Dulay, Nicole Corporation

Law
6 February 2017 Atty. Timoteo
B. Aquino

The Essential Elements of Corporate Law

A macroscopic examination of the divergence among how

corporations operate differently across countries shows the
premium placed upon the economic exigencies of the business
structure through accommodations made for contract and
property laws. This analysis of the paper on the elements of
corporate law considers how the role of American, European,
and Japanese law in structuring corporate affairs is applicable in
Philippine jurisdictions and how the latter customized its
corporate laws regarding form and content.

A primary function of corporations, as a business form, is to

lower business costs through coordination between participants
and opportunism. This is manifest through the first core legal
characteristic of foreign corporations that was discussed in the
article. Entity shielding is an offshoot of the purpose of
corporations as a nexus for contracts. This means that the
corporation stands alone as a contracting party, further
enhancing the ability of the individuals who compose it to engage
in business pursuits through separate patrimony. This core
element involves two rules of law the priority rule, which
grants creditors a first claim on the corporations assets, and a
rule of liquidation protection, which disallows withdrawal of
assets by the owners at will. These two rules manifest in the
Doctrine of Separate Personality and the Right of Succession,
respectively, in Philippine law, under Section 2 of the Corporation
Code. The Doctrine of Separate Personality provides that since a
corporation is an artificial being created by law, it therefore, has
a personality distinct from its owners, making the interest of the
owners in the Corporations property merely inchoate 1 and
divesting them of any legal right or title to any specific
properties of the corporation.2 On the other hand, the Right of
Succession, which renders a shift in the composition of the
shareholders ineffectual as against the corporations existence
and continuity.3 Similar to the rule of liquidation protection, this
Right distinguishes corporations from partnerships where the
will of the owners controls the existence of the form.
Another consequence of the separate personality of the
corporations, as discussed in the paper, is the provision for rules
specifying the individuals with authority to bind the firm and the
rules on how lawsuits are initiated. A similar power is granted to
the Board of Directors in Section 23 of our Corporation Code.
Section 23 vests all corporate powers to the Board of Directors,
unless otherwise provided in this code. This reference includes
those instances where stockholders consent is required.
Therefore, a corporation can only execute its powers and be
bound by its Board of Directors and other authorized officers. 4

1 Philippine National Bank v. Aznar, G.R. No. 171805, 30 May 2011, citing
Magsaysay-Labrador v. Court of Appeals, 259 Phil. 748 (1989).
2 Stronghold Insurance v. Cuenca, G.R. No. 173297, 6 March 2013.
3 SME Bank, Inc. v. De Guzman, G.R. Nos. 18457 & 186641, 8 October
2013.
4 Heirs of Fausto Ignacio v. Home Bankers Savings and Trust Company,
G.R. No. 177783, 23 January 2013, citing Manila Metal Container
Corporation v. Philippine National Bank, G.R. No. 166862, 20 December
2006, citing Firme v. Bukal Enterprises and Development Corporation, G.R.
No. 146608, 23 October 2003.
On the other hand, there are laws governing jurisdiction as
regards individual suits, class suits, and derivative suits. 5
.
Also discussed, and equally applicable to Philippine jurisdiction,
is the converse characteristic of entity shielding limited
liability, which protects the assets of the owners through asset-
partitioning, thereby increasing the value of both corporate and
privately-owned assets of the owners. As adopted in Philippine
jurisdiction, the Trust Fund Doctrine limits the liability of the
stockholders to unpaid subscriptions and properties regarded in
equity as a trust fund for the payment of corporate debts. 6

Another significance of limited liability would be the

flexibility it provides in allocating risks and returns; this leads to
both the third core characteristic of corporations, which is the
transferability of shares, and the fourth core characteristic,
delegated management.

One of the important advantages of the corporation over a

partnership is liquidity of stock. A stockholders interest in the
corporation furnishes him with a convenient means of raising
funds whenever the need arises. This transferability also allows a
stockholder to get out of the business, if he is dissatisfied, by
selling his share in the market. One restriction to this corporate
provision is provided for in Section 15 of the Corporation Code
regarding closed corporations as an exception to the general rule

5 Cua v. Tan, G.R. Nos. 181455-56 & 182008, 4 December 2009.

6 Halley v. Printwell, Inc., G.R. No. 157549, 30 May 2011, citing Villanueva,
Philippine Corporate Law (2001), pp. 558, citing Chicago Rock Island &
Pac. R.R. Co. v. Howard, 7 Wall., 392, 19 L. Ed. 117; Sawyer v. Hoag, 17
Wall 610, 21 L. Ed. 731; and Pullman v. Upton, 96 U.S. 328, 24 L. Ed. 818.
of free transferability of shares. This transferability also lends to
the establishment of the Right to Succession.

The fourth core characteristic is the delegation of

management through a board structure. Similarly, in Philippine
jurisdiction, the governing body of a corporation is the board of
directors in case of a stock corporation, and the board of trustees
in case of a non-stock corporation. The board exercises almost all
the corporate powers, lays down all the business policies, and is
responsible for efficient management. Under Sec. 23 of the
Corporation Code, the Board has the sole power and
responsibility to decide whether a corporation should sue,
purchase, and sell property, enter into any contract, or perform
any act, while the stockholders only abide by the Boards
decisions. The raison detre for the concentration in the board of
the powers of control over corporate business and over
appointment of corporate officers and managers is the necessity
for efficiency in any large organization. 7 The board acts as a
body, hence, the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or
connected with the performance of authorized duties of such
director, are held not binding on the corporation. However,
individual persons authorized by the articles of incorporation, by-
laws, board resolutions, practice, estoppel, and board ratification
may perform acts on behalf of the corporation.8

The fifth core characteristic of corporations is investor

ownership. This grants investors the right to have control over
the corporation through votes and the right to receive net

7 Filipinas Port Services, Inc v. Go, G.R. No. 161886, 16 March 2007.
8 Board of Liquidators v. Heirs of Kalaw, G.R. No. L-18805, 14 August 1967.
earning, both rights generally being proportionate to the capital
contributed.

H Also discussed in the paper are the sources of

corporation law. In Philippine
jurisdiction, aside from the Corporation Code, the Securities
Regulation Code vis--vis P.D. 902-A conferred original and
exclusive jurisdiction upon the SEC to hear and decide cases
involving intra-corporate disputes. Further, Section 2 of R.A.
8799 took into consideration new products, globalization, and
technological improvement and a ddressed lack of equality and
access to information and uneven field among the market
participants and investors.

Finally, similar to the options given in foreign jurisdictions as

regards the pattern of ownership, Philippine corporations may be
categorized vis--vis the State, as to the place of incorporation,
as to its purpose, as to the number of members, as to the
existence of shares, and as to legal status. All of these cater to
specific business exigencies that incorporators have, furthering
the common goal of all corporations, which is to serve the
interests of the public as a whole, through an efficient form of
organization.