and participating, the stoc4holders do not *ecome entitled to the payment thereof as a matter of right witho)t necessity of a prior declaration of dividends$ Sec$ %- of orporation ode prohi*its the iss)ance of any stoc4 dividend witho)t the approval of stoc4holders, representing not less than two1thirds "2:-( of the o)tstanding capital stoc4, which )nderscores the fact that payment of dividends to a stoc4holder is not a matter of right *)t a matter of consens)s$ L)rthermore, ;interest *earing stoc4s<, on which the corporation agrees a*sol)tely to pay interest *efore dividends are paid to the common stoc4holders, is legal only when constr)ed as re3)iring payment of interest as dividends from net earnings or s)rpl)s only$ .e"ublic Planters Ban) v. Agana, 2/' S 7A 1 "1''2($ 0n the li3)idating of a corporation, after the payment of all corporate de*ts and lia*ilities, the remaining assets, if any, m)st *e distri*)ted to the stoc4holders in proportion to their interests in the corporation$ +he share of each stoc4holder in the assets )pon li3)idation is what is 4nown as li0uidating dividend. President o# P!&C v. .eyes, %/. S 7A %2- "2..&($ ;. R @h( (% V%($ '#, (% A(($#, M$$( #@: "Secs$ / and ,'( +he right to vote is inherent in and incidental to the ownership of corporate stoc4s$ 0t is settled that )niss)ed stoc4s may not *e voted or considered in determining whether a 3)or)m is present in a stoc4holdersD meeting, or whether a re3)isite proportion of the stoc4 of the corporation is voted to adopt a certain meas)re or act$ @nly stoc4 actually iss)ed and o)tstanding may *e voted$ Under Section / of the orporation ode, each share of stoc4 is entitled to vote, )nless otherwise provided in the articles of incorporation or declared delin3)ent )nder Section /2 of the ode$ #either the stoc4holders nor the corporation can vote or represent shares that have never passed to the ownership of stoc4holders, or, having so passed, have again *een p)rchased *y the corporation$ +hese shares are not to *e ta4en into consideration in determining ma8orities$ ?hen the law spea4s of a given proportion of the stoc4, it m)st *e constr)ed to mean shares that have "assed from the corporation, and that may *e voted$ 'an v. $yci", %'' S 7A 21/ "2../($ @ne of the rights of a stoc4holder is the right to participate in the control and management of the corporation that is exercised thro)gh his vote$ +he right to vote is a right inherent in and incidental to the ownership of corporate stoc4, and as s)ch is a property right$ Castillo v. Balinghasay, %%. S 7A %%2 "2..%($ Until challenged s)ccessf)lly in proper proceedings, a registered stoc4holder has a right to participate in any meeting, and in the a*sence of fra)d the action of the stoc4holdersD meeting cannot *e collaterally attac4ed on acco)nt of s)ch participation, even if it *e shown later on that the shares had *een previo)sly sold "*)t not recorded($ Price and $ulu !ev. Co. v. Martin , &, Phil$ 2.2 "1'--($ +he se3)estration of shares does not entitle the government to exercise acts of ownership over the shares; even se3)estered shares may *e voted )pon *y the registered stoc4holder$ Co/uangco -r. v. .oxas, 1'& S 7A 2'2 "1''1($ +he right to vote se3)estered shares of stoc4 registered in the names of private individ)als or entities and alleged to have *een ac3)ired with ill1gotten wealth shall, as a r)le, *e exercised *y the registered owner$ +he P JJ may, however, *e granted s)ch voting right provided it can "1( show "rima #acie evidence that the wealth and:or the shares are indeed ill1gotten; and "2( demonstrate imminent danger of dissipation of the assets, th)s necessitating their contin)ed se3)estration and voting *y the government )ntil a decision, r)ling with finality on their ownership, is prom)lgated *y the proper co)rt$ #evertheless, the foregoing "two1tiered" test

%/
does not apply when the f)nds that are "rima #acie p)*lic in character or, at least, are affected with p)*lic interest$ 0nasm)ch as the s)*8ect U P> shares in the present case were )ndisp)ta*ly ac3)ired with coco levy f)nds which are p)*lic in character, then the right to vote them shall *e exercised *y the P JJ$ 0n s)m, the "p)*lic character" test, not the "two1tiered" one, applies$ .e"ublic v. C8C81E!% -22 S 7A %/2 "2..1($ Also 'rans Middle East 6Phils7 v. $andiganbayan, %'. S 7A %&& "2../($ M)or)m is *ased on the totality of the shares which have *een s)*scri*ed and iss)ed whether it *e fo)ndersD shares or common shares$ +o *ase the comp)tation of 3)or)m solely on the o*vio)sly deficient, if not inacc)rate stoc4 and transfer *oo4, and completely disregarding the iss)ed and o)tstanding shares indicated in the articles of incorporation wo)ld wor4 in8)stice to the owners and:or s)ccessors in interest of the said shares$ +he stoc4 and transfer *oo4 cannot *e )sed as the sole *asis for determining the 3)or)m as it does not reflect the totality of shares which have *een s)*scri*ed, more so when the articles of incorporation show a significantly larger amo)nt of shares iss)ed and o)tstanding as compared to that listed in the stoc4 and transfer *oo4$ *anu4a v. Court o# A""eals, %&% S 7A &% "2..&($ +reas)ry shares cannot *e voted )pon$ 'an v. $yci", %'' S 7A 21/ "2../($ 2'3 #nstances ,hen Stockholders Entitled to ;ote6
1 1 1 1 1 1 1 1 1 Election of directors and tr)stees "Sec$ 2%($ Amendment of articles of incorporation "Sec$ 1/($ 0nvestment in another *)siness or corporation "Secs$ -/ and %2($ 5erger and consolidation "Sec$ 22($ 0ncrease and Fecrease of capital stoc4 "Sec$ -,($ Adoption, amendment and repeal of *y1laws "Sec$ %,($ Feclaration of stoc4 dividends "Sec$ %-($ 5anagement contracts "Sec$ %%($ Lixing of consideration of no par val)e shares "Sec$ /2($

243 /oint 1wnership "Sec$ &/( 2-3 Treasury Share +o ;oting $ights "Sec$ &2( 2,3 Pledgor" &ortgagors and )dministrators "Sec$ &&( ?hen shares are pledged *y means of endorsement in *lan4 and delivery of the covering certificates to a loan, the pledgee does not *ecome the owner thereof simply *y the fail)re of the registered stoc4holder to pay his loan$ onse3)ently, witho)t proper foreclos)re, the lender cannot demand that the shares *e registered in his name$ *im 'ay v. Court o# A""eals% 2'S 7A /-% "1'',($ Altho)gh the 7)les of o)rt, while permitting an exec)tor or administrator to represent or to *ring s)its on *ehalf of the deceased, do no prohi*it the heirs from representing the deceased$ ?hen no administrator has *een appointed, there is all the more reason to recogni6e the heirs as the proper representatives of the deceased$ 2ochan v. @oung% -&% S 7A 2.2 "2..1($ 2$3 ;oting $ights of &em'ers 0n stoc4 corporation, shareholders may generally transfer their shares$ +h)s, on the death of a shareholder, the exec)tor or administrator d)ly appointed *y the o)rt is vested with the legal title to the stoc4 and entitled to vote it$ Until a settlement and division of the estate is effected, the stoc4s of the decedent are held *y the administrator or exec)tor$ @n the other hand, mem*ership in and all rights arising from a nonstic4 corporation are personal and non1 transfera*le, )nless the articles of incorporation or the *ylaws of the corporation provide otherwise$ 0n other words, the determination of whether or not ;dead mem*ers< are entitled to exercise their voting rights "thro)gh their exec)tor or administrator(, depends on those articles of incorporation or *ylaws$ 'an v. $yci", %'' S 7A 21/ "2../($ Under the >y1!aws of J KS, mem*ership in the corporation shall, among others, *e terminated *y the death of the mem*er$ Section '1 of the orporation ode f)rther provides that termination exting)ishes all the rights of a mem*er of the corporation, )nless otherwise provided in the articles of the incorporation or the *ylaws$ Applying Section '1 to the present case, we hold that dead mem*ers who are dropped from the mem*ership roster in the manner for the ca)se provided for in the >y1!aw of J KS are not to *e co)nted in determining the re3)isite vote in corporate matters or the re3)isite 3)or)m for the ann)al mem*ersD meeting$

%2 ?ith 11 remaining mem*ers, the 3)or)m in the present case sho)ld *e /$ therefore, there *eing a 3)or)m, the ann)al mem*ersD meeting, cond)cted with six mem*ers present, was valid$ 'an v. $yci", %'' S 7A 21/ "2../($ 2+3 Conduct of Stockholders= or &em'ers= &eetings6 2 3 Rinds and 7e3)irements of 5eetings "Secs$ %' and &.(; 2 3 Place and +ime of 5eeting "Secs$ &1 and '-(; 2 3 M)or)m "Sec$ &2( M)or)m is *ased on the totality of the shares which have *een s)*scri*ed and iss)ed whether it *e fo)ndersD shares or common shares$ +o *ase the comp)tation of 3)or)m solely on the o*vio)sly deficient, if not inacc)rate stoc4 and transfer *oo4, and completely disregarding the iss)ed and o)tstanding shares indicated in the articles of incorporation wo)ld wor4 in8)stice to the owners and:or s)ccessors in interest of the said shares$ +he stoc4 and transfer *oo4 cannot *e )sed as the sole *asis for determining the 3)or)m as it does not reflect the totality of shares which have *een s)*scri*ed, more so when the articles of incorporation show a significantly larger amo)nt of shares iss)ed and o)tstanding as compared to that listed in the stoc4 and transfer *oo4$ *anu4a v. Court o# A""eals, %&% S 7A &% "2..&($ B. C%#(&'-(: '#, A@&$$.$#( A++$-( #@ Sh'&$h%!, #@: 2'3 Pro2y "Sec$ &,( 243 ;oting Trust )greements "Sec$ &'; Lee v. C), 208 SCRA B82 <1992=3. +he tr)stor has a right to terminate the A+A for *reach thereof$ Everett v. Asia Ban)ing Cor"oration, %' Phil$ &12 "1'2/($ Aoting tr)st agreement as part of a loan arrangement$ N&!C v. A0uino, 1/- S 7A 1&"1',,($ 2-3 Pooling )greements or Shareholders? )greements "Sec$ 1..( 8. R @h(: (% I#:"$-( '#, C%"9 2'3 Basis of $ight "2o)ong,ei% -r. v. $EC, ,' S 7A --/ B1'2'C($ 243 Limitations on $ight +he only express limitations on the right of inspection )nder Sec$ 2% of orporation ode are= "a( it sho)ld *e exercised at reasona*le ho)rs on *)siness days; "*( the person demanding the right to examine and copy excerpts from the corporate records and min)tes has not improperly )sed any information sec)red thro)gh any previo)s examination of records; and "c( the demand is made in good faith or for a legitimate p)rpose$ A#rica v. PC22 , 2.& S 7A -' "1''2($ Summary of $ulings6 +he right to inspect corporate *oo4s and records= 0s exercisa*le thro)gh agents and representatives, otherwise it wo)ld often *e )seless to the stoc4holder who does not 4now corporate intricacies$ (.2. Phil"otts v. Phili""ine Manu#acturing Co., %. Phil$ %21 "1'1'($ annot *e denied on the gro)nd that the director is on )nfriendly terms with the officers of the corporation whose records are so)ght to *e inspected$ 5eraguth v. &sabela $ugar Co., &2 Phil$ 2// "1'-2($

Altho)gh it incl)des the right to ma4e copies, does not a)thori6e *ringing the *oo4s or records o)tside of corporate premises$ 5eraguth v. &sabela $ugar Co., &2 Phil$ 2// "1'-2($ Foes not incl)de the right of access to min)tes )ntil s)ch min)tes have *een written )p and approved *y the directors$ 5eraguth v. &sabela $ugar Co., &2 Phil$ 2// "1'-2($ annot *e limited to a period of ten days shortly prior to the ann)al stoc4holdersD meeting, as s)ch wo)ld *e an )nreasona*le restriction and violates the legal provision granting the exercise of s)ch right ;at reasona*le ho)rs$< Pardo v. Hercules *umber Co., %2 Phil$ '/% "1'2%($

%,
2-3 Specified $ecords "Secs$ 2%, 2& and 1%1( 2,3 $emedies #f %enied6 &andamus on!ales v. P+B, 122 SCRA 089 2198/3$ >)rden of proof to show that examination is for improper p)rpose is on the part of the corporation$ .e"ublic v. $andiganbayan% 1'' S 7A -' "1'''($ 2$3 Confidential +ature of SEC E2aminations "Sec$ 1%2( 9. A""&' :'! R @h( "Secs$ ,1 to ,/ and 1.&( 10. D$& ?'( ?$ S> (: "0nterim 7)les for 0ntra1 orporate .ahn, 1B; SCRA 00B <1989=( ontroversies; San &iguel Corp. v.

?here a corporation is an in8)red party, its power to s)e is lodged with its *oard of directors or tr)stees$ An individ)al stoc4holder may *e permitted to instit)te a derivative s)it in *ehalf of the corporation to protect or vindicate corporate rights whenever the officials of the corporation ref)se to s)e, or when a demand )pon them to file the necessary action wo)ld *e f)tile *eca)se they are the ones to *e s)ed, or *eca)se they hold control of the corporation$ 0n s)ch actions, the corporation is the real party1in1interest while the s)ing stoc4holder, in *ehalf of the corporation, is only a nominal party$ 1ili"inas Port $ervices% &nc. v. 2o , &1, S 7A %&- "2..2($ +he whole p)rpose of the law a)thori6ing a derivative s)it is to allow the stoc4holders:mem*er to enforce rights which are derivative "secondary( in nat)re, i$e$, to enforce a corporate ca)se of action$ ..N. $ymaco 'rading Cor" v. $antos , %/2 S 7A -12 "2..&($ A derivative action is a s)it *y a shareholder to enforce a corporate ca)se of action$ +he corporation is a necessary party to the s)it$ And the relief which is granted is a 8)dgment against a third person in favor of the corporation$ Similarly, if a corporation has a defense to an action against it and is not asserting it, a stoc4holder may intervene and defend on *ehalf of the corporation$ Chua v. Court o# A""eals, %%- S 7A 2&' "2..%($ A derivative s)it is an action *ro)ght *y minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors ref)se to s)e$ 0t is a remedy designed *y e3)ity and has *een the principal defense of the minority shareholders against a*)ses *y the ma8ority$ (estern &nstitute o# 'echnology% &nc. v. $alas% 22, S 7A 21/ "1''2($ 2'3 ,ho &ay Bring the Suit 2Chua v. Court of )ppeals, 00/ SCRA 289 <2000=3 Since the ones to *e s)ed are the directors:officers of the corporation itself, a stoc4holder, li4e petitioner r)6, may validly instit)te a derivative s)it to vindicate the alleged corporate in8)ry, in which case r)6 is only a nominal party while Lilport is the real party1in1interest$ 1ili"inas Port $ervices% &nc. v. 2o, &1, S 7A %&- "2..2($ Under Section -/ of the orporation ode, read in relation to Section 2-, where a corporation is an in8)red party, its power to s)e is lodged with its *oard of directors or tr)stees$ An individ)al stoc4holder is permitted to instit)te a derivative s)it on *ehalf of the corporation wherein he holds stoc4s in order to protect or vindicate corporate rights, whenever the officials of the corporation ref)se to s)e, or are the ones to *e s)ed, or hold the control of the corporation$ 0n s)ch actions, the s)ing stoc4holder is regarded as a nominal party, with the corporation as the real party in interest$ Chua v. Court o# A""eals, %%- S 7A 2&' "2..%($ 0n the a*sence of a special a)thority from the >oard of Firectors to instit)te a derivative s)it for and in *ehalf of the corporation, the president or managing director is dis3)alified *y law to s)e in her own name$ +he power to s)e and *e s)ed in any co)rt *y a corporation even as a stoc4holder is lodged in the >oard that exercises its corporate powers and not in the president or officer thereof$ Bitong v. Court o# A""eals% 2'2 S 7A &.- "1'',($ A minority stoc4holder and mem*er of the *oard has no power or a)thority to s)e on the corporationDs *ehalf$ #or can we )phold this as a derivative s)it, since it is re3)ired that the minority stoc4holder s)ing for and on *ehalf of the corporation m)st allege in his complaint that he is s)ing on a derivative ca)se of action on *ehalf of the corporation and all other stoc)holders similarly situated ,ho may ,ish to /oin him in the suit $ +here is now showing that petitioner has complied with the foregoing re3)isites$ 'am (ing 'a) v. Ma)asiar% -&. S 7A %2& "2..1($

%' +he relators m)st *e stoc4holders *oth at time of occ)rrence of the events constit)ting the ca)se of action and at the time of the filing of the derivative s)it$ 2ochan v. @oung, -&% S 7A 2.2 "2..1(; Pascual v. 8ro4co, 1' Phil$ ,- "1'11($ A minority stoc4holder can file a derivative s)it against the president for diverting corporate income to his personal acco)nts$ Commart 6Phils.7 &nc. v. $EC, 1', S 7A 2- "1''1($ A lawyer engaged as co)nsel for a corporation cannot represent mem*ers of the same corporationDs *oard of directors in a derivative s)it *ro)ght against them$ +o do so wo)ld *e tantamo)nt to representing conflicting interests, which is prohi*ited *y the ode of Professional 7esponsi*ility$< Hornilla v. $alunat, %.& S 7A 22. "2..-($ 243 E2haustion of #ntra7Corporate $emedies6 Everett v. Asia Ban)ing Cor".% %' Phil$ &12 "1'22(; Angeles v. $antos% /% Phil$ /'2 "1'-2(. A derivative s)it to 3)estion the validity of the foreclos)re of the mortgage on corporate assets can *e filed witho)t prior demand )pon the >oard of Firectors where the legality of the constit)tion of the >oard lies at the center of the iss)es$ !BP v. Pundogar% 21, S 7A 11, "1''-($ 2-3 +ature of $elief6 Evangelista v. $antos, ,/ Phil$ -,2 B1'&.C; .e"ublic Ban) v. Cuaderno, 1' S 7A /21 "1'/2(; .eyes v. 'an, - S 7A 1', "1'/1($ 0n a derivative s)it, any monetary *enefits )nder the decision of the co)rt shall pertain to the corporation and not to the stoc4holders or mem*ers$ ..N. $ymaco 'rading Cor". v. $antos , %/2 S 7A -12 "2..&($ +he allegations of in8)ry to the relators can co1exist with those pertaining to the corporation, and does not dis3)alify them from filing a derivative s)it on *ehalf of the corporation$ 0t merely gives rise to an additional ca)se of action for damages against the erring directors$ 2ochan v. @oung, -&% S 7A 2.2 "2..1($ 0n a derivative action, the real party in interest is the corporation itself, not the shareholders who act)ally instit)ted it$ A s)it to enforce preemptive rights in a corporation is not a derivative s)it, and therefore a temporary restraining order en8oining a person from representing the corporation will not *ar s)ch action, *eca)se it is instit)ted on *ehalf and for the *enefit of the shareholder, not the corporation$ *im v. *im=@u% -&2 S 7A 21/ "2..1($ Appointment of receiver can *e an ancillary remedy in a derivative s)it$ Chase v. C1& o# Manila, 1, S 7A /.2 "1'//($ ?here corporate directors have committed a *reach of tr)st either *y their fra)ds, ultra vires acts, or negligence, and the corporation is )na*le or )nwilling to instit)te s)it to remedy the wrong, a stoc4holder may s)e on *ehalf of himself and other stoc4holders and for the *enefit of the corporation, to *ring a*o)t a redress of the wrong done directly to the corporation and indirectly to the stoc4holders$ +his is what is 4nown as a derivative s)it, and settled is the doctrine that in a derivative s)it, the corporation is the real party in interest while the stoc4holder filing s)it for the corporationDs *ehalf is only nominal party$ +he corporation sho)ld *e incl)ded as a party in the s)it$ Hornilla v. $alunat, %.& S 7A 22. "2..-($ 11. R @h( (% P&%"%&( %#'($ Sh'&$ %+ R$.' # #@ A::$(: U"%# D ::%!>( %# "Sec$ 122( 2'3 %ifferent $ules for +on7stock Corporations and Foundations "Secs$ '% and '&; Section -%"K("2("c(, 1''2 #07 ($

5III. CAPITAL STRUCTURE* SHARES O1 STOCK

1. C%#-$"( %+ FC'" ('! S(%-JG "Central 'extile Mills v. National (age and Productivity Commission% 2/. S 7A -/, B1''/C($ >y express provision of Sec$ 1- of orporation ode, paid1)p capital is that portion of the a)thori6ed capital stoc4 which has *een *oth s)*scri*ed and paid$ $ $ #ot all f)nds or assets received *y the corporation can *e considered paid1)p capital, for this term has a technical signification in orporation !aw$ S)ch m)st form part of the a)thori6ed capital stoc4 of the corporation, s)*scri*ed and then act)ally paid )p$ M$C&=NAC+$&P *ocal Cha"ter v. National (ages and Productivity Commission% 2/' S 7A 12- "1''2($

&.
+he term ;capital< and other terms )sed to descri*e the capital str)ct)re of a corporation are of )niversal acceptance, and their )sages have long *een esta*lished in 8)rispr)dence$ >riefly, capital refers to the val)e of the property or assets of a corporation$ +he capital s)*scri*ed is the total amo)nt of the capital that persons "s)*scri*ers or shareholders( have agreed to ta4e and pay for, which need not necessarily *e, and can *e more than, the par val)e of the shares$ 0n fine, it is the amo)nt that the corporation receives, incl)sive of the premi)m if any, in consideration of the original iss)ance of the shares$ N'C v. Court o# A""eals, -11 S 7A &., "1'''($ +he o)tstanding capital stoc4 is defined )nder Section 1-2 of the orporation ode as ;the total shares of stoc4 iss)ed to s)*scri*ers or stoc4holders whether or not f)lly or partially paid "as long as there is *inding s)*scription agreement( except treas)ry shares$< +h)s, 3)or)m is *ased on the totality of the shares which have *een s)*scri*ed and iss)ed, whether it *e fo)ndersD shares or common shares$ *anu4a v. Court o# A""eals, %&% S 7A &% "2..&($ An ;investment< is an expendit)re to ac3)ire property or other assets in order to prod)ce reven)e$ 0t is the placing of capital or laying o)t of money in a way intended to sec)re income or profit from its employment$ ;+o invest< is to p)rchase sec)rities of a more or less permanent nat)re, or to place money or property in *)siness vent)res or real estate, or otherwise lay it o)t, so that it may prod)ce a reven)e or income$ President o# P!&C v. .eyes, %/. S 7A %2"2..&($ An investment, *eing in the nat)re of e3)ity, and )nli4e a deposit of money or a loan that earns interest, cannot *e ass)red of a dividend or an interest on the amo)nt invested, for dividends on investments are granted only after profits or gains are generated$ President o# P!&C v. .eyes, %/. S 7A %2- "2..&($ 2. C!':: + -'( %# %+ Sh'&$: "Sec$ /( Section / of the orporation ode which prohi*its the classification of shares as non1voting, except when they are expressly classified as preferred or redeema*le shares, will apply to corporation organi6ed )nder the old orporation !aw$ Section 1%, of the orporation ode expressly provides that it shall apply to corporations in existence at the time of the effectivity of the ode$ Castillo v. Balinghasay, %%. S 7A %%2 "2..%($ 2'3 Common Shares ;A common stoc4 represents the resid)al ownership interest in the corporation$ 0t is a *asic class of stoc4 ordinarily and )s)ally iss)ed witho)t extraordinary rights or privileges and entitles the shareholder to a "ro rata division of profits$< Commissioner o# &nternal .evenue v. Court o# A""eals, -.1 S 7A 1&2 "1'''($ 243 Preferred Shares "$epu'lic Planters Bank v. )gana, 2;9 SCRA 1 <199B=($ Participating and +on7participating Cumulative and +on7cumulative Par ;alue and +o Par ;alue ;Preferred stoc4s are those which entitle the shareholder to some priority on dividends and asset distri*)tion$< Commissioner o# &nternal .evenue v. Court o# A""eals% -.1 S 7A 1&2 "1'''($ 243 $edeema'le Shares "Sec$ ,;$epu'lic Planters Bank v. )gana, 2;9 SCRA 1( ;7edemption is rep)rchase, a reac3)isition of stoc4 *y a corporation which iss)ed the stoc4 in exchange for property, whether or not the ac3)ired stoc4 is cancelled, retired or held in the treas)ry$ Essentially, the corporation gets *ac4 some of its stoc4, distri*)tes cash or property to the shareholder in payment for the stoc4, and contin)es in *)siness as *efore$ +he redemption of stoc4 dividends previo)sly iss)ed is )sed as a veil for the constr)ctive distri*)tion of cash dividends$ Commissioner o# &nternal .evenue v. Court o# A""eals% -.1 S 7A 1&2 "1'''($ 2-3 Founder Shares "Sec$ 2(1.
1. 0n Castillo v. Balinghasay, %%. S 7A %%2 "2..%(, the position that when the articles of incorporation provide expressly a class of shares to have the excl)sive right to vote and *e voted for into the >oard of Firectors, that s)ch shares wo)ld essentially *e

&1 2,3 Treasury Shares "Sec$ '; Commissioner v. Manning, // S 7A 1% B1'2&C($ 2$3 Stock ,arrants 2+3 Stock 1ptions 2@3 $e7Classification of Shares ;7eclassification of shares does not always *ring any s)*stantial alteration in the s)*scri*erDs proportional interest$ >)t the exchange is differentEthere wo)ld *e a shifting of the *alance of stoc4 feat)res li4e priority in dividend declarations or a*sence of voting rights$ Net neither the reclassification nor exchange "er se yields income for tax p)rposes$ $ $ 0n this case, the exchange of shares, witho)t more, prod)ces no reali6ed income to the s)*scri*er$ +here is only a modification of the s)*scri*erDs rights and privilegesEwhich is not a flow of wealth for tax p)rposes$ +he iss)e of taxa*le dividend may arise only once a s)*scri*er disposes of his entire interests and not when there is still maintenance of proprietary interest$< Commissioner o# &nternal .evenue v. Court o# A""eals% -.1 S 7A 1&2 "1'''($ /. H94& , S$->& ( $: " overnment v. Phil. Sugar Estates, /8 Ph !. 18 <1918=($ 0. H>': -R$%&@'# A'( %# 2'3 $eduction of Capital Stock "Sec$ -,( 7ed)ction of capital stoc4 cannot *e employed to avoid the corporationDs o*ligations )nder the !a*or ode$ xMadrigal & Co. v. Camora, 1&1 S 7A -&& "1',2($ 243 Stock Splits 2-3 Stock Consolidations

5IV. ACHUISITIONS, MERGERS AND CONSOLIDATIONS

A. ACHUISITIONS AND T RANS1ERS 1. C%#-$"( %+ FE#($&"& :$G %& FE-%#%. - ># (G %& FG% #@ -%#-$&#G 2. T9"$: %+ A-E> : ( %#:MT&'#:+$&: "Edward /. +ell Co. v. Pacific , 18 SCRA 018; PNB v. Andrada Electric & Engineering Co., -,1 S 7A 2%% B2..2C( As a r)le, a corporation that p)rchases the assets of another will not *e lia*le for the de*ts of the selling corporation, provided the former acted in good faith and paid ade3)ate consideration for s)ch assets, except when any of the following circ)mstances is present= "1( where the p)rchasers expressly or impliedly agrees to ass)me the de*ts; "2( where the transaction amo)nts to a consolidation or merger of the corporations, "-( where the p)rchasing corporation is merely a contin)ation of the selling corporation, and "%( where the selling corporation fra)d)lently enters into the transactions to escape lia*ility for those de*ts$ Mc*eod v. N*.C, &12 S 7A 222 "2..2(, reiterating Phili""ine National Ban) v. Andrada Electric & Engineering Co.%, -,1 S 7A 2%% "2..2($ ?hen a corporation transferred all its assets to another corporation ;to settle its o*ligations< that wo)ld not amo)nt to a fra)d)lent transfer$ Mc*eod v. N*.C, &12 S 7A 222 "2..2($ Even )nder the provisions of the ivil ode, a creditor has a real interest to go after any person to whom the de*tor fra)d)lently transferred its assets$ Calte2 BPhils.C" #nc. v. P+1C Shipping and Transport Corp. , 098 SCRA 000 2200;3$ /. B>: #$:: E#($&"& :$ T&'#:+$&:*).%. Santos v. ;as5ue!, 22 SCRA 118; 219;83DLaguna Trans. Co." #nc. v. SSS , 10B Ph !. 8// 219;03D&cLeod v. +L$C, 812 SCRA 222 2200B3 Altho)gh the *)siness enterprise was operated )nder a partnership scheme and later transferred to a corporation, the *)siness enterprise is deemed to have *een in operation for the re3)ired two1year period as to come )nder the coverage of the SSS !aw$ $an 'eodoro !ev. v. $$$, , S 7A '/ "1'/-(; and since the corporation ass)med all the assets and lia*ilities of the partnership, then the corporation cannot *e regarded, for p)rposes of the SSS

fo)nderDs share was raised *)t not resolved *y the o)rt$

&2
!aw, as having come into *eing only on the date of its incorporation *)t from the date the partnership started the *)siness$ 8romeca *umber Co. v. $$$% % S 7A 11,, "1'/2($ ?here a corporation is closed for alleged losses and its e3)ipment are transferred to another company which engaged in the same operations, the separate 8)ridical personality of the latter can *e pierced to ma4e it lia*le for the la*or claims of the employees of the closed company$ National 1ederation o# *abor +nion v. 8"le, 1%- S 7A 12% "1',/($ Altho)gh a corporation may have ceased *)siness operations and an entirely new company has *een organi6ed to ta4e over the same type of operations, it does not necessarily follow that no one may now *e held lia*le for illegal acts committed *y the earlier firm$ Pepsi7Cola Bottling Co." v. +L$C, 210 SCRA 2BB 219923$ ;0t sho)ld *e rather clear that, as bet,een the estate and the cor"oration% the intention of incorporation was to ma4e the corporation lia*le for past and pending o*ligations of the estate as the transportation *)siness itself was *eing transferred to and placed in the name of the corporation$ +hat lia*ility on the part of the corporation, vis1T1vis the estate, sho)ld contin)e to remain with it even after the percentage of the estateDs shares of stoc4 in the corporation sho)ld *e dil)ted$< Buan v. )lcantara" 12B SCRA 808 219803$ 0. EE> (9 T&'#:+$&: "Phividec v. Court of )ppeals, 181 SCRA ;;9 <1990=($ B. MERGER AND CONSOLIDATION 1. C%#-$"(: 2&cLeod v. +L$C, 812 SCRA 222 <200B=3$ A consolidation is the )nion of two or more existing entities to form a new entity called the consolidated corporation$ A merger, on the other hand, is a )nion where*y one or more existing corporations are a*sor*ed *y another corporation that s)rvives and contin)es the com*ined *)siness$ Since a merger or consolidation involves f)ndamental changes in the corporation, as well as in the rights of stoc4holders and creditors, there m)st *e an express provision of law a)thori6ing them$ PNB v. Andrada Electric & Engineering Co.% -,1 S 7A 2%% "2..2($ 2. P&%-$,>&$* 2'3 Plan of &erger or Consolidation "Sec$ 2/( 243 Stockholders= or &em'ers= )pproval "Sec$ 22( 2-3 )rticles of &erger or Consolidation "Sec$ 2,( 2,3 )pproval 'y SEC "Sec$ 2'( As specifically provided )nder Section 2' of the orporation ode, the merger shall only *e effective )pon the iss)ance of a certificate of merger *y the Sec)rities and Exchange ommission "SE (, s)*8ect to its prior determination that the merger is not inconsistent with the ode or existing laws$ ?here a party to the merger is a special corporation governed *y its own charter, the ode partic)larly mandates that a favora*le recommendation of the appropriate government agency sho)ld first *e o*tained$ +he iss)ance of the certificate of merger is cr)cial *eca)se not only does it *ear o)t SE Ds approval *)t also mar4s the moment where)pon the conse3)ences of a merger ta4e place$ >y operation of law, )pon the effectivity of the merger, the a*sor*ed corporation ceases to exist *)t its rights, and properties as well as lia*ilities shall *e ta4en and deemed transferred to and vested in the s)rviving corporation$ Poliand &ndustrial *td. 5. N!C, %/2 S 7A &.. "2..&($ Su'mission of Financial Statements $e5uirements6 Lor applications of merger, the a)dited financial statements of the constit)ent corporations "s)rviving and a*sor*ed( as of the date not earlier than 12. days prior to the date of filing of the application and the long1form a)dit report for a*sor*ed corporation"s( are always re3)ired$ !ong form a)dit report for the s)rviving corporation is re3)ired if it is insolvent$ "SE @pinion 1%, s$ of 2..2, 1& #ovem*er 2..2($ /. E++$-(: %+ M$&@$& %& C%#:%! ,'( %# "Sec$ ,.; Associated Ban) v. Court o# A""eals% 2'1 S 7A &11 B1'',C( @rdinarily, in the merger of two or more existing corporations, one of the com*ining corporations s)rvives and contin)es the com*ined *)siness, while the rest are dissolved and all their rights, properties and lia*ilities are ac3)ired *y the s)rviving corporation$ Poliand &ndustrial *td. 5. N!C, %/2 S 7A &.. "2..&(; Mc*eod v. N*.C, &12 S 7A 222 "2..2($

&?hen the proced)re for merger:consolidation prescri*ed )nder the orporation ode are not followed, there can *e no merger or consolidation, and corporate separateness *etween the constit)ent corporations remains, and the lia*ilities of one entity cannot *e enforced against another entity$ PNB v. Andrada Electric & Engineering Co.% -,1 S 7A 2%% "2..2($ 0t is settled that in the merger of two existing corporations, one of the corporations s)rvives and contin)es the *)siness, while the other is dissolved and all its rights, properties and lia*ilities are ac3)ired *y the s)rviving corporation$ +he s)rviving corporation therefore has a right to instit)te a collection s)it on acco)nts of one of one of the constit)ent corporations$ Babst v. Court o# A""eals, -&. S 7A -%1 "2..1($ C. E11ECTS ON EMPLOYEES O1 CORPORATION 1. A::$(: O#!9 T&'#:+$&: "$undo,ner !ev. Cor". v. !rilon% 1,. S 7A 1% B1','C( ;+here is no law re3)iring that the p)rchaser of 5F00Ds assets sho)ld a*sor* its employees $ $ $ the most that the #!7 co)ld do, for reasons of p)*lic policy and social 8)stice, was to direct Bthe *)yerC to give preference to the 3)alified separated employees of 5F00 in the filling )p of vacancies in the facilities$ M!&& $u"ervisors & Con#idential Em"loyees Asso. v. Pres. Assistance on *egal A##airs, 2' S 7A %.$ 2. B>: #$::-E#($&"& :$ T&'#:+$&: "Central )!ucarera del %anao v. C), 1/B SCRA 298 <1988=D Comple2 Electronics Employees )ssn. v. +L$C" /10 SCRA 00/ 219993; @u v. N*.C% 2%& S 7A 1-% B1''&C; $unio v. N*.C, 122 S 7A -'. B1',%C; $an 1eli"e Neri $chool o# Mandaluyong% &nc. v. N*.C, 2.1 S 7A %2, "1''1($ L)rthermore, )nder the principle of a*sorption, a *ona fide *)yer or transferee of all, or s)*stantially all, the properties of the seller or transferor is not o*liged to a*sor* the latterDs employees$ +he most that the p)rchasing company may do, for reasons of p)*lic policy and social 8)stice, is to give preference of reemployment to the selling companyDs 3)alified separated employees, who in its 8)dgment are necessary to the contin)ed operation of the *)siness esta*lishment$ Barayoga v. Asset Privation 'rust , %2- S 7A /'. "2..&(, citing Manlimos v. N*.C% 'he Ne, 5alley .imes Press v. N*.C$ 0n the case of a transfer of all or s)*stantially all of the assets of a corporation "i$e$, *)siness enterprise transfers(, the lia*ilities of the previo)s owners to its employees are not enforcea*le against the *)yer or transferee, )nless "a( the latter )ne3)ivocally ass)mes them; or "*( the sale or transfer was made in *ad faith$ Barayoga v. Asset Privation 'rust , %2- S 7A /'. "2..&($ /. EE> (9 T&'#:+$&: "Pepsi Cola %istri'utors v. +L$C , 20B SCRA /8; 219983D &anlimos v. +L$C, 202 SCRA 108 <1998=; .obledo v. N*.C, 2-, S 7A &2 B1''%C; Pe"si=Cola Bottling Co. v. N*.C, 21. S 7A 222 "1''2(; !BP v. N*.C, 1,/ S 7A ,%1 B1''.C; Coral v. N*.C, 2&, S 7A 2.% B1''/C; Avon !ale 2arments% &nc. v. N*.C, 2%/ S 7A 2-- B1''&C($ 0. M$&@$&: '#, C%#:%! ,'( %#: "Filipinas Port Services v. +L$C" 1BB SCRA 20/ <1989=; 1ili"inas Port $ervices v. N*.C% 2.. S 7A 22- B1''1C; National +nion Ban) Em"loyees v. *a4aro, 1&/ S 7A 12- B1',,C(; 1irst 2en. Mar)eting Cor". v. N*.C, 22- S 7A --2 "1''-($ 8. S" #-O++: "S&C Employees 0nion7PT ,1 v. Confessor, 2;2 SCRA 81 <199;=($

&% 5V. 2REHABILITATION AND INSOLVENCY

1. C%&"%&'($ B'#J&>"(-9 L'): # G$#$&'! 2'3 overning Laws "0nsolvency Act, PF '.21A, Sec)rities 7eg)lation ode B7A ,2''C( +he pertinent law concerning the s)spension of actions for claims against corporation is Presidential Fecree #o$ '.21A, as amended, partic)larly, section &"d(, and li4ewise Section /"c( thereof$ Phili""ine Airlines &nc. v. PA* Em"loyees Association, &2& S 7A 2' "2..2($ 243 Types of Bankruptcy Proceedings in the Philippines 2-3 $esolution on /urisdiction #ssues in Bankruptcy Proceedings6 Ching v. *and Ban) o# the Phili""ines% 2.1 S 7A 1'. "1''1($ 2. S>:"$#: %# %+ P'9.$#(: 2'3 #nsolvency Law "Secs$ 2 to 1-( 1 Sit)ation of the corporate de*tor 1 #at)re of petition 1 7e3)ired vote of creditors 1 onse3)ences of approval:non1approval 243 P.%. DEF7) "Sec$ &BdC(, Sec$ &$1. of Sec)rities 7eg)lation

ode 7)les on Petition, SE

2-3 #nterim $ules on Corporation $eha'ilitation "s)pplanted SE 5emo, dated 2 @cto*er 1''2( /. C%&"%&'($ R$h'4 ! ('( %# 2'3 +ature of 8$eha'ilitation9

7eha*ilitation contemplates a contin)ance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of s)ccessf)l operation and solvency$ .uby &ndustrial Cor". v. CA% 2,% S 7A %%& "1'',(; Ne, 1rontier $ugar Cor". v. .'C% Branch K:% &loilo City, &1- S 7A /.& "2..2($ +he p)rpose of reha*ilitation proceedings is to ena*le the company to gain new lease on life and there*y allows creditors to *e paid their claims from its earnings$ 7eha*ilitation contemplates a contin)ance of corporate life and activities in an effort to restore and reinstate the financially distressed corporation to its former position of s)ccessf)l operation and solvency$ +his is in consonance with the StateDs o*8ective to promote a wider and more meaningf)l e3)ita*le distri*)tion of wealth to protect investments and the p)*lic$ Metro"olitan Ban) & 'rust Co. v. A$B Holdings% &nc., &12 S 7A 1 "2..2($ 243 Basis of $TC Power to 0ndertake Corporate $eha'ilitation "Secs$ &BdC and /, PF '.21 A, Sec$ &$1., Sec)rities 7eg)lation ode( Presently, the applica*le law on reha*ilitation petitions filed *y corporations, partnerships or associations, incl)ding reha*ilitation cases transferred from the Sec)rities and Exchange ommission to the 7+ s p)rs)ant to 7ep)*lic Act #o$ ,2'' or the Sec)rities 7eg)lations ode, is the 0nterim 7)les of Proced)re on orporation 7eha*ilitation "2...($ Ne, 1rontier $ugar Cor". v. .'C% Branch K:% &loilo City , &1- S 7A /.& "2..2($ @n 1& Fecem*er 2..., the S)preme o)rt, in A$5$ #o$ ..1,11.1S , adopted the 0nterim 7)les of Proced)re on orporate 7eha*ilitation and directed to *e transferred from the SE to 7egional +rial o)rts, all petitions for reha*ilitation filed *y corporations, partnerships, and association )nder P$F$ '.21A in accordance with the amendatory provisions of 7ep)*lic Act #o$ ,2''$ +he r)les re3)ire trial co)rts to iss)e, among other things, a stay order in the ;enforcement of all claims, whether for money or otherwise, and whether s)ch enforcement is *y co)rt action or otherwise,< against the corporation )nder reha*ilitation, its g)arantors and s)reties not solidarily lia*le with it$ Phili""ine Airlines v. 3urang)ing, -,' S 7A &,, "2..2($ 2-3 SC #nterim $ules on Corporate $eha'ilitation6 0t sho)ld *e stressed that the 0nterim 7)les was enacted to provide for a s)mmary and non1adversarial reha*ilitation proceedings$ +his is in consonance with the commercial nat)re of a reha*ilitation case,

&& which is aimed to *e resolved expeditio)sly for the *enefit of all the parties concerned and the economy in general$ Ne, 1rontier $ugar Cor". v. .'C% Branch K:% &loilo City , &1S 7A /.1 "2..2($ 2,3 $e5uirements of Petition6 +he contents of the petition for corporate reha*ilitation are provided )nder 7)le %, Section 2"4( of the 0nterim 7)les on orporate 7eha*ilitation, which among other things, prescri*e that the petition needs for a certification$ Chas .ealty and !ev. Cor". v. 'alavera% -'2 S 7A ,% "2..%($ 0f extraordinary corporate action mentioned in 7)le %, Section 2"4(, of the 0nterim 7)les are to *e done )nder the proposed reha*ilitation plan, the petitioner wo)ld *e *o)nd to ma4e it 4nown that it has received the approval of a ma8ority of the directors and the affirmative votes of stoc4holders representing at least two1thirds "2:-( of the o)tstanding capital stoc4$ ?here no s)ch extraordinary corporate acts, or one that )nder the law wo)ld call for a two1thirds "2:-( vote are contemplated to *e done in carrying o)t the proposed reha*ilitation plan, then the approval of stoc4holders wo)ld only *e *y a ma8ority, not necessarily a two1thirds "2:-(, vote, as long as, of co)rse, there is a 3)or)m$ Chas .ealty and !ev. Cor". v. 'alavera , -'2 S 7A ,% "2..%($ ?hen a petition for corporate reha*ilitation is filed )nder the 0nterim 7)les of Proced)re Joverning orporate 7eha*ilitation, the first d)ty of a co)rt is to determine whether the petition is s)fficient as to form and s)*stance$ @nce it is satisfied as to form and s)*stance, it iss)es an order staying enforcement of all claims, whether for money or otherwise and whether s)ch enforcement is *y co)rt action or otherwise, against the de*tor, its g)arantors and s)reties not solidarily lia*le with the de*tor$ $obre/uanite v. A$B !ev. Cor"., %21 S 7A 2/- "2..&($ Summary of Procedure under the #nterim $ules. Ne, 1rontier $ugar Cor". v. .'C% Branch K:% &loilo City, &1- S 7A /.1 "2..2($ 2$3 Stay 1rder< Purpose6 +he avowed o*8ective of s)spending all actions against the distressed corporation when a management committee or reha*ilitation receiver is appointed is to ena*le s)ch management committee or reha*ilitation receiver to effectively exercise its powers free from any 8)dicial or extra18)dicial interference that might )nd)ly hinder or prevent the resc)e of the distressed company$ Kowever, this p)rpose can no longer *e effectively met in the present case as the proceedings herein have already *een pending for almost ten years and have already reached this o)rt$ +he management committee has *een )nd)ly *)rdened eno)gh, its time and reso)rces wasted *y the proceedings that too4 place *efore the 7+ and the appellate co)rt$ Kence, the decree of ann)lment of the previo)s proceedings in the lower co)rts will only res)lt in f)rther delay$ +he greater interest of 8)stice demands that we now dispose of the iss)es raised in the present petition$ 'yson s $u"er Concrete% &nc. v. Court o# A""eals , %/1 S 7A %/' "2..&(; $obre/uanite v. A$B !ev. Cor". , %21 S 7A 2/- "2..&(; Phili""ine Airlines &nc. v. PA* Em"loyees Association, &2& S 7A 2' "2..2(; Phili""ine Airlines% &nc. v. Camora, &1% S 7A &,% "2..2($ >esides, the other o*8ect of s)spending all actions against a distressed corporation, which is to treat all of its creditors on e3)al footing, is defeated *y the fact that the assailed 8)dgment of the 5e+ has already *een implemented thro)gh a writ of exec)tion iss)ed *y the co)rt a 0uo as early as H)ly 22, 1''/$ 'yson s $u"er Concrete% &nc. v. Court o# A""eals , %/1 S 7A %/' "2..&($ Under the 0nterim 7)les, the 7+ , within five "&( days from the filing of the petition for reha*ilitation and after finding that the petition is s)fficient in for and s)*stance, shall iss)e a Stay @rder appointing a 7eha*ilitation 7eceiver, :>:"$#, #@ $#+%&-$.$#( %+ '!! -!' .:, prohi*iting transfers or enc)m*rances of the de*torDs properties, prohi*iting payment of o)tstanding lia*ilities, and prohi*iting the withholding of s)pply of goods and services from the de*tor$ Any transfer of property or any other conveyance, sale payment, or agreement made in violation of the Stay @rder or in violation of the 7)les may *e declared void *y the co)rt )pon motion or motu "ro"rio$ Ne, 1rontier $ugar Cor". v. .'C% Branch K:% &loilo City , &1- S 7A /.1 "2..2($ ,hen #t Becomes Effective6 +he appointment of a management committee or reha*ilitation receiver may only ta4e place after the filing with the SE of an appropriate petition for s)spension of payments$ +he concl)sion is inevita*le that p)rs)ant to Section /"c(, ta4en together with Sections &"d( and "d(, a co)rt action is i"so /ure s)spended only u"on the

&/
a""ointment o# a management committee or a rehabilitation receiver. Barotac $ugar Mills% &nc. v. CA% 22& S 7A %'2 "1''2(; +nion Ban) v. CA% 2'. S 7A 1', "1'',($ %uration6 B.1. Homes% &nc. v. Court o# A""eals% 1'. S 7A 2/2 "1''.($ +he stay order is effective from the date of its iss)ance )ntil the dismissal of the petition or the termination of the reha*ilitation proceedings$ PA* v. 3urang)ing, -,' S 7A &,, "2..2($ Parties Covered@Benefited6 +nion Ban) o# the Phili""ines v. CA , 2'. S 7A 1', "1'',(; Modern Pa"er Products% &nc. v. CA , 2,/ S 7A 2%' "1'',(; 'raders .oyal Ban) v. CA% 122 S 7A 2,, "1','(; Chung 3a Bio v. &AC% 1/- S 7A &-% "1',,($ Claims Covered6 +he stay order is effective *oth against sec)re and )nsec)red creditors$ +his is in harmony with the principle of ;e3)ality is e3)ity<$ Alemar s $ibal & $ons% &nc. v. Elbinias, 1,/ S 7A '% "1''.(; .CBC v. &AC, 21- S 7A ,-. "1''2(; BP& v. CA, 22' S 7A 22"1''%(; PC&B v. CA% 122 S 7A %-/ "1','(; Ne, 1rontier $ugar Cor". v. .'C% Branch K:% &loilo City, &1- S 7A /.1 "2..2($ 0nterim 7)les m)st *e read and applied along with Section /"c( of P$F$ '.21A, directing that )pon the appointment of a management committee, reha*ilitation receiver, *oard or *ody p)rs)ant to the decree, ;all actions< for claims against the distressed corporation ;pending *efore any co)rt, tri*)nal, *oard or *ody shall *e s)spended accordingly$< PA* v. 3urang)ing, -,' S 7A &,, "2..2($ Strictly spea4ing, an action for e8ectment filed against the corporation sho)ld *e s)spended on the gro)nd that the SE has already created a management committee )nder Pres$ Fecree #o$ '.21A p)rs)ant to a petition for corporate reha*ilitation$ 0t m)st *e noted that the constit)tion of a management committee )nder Pres$ Fecree #o$ '.21A, does not divest a co)rt of its 8)risdiction over the pending case *)t merely provides for the s)spension of the proceedings in the civil action$ 'yson s $u"er Concrete% &nc. v. Court o# A""eals , %/1 S 7A %/' "2..&($ +he effects of the stay order )nder the Sec$ /"*(, 7)le % of the 0nterim 7)les of Proced)re for orporate 7eha*iliation which en8oings the enforcement of all claims against g)arantors and s)reties ;who are not solidarily lia*le with the de*tor,< cannot apply to the letter of credit iss)ed in *ehalf of the de*tor1applicant since the o*ligation of the iss)ing *an4s )nder the letter of credit is primary and solidary$ Metro"olitan (ater,or)s v. !a,ay, %-2 S 7A &&' "2..%($ Types of 8Claims9 Covered6 +he limitation of covered ;claims< to those that are pec)niary in nat)re is applica*le only to SE corporation reha*ilitation proceedings$ 1inasia &nvestments v. CA% 2-2 S 7A %%/ "1''%(; Phili""ine Airlines &nc. v. PA* Em"loyees Association , &2& S 7A 2' "2..2(; Cordova v. .eyes !a,ay *im Bernardo *indo .osales *a, 8##icers , &2/ S 7A -.. "2..2($ A ;claim< is said to *e ;a right to payment, ,hether or not it is red)ced to 8)dgment, li3)idated or )nli3)idated, fixed or contingent, mat)red or )nmat)red, disp)ted or )ndisp)ted, legal or e3)ita*le, and sec)red or )nsec)red$< Aerily, the claim against an airline company is a money claim for the missing l)ggages, a financial demand, that the law re3)ires to *e s)spended pending the reha*ilitation proceedings$ PA* v. 3urang)ing, -,' S 7A &,, "2..2($ +he 8)stification for the a)tomatic stay of all pending actions for claims is to ena*le the management committee or the reha*ilitation receiver to effectively exercise its:his powers free from any 8)dicial or extra18)dicial interference that might )nd)ly hinder or prevent the ;resc)e< of the de*tor company$ +o allow la*or claims to contin)e wo)ld only add to the *)rden of the management committee or reha*ilitation receiver, whose time, effort and reso)rces wo)ld *e wasted defending claims against the corporation instead of *eing directed toward its restr)ct)ring and reha*ilitation$ .ubber,orld LPhils.M% &nc. v. N*.C% -.& S 7A 221 "1'''(; --/ S 7A %-- "2...($ Also .ubber,orld 6Phils.7% &nc. and -ulie 8ng v. N*.C% --/ S 7A %-"2...(; *ing)od Maggaga,a sa .ubber,orld% Adidas=Anglo v. .ubber,orld 6Phil.s7% &nc. , &1S 7A 2., "2..2($ 2+3 Powers of &anagement Committee or the $eha'ilitation $eceiver "Sec$ /, PF '.21A; 0nterim 7)les on orporate 7eha*ilitation( A management committee is tas4ed to manage, ta4e c)stody of and control all existing assets, f)nds and records of the corporation, and to determine the *est way to protect the

&2 interest of its stoc4holders and creditors$ Punongbayan v. Punongbayan% -r. , %'1 S 7A %22 "2../($ 0n exercising the discretion to appoint a management committee, the officer or tri*)nal *efore whom the application was made m)st ta4e into acco)nt all the circ)mstances and facts of the case, the presence of conditions and gro)nds 8)stifying the relief, the ends of 8)stice, the rights of all the parties interests in the controversy and the ade3)acy and effectiveness of other availa*le remedies$ +he discretion m)st *e exercised with great ca)tion and circ)mspection and only for a reason strongly appearing to the tri*)nal or officer exercising 8)risdiction$ @nce the discretion has *een exercised, the pres)mption to *e considered is that the officer or tri*)nal has fairly weighed and appraised the evidence s)*mitted *y the parties$ -acinto v. 1irst (omen s Credit Cor"., %1. S 7A 1%. "2..-($ S)mmons may validly *e served )pon any mem*er of the management committee$ +here is nothing in the 0nterim 7)les of Proced)re for orporate 7eha*ilitation that provides that service of s)mmons on the corporation )nder reha*ilitation can only *e made on the chairman of the management committee$ 'yson s $u"er Concrete% &nc. v. Court o# A""eals , %/1 S 7A %/' "2..&($ 2@3 $TC 1rders #mmediately E2ecutory6 Linally, it *ears stressing that )nder Section %, 7)le 1 of the 0nterim 7)les of Proced)re Joverning 0ntra1 orporate ontroversies )nder 7ep)*lic Act #o$ ,2'', the prevailing party has the right to file a motion for the immediate exec)tion of a decision of 8)dgment$ *ao v. 3ing, &.. S 7A &'' "2../($ 2h3 )ppeal from the %ecision of the $TC Special Commercial Courts +he @mni*)s @rder dated Han)ary 1-, 2..- iss)es *y the 7+ is a final order since it terminated the proceedings and dismissed the case *efore the trial co)rt; it leaves nothing more to *e done$ As s)ch, petitionerDs reco)rse is to file an appeal from the @mni*)s @rder$ #ew Lrontier S)gar orp$ v$ 7+ , >ranch -', 0loilo ity, &1- S 7A /.1 "2..2( 0n this regard, A$5$ ..1,11.1S prom)lgated *y the o)rt on Septem*er %, 2..1 provides that a petition for reha*ilitation is considered a special proceeding given that it see4s to esta*lish the stat)s of a party or a partic)lar fact$ Accordingly, the period of appeal provided in paragraph "*( of the 0nterim 7)les 7elative to the 0mplementation of >atas Pam*ansa >lg$ 12' for special proceedings shall apply$ Under said paragraph 1' "*(, the period of appeal shall *e thirty "-( days, a record of appeal *eing re3)ired$ #ew Lrontier S)gar orp$ v$ 7+ , >ranch -', 0loilo ity, &1- S 7A /.1 "2..2( Kowever, it sho)ld *e noted that the o)rt iss)ed A$5$ #o$ .%1'1.21S on Septem*er 1%, 2..%, clarifying the proper mode of appeal in cases involving corporate reha*ilitation and intra1 corporate controversies$ 0t is provided therein that all decisions and final orders in cases falling )nder the 0nterim 7)les of Proced)re Joverning 0ntra1 orporate ontroversies )nder 7ep)*lic Act #o$ ,2'' shall *e appealed to the A thro)gh petition for review )nder 7)le %- of the 7)les of o)rt to *e filed within fifteen "1&( days from notice of the decision or final order of the 7+ $ #ew Lrontier S)gar orp$ v$ 7+ , >ranch -', 0loilo ity, &1- S 7A /.1 "2..2($ 2 3 SEC Power to Li5uidate Corporation6 Al*eit 8)risdiction over a petition to declare a corporation in a state of insolvency strictly lies with reg)lar co)rts, the SE possessed ample power )nder P$F$ '.21A to declare a corporation insolvent as an incident of and in contin)ation of its already ac3)ired 8)risdiction over the petition to *e declared in the state of s)spension of payments in the two instances provided in Section &"d( thereof$ +nion Ban) o# the Phili""ines v. Conce"cion, &2& S 7A /22 "2..2( 2K3 Basic %ifferences Between Suspension of Payments Proceedings under the #nsolvency Law and 0nder P% DEF7) 0. I#:%!?$#-9 P&%-$$, #@: !i3)idation proceeding is one in rem so that all other interested persons whether 4nown to the parties or not may *e *o)nd *y s)ch proceedings$ Chua v. N*.C, 1'. S 7A &&, "1''.($ 2'3 overning Law and /urisdiction 243 eneral Effect of Corporate #nsolvency Proceedings 2-3 VOLUNTARY INSOLVENCY

&,
2,3 Filing of Petition "Sec$ 1%, 0nsolvency !aw( 2$3 Effect of 1rder of #nsolvency "Sec$ 1,, 0nsolvency !aw; !e Amu4ategui v. Macleod% -Phil$ ,. B1'1&C($ Section 1, on the a)tomatic stay is no self1exec)tory; applications for s)spension of proceedings m)st *e made in the vario)s co)rts where actions in pending$ +nson v. Abeto% %2 Phil$ %2 "1'2%($ 2+3 INVOLUNTARY INSOLVENCY "Sec$ 2. to --( 2@3 3ualifications of Petitioning Creditors A foreign corporation which shows that it is a resident of the Philippines has legal standing to petition for invol)ntary insolvency of a corporate de*tor$ $tate &nvestment House% &nc. v. Citiban)% N.A.% 2.- S 7A ' "1''1($ 2h3 1rder to Show Cause "Sec$ 21(; -earing of petition "Sec$ 2%( 2 3 )cts of #nsolvency and 1rder of )d4udication "Sec$ 2.( 2K3 &eeting of Creditors to Elect )ssignee "Secs$ 2' and -.( 2J3 Effects of 1rder of #nsolvency and )ppointment of $eceiver "Secs$ -2, -% and -&; .adiola='oshiba Phil. v. &AC, 1'' S 7A -2- B1''1C( 2!3 Li5uidation of )ssets and Payment of %e'ts "Sec$ --( 2.3 $emedies of Secured Creditors "Sec$ 2', %- and &'( 2#3 Composition "Sec$ /-( 2%3 %ischarge "Secs$ &2, /%, and //( 2"3 )ppeal in certain cases "Sec$ ,2( 5VI.

DISSOLUTION

1. N% V$:($, R @h(: (% C%&"%&'($ 1 -( %#. on!ales v. S$)" 1B0 SCRA /BB 219893. 2. V%!>#('&9 D ::%!>( %# "Sec$ 112( 2'3 +o Creditors )ffected "Sec$ 11,( 243 There )re Creditors )ffected "Secs$ 11' and 122($ ?hen a corporation is contemplating dissol)tion, it m)st s)*mit tax ret)rn on the income earned *y it from the *eginning of the year )p to the date of its dissol)tion and pay the corresponding tax d)e$ BP& v. Court o# A""eals, -/- S 7A ,%. "2..1($ /. I#?%!>#('&9 D ::%!>( %# "Sec$ 121; Sec$ /"l(, P$F$ '.21A; Sec$ 2, 7)le //, 7)les of o)rt(

2'3 3uo ,arranto ".e"ublic v. Bisaya *and 'rans"ortation Co. , ,1 S 7A ' B1'2,C; .e"ublic v. $ecurity Credit & Acce"tance Cor"., 1' S 7A &, B1'/2C; 2overnment v. El Hogar 1ili"ino, &. Phil$ -'' B1'22C($ 243 E2piration of Term 2-3 Shortening of Corporate Term "Sec$ 12.( 2,3 +on7user of Charter and Continuous #noperation "Sec$ 22( ;@rgani6e< involves the election of officers, providing for the s)*scription and payment of the capital stoc4, the adoption of *y1laws, and s)ch other steps as are necessary to endow the legal entity with the capacity to transact the legitimate *)siness for which the corporation was created$ ;@rgani6ation< relates merely to the systemati6ation and orderly arrangement of the internal and managerial affairs and organs of the corporation$ Benguet Consolidated Mining Co. v. Pineda% ', Phil$ 211$ +he fail)re to file the *y1laws does not a)tomatically operate to dissolve a corporation *)t is now considered only a gro)nd for s)ch dissol)tion$ Chung 3a Bio v. &AC% 1/- S 7A &-% "1',,($

&' 2$3 %emand of &inority Stockholders for %issolution . 1inancing Cor". o# the Phil. v. 'eodoro, '- Phil$ %.% "1'&-($ orporate dissol)tion d)e to mismanagement of ma8ority stoc4holder is too drastic a remedy, especially when the sit)ation can *e remedied s)ch as giving minority stoc4holders a veto power to any decision$ Chase v. Buencamino% 1-/ S 7A -/& "1',&($ 0. L$@'! E++$-(: %+ D ::%!>( %# +he termination of the life of a 8)ridical entity does not *y itself ca)se the extinction or dimin)tion of the rights and lia*ility of s)ch entity, since it is allowed to contin)e as a 8)ridical entity for - years for the p)rpose of prosec)ting and defending s)its *y or against it and ena*ling it to settle and close its affairs, to dispose of and convey its property, and to distri*)te its assets$ .e"ublic v. 'ancinco, -'% S 7A -,/ "2..2($ A *oard resol)tion to dissolve the corporation does not operate to so dissolve the 8)ridical entity$ Lor dissol)tion to *e effective ;BtChe re3)irements mandated *y the orporation ode sho)ld have *een strictly complied with$< 5esagas v. Court o# A""eals% -21 S 7A &.', &1/ "2..2($ A corporation cannot extend its life *y amendment of its articles of incorporation effected d)ring the three1year stat)tory period for li3)idation when its original term of existence had already expired, as the same wo)ld constit)te new *)siness$ Alhambra Cigar & Cigarette Manu#acturing Com"any% &nc. v. $EC, 2% S 7A 2/' "1'/,($ ?hen the period of corporate life expires, the corporation ceases to *e a *ody corporate for the p)rpose of contin)ing the *)siness for which it was organi6ed$ PNB v. Court o# 1irst &nstance o# .i4al% Pasig% Br. NN&, 2.' S 7A 2'% "1''2($ 8. M$(h%,: %+ L E> ,'( %# "Sec$ 122; Board of Li5uidators v. .alaw , 20 SCRA 98B <19;B=; $umera v. 5alencia, /2 Phil$ 221 B1'-'C; Buena#lor v. Camarines &ndustry , 1., Phil$ %22 B1'/.C($ !i3)idation, in corporation law, connotes a winding )p or settling with creditors and de*tors$ 0t is the winding )p of a corporation so that assets are distri*)ted to those entitled to receive them$ 0t is the process of red)cing assets to cash, discharging lia*ilities and dividing s)rpl)s or loss$ P5B Em"loyees +nion=N.+.B.E. v. 5ega% -/. S 7A -- "2..1($ +here can *e no do)*t that )nder Secs$ 22 and 2, of orporation !aw, the !egislat)re intended to let the shareholders have the control of the assets of the corporation )pon dissol)tion in winding )p its affairs$ +he normal method of proced)re is for the directors and exec)tive officers to have charge of the winding )p operations, tho)gh there is the alternative method of assigning the property of the corporation to the tr)stees for the *enefit of its creditors and shareholders$ ;?hile the appointment of a receiver rests within the so)nd 8)dicial discretion of the co)rt, s)ch discretion m)st, however, always *e exercised with ca)tion and governed *y legal and e3)ita*le principles, the violation of which will amo)nt to its a*)se, and in ma4ing s)ch appointment the co)rt sho)ld ta4e into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind )p the corporate *)siness$< China Ban)ing Cor". v. M. Michelin & Cie, &, Phil$ 2/1 "1'--( +here is nothing in Sec$ 122 which *ars an action for the recovery of the de*ts of the corporation against the li3)idator thereof, after the lapse of the said three1year period$ ;0t immaterial that the present action was filed after the expiration of the three years $ $ $ for at the very least, and ass)ming that 8)dicial enforcement of taxes may not *e initiated after said three years despite the fact that act)al li3)idation has not terminated and the one in charge thereof is still holding the assets of the corporation, o*vio)sly for the *enefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely esta*lished the Jovernment as a creditor of the corporation for whom the li3)idator is s)pposed to hold assets of the corporation$< .e"ublic v. Marsman !ev. Co.% %% S 7A %1, "1'22($ Under Section 11 of the orporation ode, a corporation whose corporate existence is terminated in any manner contin)es to *e a *ody corporate for three "-( years after its dissol)tion for p)rposes of prosec)ting and defending s)its *y and against it and to ena*le it to settle and close its affairs, c)lminating in the disposition and distri*)tion of its remaining assets$ 0f the three1year extended life has expired witho)t a tr)stee or receiver having *een expressly

/.
designated *y the corporation within that period, the *oard of directors "or tr)stee( itself, may *e permitted to contin)e as ;tr)stees< *y legal implication to complete the corporation li3)idation$ Pe"si=Cola Products Phils.% &nc. v. Court o# A""eals, %%- S 7A &21 "2..%($ ;. Wh% A&$ L '4!$ A+($& D ::%!>( %# '#, W #, #@-U"L "+ational )'aca Corp. v. Pore , 2 SCRA 989 <19;1=D Tan Tiong Bio v. Commissioner , 100 Ph !. 8; <198;=D elano v. Court of )ppeals, 10/ SCRA 90 <1981=($ Altho)gh a corporate officer is not lia*le for corporate o*ligations, s)ch as claims for wages, however, when s)ch corporate officer ceases corporate property to apply to his own claims against the corporation, he shall *e lia*le to the extent thereof to corporate lia*ilities, since 4nowing f)lly well that certain creditors had similarly valid claims, he too4 advantage of his position as general manager and applied the corporationPs assets in payment excl)sively to his own claims$ !e 2u4man v. N*.C, 211 S 7A 22- "1''2($ 0f the -1year extended life has expired witho)t a tr)stee or receiver having *een designated, the >oard of Firectors itself, following the rationale of the decision in 2elano, may *e permitted to so contin)e as ;tr)stees< to complete li3)idation; and in the a*sence of a >oard, those having pec)niary interest in the assets, incl)ding the shareholders and the creditors of the corporation, acting for and in its *ehalf, might ma4e proper representations with the appropriate *ody for wor4ing o)t a final settlement of the corporate concerns$ Clemente v. Court o# A""eals, 2%2 S 7A 212 "1''&($ 0n 2elano case, the co)nsel of the dissolved corporation was considered a tr)stee$ 0n the later case of Clemente v. Court o# A""eals, the >oard of Firectors was permitted to complete the corporate li3)idation *y contin)ing as ;tr)stees<$ Under Sec$ 1%& ;#o right of remedy in favor or against any corporation $ $ $ shall *e removed or impaired either *y the s)*se3)ent dissol)tion of said corporation or *y any s)*se3)ent amendment or repeal of this ode or of any part thereof$< +his provision safeg)ards the rights of a corporation which is dissolved pending litigation$ .eburiano v. Court o# A""eals% -.1 S 7A -%2 "1'''(; 3necht v. +nited Cigarette Cor"., -,% S 7A %, "2..2($ B. R$ #-%&"%&'( %#* Chung .a Bio v. #)C, 1;/ SCRA 8/0 219883$

5VII.

CLOSE CORPORATION

1. D$+ # ( %# "Sec$ '/; &anuel $. %ulay Enterprises v. Court of )ppeals , 228 SCRA ;B8 <199/=D San /uan Structural v. Court of )ppeals, 29; SCRA ;/1 <1998=($ +he concept of a close corporation organi6ed for the p)rpose of r)nning a family *)siness or managing family property has formed the *ac4*one of Philippine commerce and ind)stry$ +hro)gh this device, Lilipino families have *een a*le to t)rn their h)m*le, hard1earned life savings into going concerns capa*le of providing them and their families with a modic)m of material comfort and financial sec)rity as a reward for years of hard wor4$ A family corporation sho)ld serve as a reward for years of hard wor4$ A family corporation sho)ld serve as a rallying point for family )nity and prosperity, not as a flashpoint for familial strife$ 0t is hoped that people reac3)aint themselves with the concepts of m)t)al aid and sec)rity that are the original driving forces *ehind the formation of family corporations and )se these tenets in order to facilitate more civil, if not more amica*le, settlements of family corporate disp)tes$ ala v. Ellice )gro7#ndustrial Corp. , 018 SCRA 0/1 2200/3$ 2. A&( -!$: %+ I#-%&"%&'( %# R$E> &$.$#(: "Sec$ '2( 2'3 Pre7Emptive $ights "Sec$ 1.2( 243 )mendment "Sec$ 1.-( /. R$:(& -( %# %# T&'#:+$& %+ Sh'&$: "Secs$ ', and ''( 0. A@&$$.$#(: 49 S(%-Jh%!,$& "Sec$ 1..( 8. N% N$-$:: (9 %+ B%'&, "Sec$ 1.1; Sergio F. +aguiat v. +L$C" 2;9 SCRA 8;0 <199B=($ ;. D$',!%-J: "Sec$ 1.%( B. W (h,&')'! '#, D ::%!>( %# "Sec$ 1.&(

/1 Even prior to the passage of orporation ode which recogni6ed close corporations, the S)preme o)rt had on limited instances recogni6ed the common law rights of minority stoc4holders to see4 dissol)tion of the corporation$ 1inancing Cor". o# the Phil. v. 'eodoro , 'Phil$ %.% "1'&-($

5VIII. NON-STOCK CORPORATIONS AND 1OUNDATIONS

1. Th$%&9 %# N%#-S(%-J C%&"%&'( %# "Secs$ 1%"2(, %-, ,2, ,, and '%"&(; Collector of #nternal $evenue v. Clu' Filipino #nc. de Ce'u , 8 SCRA /21 <19;2=D Collector of #nternal $evenue v. 0niversity of ;isayas, 1 SCRA ;;9 <19;1=($ A non1stoc4 corporation may only *e formed or organi6ed for charita*le, religio)s, ed)cational, professional, c)lt)ral, fraternal, literary, scientific, social, civic or other similar p)rposes$ 0t may not engage in )nderta4ings s)ch as the investment *)siness where profit is the main or )nderlying p)rpose$ Altho)gh the non1stoc4 corporation may o*tain profits as an incident to its operation s)ch profits are not to *e distri*)ted among its mem*ers *)t m)st *e )sed for the f)rtherance of its p)rposes$ Peo"le v. Menil, J$7$ 11&.&%1//, 12 Septem*er 1''' B)nrep$C( +he inc)rring of profit or losses does not determine whether an activity is for profit or non1 profit, and the co)rts will consider whether dividends have *een declared or its mem*ers or that is property, effects or profit was ever )sed for personal or individ)al gain, and not for the p)rpose of carrying o)t the o*8ectives of the enterprise$ Manila $anitarium and Hos"ital v. 2abuco, 2 S 7A 1% "1'/-($ 0n a m)t)al life ins)rance corporation, organi6ed as a non1stoc4 nonprofit corporation, the so1called ;dividend< that is received *y mem*ers1policyholders is not a portion of profits set aside for distri*)tion to the stoc4holders in proportion to their s)*scription to the capital stoc4 of a corporation$ 8ne% a m)t)al company has no capital stoc4 to which s)*scription is necessary; there are no stoc4holders to spea4 of, *)t only mem*ers$ And, t,o, the amo)nt they receive does not parta4e of the nat)re of a profit or income$ +he 3)asi1appearance of profit will not change its character; it remains an overpayment, a *enefit to which the mem*er1policyholder is e3)ita*ly entitled$ .e"ublic v. $unli#e Assurance Com"any o# Canada, %2- S 7A 12' "2..&($ 2. N%#-A""! -'4 ! (9 %+ (h$ N'( %#'! A'( %# L'): A foreigner may a mem*er or an officer of a non1stoc4 corporation$ Save for the position of the Secretary, who m)st *e a Lilipino citi6en and a resident of the Philippines, the prohi*ition of foreign citi6ens *ecoming officers in corporations engaged in *)siness does not apply to the activities of a non1stoc4 corporation which do not fall within the coverage of a nationali6ed ind)stry or area of *)siness reserved *y law excl)sively to Lilipino citi6ens$ "SE @pinion #o$ 12, series of 2..2, 21 #ovem*er 2..2($ /. C%#?$&: %# %+ N%#-S(%-J C%&"%&'( %# (% S(%-J C%&"%&'( %# +he conversion of a non1stoc4 ed)cational instit)tion into a stoc4 corporation is not legally feasi*le, as it violates Sec$ ,2 of orporation ode that no part of the income of a non1stoc4 corporation may *e distri*)ta*le as dividends to its mem*ers, tr)stees or officers$ ;+h)s, the ommission has previo)sly r)led that a non1stoc4 corporation cannot *e converted into a stoc4 corporation *y a mere amendment of the Articles of 0ncorporation$ Lor p)rposes of transformation, it is f)ndamental that the non1stoc4 corporation *e dissolved first )nder any of the methods specified +itle I0A of the orporation ode$ +hereafter, the mem*ers may organi6e as a stoc4 corporation directed to *ring profits or pec)niary gains to themselves$ "SE @pinion dated 2% Le*r)ary 2..-; SE @pinion dated 1. Fecem*er 1''2($ 0n the event of dissol)tion of a non1stoc4 corporation, its assets shall *e distri*)ted in accordance with the r)les as provided for )nder Secs$ '% and '& of orporation ode$ Unless, it is so provided in the Articles of 0ncorporation or >y1!aws, the mem*ers are not entitled to any *eneficial or vested interest over the assets of the non1stoc4 corporation$ 0n other words, non1 stoc4, non1profit corporations hold their f)nds in tr)st for the carrying o)t of the o*8ectives and p)rposes expressed in its charter$ "SE @pinion dated 2% Le*r)ary 2..-; SE @pinion dated 1- 5ay 1''2($

/2
0. Wh'( I: ' 1%>#,'( %#L "Secs$ -. and -%"K(, #07 of 1''2; Sec$ 2%, 7even)e 7eg)lations #o$ 2; >071#EFA 7eg)lations #o$ 11,1, as amended( Lormal re3)irements of 7ev$ 7eg$ #o$ 2 are not mandatory and an entity may, in the a*sence of compliance with s)ch re3)irements, still show that it falls )nder the provisions of Sec$ of #07 $ Collector v. 5.2. $inco Educational Cor". , 1.. Phil$ 122 "1'&/($ 8. D ::%!>( %# "Secs$ '% and '&(

5I5. 1OREIGN CORPORATION

1. D$+ # ( %# "Sec$ 12-( A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign$ Avon &nsurance P*C v. Court o# A""eals% 22, S 7A -12 "1''2( A f)ndamental r)le of international 8)risdiction is that no state can *y its laws, and no co)rt which is only a creat)re of the state, can *y its 8)dgments and decrees, directly *ind or affect property or persons *eyond the limits of that state$ 'imes% &nc. v. .eyes, -' S 7A -.- "1'21($ 2. S('(>(%&9 C%#-$"( %+ F %oing BusinessG "Art$ %%, Exec)tive @rder #o$ 22/, @mni*)s 0nvestment ode; Sec$ -"d(, 7$A$ #o$ 2.%2, Loreign 0nvestment Act of 1''1($ 2'3 )pplication for License "Secs$ 12% and 12&; Art$ %,, @mni*)s 0nvestment ode( An )nlicensed foreign corporation doing *)siness in the Philippines cannot s)e *efore Philippine co)rts; an )nlicensed foreign corporation not doing *)siness in the Philippines can s)e *efore Philippine co)rts$ B. 5an Cuiden Bros.% *td v. 2'5* Manu#acturing &ndustries% &nc. , &2- S 7A 2-- "2..2($ A foreign corporation witho)t a license is not i"so #acto incapacitated from *ringing an action in Philippine co)rts$ A license is necessary only if a foreign corporation is ;transacting< or ;doing *)siness< in the co)ntry$ Agilent 'echnologies $inga"ore 6P'E7 *td. v. &ntegrated $ilicon 'ech., %22 S 7A &'- "2..%($ 243 $ationale for $e5uiring License to %o Business +he p)rpose of the law in re3)iring that foreign corporations doing *)siness in the co)ntry *e licensed to do so, it to s)*8ect the foreign corporations doing *)siness in the Philippines to the 8)risdiction of the co)rts$ @therwise, a foreign corporation illegally doing *)siness here *eca)se of its ref)sal or neglect to o*tain the re3)ired license and a)thority to do *)siness may s)ccessf)lly tho)gh )nfairly plead s)ch neglect or illegal act so as to avoid service and there*y imp)gn the 8)risdiction of the local co)rts$ Avon &nsurance P*C v. Court o# A""eals% 22, S 7A -12 "1''2($ +he same danger does not exist among foreign corporations that are ind)*ita*ly not doing *)siness in the Philippines$ 0ndeed, if a foreign corporation does not do *)siness here, there wo)ld *e no reason for it to *e s)*8ect to the StateDs reg)lation$ As we o*served, in so far as the State is concerned, s)ch foreign corporation has no legal existence$ +herefore, to s)*8ect s)ch foreign corporation to the co)rtsD 8)risdiction wo)ld violate the essence of sovereignty$ Avon &nsurance P*C v. Court o# A""eals% 22, S 7A -12 "1''2($ 2-3 #ssuance of License "Sec$ 12/; Art$ %', @mni*)s 0nvestment ode(

A foreign corporation licensed to do *)siness sho)ld *e s)*8ected to no harsher r)les that is re3)ired of domestic corporation and sho)ld not generally *e s)*8ect to attachment on the pretense that s)ch foreign corporation is not residing in the Philippines$ Claude Neon *ights v. Phil. Advertising Cor"., &2 Phil$ /.2 "1'-2($ 2,3 )mendment of License "Sec$ 1-1( /. 7>& :"&>,$#( '! C%#-$"(: %+ FD% #@ B>: #$::G 2'3 F%oing BusinessG implies a contin)ity of commercial dealings and arrangements and the performance of acts or wor4s or the exercise of some of the f)nctions normally incident to the p)rpose or o*8ect of its organi6ation$ &entholatum v. &angaliman , B2 Ph !. 828

/219013D )gilent Technolgies Singapore v. #ntegrated Silicon Technology Phil. Corp. , 02B SCRA 89/ 220003$ Altho)gh each case m)st *e 8)dged in light of its attendant circ)mstances, 8)rispr)dence has evolved several g)iding principles for the application of these tests$ Agilent 'echnolgies $inga"ore 6P'E7 *td. v. &ntegrated $ilicon 'echnology Phil. Cor". , %22 S 7A &'- "2..%($ Bciting A0!!A#UEAA, PK0!0PP0#E @7P@7A+E !A? &'/ et se3$ "1'', ed$(C +here is no general r)le or governing principle laid down as to what constit)tes ;doing< or ;engaging in< or ;transacting< *)siness in the Philippines$ A foreign consorti)m, *y participating in the *idding for the operation of a waste management center, exhi*ited its intent to transact *)siness in the Philippines and is th)s considered doing *)siness in the Philippines$ Euro"ean .esources and 'echnologies% &nc. v. &ngenieuburo Bir)hanh O Nolte , %-& S 7A 2%/ "2..%($ Participating in a *idding process constit)tes ;doing *)siness< *eca)se it shows the foreign corporationDs intention to engage in *)8siness in the Philippines$ 0n this regard, it is the performance *y a foreign corporation of the acts for which it was created, regardless of vol)me of *)siness, that determines whether a foreign corporation needs a license or not$< Euro"ean .esources and 'echnologies% &nc. v. &ngenieuburo Bir)hanh O Nolte , %-& S 7A 2%/ "2..%($ ;>y and large, to constit)te Sdoing *)siness,D the activity to *e )nderta4en in the Philippines is one that is for profit1ma4ing$< Agilent 'echnolgies $inga"ore 6P'E7 *td. v. &ntegrated $ilicon 'echnology Phil. Cor"., %22 S 7A &'- "2..%($ Bciting A0!!A#UEAA, PK0!0PP0#E @7P@7A+E !A? &'. "1'', ed$(C Single Transaction6 ?here a single act or transaction, however, is not merely incidental or cas)al *)t indicates the foreign corporationPs intention to do other *)siness in the Philippines, said single act or transaction constit)tes doing *)siness$ 1ar East &ntPl. v. Nan)ai 3ogyo, / S 7A 22& "1'/2($ 0t is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in *)siness in the Philippines, since other circ)mstances m)st *e considered$ ?here a single act or transaction of a foreign corporation is not merely incidental or cas)al *)t is of s)ch character as distinctly to indicate a p)rpose on the part of the foreign corporation to do other *)siness in the state, s)ch act will *e considered as constit)ting *)siness$ *itton Mills% &nc. v. Court o# A""eals, 2&/ S 7A /'/ "1''/($ Territoriality $ule6 +o *e doing or ;transaction *)siness in the Philippines< for p)rposes of Section 1-- of the orporation ode, the foreign corporation m)st act)ally transact *)siness in the Philippines, that is, perform specific *)siness transactions within the Philippine territory on a contin)ing *asis in its own name and for its own acco)nt$ B. 5an Cuiden Bros.% *td v. 2'5* Manu#acturing &ndustries% &nc., &2- S 7A 2-- "2..2(, citing A0!!A#UEAA, PK0!0PP0#E @7P@7A+E !A? ,1- "2..1($ )cts of Soliciations6 Solicitation of *)siness contracts constit)tes doing *)siness in the Philippines$ Marubeni Nederland B.5. v. 'ensuan, 1'. S 7A 1.&$ 1n #nsurance Business6 A foreign corporation with a settling agent in the Philippines which iss)es twelve marine policies covering different shipments to the Philippines is doing *)siness in the Philippines$ 2eneral Cor". o# the Phil. v. +nion &nsurance $ociety o# Canton% *td.% ,2 Phil$ -1- "1'&.($ A foreign corporation which had *een collecting premi)ms on o)tstanding policies is doing *)siness in the Philippines$ Manu#acturing *i#e &ns. v. Meer, ,' Phil$ -&1 "1'&1($ Summary of %oing Business* +he principles regarding the right of a foreign corporation to *ring s)it in Philippine co)rts may th)s *e condensed in fo)r statements= "1( if a foreign corporation does *)siness in the Philippines witho)t a license, it cannot s)e *efore the Philippine co)rts; "2( if a foreign corporation is not doing *)siness in the Philippines, it needs no license to s)e *efore Philippine co)rts on an isolated transaction or on a ca)se of action entirely independent of any *)siness transaction; "-( if a foreign corporation does *)siness in the Philippines witho)t a license, a Philippine citi6en or entity which has contracted with said corporation may *e estopped from challenging the foreign corporationDs corporate personality in a s)it *ro)ght *efore the Philippine co)rts; and "%( if a foreign corporation does *)siness in the Philippines with the re3)ired license, it can s)e *efore Philippine co)rts on any transaction$

/%
M.. Holdings% *td. 5. Ba/ar% -,. S 7A /12 "2..2(; Agilent 'echnolgies $inga"ore 6P'E7 *td. v. &ntegrated $ilicon 'echnology Phil. Cor". , J$7 #o$ 1&%/1,, 1% April "2..%($ 243 0nrelated or #solated Transactions. Eastboard Navigation% *td. v. -uan @smael and Co.% &nc., 1.2 Phil$ 1 "1'&2(;)ntam Consolidated v. C), 10/ SCRA 288 2198;3$ Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of *)siness$ +ypical examples of these are the ma4ing of a single contract, sale, sale with the ta4ing of a note and mortgage in the state to sec)re payment thereof, p)rchase, or note, or the mere commission of a tort$ 0n these instances, there is no p)rpose to do any other *)siness within the co)ntry$ M.. Holdings% *td. 5. Ba/ar, -,. S 7A /12 "2..2($ Section 1-- of the orporation is clear in depriving foreign corporations which are doing *)siness in the Philippines witho)t a license from *ringing or maintaining actions *efore, or intervening in Philippines co)rts$ +he law does not prohi*it foreign corporations from performing single acts of *)siness$ A foreign corporation needs no license to s)e *efore Philippine co)rts on an isolated transactions$ *oren4o $hi""ing v. Chubb and $ons% &nc., %-1 S 7A 2// "2..%($ Even a series of transactions which are occasional, incidental and cas)alEnot of a character to indicate a p)rpose to engage in *)sinessEdo not constit)te the doing or engaging in *)siness as contemplated *y law$ *oren4o $hi""ing v. Chubb and $ons% &nc. , %-1 S 7A 2// "2..%($ Case7Law E2amples6
ollision of two vessels at the 5anila Kar*or$ !am"#schie##s .hederei +nion v. *a Cam"aDia 'ransatlantica, , Phil$ 2// "1'.2($ !oss of goods *o)nd for Kong4ong *)t erroneo)sly discharged in 5anila$ 'he $,edish East Asia Co.% *td. v. Manila Port $ervice, 2& S 7A /-- "1'/,($ 0nfringement of trade name$ 2eneral 2arments Cor". v. !irector o# Patens , %1 S 7A &. "1'21(; +niversal .ubber Products% &nc. v. Court o# A""eals, 1-. S 7A 1.% "1',,($ 7ecovery of damages s)stained *y cargo shipped to the Philippines$ Bula)hidas v. Navarro , 1%2 S 7A 1 "1',/($ Sale constr)ction e3)ipment to the Jovernment with no intent of contin)ity of transaction$ 2on4ales v. .a0ui4a, 1,. S 7A 2&% "1','($ 7ecovery on a Kong4ong 8)dgment against a 5anila resident$ Hang *ung Ba) v. $aulog, 2.1 S 7A 1-2 "1''1($ Appointment of local lawyer *y foreign movie companies who have registered intellect)al property rights over their movies in the Philippines, to protect s)ch rights for piracy= ;?e fail to see how exercising onePs legal and property rights and ta4ing steps for the vigilant protection of said rights, partic)larly the appointment of an attorney1in1fact, can *e deemed *y and of themselves to *e doing *)siness here$< Columbia Pictures &nc. v. Court o# A""eals% 2/1 S 7A 1%% "1''/($

+eed to )llege6 +he fact that a foreign corporation is not doing *)siness in the Philippines m)st *e alleged if a foreign corporation desires to s)e in Philippines co)rts )nder the ;isolated transactions r)le$< )tlantic &utual #nc. Co. v. Ce'u Stevedoring Co., 1B SCRA 10/B 219;;3; Commissioner o# Customs v. 3.M.3. 2ani, 1,2 S 7A &'1 "1''.($1 2-3 8Contract Test9 of %oing Business6 Pacific ;egeta'le 1il Corp. v. Singson , A,?'#-$, D$- : %# S>"&$.$ C%>&(, A"& ! 1988 V%!., ". 100-AD )etna Casualty > Surety Co. v. Pacific Star Line , 80 SCRA ;/8 219BB3; +niversal $hi""ing *ines% &nc. v. &AC, 1,, S 7A 12. "1''.($ 2,3 Transactions with )gents and Brokers6 ranger )ssociates v. &icrowave Systems" #nc., 189 SCRA ;/1 219903; *a Chemise *acoste% $.A. v. 1ernande4, 12' S 7A -2"1',%(; $chmid & 8berly v. .-*, 1// S 7A %'- B1',,C; (ang *aboratories% &nc. v. Mendo4a, 1&/ S 7A %% "1'2%($ 0. D ++$&$#( R>!$: %# T&',$.'&J '#, T&',$#'.$: ",estern E5uipment > Supply Co. v. $eyes, 81 Ph !. 118 <192B=; *eviton &ndustries v. $alvador, 11% S 7A %2. B1',2C; Converse
1 +his overt)rned the previo)s doctrine in Marshall=(ells "as well as in &n re *i0uidation o# the Mercantile Ban) o# China% etc., /& Phil$ -,& "1'-,(, that the lac4 of a)thority of foreign corporation to s)e in Philippine co)rts for fail)re to o*tain the license is a matter of affirmative defense$

/& .ubber v. +niversal .ubber, 1%2 S 7A 1&% B1',2C; Converse .ubber Cor". v. -acinto .ubber & Plastic Co., '2 S 7A 1&, B1',.C; +niversal .ubber Products% &nc. v. CA , 1-. S 7A 1.% B1',%C; Puma $"ortschunh#abri)en .udol# !assler% 3.2. v. &AC , 1&, S 7A 2-B1',,C; Phili"s Ex"ort B.5. v. CA, 2./ S 7A %&2 B1''2C($ 8. E++$-(: %+ 1' !>&$ (% O4(' # L -$#:$* 2'3 1n the Contract Entered #nto6 -ome #nsurance Co. v. Eastern Shipping Lines , 12/ SCRA 020 2198/3$ Sec$ /' of old orporation !aw was intended to s)*8ect the foreign corporation doing *)siness in the Philippines to the 8)risdiction of o)r co)rts and not to prevent the foreign corporation from performing single acts, *)t to prevent it from ac3)iring domicile for the p)rpose of *)siness witho)t ta4ing the necessary steps to render it amena*le to s)it in the local co)rts$ Marshall=(ells Co.% v. Elser, %/ Phil$ 2. "1'2%($ 243 Standing to Sue "Sec$ 1--; Marshall=(ells v. Elser, %/ Phil$ 21 B1'2%C( 2-3 Criminal Lia'ility under Sec. GHH -ome #nsurance Co. v. Eastern Shipping Lines , 12/ SCRA 020 2198/3$ 2,3 Pari %elicto %octrine6 +he local party to a contract with a foreign corporation that does *)siness in the Philippines witho)t license cannot maintain s)it against the foreign corporation 8)st as the foreign corporation cannot maintain s)it, )nder the principle of "ari delicto$ Top7,eld &fg. v. ECE%, 119 SCRA 118 219883. But See6Communication &aterials v. Court of )ppeals" 2;0 SCRA ;B/ 2199;($ 2$3 Estoppel %octrine6 A foreign corporation doing *)siness in the Philippines may s)e in Philippine co)rts altho)gh it is witho)t license to do *)siness here against a Philippine citi6en who had contracted with and *een *enefited *y said corporation and 4new it to *e witho)t the necessary license to do *)siness, )nder the principle of estoppel$ &errill Lynch Futures" #nc. v. C), 211 SCRA 820 219923; 2eorg 2rot/ahn 2MBH & C. v. &snani, 2-& S 7A 21/ "1''%(; Agilent 'echnolgies $inga"ore 6P'E7 *td. v. &ntegrated $ilicon 'echnology Phil. Cor"., J$7 #o$ 1&%/1,, 1% April "2..%($ 2+3 Proper %octrine6 Eriks Ltd. v. Court of )ppeals" 2;B SCRA 8;B 2199B3$ ;. S> (: A@' #:( 1%&$ @# C%&"%&'( %#:* 2'3 /urisdiction 1ver Foreign Corporations "Sec$ 1%, 7)le 1%, 7)les of o)rt; 2eneral Cor". o# the Phil. v. +nion &nsurance $ociety o# Canton% *td. , ,2 Phil$ -1- B1'&.C; -ohnlo 'rading Co.% v 1lores% ,, Phil$ 2%1 B1'&1C; -ohnlo 'rading Co. v. Culueta , ,, Phil$ 2&. B1'&1C; Paci#ic Micronisian *ine% &nc. v. !el rosario, '/ Phil$ 2- B1'&%C; 1ar East &nt l &m"ort and Ex"ort Cor". v. Nan)ai 3ogyo Co.% *td., / S 7A 22& B1'/2C($ Lor p)rpose serving s)mmons a foreign corporation in accordance with 7)le 1%, Section 1%, it is s)fficient that it *e alleged in the complaint that it is doing *)siness in the Philippines$ Hahn v. Court o# A""eals% 2// S 7A &-2 "1''2($ ?hen it is shown that a foreign corporation is doing *)siness in the Philippines, s)mmons may *e served on "a( its resident agent designated in accordance with law; "*( if there is no resident agent, the government official designated *y law to that effect; or "c( any of its officers or agent within the Philippines$ +he mere allegation in the complaint that a local company is the agent of the foreign corporation is not s)fficient to allow proper service to s)ch alleged agent; it is necessary that there m)st *e specific allegations that esta*lishes the connection *etween the principal foreign corporation and its alleged agent with respect to the transaction in 3)estion$ 1rench 8il Mills Machinery Co.v. CA% 2'& S 7A %/2 "1'',($ 243 1'4ection to /urisdiction6 Appearance of a foreign corporation to a s)it precisely to 3)estion the tri*)nalDs 8)risdiction over its person is not e3)ivalent to service of s)mmons, nor does it constit)te an ac3)iescence to the co)rtDs 8)risdiction$ Avon &nsurance P*C v. Court o# A""eals% 22, S 7A -12, -22 "1''2($ 2-3 1dd %octrine6 Facilities &anagement Corp. v. %e la 1sa, 89 SCRA 1/1 219B93; 1BA Aircra#t v. Cosa, 11. S 7A 1 "1',1(; .oyal Cro,n &nt l v. N*.C, 12, S 7A &/' "1','(; (ang *aboratories% &nc. v. Mendo4a, 1&/ S 7A %% "1',2($

//
Contra* +he sine 0ua non re3)irement for service of s)mmons and other legal processes or any s)ch agent or representative is that the foreign corporation is doing *)siness in the Philippines$ Hyo"sung Maritime Co.% *td. v. CA , 1/& S 7A 2&, 1',,(; Signetics Corp. v. C), 228 SCRA B/B 2199/3$ But +ow See6 Avon &nsurance P*C v. Court o# A""eals% 22, S 7A -12 "1''2($ 2,3 Stipulation on ;enue6 ?hen the contract s)ed )pon has a ven)e cla)se within the Philippines, it is deemed a confirmation *y the foreign corporation, even tho)gh not doing *)siness in the Philippines, to *e s)ed in local co)rts$ *inger & 1isher 2MBH v. &AC , 12& S 7A &22 "1',-($ B. R$: ,$#( A@$#( "Sec$ 122 and 12,( 2'3 Concept of 8residence96 $tate &nvestment House v. Citiban), 2.- S 7A ' "1''1($ >eing a resident agent of a foreign corporation does not mean that he is a)thori6ed to exec)te the re3)isite certification against for)m shoppingEwhile a resident agent may *e aware of actions filed against his principal "a foreign corporation doing *)siness in the Philippines(, he may not *e aware of actions initiated *y its principal, whether in the Philippines against a domestic corporation or private individ)al, or in the co)ntry where s)ch corporation was organi6ed and registered, against a Philippine registered corporation or a Lilipino citi6en$ Ex"ertravel & 'ours% &nc. v. Court o# A""eals, %&' S 7A 1%2 "2..&($ 243 A complaint filed *y a foreign corporation is fatally defective for failing to allege its d)ly a)thori6ed representative or resident agent in Philippine 8)risdiction$ Ne, @or) Marine Managers% &nv. c. Court o# A""eals% 2%' S 7A %1/ "1''&($ 2-3 ?hen a corporation has designated a person to receive service of s)mmon p)rs)ant to the orporation ode, the designation is excl)sive and service of s)mmons on any other person is inefficacio)s$ H.B. Cachry Com"any &nt l v. CA, 2-2 S 7A -2' "1''%( 8. L'): A""! -'4!$ (% 1%&$ @# C%&":. "Sec$ 12'; 2rey v. &nsular *umber Co. , /2 Phil$ 1-' "1'-,( 9. A.$#,.$#( %+ A&( -!$: %+ I#-%&"%&'( %# "Sec$ 1-.( 10. M$&@$& '#, C%#:%! ,'( %# "Sec$ 1-2; Art$ &1, @mni*)s ode( 11. R$?%-'( %# %+ L -$#:$ "Secs$ 1-% and 1-&; Art$ &., @mni*)s 0nvestment 12. W (h,&')'! %+ 1%&$ @# C%&"%&'( %# "Sec$ 1-/( ode(

55. PENALTY PROVISIONS O1 THE CODE

$ee A0!!A#UEAA, 'he Penal Provision +nder $ec. 9QQ o# the Cor"oration Code , +KE !A?NE7S 7EA0E? , Aol$ I, #o$ 2 "2' Le*r)ary 1''/($ 1. 2. /. 0. 8. P$#'!(9 C!'>:$ +%& V %!'( %#: %+ (h$ P&%? : %#: %+ (h$ C%,$ "Sec$ 1%%( C&%::-&$+$&$#-$ "Sec$ 22($ S"$- + - '""! -'( %# "Sec$ 2%($ S(& -( P& #- "!$: # C& . #'! L')D (h$ ::>$ %+ .'! -$. H :(%& -'! B'-J@&%>#, %+ S$-. 100 2S$-. 190 1NB %+ (h$ C%&"%&'( %# L')3 Sec$ 1'. was not intended to ma4e every cas)al violation of one of the orporation !aw provisions gro)nd for invol)ntary dissol)tion of the corporation and that the co)rt was entitled to exercise discretion in s)ch matters$ 2overnment o# P.&. v. El Hogar 1ili"ino , &. Phil$ -'' "1'22($ Penalties imposed in Sec$ 1'."A( for the violation of the prohi*ition in 3)estion are of s)ch nat)re that they can *e enforced only *y a criminal prosec)tion or *y an action of 0uo ,arranto$ But these "roceedings can be maintained only by the Attorney=2eneral in re"resentation o# the 2overnment. Harden v. Benguet Consolidated Mining Co.% &, Phil$ 1%1 "1'--($ ;. V %!'( %# %+ S$-. 1// 49 1%&$ @# C%&"%&'( %#:

/2 Sec$ 1--, which )nli4e its co)nterpart Sec$ /' of orporation !aw provided specifically for penal sanctions for foreign corporations engaging in *)siness in the Philippines witho)t o*taining the re3)isite license, sho)ld *e deemed to have a penal sanction *y virt)e of Section 1%% of the orporation ode$ Home &nsurance Co. v. Eastern $hi""ing *ines , 12- S 7A %2% "1',-($

55I. MISCELLANEOUS
1. 2. /. 0. SEC P%)$& '#, S>"$&? : %# "Secs$ 1., and 1%-; PF '.21A($ S"$- '! C%&"%&'( %#: "Sec$ %($ N$) R$E> &$.$#(: %# EC :( #@ C%&"%&'( %#: "Sec$ 1%,($ A""! -'4 ! (9 %+ O(h$& P&%? : %# %+ %!, C%&"%&'( %# L') "Sec$ 1%& and 1%/($ O%O%O

UPDATED* 08 NOV 2008MSCRA

888