I.

HISTORICAL BACKGROUND the world of commerce, and some expressed

jurisprudential rules that try to apply and adopt
1. The Philippine Corporate Law
corporate principles into the changing concepts
When the Philippines came under American and mechanism of the commercial world.
sovereignty, attention was drawn to the fact that
II. CONCEPTS
there was no entity in Spanish law exactly
corresponding to the notion corporation in See opening paragraphs of Villanueva, Corporate
English and American law; the Philippine Contract Law,38 Ateneo L.J. 1 (No. 2, June 1994).
Commission enacted the Corporation Law (Act
1. Definition: Corporation is an artificial being
No. 1459), to introduce the American corporation
created by operation of law, having the right of
into the Philippines as the standard commercial
succession and the powers, attributes and
entity and to hasten the day when the sociedad
properties expressly authorized by law or
annima of the Spanish law would be obsolete.
incident to its existence. [Sec. 2. BP 68] ( See also
The statute is a sort of codification of American
Section 2; Articles 44(3), 45, 46, and 1775, Civil
Corporate Law. Harden v. Benguet Consolidated
Code. )
Mining Co., 58 Phil. 141 (1933).
2. Tri-Level Existence of Corporation
2. The Corporation Law
(a) Aggregation of Assets and Resources
The first corporate statute, the Corporation Law,
or Act No. 1459, became effective on 1 April (b) Business Enterprise or Economic Unit
1906. It had various piece-meal amendments
during its 74 year history. It rapidly became (c) Juridical Entity
antiquated and not adapted to the changing
3. Relationships Involved in Corporate Setting
times.
(a) Juridical Entity Level, which views the State-
3. The Corporation Code
corporations relationship
The present Corporation Code, or Batas
(b) Contractual Relationship Level, which
Pambansa Blg. 68, became effective on 1 May
considers that the corporate setting is at once a
1980. It adopted various corporate doctrines
contractual relationship on four (4) levels:
enunciated by the Supreme Court under the old
Corporation Law. It clarified the obligations of Between the corporation and its agents or
corporate directors and officers, expressed in representatives to act in the real world, such as
statutory language established principles and its directors and its officers, which is governed
doctrines, and provided for a chapter on close also by the Law on Agency;
corporations.
Between the corporation and its shareholders
4. Proper Treatment of Philippine Corporate or members;
Law
Between and among the shareholders in a
Philippine Corporate Law comes from the common venture; and
common law system of the United States.
Between the corporation and third-parties or
Therefore, although we have a Corporation Code
outsiders, which is essentially governed by
that provides for statutory principles, Corporate
Contract Law.
Law is essentially, and continues to be, the
product of commercial developments. Much of
this development can be expected to happen in
4. Theories on Formation of Corporation:
(a) Theory of Concession (Tayag v. Benguet
Consolidated Inc., 26 SCRA 242 [1968])
To organize a corporation that could claim a
juridical personality of its own and transact
business as such, is not a matter of absolute right
but a privilege which may be enjoyed only under
such terms as the State may deem necessary to
impose (x-cf.Ang Pue & Co. v. Sec. of Commerce
and Industry, 5 SCRA 645 [1962]).
Before a corporation may acquire juridical
personality, the State must give its consent either
in the form of a special law or a general enabling
act, and the procedure and conditions provided
under the law for the acquisition of such juridical
personality must be complied with. The failure to
comply with the statutory procedure and
conditions does not warrant a finding that such
association achieved the acquisition of a separate
juridical personality, even when it adopts sets of
constitution and by-laws. xInternational Express
Travel & Tour Services, Inc. v. Court of
Appeals, 343 SCRA 674 (2000).
Since all corporations, big or small, must abide by
the provisions of the Corporation Code, then
even a simple family corporation cannot claim an
exemption nor can it have rules and practices
other than those established by law. xTorres v.
Court of Appeals, 278 SCRA 793 (1997).
(b) Theory of Enterprise Entity (Berle, Theory of
Enterprise Entity, 47 Col. L. Rev. 343 [1947])
Corporations are composed of natural persons
and the legal fiction of a separate corporate
personality is not a shield for the commission of
injustice and inequity, such as the use of separate
personality to avoid the execution of the property
of a sister company. xTan Boon Bee & Co., Inc. v.
Jarencio, 163 SCRA 205 (1988).
A corporation is but an association of individuals,
allowed to transact under an assumed corporate
name, and with a distinct legal personality. In
organizing itself as a collective body, it waives no
constitutional immunities and perquisites
appropriate to such a body. xPhilippine Stock
Exchange, Inc. v. Court of Appeals, 281 SCRA 232
(1997).
5. Four Attributes of Corporation from Statutory
Definition:
(a) A corporation is an artificial being
(b) Created by operation of law
(c) With right of succession
(d) Only has powers, attributes and properties
expressly authorized by law or incident to its
existence
6. Advantages and Disadvantages of Corporate
Form:
(a) Four Basic Advantageous Characteristics of
Corporate Organization:
(i) Strong Legal Personality
Entity attributable powers
Continuity of existence
Purpose
The corporation was evolved to make possible
the aggregation and assembling of huge amounts
of capital upon which big business depends; and
has the advantage of non-dependence on the
lives of those who compose it even as it enjoys
certain rights and conducts activities of natural
persons. Reynoso, IV v. Court of Appeals, G.R. No.
116124-25, 22 November 2000.
(ii) Centralized Management.
(iii) Limited Liability to Investors
One advantage of a corporate business
organization is the limitation of an investors
liability to the amount of the investment, which
flows from the legal theory that a corporate
entity is separate and distinct from its
stockholders. xSan Juan Structural and Steel
Fabricators, Inc. v. Court of Appeals, 296 SCRA
631, 645 (1998).
(iv) Free Transferability of Units of Ownership
for Investors
(b) Disadvantages:
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) Cost of maintenance
(iv) Double taxation
Dividends received by individuals from domestic
corporations are subject to final 10% tax (Sec.
24(B)(2), NIRC of 1997) for income earned on or
after 1 January 1998. Inter-corporate dividends
between domestic corporations, however, are
not subject to any income tax (Sec. 27(D)(4), NIRC
of 1997).
In addition, there has been a re-imposition of the
improperly accumulated earnings tax, under
Section 29 of the NIRC of 1997 for corporations at
the rate of 10% annually.
7. Compared With Other Media of Business
Endeavors
Distribution of Risk, Profit and Control
(a) Sole Proprietorships
(b) Business Trusts (Article 1442, Civil Code)
(c) Partnerships and Other Associations (Arts.
1768 and 1775, Civil Code)
Can a defective attempt to form a corporation
result at least in the formation of a
partnership? Pioneer Insurance v. Court of
Appeals, 175 SCRA 668 (1989).
It is ordinarily held that persons who attempt, but
fail, to form a corporation and who carry on
business under the corporate name occupy the
position of partners inter se. Thus, where persons
associate themselves together under articles to
purchase property to carry on a business, and
their organization is so defective as to come short
of creating a corporation within the statute, they
become in legal effect partners inter se, and their
rights as members of the company to the
property acquired by the company will be
recognized.
However, such a relation does not necessarily
exist, for ordinarily persons cannot be made to
assume the relation of partners, as between
themselves, when their purpose is that no
partnership shall exist , and it should be implied
only when necessary to do justice between the
parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation
which is never legally formed does not become a
partner with other subscribers who engage in
business under the name of the pretended
corporation, so as to be liable as such in an action
for settlement of the alleged partnership and
contribution.
(d) Joint Ventures
Joint venture is defined as an association of
persons or companies jointly undertaking some
commercial enterprise; generally all contribute
assets and share risks. It requires a community of
interest in the performance of the subject matter,
a right to direct and govern the policy in
connection therewith, and duty, which may be
altered by agreement to share both in profit and
losses. the acts of working together in a joint
project. xKilosbayan, Inc. v. Guingona, Jr., 232
SCRA 110, 143 (1994), citing Blacks Law
Dictionary, Sixth ed., 839.
(e) Cooperatives (Art. 3, R.A. No. 6938)
Section 3. General Concepts. - A cooperative is a
duly registered association of persons, with a
common bond of interest, who have voluntarily
joined together to achieve a lawful common
social or economic end, making equitable
contributions to the capital required and
accepting a fair share of the risks and benefits of being no mutual agreement between the
the undertaking in accordance with universally partners, and without a corporate name
accepted cooperative principles. indicating to the public in some way that there
were other people besides the one who
(f) Sociedades Annimas
ostensibly managed and conducted the business,
A sociedad annima was considered a governed under article 239 of the Code of
commercial partnership, a sort of a corporation, Commerce.
where upon the execution of the public
Those who contract with the person under whose
instrument in which its articles of agreement
name the business of such partnership of cuentas
appear, and the contribution of funds and
en participacion is conducted, shall have only a
personal property, becomes a juridical person
right of action against such person and not
an artificial being, invisible, intangible, and
against the other persons interested, and the
existing only in contemplation of lawwith
latter, on the other hand, shall have no right of
power to hold, buy, and sell property, and to sue
action against third person who contracted with
and be sueda corporationnot a general
the manager unless such manager formally
copartnership nor a limited copartnership . . . The
transfers his right to them. xBourns v. Carman, 7
inscribing of its articles of agreement in the
Phil. 117 (1906).
commercial register was not necessary to make it
a juridical persona corporation. Such III. NATURE AND ATTRIBUTES OF A
inscription only operated to show that it partook CORPORATION
of the form of a commercial corporation. xMead
1. Nature of Power to Create a Corporation (Sec.
v. McCullough, 21 Phil. 95,106 (1911).
16, Article XII, 1987 Constitution)
The sociedades annimas were introduced in
SECTION 16. The Congress shall not, except by
Philippine jurisdiction on 1 December 1888 with
general law, provide for the formation,
the extension to Philippine territorial application
organization, or regulation of private
of Articles 151 to 159 of the Spanish Code of
corporations. Government-owned or controlled
Commerce. Those articles contained the features
corporations may be created or established by
of limited liability and centralized management
special charters in the interest of the common
granted to a juridical entity. But they were more
good and subject to the test of economic viability.
similar to the English joint stock companies than
the modern commercial corporations. xBenguet 2. Corporation as a Person:
Consolidated Mining Co. v. Pineda, 98 Phil. 711
(1956) (a) Entitled to due process

Our Corporation Law recognizes the difference
between sociedades annimas and corporations
and will not apply legal provisions pertaining to
the latter to the former xPhil. Product Co. v.
Primateria Societe Anonyme, 15 SCRA 301 (1965).
(g) Cuentas En Participacion
A cuentas en participacion as a sort of an
accidental partnership constituted in such a
manner that its existence was only known to
those who had an interest in the same, there
The due process clause is universal in its
application to all persons without regard to any
differences of race, color, or nationality. Private
corporations, likewise, are persons within the
scope of the guaranty insofar as their property is
concerned. xSmith Bell & Co. v. Natividad, 40
Phil. 136, 144 (1920).
(b) Equal protection clause (xSmith Bell & Co. v.
Natividad, 40 Phil. 136 [1920]).
(c) Unreasonable Searches and Seizure Henkel, 201 U.S. 43 (1906); xWilson v. United
States, 221 U.S. 361 (1911); xUnited States v.
Corporations are protected by the constitutional
White, 322 U.S. 694 (1944).
guarantee against unreasonable searches and
seizures, but that the officers of a corporation 3. Liability for Torts
from which documents, papers and things were
A corporation is civilly liable in the same manner
seized have no cause of action to assail the
as natural persons for torts, because generally
legality of the seizures, regardless of the amount
speaking, the rules governing the liability of a
of shares of stock or of the interest of each of
principal or master for a tort committed by an
them in said corporation, and whatever the
agent or servant are the same whether the
offices they hold therein may be, because the
principal or master be a natural person or a
corporation has a personality distinct and
corporation, and whether the servant or agent be
separate from those of said officers. The legality
a natural or artificial person. That a principal or
of a seizure can be contested only by the party
master is liable for every tort which he expressly
whose rights have been impaired thereby; and
directs or authorizes, is just as true of a
the objection to an unlawful search is purely
corporation as a natural person. PNB v. CA, 83
personal and cannot be availed of by such officers
SCRA 237 (1978).
of the corporation who interpose it for their
personal interests. xStonehill v. Diokno, 20 SCRA Our jurisprudence is wanting as to the definite
383 (1967). scope of corporate tort. Essentially, tort
consists in the violation of a right given or the
A corporation is but an association of individuals
omission of a duty imposed by law. Simply stated,
under an assumed name and with a distinct legal
tort is a breach of a legal duty. When it was
entity. In organizing itself as a collective body it
found that Clark Field Taxi failed to comply with
waives no constitutional immunities appropriate
the obligation imposed under Article 283 of the
for such body. Its property cannot be taken
Labor Code which mandates that the employer to
without compensation; can only be proceeded
grant separation pay to employees in case of
against by due process of law; and is protected
closure or cessation of operations of
against unlawful discrimination. xBache & Co.
establishments or undertaking not due to serious
(Phil.), Inc. v. Ruiz, 37 SCRA 823, 837
business losses or financial reverses;
(1971), quoting fromxHale v. Henkel, 201 U.S. 43,
consequently, its stockholder who was actively
50 L.Ed. 652.
engaged in the management or operation of the
(d) But a corporation is not entitled to privilege business should be held personally liable. xSergio
against self incrimination F. Naguiat v. NLRC, 269 SCRA 564 (1997).

It is elementary that the right against self-
incrimination has no application to juridical
persons. Bataan Shipyard & Engineering Co v.
PCGG, 150 SCRA 181, 234-235 (1987).
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 privilege. xHale v.
As a general rule, a banking corporation is liable
for the wrongful or tortuous acts and
declarations of its officers or agents within the
course and scope of their employment. A bank
will be held liable for the negligence of its officers
or agents when acting within the course and
scope of their employment, even as regards that
species of tort of which malice is an essential
element. In this case, we find a situation where
the PCIBank appears also to be the victim of the
scheme hatched by a syndicate in which its own
management employees had
participated. Philippine Commercial International
Bank vs. Court of Appeals, G.R. No. 121413, 29
January 2001.
4. Criminal Liability of a Corporation (West Coast
Life Ins. Co. v. Hurd, 27 Phil. 401 (1914);People v.
Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121
SCRA 655 [1983]; Articles 102 and 103, Revised
Penal Code).
No criminal suit can lie against an accused who is
a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303
(1971).
When a criminal statute forbids the corporation
itself from doing an act, the prohibition extends
to the board of directors, and to each director
separately and individually. xPeople v.
Concepcion, 44 Phil. 129 (1922).
5. Recovery of Moral Damages and Other
Damages
A corporation, being an artificial person, cannot
experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral
shock or social humiliation which are basis for
moral damages under Art. 2217 of the Civil
Code. However, a corporation may have a good
reputation which, if besmirched, may be a ground
for the award of moral damages.xMambulao
Lumber Co. v. Philippine National Bank, 22 SCRA
359 (1968).
Even when the corporations reputation and
goodwill have been prejudiced, there can be no
award for moral damages under Article 2217 and
succeeding articles of Section 1 of Chapter 3 of
Title XVIII of the Civil Code in favor of a
corporation. xPrime White Cement Corp. vo
Intermediate Appellate Court, 220 SCRA 103, 113-
114 (1993).
Moral damages are granted in recompense for
physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and
similar injury. A corporation, being an artificial
person and having existence only in legal
contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering
can be experienced only by one having a nervous
system and it flows from real ills, sorrows, and
griefs of lifeall of which cannot be suffered by
respondent bank as an artificial person. xLBC
Express, Inc. v. Court of Appeals, 236 SCRA 602
(1994); xAcme Shoe, Rubber & Plastic Corp. v.
Court of Appeals, 260 SCRA 714 (1996); xSolid
Homes, Inc. v. Court of Appeals, 275 SCRA 267
(1997).
In Asset Privatization Trust v. Court of
Appeals, 300 SCRA 579 (1998), the Supreme
Court seemed to have gone back to the original
doctrine that *u+nder Article 2217 of the Civil
Code, moral damages include besmirched
reputation which a corporation may possibly
suffer.
The award of moral damages cannot be granted
in favor of a corporation because, being an
artificial person and having existence only in legal
contemplation, it has no feelings, no emotions,
no senses. It cannot, therefore, experience
physical suffering and mental anguish, which can
be experienced only by one having a nervous
system. The statement in People v. Manero [218
SCRA 85 (1993)] and Mambulao Lumber Co. v.
PNB [130 Phil. 366 (1968)], that a corporation
may recover moral damages if it has a good
reputation that is debased, resulting in social
humiliation is an obiter dictum. . . The possible
basis of recovery of a corporation would be under
Articles 19, 20 and 21 of the Civil Code, but which
requires a clear proof of malice or bad
faith. xABS-CBN Broadcasting Corp. v. Court of
Appeals, 301 SCRA 589 (1999).
While it is true that a criminal case can only be
filed against the officers of a corporation and not
against the corporation itself, it does not follow
from this, however, that the corporation cannot
be a real-party-in-interest for the purpose of
bringing a civil action for malicious prosecution
for the damages incurred by the corporation for
the criminal proceedings brought against its
officer. xCometa v. Court of Appeals, 301 SCRA
459 (1999).
6. Nationality of Corporation: Country Under
Whose Laws Incorporated (Sec. 123).
Exceptions: The Test of Controlling
Ownership Applies In:
(a) Exploitation of Natural Resources (Sec. 140;
Sec. 2, Article XII, 1987 Constitution;Roman
Catholic Apostolic Administrator of Davao, Inc. v.
The LRC and the Register of Deeds of Davao, 102
Phil. 596 [1957]).
The donation of land to an unincorporated
religious organization, whose trustees are
foreigners, cannot be allowed registration for
being violation of the constitutional prohibition
and it would not be violation of the freedom of
religion clause. The fact that the religious
association has no capital stock does not suffice
to escape the constitutional inhibition, since it is
admitted that its members are of foreign
nationality. The purpose of the sixty per centum
requirement is obviously to ensure that
corporations or associations allowed to acquire
agricultural land or to exploit natural resources
shall be controlled by Filipinos; and the spirit of
the Constitution demands that in the absence of
capital stock, the controlling membership should
be composed of Filipino citizens. xRegister of
Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58
(1955)
(b) Public Utilities (Sec. 11, Article XII, 1987
Constitution; People v. Quasha, 93 Phil. 333
[1953]).
The primary franchise of a corporation, that is,
the right to exist as such, is vested in the
individuals who compose the corporation and not
in the corporation itself and cannot be conveyed
in the absence of a legislative authority so to do.
But 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 of its property, except such special or
secondary franchises as are charged with a public
use. xJ.R.S. Business Corp. v. Imperial Insurance,
11 SCRA 634 (1964).
The Constitution, in no uncertain terms, requires
a franchise for the operation of a public utility;
however, it does not requires a franchise before
one can own the facilities needed to operate a
public utility so long as it does not operate them
to serve the public. In law there is a clear
distinction between the operation of a public
utility and the ownership of the facilities and
equipment used to serve the public. Tatad v.
Garcia, Jr., 243 SCRA 436 (1995)
A distinction should be made between shares of
stock, which are owned by stockholders, the sale
of which requires only NTC approval, and the
franchise itself which is owned by the corporation
as the grantee thereof, the sale or transfer of
which requires Congressional sanction. Since
stockholders own the shares of stock, they may
dispose of the same as they see fit. They may not,
however, transfer or assign the property of a
corporation, like its franchise. In other words,
even if the original stockholders had transferred
their shares to another group of shareholders,
the franchise granted to the corporation subsists
as long as the corporation, as an entity, continues
to exist. The franchise is not thereby invalidated
by the transfer of the shares. A corporation has a
personality separate and distinct from that of
each stockholder. It has the right of continuity or
perpetual succession Corporation Code, Sec.
2). Philippine Long Distance Telephone Co. v.
National Telecommunications Commission, 190
SCRA 717, 732 (1990).
(c) Mass Media (Sec. 11(1), Art. XVI, 1987
Constitution)
SECTION 11. (1) The ownership and management
of mass media shall be limited to citizens of the
Philippines, or to corporations, cooperatives or
associations, wholly-owned and managed by such
citizens.
The Congress shall regulate or prohibit
monopolies in commercial mass media when the
public interest so requires. No combinations in
restraint of trade or unfair competition therein
shall be allowed.
Sources: P.D. 36, as amended by PDs 191 and
197; DOJ Opinion No. 120, s. of 1982;Section 2,
P.D. 576; SEC Opinion dated 24 March 1983; DOJ
Opinion 163, s. 1973; SEC Opinion dated 15 July
1991, XXV SEC QUARTERLY BULLETIN, (No. 4
December, 1991), at p. 31.
Cable Industry
The National Telecommunications Commission
(NTC), which regulates and supervises the cable
television industry in the Philippines under
Section 2 of Executive Order No. 436, s. 1997, has
provided under NTC Memorandum Circular No.
8-9-95, under item 920(a) thereof provides that
Cable TV operations shall be governed by E.L.
No. 205, s. 1987. If CATV operators offer public
telecommunications services, they shall be
treated just like a public telecommunications
entity.
Under DOJ Opinon No. 95, series of 1999, the
Secretary of Justice, taking its cue from Allied
Broadcasting, Inc. v. Federal Communications
Commission, 435 F. 2d 70, considered CATV as a
form of mass media which must, theefore, be
owned and managed by Filipino citizens, or
corporations, cooperatives or associations,
wholly-owned and managed by Filipino citizens
pursuant to the mandate of the Constitution.
(d) Advertising Business (Sec. 11(2), Art. XVI,
1987 Constitution)
(2) The advertising industry is impressed with
public interest, and shall be regulated by law for
the protection of consumers and the promotion
of the general welfare.
Only Filipino citizens or corporations or
associations at least seventy per centum of the
capital of which is owned by such citizens shall be
allowed to engage in the advertising industry.
The participation of foreign investors in the
governing body of entities in such industry shall
be limited to their proportionate share in the
capital thereof, and all the executive and
managing officers of such entities must be
citizens of the Philippines.
(e) War-Time Test (Filipinas Compania de Seguros
v. Christern, Huenefeld & Co., Inc., 89 Phil. 54
[1951]; xDavis Winship v. Philippine Trust Co., 90
Phil. 744 [1952]; xHaw Pia v. China Banking Corp.,
80 Phil. 604 [1948]).
(f) Investment Test as to Philippine Nationals
(Sec. 3(a),(b), R.A. 7042, Foreign Investment Act
of 1992)
Section 3. Definitions. - As used in this Act:
a) The term "Philippine national" shall
mean a citizen of the Philippines or a
domestic partnership or association
wholly owned by citizens of the
Philippines; or a corporation organized
under the laws of the Philippines of which
at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is
owned and held by citizens of the
Philippines; or a trustee of funds for
pension or other employee retirement or
separation benefits, where the trustee is a
Philippine national and at least sixty (60%)
of the fund will accrue to the benefit of
the Philippine nationals: Provided, That
where a corporation and its non-Filipino
stockholders own stocks in a Securities
and Exchange Commission (SEC)
registered enterprise, at least sixty
percent (60%) of the capital stocks
outstanding and entitled to vote of both
corporations must be owned and held by
citizens of the Philippines and at least
sixty percent (60%) of the members of the
Board of Directors of both corporations
must be citizens of the Philippines, in
 order that the corporations shall be
considered a Philippine national;
b) The term "investment" shall mean
equity participation in any enterprise
organized or existing under the laws of
the Philippines;
(g) The Grandfather Rule (Opinion of DOJ No. 18,
s. 1989, dated 19 January 1989; SEC Opinion,
dated 6 November 1989, XXIV SEC Quarterly
Bulletin (No. 1- March 1990); SEC Opinion, dated
14 December 1989, XXIV SEC Quarterly Bulletin
(No. 2 -June 1990)
Up to what level do you apply the grandfather
rule? (Palting v. San Jose Petroleum Inc., 18 SCRA
924 [1966]).
CANNOT go beyond the level of what is
reasonable
(h) Special Classifications (Sec. 140)
IV. SEPARATE JURIDICAL PERSONALITY AND
DOCTRINE OF PIERCING VEIL OF CORPORATE
FICTION
A. Main Doctrine: A Corporation Has A
Personality Separate and Distinct from its
Stockholders or Members.
Rudimentary is the rule that a corporation is
invested by law with a personality distinct and
separate from its stockholders or membersby
legal fiction and convenience it is shielded by a
protective mantel and imbued by law with a
character alien to the persons comprising it. xLim
v. Court of Appeals, 323 SCRA 102 (2000).
1. Sources: Sec. 2; Article 44, Civil Code
Article 44. The following are juridical persons:
(2) Other corporations, institutions and entities for
public interest or purpose, created by law; their
personality begins as soon as they have been
constituted according to law;
2. Importance of Protecting Main Doctrine:
The separate juridical personality includes:
right of succession; limited liability; centralized
management; and generally free transferability of
shares of stock. Therefore, an undermining of the
separate juridical personality of the corporation,
such as the application of the piercing doctrine,
necessarily dilutes any or all of those attributes.
One of the advantages of a corporate form of
business organization is the limitation of an
investors liability to the amount of the
investment. This feature flows from the legal
theory that a corporate entity is separate and
distinct from its stockholders. However, the
statutorily granted privilege of a corporate veil
may be used only for legitimate purposes. On
equitable considerations, the veil can be
disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve
as a mere alter ego or business conduit of a
person or an instrumentality, agency or adjunct
of another corporation. xSan Juan Structural and
Steel Fabricators, Inc. v. Court of Appeals, 296
SCRA 631, 645 (1998).
3. Applications:
(a) Majority Ownership of or Dealings in
Shareholdings: Ownership of a majority of capital
stock and the fact that majority of directors of a
corporation are the directors of another
corporation creates no employer-employee
relationship with the latters employees. DBP v.
NLRC, 186 SCRA 841 (1990); Francisco, et al. v.
Mejia, G. R. No. 141617, 14 August 2001.
The mere fact that a stockholder sells his shares
of stock in the corporation during the pendency
of a collection case against the corporation, does
not make such stockholder personally liable for
the corporate debt, since the disposing
stockholder has no personal obligation to the
creditor, and it is the inherent right of the
stockholder to dispose of his shares of stock
anytime he so desires. xRemo, Jr. v. Intermediate
Appellate Court, 172 SCRA 405, 413-414 (1989).
Mere ownership by a single stockholder or by
another corporation of all or nearly all of the
capital stock of a corporation is not of itself
sufficient ground for disregarding the separate
corporate personality. xSunio v. NLRC , 127 SCRA
390 (1984); xAsionics Philippines, Inc. v. National
Labor Relations Commission, 290 SCRA 164
(1998); xLim v. Court of Appeals, 323 SCRA 102
(2000); xManila Hotel Corp. v. NLRC, 343 SCRA 1
(2000); xFrancisco v. Mejia, G. R. No. 141617, 14
August 2001.
Mere substantial identity of the incorporators of
the two corporations does not necessarily imply
fraud, nor warrant the piercing of the veil of
corporate fiction. In the absence of clear and
convincing evidence to show that the corporate
personalities were used to perpetuate fraud, or
circumvent the law, the corporations are to be
rightly treated as distinct and separate from each
other. xLaguio v. NLRC, 262 SCRA 715 (1996).
(b) Dealings Between the Corporation and
Stockholders: The transfer of the corporate
assets to the stockholder is not in the nature of a
partition but is a conveyance from one party to
another. Stockholders of F. Guanzon and Sons,
Inc. v. Register of Deeds of Manila, 6 SCRA 373
(1962).
As a general rule, a corporation may not be made
to answer for acts or liabilities of its stockholders
or those of the legal entities which it may be
connected and vice-versa. xARB Constructions
Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)
(c) On Issues of Privileges Enjoyed: The tax
privileges enjoyed by a corporation do not extend
to its stockholders. A corporation has a
personality distinct from that of its stockholders,
enabling the taxing power to reach the latter
when they receive dividends from the
corporation. It must be considered as settled in
this jurisdiction that dividends of a domestic
corporation which are paid and delivered in cash
to foreign corporations as stockholders are
subject to the payment of the income tax, the
exemption clause to the charter [of the domestic
corporation+ notwithstanding. xManila Gas
Corp. v. Collector of Internal Revenue, 62 Phil.
895, 898 (1936).
(d) Being a Corporate Officer: Being an officer or
stockholder of a corporation does not by itself
make ones property also of the corporation,
and vice-versa, for they are separate entities, and
that shareholders are in no legal sense the
owners of corporate property which is owned by
the corporation as a distinct legal person. Good
Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)
The 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
individual, and the corporation are separate
entities. xCruz v. Dalisay, 152 SCRA 487 (1987).
(e) Properites, Obligations and Debts: Likewise, a
corporation has no legal standing to file a suit for
recovery of certain parcels of land owned by its
members in their individual capacity, even when
the corporation is organized for the benefit of the
members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA
347 [1976]).
The corporate debt or credit is not the debt or
credit of the stockholder nor is the stockholders
debt or credit that of the corporation. xTraders
Royal Bank v. CA, 177 SCRA 789 (1989).
Stockholders have no personality to intervene in
a collection case covering the loans of the
corporation on the ground that the interest of
shareholders in corporate property is purely
inchoate. xSaw v. CA, 195 SCRA 740 [1991])
The interests of payees in promissory notes
cannot be off-set against the obligations between
the corporations to which they are stockholders
absent any allegation, much less, even a scintilla
of substantiation, that the parties interest in the
corporation are so considerable as to merit a
declaration of unity of their civil
personalities. xIndustrial and Development Corp.
v. Court of Appeals, 272 SCRA 333 (1997).
It is a basic postulate that a corporation has a
personality separate and distinct from its
stockholders. Therefore, even when the
foreclosure on the assets of the corporation was
wrongful and done in bad faith, the stockholders
of the corporation have no standing to recover
for themselves moral damages. Otherwise, it
would amount to the appropriation by, and the
distribution to, such stockholders of part of the
corporations assets before the dissolution of the
corporation and the liquidation of its debts and
liabilities. xAsset Privatization Trust v. Court of
Appeals, 300 SCRA 579, 617 (1998).
Where real properties included in the inventory
of the estate of a decedent are in the possession
of and are registered in the name of the
corporations, in the absence of any cogency to
shred the veil of corporate fiction, the
presumption of conclusiveness of said titles in
favor of said corporations should stand
undisturbed. xLim v. Court of Appeals, 323 SCRA
102 (2000).
(f) Third-Parties: The fact that respondents are
not stockholders of the disputed corporations
does not make them non-parties to the case,
since the jurisdiction of a court or tribunal over
the subject matter is determined by the
allegations in the Complaint. In this case, it is
alleged that the aforementioned corporations are
mere alter egos of the directors-petitioners, and
that the former acquired the properties sought to
be reconveyed to FGSRC in violation of directors-
petitioners fiduciary duty to FGSRC. The notion
of corporate entity will be pierced or disregarded
and the individuals composing it will be treated
as identical if, as alleged in the present case, the
corporate entity is being used as a cloak or cover
for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a
business conduit for the sole benefit of the
stockholders. Gochan v. Young, G.R. No. 131889,
21 March 2001.
B. Piercing the Veil of Corporate Fiction:
1. Source of Incantation: xUnited States v.
Milwaukee Refrigerator Transit Co., 142 Fed. 247
[1905]). xSee also Francisco v. Mejia, G. R. No.
141617, 14 August 2001.
2. Nature of the Piercing Doctrine (Traders
Royal Bank v. Court of Appeals, 269 SCRA 15
[1997])
Piercing the veil of corporate entity requires the
court to see through the protective shroud which
exempts its stockholders from liabilities that
ordinarily, they could be subject to, or
distinguishes one corporation from a seemingly
separate one, were it not for the existing
corporate fiction. xLim v. Court of Appeals, 323
SCRA 102 (2000).
This Court has pierced the veil of corporate
fiction in numerous cases where it was used,
among others, to avoid a judgment credit, to
avoid inclusion of corporate assets as part of the
estate of a decedent, to avoid liability arising
from debt; when made use of as a shield to
perpetrate fraud and/or confuse legitimate
issues, or to promote unfair objectives or
otherwise to shield them. xReynoso, IV v. Court
of Appeals, G.R. No. 116124-25, 22 November
2000; also xRamoso v. Court of Appeals, G.R. No.
117416, 8 December 2000.
3. When Piercing Doctrine Not Applicable:
(a) Piercing the veil of corporate fiction is remedy
of last resort and is not available when
other remedies are still available. Umali v. CA,
189 SCRA 529 (1990).
(b) Piercing is not allowed unless the remedy
sought is to make the officer or another
corporation pecuniarily liable for corporate
debts. Umali v. CA, 189 SCRA 529 (1990);Indophil
Textile Mill Workers Union-PTGWO v. Calica, 205 stockholders of corporate properties. Boyer-
SCRA 697 (1992). Roxas v. Court of Appeals, 211 SCRA 470 [1992]).

(c) Piercing is not available when the personal The piercing doctrine cannot be availed of in
obligations of an individual are sought to be order to dislodge from the jurisdiction of the SEC
enforced against the corporation. xRobledo v. a the petition for suspension of payments filed
NLRC, 238 SCRA 52 (1994) under Section 5(e) of Pres. Decree No. 902-A, on
the ground that the petitioning individuals should
The rationale behind piercing a corporations
be treated as the real petitioners to the exclusion
identity in a given case is to remove the barrier
of the petitioning corporate debtor. The
between the corporation from the persons
doctrine of piercing the veil of corporate fiction
comprising it to thwart the fraudulent and illegal
heavily relied upon by the petitioner is entirely
schemes of those who use the corporate
misplaced, as said doctrine only applies when
personality as a shield for undertaking certain
such corporate fiction is used to defeat public
proscribed activities. However, in the case at bar,
convenience, justify wrong, protect fraud or
instead of holding certain individuals or person
defend crime. xUnion Bank of the Philippines v.
responsible for an alleged corporate act, the
Court of Appeals, 290 SCRA 198 (1998).
situation has been reversed. It is the petitioner as
a corporation which is being ordered to answer Changing of the petitionerss subsidiary liabilities
for the personal liability of certain individual by converting them to guarantors of bad debts
directors, officers and incorporators concerned. cannot be done by piercing the veil of corporate
Hence, it appears to us that the doctrine has identity. xRamoso v. Court of Appeals, G.R. No.
been turned upside down because of its 117416, 8 December 2000.
erroneous invocation. Francisco Motors Corp. v
(f) Piercing doctrine is meant to prevent fraud,
Court of Appeals, 309 SCRA 72, 83 (1999).
and cannot be employed to perpetrate fraud or a
(d) To disregard the separate juridical personality wrong. Gregorio Araneta, Inc. v. Tuason de
of a corporation, the wrongdoing must be clearly Paterno and Vidal, 91 Phil. 786 (1952).
and convincingly established. It cannot be
The theory of corporate entity was not meant to
presumed. This is elementary. The organization of
promote unfair objectives or otherwise, nor to
the corporation at the time when the relationship
shield them. xVillanueva v. Adre, 172 SCRA 876
between the landowner and the developer were
(1989).
still cordial cannot be used as a basis to hold the
corporation liable later on for the obligations of (g) Piercing is a power belonging to the court and
the landowner to the developer under the mere cannot be assumed improvidently by a
allegation that the corporation is being used to sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).
evade the performance of obligation by one of its
major stockholders. xLuxuria Homes, Inc. v. Court
of Appeals,302 SCRA 315 (1999); xDevelopment
3. Consequences and Types of Piercing
Bank of the Philippines vs. Court of Appeals,G.R.
Cases: Umali v. CA, 189 SCRA 529 [1990])
No. 126200, 16 August 2001.
(a) The application of the doctrine to a particular
(e) Not Applicable to Theorizing: Piercing of the
case does not deny the corporation of legal
veil of corporate fiction is not allowed when it is
personality for any and all purposes, but only for
resorted to justify under a theory of co-
the particular transaction or instance for which
ownership the continued use and possession by
the doctrine was applied. Koppel (Phil.) Inc. v.
Yatco, 77 Phil. 496 (1946); xTantoco v. Kaisahan
ng Mga Manggagawa sa La Campana, 106 Phil.
198 (1959).
(b) Classification of the Piercing Cases:
(i) When the corporate entity is used to commit
fraud or to do a wrong (fraud cases);
(ii) When the corporate entity is merely a farce
since the corporation is merely the alter ego,
business conduit or instrumentality of a person or
another entity (alter ego cases); and
(iii) When the piercing the corporate fiction is
necessary to achieve justice or equity (equity
cases).
The three cases may appear together in one
application. R.F. Sugay & Co., v. Reyes, 12 SCRA
700 (1964).
4. Fraud Cases:
(a) Acts by the Controlling Shareholder: Where a
stockholder, who has absolute control over the
business and affairs of the corporation, entered
into a contract with another corporation through
fraud and false representations, such stockholder
shall be liable jointly and severally with his co-
defendant corporation even when the contract
sued upon was entered into on behalf of the
corporation. Namarco v. Associated Finance Co.,
19 SCRA 962 (1967).
The tests in determining whether the corporate
veil may be pierced are: (1) the defendant must
have control or complete domination of the other
corporations finances, policy and business
practices with regard to the transaction attached;
(2) control must be used by the defendant to
commit fraud or wrong; and (3) the aforesaid
control or breach of duty must be the proximate
cause of the injury or loss complained of. Manila
Hotel Corporation v. NLRC, 343 SCRA 1 (2000);
xAlso Lim v. Court of Appeals, 323 SCRA 102
(2000).
(b) One cannot evade civil liability by
incorporating properties or the business. Palacio
v. Fely Transportation Co., 5 SCRA 1011 (1962).
(c) The veil of corporation fiction may be pierced
when used to avoid a contractual commitment
against non-competition. Villa Rey Transit, Inc. v.
Ferrer, 25 SCRA 845 (1968).
(d) The Supreme Court found the following facts
to be legal basis to pierce: One company was
merely an adjunct of the other, by virtue of a
contract for security services, the former
provided with security guards to safeguard the
latters premises; both companies have the same
owners and business address; the purported sale
of the shares of the former stockholders to a new
set of stockholders who changed the name of the
corporation appears to be part of a scheme to
terminate the services of the security guards, and
bust their newly-organized union which was then
beginning to become active in demanding the
companys compliance with Labor Standards
laws. De Leon v. NLRC, G.R. No. 112661, 30 May
2001.
(e) Parent-Subsidiary Relations; Affiliates
(Reynoso, IV v. Court of Appeals, G.R. No. 116124-
25, 22 November 2000; Commissioner of Internal
Revenue v. Norton and Harrison, 11 SCRA 704,
[1954]; Tomas Lao Construction v. NLRC, 278
SCRA 716 [1997]).
Guiding Principles in Fraud Cases:
Why is there inordinate showing of alter-ego
elements?
(i) There must have been fraud or an evil motive
in the affected transaction, and the mere proof of
control of the corporation by itself would not
authorize piercing; and
(ii) The main action should seek for the
enforcement of pecuniary claims pertaining to
the corporation against corporate officers or
stockholders.
5. Alter-Ego Cases: the two corporations, there was much confusion
as to the proper employment of the
(a) Where the stock of a corporation is owned by
claimant. xAzcor Manufacturing, Inc. v. NLRC, 303
one person whereby the corporation functions
SCRA 26 (1999). Where the corporate fiction was
only for the benefit of such individual owner, the
used as a means to perpetrate a social injustice
corporation and the individual should be deemed
or as a vehicle to evade obligations or confuse
the same. Arnold v. Willets and Patterson, Ltd., 44
the legitimate issues.
Phil. 634 (1923).
(d) Use of nominees to man the corporation for
(b) When the corporation is merely an adjunct,
the benefit of the controlling
business conduit or alter ego of another
stockholder. xMarvel Building v. David, 9 Phil.
corporation, the fiction of separate and distinct
376 (1951).
corporation entities should be disregarded. xTan
Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988). (e) Avoidance of tax. Yutivo Sons Hardware v.
Court of Tax Appeals 1 SCRA 160 (1961); xLiddell
The corporation veil cannot be used to shield an
& Co. v. Collector of Internal Revenue, 2 SCRA 632
otherwise blatant violation of the prohibition
(1961).
against forum-shopping. Shareholders, whether
suing as the majority in direct actions or as the (f) Mixing of bank deposit accounts. xRamirez
minority in a derivative suit, cannot be allowed to Telephone Corp. v. Bank of America, 29 SCRA 191
trifle with court processes, particularly where, as (1969).
in this case, the corporation itself has not been
(g) Disrespect of separate entities. Where it
remiss in vigorously prosecuting or defending
appears that two business enterprises are
corporate causes and in using and applying
owned, conducted, and controlled by the same
remedies available to it. xFirst Philippine
parties, both law and equity will, when necessary
International Bank v. Court of Appeals, 252 SCRA
to protect the rights of third persons, disregard
259 (1996).
the legal fiction that two corporations are distinct
(c) Employment of same workers; single place of entities and treat them as identical. xSibagat
business, etc., may indicate alter ego Timber Corp. v. Garcia, 216 SCRA 70 (1992).
situation. La Campana Coffee Factory v. Kaisahan
(h) Thinly-capitalized corporations. McConnel v.
ng Manggagawa, 93 Phil. 160 (1953).
Court of Appeals, 1 SCRA 722 (1961).
The doctrine that a corporation is a legal entity or
(i) Parent-subsidiary relationship. Koppel (Phil.),
a person in law distinct from the persons
Inc. v. Yatco, 77 Phil. 97 (1946);xPhilippine
composing it is merely a legal fiction for purposes
Veterans Investment Development Corporation v.
of convenience and to subserve the ends of
CA, 181 SCRA 669 (1990).
justice. This fiction cannot be extended to a point
beyond its reason and policy. Where, as in this (j) Affiliated companies. xGuatson International
case, the corporation fiction was used as a means Travel and Tours, Inc. v. NLRC, 230 SCRA 815
to perpetrate a social injustice or as a vehicle to (1990).
evade obligations or confuse the legitimate
issues, it would be discarded and the two (2) (k) Summary of Probative Factors: Philippine
corporations would be merged as one, the first National Bank vs. Ritratto Group, Inc., et al., G.R.
being merely considered as the instrumentality, No. 142616, 31 July 2001; xConcept Builders, Inc.
agency conduit or adjunct of the other. In this v. NLRC, 257 SCRA 149 (1996).
case, because of the actions of management of
Whether the existence of the corporation should
be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a
corporation is the alter ego of the individual
stockholders is insufficient. The presumption is
that the stockholders or officers and the
corporation are distinct entities. The burden of
proving otherwise is on the party seeking to have
the court pierce the veil of corporate
entity. xRamoso v. Court of Appeals, G.R. No.
117416, 8 December 2000.
(l) Guiding Principles in Alter-Ego Cases:
(i) The doctrine applies in this case even in the
absence of evil intent; it applies because of the
direct violation of a central corporate law
principle of separating ownership from
management.
(ii) The doctrine in such cased is based on
estoppel: if stockholders do not respect the
separate entity, others cannot also be expected
to be bound by the separate juridical entity.
(iii) Piercing in alter ego cases may prevail even
when no monetary claims are sought to be
enforced against the stockholders or officers of
the corporation.
6. Equity Cases:
(a) When used to confuse legitimate
issues. Telephone Engineering and Service Co.,
Inc. V. WCC, 104 SCRA 354 (1981).
(b) When used to raise technicalities. xEmilio
Cano Ent. v. CIR, 13 SCRA 291 (1965).
7. Piercing Doctrine and Due Process Clause
(a) The need to bring a new case against the
officer. McConnel v. Court of Appeals, 1 SCRA 723
(1961).
(b) When corporate officers are sued in their
official capacity when the corporation was not
made a party, the corporation is not denied due
process. Emilio Cano Enterprises v. Court of
Industrial Relations, 13 SCRA 291 (1965).
(c) Provided that evidential basis has been
adduced during trial to apply the piercing
doctrine. Jacinto v. Court of Appeals, 198 SCRA
211 (1991); xArcilla v. Court of Appeals, 215 SCRA
120 (1992).
V. CLASSIFICATIONS OF CORPORATIONS
1. In Relation to the State:
(a) Public corporations (Sec. 3, Act No. 1459)
Organized for the government of the
portion of the state (e.g., barangay, municipality,
city and province)
Majority shares by the Government does
not make an entity a public corporation.xNational
Coal Co., v. Collector of Internal Revenue, 46 Phil.
583 (1924).
(b) Quasi-public corporations xMarilao Water
Consumers Associates v. IAC, 201 SCRA 437
(1991)
Although Boy Scouts of the Philippines does not
receive any monetary or financial subsidy from
the Government, and that its funds and assets
are not considered government in nature and not
subject to audit by the COA, the fact that it
received a special charter from the government,
that its governing board are appointed by the
Government, and that its purpose are of public
character, for they pertain to the educational,
civic and social development of the youth which
constitute a very substantial and important part
of the nation, it is not a public corporation in the
same sense that municipal corporation or local
governments are public corporation since its does
not govern a portion of the state, but it also does
not have proprietary functions in the same sense
that the functions or activities of government-
owned or controlled corporations such as the
National Development Company or the National
Steel Corporation, is may still be considered as Those with special charters are government
such, or under the 1987 Administrative Code as corporations subject to its provisions, and its
an instrumentality of the Government. Therefore, employees are under the jurisdiction of the Civil
the employees are subject to the Civil Service Service Commission, and are compulsory
Law. xBoy Scouts of the Philippines v. NLRC, 196 members of the Government Service Insurance
SCRA 176 (1991). System. xCamparedondo v. NLRC, 312 SCRA 47
(1999).
(c) Private Corporation (Sec. 3, Act 1459)
Section 31 of the Corporation Code (Liability of
A government-owned or -controlled corporation
Directors and Officers) is applicable to
when organized under the Corporation Code is
corporations which have been organized by
still a private corporation. But being a
special charters since Sec. 4 of the Corporation
government-owned or -controlled corporation
Code renders the provisions of thereof applicable
makes it liable for laws and provisions applicable
in a supplementary manner to all corporations,
to the Government or its entities and subject to
including those with special or individual
the control of the Government. xCervantes v.
charters, such as cooperatives organized under
Auditor General, 91 Phil. 359 (1952).
Pres. Decree No. 269, so long as those provisions
A private corporation is created by operation of are not inconsistent with such charters. xBenguet
law under the Corporation while a government Electric Cooperative, Inc. v. NLRC, 209 SCRA 55
corporation is normally created by special law (1992).
referred to often as a charter. xBliss Dev. Corp.
2. As to Place of Incorporation:
Employees Union v. Calleja, 237 SCRA 271 (1994).
(a) Domestic Corporation
The doctrine that employees of government-
owned and -controlled corporations, whether (b) Foreign Corporation (Sec. 123)
created by special law or formed as subsidiaries
under the general corporation law are governed
by the Civil Service Law and not by the Labor 3. As to Purpose of Incorporation:
Code, has been supplanted by the 1987
Constitution. The present doctrine in determining (a) Municipal or Public corporation
whether a government-owned or -controlled
(b) Religious corporation (Secs. 109 and 116)
corporation is subject to the Civil Service Law is
the manner of its creation, such that government (c) Educational corporations (Secs. 106, 107 and
corporations created by special charter are 108; Sec. 25, B.P. Blg. 232)
subject to the Civil Service Law, while those
(d) Charitable, Scientific or Vocational
incorporated under the general corporation law
corporations
are governed by the Labor Code. xPNOC-Energy
Development Corp. v. NLRC, 201 SCRA 487 (1991); (e) Business corporation
xDavao City Water District v. Civil Service
Commission, 201 SCRA 593 (1991).

The test to determine whether a corporation is 4. As to Number of Members:

government owned or controlled, or private in (a) Aggregate Corporation
nature is simple. Is it created by its own charter
for the exercise of a public function, or by (b) Corporation Sole (Secs. 110 to 115; xRoman
incorporation under the general corporation law? Catholic Apostolic Administrator of Davao, Inc. v.
LRC and the Register of Deeds of Davao City, 102
Phil. 596 (1957).
xDirector of Land v. IAC, 146 SCRA 509 (1986),
which held that a corporation sole has no
nationality, overturned the previous doctrine
(xRepublic v. Villanueva, 114 SCRA 875 [1982]
and Republic v. Iglesia Ni Cristo, 127 SCRA 687
[1984]) that a corporation sole is disqualified to
acquire or hold alienable lands of the public
domain, because of the constitutional prohibition
qualifying only individuals to acquire land of the
public domain and the provision under the Public
Land Act which applied only to Filipino citizens or
natural persons. xRepublic v. Iglesia ni Cristo, 127
SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165
(1988).
5. As to Legal Status:
(a) De Jure Corporation
What Does a De Jure Corporation Actually
Signify?
This term literally refers to the legality of the
entity and indicates that all of the requirements
for properly forming a corporation in the state
were fully met. Once viewed in this manner, a
corporations officers are free to hold a board of
directors meeting, issue stock to shareholders
and begin conducting business.
(b) De Facto Corporation (Sec. 20)
The Meaning of the Term De Facto Corporation
This indicates that there is some degree of legal
recognition of a corporation, even though its
articles of incorporation may not have been filed
correctly. To be considered a de facto
corporation, the parties who tried to establish it
must have acted in good faith and must be
running their business as a (b)
corporation.
This common law doctrine was created to try and
offer individuals who thought they were running
a valid corporation a certain degree of limited
liability once they learn that their good faith
efforts to establish a valid corporation failed. Its
obviously important to do whatever is necessary
to correct the filing or paperwork defects,
according to information you can obtain from the
states Secretary of State Office.
(c) Corporation by Estoppel (Sec. 21)
Corporation by Estoppel What Does this Mean?
This is another common law doctrine designed to
try and offer some degree of protection to the
officers and shareholders of a corporation that
was not properly established and cannot be
considered either a de jure or de
facto corporation. Its not really one theory but
the sum total of various equitable principles
designed to preserve fairness.
The doctrine basically states that when someone
has been doing business with an entity in a
manner that indicates that it assumed the
business was a corporation, it is normally
prevented or estopped from later denying the
corporate status of the company.
6. As to Existence of Shares (Secs. 3 and 5)
(a) Stock Corporation
(b) Non-Stock Corporation
VI. CORPORATE CONTRACT LAW
1. Pre-Incorporation Contracts
(a) Who Are Promoters?
Promoter is a person who, acting alone or with
others, takes initiative in founding and organizing
the business or enterprise of the issuer and
receives consideration therefor.(Sec. 3.10,
Securities Regulation Code [R.A. 8799])
Nature of Pre-incorporation
Agreements (Secs. 60 and 61; Bayla v. Silang
Traffic Co., Inc., 73 Phil. 557 [1942])
(c) Theories on Liabilities for Promoters
Contracts (Cagayan Fishing Development Co., Inc.
v. Teodoro Sandiko, 65 Phil. 223 [1937]; Rizal
Light & Ice Co., Inc. v. Public Service Commission,
25 SCRA 285 [1968]; Caram, Jr. v. CA, 151 SCRA
372 [1987]).
2. De Facto Corporation (Sec. 20)
(a) Elements for Existence of De Facto
Corporation:
(1) Valid law under which incorporated;
(2) Attempt in good faith to incorporate;
colorable compliance;
(3) Assumption of corporate powers; and
(4) Issuance of certificate of incorporation. Arnold
Hall v. Piccio, 86 Phil. 634 (1950).
3. Corporation by Estoppel Doctrine (Sec.
21; Salvatierra v. Garlitos, 103 Phil. 757
[1958];Albert v. University Publishing Co., 13
SCRA 84 [1965]; International Express Travel &
Tour Services, Inc. v. Court of Appeals, 343 SCRA
674 (2000); xAsia Banking Corporation v.
Standard Products, 46 Phil. 145 [1924]; xMadrigal
Shipping Co., Inc. v. Ogilvie, Supreme Court
Advanced Decision, 55 O.G. No. 35, p. 7331).
An individual should be held personally liable for
the unpaid obligations of the unincorporated
association in whose behalf he entered into such
transactions, under the principle that any person
acting or purporting to act on behalf of a
corporation which has no valid existence assumes
such privileges and becomes personally liable for
contract entered into or for other acts performed
as such agent. International Express Travel &
Tour Services, Inc. v. Court of Appeals, 343 SCRA
674 (2000).
(a) Nature of Doctrine
Corporation by estoppel doctrine is founded on
principles of equity and is designed to prevent
injustice and unfairness. It applies when persons
assume to form a corporation and exercise
corporate functions and enter into business
relations with third persons. Where there is no
third person involved and the conflict arises only
among those assuming the form of a corporation,
who therefore know that it has not been
registered, there is no corporation by
estoppel. Lozano v. De Los Santos, 274 SCRA 452
(1997)
A party cannot challenge the personality of the
plaintiff as a duly organized corporation after
having acknowledged same when entering into
the contract with the plaintiff as such corporation
for the transportation of its merchandise. (Ohta
Dev. Co. v. Steamship Pompey, 49 Phil. 117
[1926]); the same principle applied in Compania
Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but
that case pertained to a commercial partnership
which required registration in the registry under
the terms of the Code of Commerce.
(b) Two Levels: (i) With fraud and (ii) Without
fraud
When incorporating individuals represent
themselves to be officers of the corporation
never duly registered with SEC, and engages in
the name of purported corporation in illegal
recruitment, they are estopped from claiming
that they are not liable as corporate officers,
since Section 25 of Corporation Code provides
that all persons who assume to act as a
corporation knowing it to be without authority to
do so shall be liable as general partners for all the
debts, liabilities and damages incurred or arising
as a result thereof. People v. Garcia, 271 SCRA
621 (1997).
An individual cannot avoid his liabilities to the
public as an incorporator of a corporation whose
incorporation was not consummated, when he
held himself out as officer of the corporation and
received money from applicants who availed of
their services. Such individual is estopped from
claiming that they are not liable as corporate
officers for illegal recruitment under the
corporation by estoppel doctrine under Sec. 25 of
the Corporation Code which provides that all
persons who assume to act as a corporation
knowing it to be without authority to do so shall
be liable as general partners for all the debts,
liabilities and damages incurred or arising as a
result thereof. People v. Pineda, G.R. No. 117010,
18 April 1997.
4. Trust Fund Doctrine
(a) Commercial/Common Law Premise on Equity
vis-a-vis Debts
(b) Nature of Doctrine
Under the trust fund doctrine, the capital stock,
property and other assets of the corporation are
regarded as equity in trust for the payment of the
corporate creditors. Commissioner of Internal
Revenue v. Court of Appeals, 301 SCRA 152
(1999).
The requirement of unrestricted retained
earnings to cover the shares is based on the trust
fund doctrine which means that the capital stock,
property and other assets of a corporation are
regarded as equtiy in trust for the payment of
corporate creditors. The reason is that creditors
of a corporation are preferred over the
stockholders in the distribution of corporate
assets. There can be no distribution of assets
among the stockholders without first paying
corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is
null and void. Boman Environmental Dev. Corp. v.
CA, 167 SCRA 540 (1988).
The Trust Fund doctrine considers the
subscribed capital as a trust fund for the payment
of the debts of the corporation, to which the
creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the
subscribed capital stock may be turned over or
released to the stockholder (except in the
redemption of the redeemable shares) without
violating this principle. Thus dividends must never
impair the subscribed capital stock; subscription
commitments cannot be condoned or remitted;
nor can the corporation buy its own shares using
the subscribed capital as the consideration
therefore. NTC v. Court of Appeals, 311 SCRA
508, 514-515 (1999).
(c) Corporation Purchasing Own Shares (Secs. 8,
41, 43 and 122, last paragraph; Phil. Trust Co. v.
Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco,
52 Phil. 953 [1929])
VII. ARTICLES OF INCORPORATION
1. Nature of Charter The charter is in the
nature of a contract between the corporation and
the Government. Government of P.I. v. Manila
Railroad Co., 52 Phil. 699 (1929).
2. Procedure and Documentary
Requirements (Sec. 14 and 15)
(a) As to Number and Residency of
Incorporators (Sec. 10)
(b) Corporate Name (Secs. 18, 14(1) and 42; Red
Line Trans. v. Rural Transit, 60 Phil. 549 [1934]).
A corporation may change its name by the
amendment of its articles of incorporation, but
the same is not effective until approved by the
SEC. Philippine First Insurance Co. v. Hartigan, 34
SCRA 252 (1970)
A change in the corporate name does not make a
new corporation, and whether affected by special
act or under a general law, has no effect on the
identity of the corporation, or on its property,
rights, or liabilities. Republic Planters Bank v. CA,
216 SCRA 738 (1992).
Similarity in corporate names between two
corporations would cause confusion to the public
especially when the purposes stated in their
charter are also the same type of
business. Universal Mills Corp. v. Universal Textile
Mills Inc., 78 SCRA 62 [1977]).
A corporation has not right to intervene in a suit
using a name other than its registered name; if a
corporation legally and truly wants to intervene,
it should have used its corporate name as the law
requires and not another name which it had not
registered. Laureano Investment and
Development Corporation v. Court of Appeals,
272 SCRA 253 (1997).
There would be no denial of due process when a
corporation is sued and judgment is rendered
against it under its unregistered trade name,
holding that a corporation may be sued under the
name by which it makes itself known to its
workers. Pison-Arceo Agricultural Development
Corp. v. NLRC, 279 SCRA 312 (1997)
(c) Purpose Clause (Secs. 14(2) and 42; Uy
Siuliong v. Director of Commerce and Industry, 40
Phil. 541 [1919])
(d) Corporate Term (Sec. 11).
No extension can be effected once dissolution
stage has been reached. Alhambra Cigar v. SEC,
24 SCRA 269 (1968).
(e) Principal Place of Business
Place of residence of the corporation is the place
of its principal office. Clavecilla Radio System v.
Antillon, 19 SCRA 379 (1967)
The residence of its president is not the residence
of the corporation because a corporation has a
personality separate and distinct from that of its
officers and stockholders. Sy v. Tyson Enterprises,
Inc., 119 SCRA 367 (1982).
(f) Minimum Capitalization (Sec. 12)
Why is maximum capitalization required to be
indicated?
(g) Subscription and Paid-up Requirements (Sec.
13)
(h) Steps and Documents Required in SEC
3. Grounds for Disapproval (Sec. 17)
When the proposed articles presented show that
the object of incorporation is to organize a barrio
of a given municipality into a separate
corporation for the purpose of taking possession
and having control of all municipal property
within the barrio so incorporated and administer
it exclusively for the benefit of the residents, the
object is unlawful and the articles can be denied
registration. Asuncion v. De Yriarte, 28 Phil. 67
[1914]).
4. Amendments to Articles of
Incorporation (Sec. 16)
5. Commencement of Corporate Existence (Sec.
19)
VIII. BY-LAWS
1. Nature and Functions (Gokongwei v. SEC, 89
SCRA 337 [1979]; Pea v. CA, 193 SCRA 717
[1991])
As the rules and regulations or private laws
enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns
and its stockholders or members and directors
and officers with relation thereto and among
themselves in their relation to it, by-laws are
indispensable to corporations in this jurisdiction.
These may not be essential to corporate birth but
certainly, these are required by law for an orderly
governance and management of corporations.
Nonetheless, failure to file them within the
period required by law by no means tolls the
automatic dissolution of a corporation. Loyola
Grand Villas Homeowners (South) Association,
Inc. v. Court of Appeals, 276 SCRA 681 (1997).
(a) Common Law Limitations on By-Laws
(i) By-Laws Cannot Be Contrary to Law and
Articles of Incorporation
A by-law provision granting to a stockholder a
permanent representation in the Board of
Directors is contrary to the Corporation Code
requiring all members of the Board to be elected
by the stockholders or members. Even when the
members of the association may have formally
adopted the provision, their action would be of
no avail because no provision of the by-laws can
be adopted if it is contrary to law. Grace Christian
High School v. Court of Appeals, 281 SCRA 133 laws. Since by-laws operate merely as internal
(1997). rules among the stockholders, they cannot affect
or prejudice third persons who deal with the
Although the right to amend by-laws lies solely in
corporation, unless they have knowledge of the
the discretion of the employer, this being in the
same. PMI Colleges v. NLRC, 277 SCRA 462
exercise of management prerogative or business
(1997).
judgment, such right cannot impair the obligation
of existing contracts or rights or undermine the 2. Adoption Procedure (Sec. 46)
right to security of tenure of a regular employee.
Section 46 of the Corporation, which requires the
Otherwise, it would enable an employer to
filing of by-laws, does not expressly provide for
remove any employee from employment by the
the consequence of their non-filing within the
simple expediency of amending its by-laws and
period provided therein; however, Pres. Decree
providing the position shall cease to exist upon
902-A allows the SEC to suspend or revoke, after
occurrence of a specified event. Salafranca v.
proper notice and hearing, the franchise or
Philamlife (Pamplona) Village Homeowners
certificate of registration of corporations which
Association, Inc., 300 SCRA 469, 479 (1998).
fail to file their by-laws. Clearly, there can be
(ii) By-Laws Cannot Be Unreasonable or Be no automatic corporate dissolution simply
Contrary to Nature of By-laws. Government of because the incorporators failed to abide by the
the Philippine Islands v. El Hogar Filipino, 50 Phil. required filing of by-laws, and there is no outright
399 (1927). demise of corporate existence. Proper notice
and hearing are cardinal components of due
Authority granted to a corporation to regulate
process in any democratic institution, agency or
the transfer of its stock does not empower
society, which would require that the
corporation to restrict the right of a stockholder
incorporators must be given the chance to
to transfer his shares, but merely authorizes the
explain their neglect or omission and remedy the
adoption of regulations as to the formalities and
same. Loyola Grand Villas Homeowners (South)
procedure to be followed in effecting
Association, Inc. v. Court of Appeals, 276 SCRA
transfer. Thomson v. Court of Appeals, 298 SCRA
681 (1997).
280 (1998).
3. Contents (Sec. 47)
By-laws are intended merely for the protection of
the corporation, and prescribe regulation, not 4. Amendments (Sec. 48)
restrictions; they are always subject to the
Power to amend may be delegated to the
charter of the corporation. Rural Bank of Salinas,
board of directors
Inc. v. CA, 210 SCRA 510 (1992), quoting
from Thompson on Corporation Sec. 4137, cited
in xFleischer v. Nolasco, 47 Phil. 583.

(iii) By-Laws Cannot Discriminate

(b) Binding Effects of By-laws (China Banking

Corp. v. Court of Appeals, 270 SCRA 503 [1997]).

Neither can we concede that such contract

would be invalid just because the signatory
thereon was not the Chairman of the Board
which allegedly violated the corporations by-