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INTRODUCTION

1.

Defining the area within which the parties are free to


allocate risks, control, and profit as they wish;

2.

Prescribing the allocations of these elements in the


absence of express agreement.

Basic types of business organizations:

1.

Sole proprietorship

2.

Partnerships

3.

Joint accounts or Cuentas en Participacion

4.

Business trusts

5.

Joint venture

6.

Cooperative

7.

Syndicate

8.

Corporations

A sole proprietorship has no legal personality separate


from its proprietor.

Business name refers to any name that is different from the


true name of an individual which is used or signed in
connection with hi/her business on any written or printed
receipts including receipts for business taxes, duties and fees
and withdrawal or delivery receipts

GENERAL RULE: The Corporation Code is the primary law


that should be applied in the regulation of corporations.
EXCEPTION: The Corporation Code applies only suppletorily
to banks and other financial institutions, and insurance
corporations.
Section 2. Corporation defined. A corporation is an
artificial being created by operation of law, having the
right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
existence. (Attributes of a corporation)
Concession Theory A corporation is an artificial being
invisible, intangible, and existing only in contemplation of law.
Franchise a special privilege conferred by governmental
authority, and which does not belong to citizens of the country
generally as a matter of common right
Types of franchise:
1.

Corporate or general franchise the franchise to exist


as a corporation

2.

Special or secondary franchise certain rights and


privileges conferred upon existing corporations, such
as the right to use the streets of a municipality to lay
pipes of tracks, erect poles or string wires

Distinctions between partnership and corporation:


1.

Partnership is created by mere agreement while the


existence of the corporation commences only from
the issuance of a Certificate of Registration of the
SEC or in proper cases, passage of special law;

2.

Even two persons may form a partnership while a


corporation needs at least five incorporators;

3.

A corporation is more restricted in its powers because


of its limited personality while a partnership is subject
only to what may be agreed upon by the partners;

4.

There is mutual agency in partnership and each


general partner can represent and bind the
partnership while stockholders are not agents of the
corporation in the absence of express authority;

5.

Corporate shares are freely transferable without the


consent of other stockholders (unless there is a
stipulation) while interest in the partnership cannot be
transferred without the consent of other partners;

6.

The liability of stockholders and members of for


corporate obligations is limited to their investment
while partners may be liable beyond their investment;

7.

There is no right of succession in partnership as


death of a general partner dissolves the partnership.

The corporate or general franchise is vested in the


individuals who comprise the corporation and not in the
corporation itself, and cannot be conveyed in the absence
of legislative authority to do so.

The special or secondary franchises of a corporation are


vested in the corporation and may ordinarily be conveyed
or mortgaged under a general power granted to a
corporation to dispose its property. (J.R.S. Business Corp.
v. Imperial Insurance)

The right to be and to act as a corporation is not a natural


or civil right of any person; such right as well as the right to
enjoy the immunities and privileges resulting from
incorporation constitute a franchise and a corporation,
therefore cannot be created except by or under a special
authority from the State. (Recreation and Amusement
Association of the Phil. v. City of Manila)

Under the contract theory, incorporation is deemed to


involve contracts among the members, between the
members and the corporation, and between the members
or the corporation and the State.

THE CORPORATION CODE (B.P. Blg. 68)


Section 1. Title of the Code. This Code shall be known as
"The Corporation Code of the Philippines."
Purpose of Corporate Law:

Perpetual succession that continuous existence which


enables a corporation to manage its affairs, and hold property
without the necessity of perpetual conveyances, for purposes
of transmitting it

A corporation continues to exist even if there is a change


in those who compose it. Death of a shareholder or

transfer of his shares will not affect the continued


existence of the corporation.

A corporation has a personality separate and distinct from


its members. It has a personality separate and distinct
from the persons composing it as well as from that any
other entity to which it may be related. (Secosa v. Heirs of
Francisco, 433 SCRA 273)

Under the doctrine of piercing the veil of corporate fiction,


the corporations separate juridical personality may be
disregarded when there is an abuse of the corporate form.
The corporation will be treated by the courts as a mere
aggrupation of persons and the liability will directly attach
to them.
Instances when corporate personality may be disregarded:
1.

The properties of the corporation are not the properties of


its shareholders, members or officers. Properties
registered in the name of the corporation are owned by it
as an entity separate and distinct from those who
compose it. (Stockholders of Guanson & Sons, Inc. v.
Register of Deeds) In the same manner, properties of the
shareholders, members or officers of the corporation are
not properties of the corporation.

The interest of the shareholder in the corporation is


indirect, contingent and inchoate. (PNB v. Aznar) The
interest of the shareholder on a particular property
becomes actual, direct and existing only upon liquidation
of the assets of the corporation and the same property is
assigned to the share holder concerned.

The ownership of corporate properties is in the corporation


itself and not in the holders of its share of stocks. (Mobila
Products v. Umezawa)

The obligations of the corporation are not the obligations


of its shareholders and members and officers and viceversa.

2.
3.

When the corporate identity is used to defeat public


convenience, justify wrong, protect fraud, or defend
crime;
Where the corporation is a mere alter ego or business
conduit of a person;
Where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of
another corporation.

Mere ownership by a single stockholder or by another


corporation of all or nearly all of the capital stock of a
corporation is not in itself sufficient ground for disregarding
the separate corporate personality. (Wensha Spa Center
v. Yung)

The similarity of business of two corporations does not


warrant the disregard of the corporate veil. The mere fact
that the businesses of the two entities are interrelated is
not a justification for disregarding the separate
personalities, absent sufficient showing that the corporate
entity was purposely used as a shield to defraud creditors
and third persons of their rights. (China Bank v. Dyne-Sem
Electronics)

The corporation cannot likewise be made to answer for the


personal obligations of the stockholders, members,
directors or officers.

Limited Liability Rule A stockholder is personally liable for the


financial obligations of a corporation to the extent of his unpaid
subscription. While stock holders are generally not liable, the
stockholders may be liable if they have not or have not fully
paid the subscription price.

The overlapping of incorporators and stockholders of two


or more corporations will not necessarily justify the
piercing of the veil of corporate fiction. Much more has to
be proven. (China Bank v. Dyne-Sem Electronics)

The mere fact that two corporations have the same


president is not sufficient to pierce the veil of corporate
fiction of the two corporations. (Complex Electronics
Employees Association v. NLRC, 310 SCRA 403)

Reasons for the Limited Liability Rule:


1.

2.
3.

Investment in shares is encouraged because the task


of evaluating equity investment is greatly simplified
considering that the low-probability even of insolvency
and the financial condition of other investors can
already be ignored;
Investment in risky ventures is encouraged;
Banks and other financial intermediaries who are
considered experts are encouraged to closely monitor
corporate debtors more closely.

The acts of the stockholders do not bind the corporation


unless they are properly authorized.

It is well settled that an individual cannot enter into a


contract with himself but a corporation has the same
freedom of contracting with its stockholders that it has of
contracting with any other person. (Fletcher)

A non-stock corporation may file an action in the name of


its members only if it can prove that the members indeed
authorized the corporation to institute the action for and in
behalf of such members. The mere fact that the non-stock
corporation was organized for the purpose of advancing
the interests and welfare of its members does not
necessarily mean that the corporation has the authority to
represent its members in legal proceedings, including an
arbitration proceeding. (Ormoc Sugar Planters Assoc., v.
CA)

Variants within the doctrine of piercing the veil of corporate


fiction:
1.

2.

3.

The instrumentality doctrine calls for the application


of the test consisting of the three requisites, to wit:
a. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice
in respect to the transaction attacked so that
the corporate entity as to this transaction had
at the time no separate mind, will or
existence of its own;
b. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal
right; and
c. The aforesaid control and breach of duty
must proximately cause the injury or unjust
loss complained of.
The alter ego doctrine it must be shown that there is
unity of interest and ownership that the separate
personalities of the corporation and the individual no
longer exist and that if the acts are treated as those
of the corporation alone, an inequitable result will
follow.
The identity doctrine If the plaintiff can show that
there was such a unity of interest and ownership that
the independence of the corporations had in effect
ceased or had never begun, and adherence to the

fiction of separate identity would serve only to defeat


justice and equity by permitting the economic entity to
escape liability arising out of an operation of one
corporation for the benefit of the whole enterprise.

Only the courts (or administrative tribunals like the NLRC)


can pierce the veil of corporate fiction. Hence, a sheriff
who has a ministerial duty to enforce a final and executor
decision cannot pierce the veil of corporate fiction by
enforcing the decision against stockholders who are not
parties to the action. (Cruz v. Dalisay)
When the veil of corporate fiction is pierced in proper
cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives. (Reynoso
IV v. CA)

Group of Companies refers to corporations that are


financially related to one another as parent corporations,
subsidiaries and affiliates

A group of companies has no personality separate and


distinct from each of the components corporations.

Consistent with the Primary Rules of Attribution, notice to


the Board of Directors should also be deemed notice to
the corporation.

Knowledge of facts acquired or possessed by an officer or


agent of the corporation in the course of his employment,
and in relation to matters within the scope of his authority,
is notice to the corporation, whether he communicates
such knowledge or not since a corporation cannot see, or
know, anything except through its officers. (Francisco v.
GSIS)

Two test for determining whether a corporation is foreign or


domestic:
1.

2.

Aggregate test (Control test) requires looking into


the nationality, domicile, or residence of the
individuals who control the corporation; what about
the Grandfather Rule? The Grandfather Rule applies
if the share of Filipinos in a shareholder corporation is
less than 60%.
Entity test (place of incorporation test) looks to the
nation where the corporation was incorporated.

One exceptional situation where the Supreme Court ruled


that a corporation has no nationality is the case of
Corporation Sole.

For practical purposes, a corporation is in a metaphysical


sense a resident of the place where its principal office is
located as stated in the Articles of Incorporation.

Doctrine of Corporate Responsibility Under this doctrine, a


corporation is directly and primarily liable, not merely vicarious,
to the injury incurred to a party with whom the corporation has
a special relationship.

As a rule, a corporation is not entitled to moral damages


because, not being a natural persons, it cannot experience
physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only
exception to this rule is when the corporation has a
reputation that is debased, resulting in its humiliation in the
business realms. (MERALCO v. T.E.A.M. Corp)
A corporation is a person, in proper cases, within the due
process and equal protection clause of the Constitution.

Just like a natural person, it cannot be deprived of its life


and property without due process of law.

While an individual may lawfully refuse to answer


incriminating questions unless protected by an immunity
statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its
hand when charged with an abuse of such privileges.

No criminal action can lie against a corporation under the


present rules.

Theory of Special or Limited Capacities The powers of the


corporation are given by law and it cannot exercise powers that
are not so given. In fine, the powers of the corporation are only
those that are expressly provided for, implied powers, and
incidental powers.
Section 3. Classes of corporations. Corporations formed
or organized under this Code may be stock or non-stock
corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the
surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock
corporations.
Section 4. Corporations created by special laws or
charters. Corporations created by special laws or
charters shall be governed primarily by the provisions of
the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code,
insofar as they are applicable.
Corporations going public a corporation which decides to list
its shares in the stock exchange
Corporations going private a corporation which would restrict
the shareholders to a certain group

The issuance of share certificates is not, by itself, proof


that the corporation is a stock corporation. The so-called
share certificates may nothing more than proof of
membership in a non-stock corporation.

A public corporation is limited to corporation for the


government of the State or municipal corporations under
Section 3 of the old Corporation Law.

GOCC any agency organized as a stock or non-stock


corporation vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by
the Government directly or through its instrumentalities either
wholly or where applicable as in the case of stock corporations
to the extent of at least 51% of its capital stock
Section 5. Corporators and incorporators, stockholders
and members. Corporators are those who compose a
corporation, whether as stockholders or as members.
Incorporators are those stockholders or members
mentioned in the articles of incorporation as originally
forming and composing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called stockholders
or shareholders. Corporators in a non-stock corporation
are called members. (4a)