Corporation Law Case Digests

I. HISTORICAL BACKGROUND
Castillo v Balinghasay, 440 SCRA 4423

II. CONCEPTS
PNB v Andrada Electric & Engineering Co., 381 SCRA 244
Construction & Dev. Corp. v Cuenca, 466 SCRA 714
Pascual & Santos, Inc. v Members of Tramo Neighborhood, etc., 422 SCRA 438

III. NATURE AND ATTRIBUTES OF A CORPORATION

Veterans Federation of the Philippines v Reyes, 483 SCRA 526
Feliciano v Commission on Audit, 419 SCRA 363
NDC v. Philippine Veterans Bank, 192 SCRA 257
Smith Bell & Co. v Natividad, 40 Phil, 136, 144
Stonehill v. Diokno, 20 SCRA 383
Bataan Shipyard v PCGG, 150 SCRA 181
ULEP v. The Legal Clinic, 223 SCRA 378
Alfafara v. Acebedo Optical Co., 381 SCRA
PNB v. Court of Appeals, 83 SCRA 237 (1978)
Doctrines:
A corporation is civilly liable in the same manner as natural persons for torts. That a principal is liable for
every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person.

Facts
Phil-Am General Insurance executed its bond with a certain Rita Tapnio as principal, in favor of itself, to
guarantee the payment of Tapnios account with said bank. In turn, to guarantee the payment of whatever
amount the bonding company would pay to the PNB, both Tapnio and her husband executed an indemnity
agreement, under the terms and conditions of which there was stipulations of 12% interests and 15%
attorneys fees.

Needless to say, Tapnio defaulted on her obligations. Even after having sent several reminders of her debt both
from the bank and Phil-Am, she did not pay. Frustrated, PNB demanded payment from Phil-Am, Phil-Am
paid, and Phil- Am then went after Tapnio, sending both oral and written demands.

Tapnio claims, however, that she did not consider herself to be indebted to the bank at all because she had an
agreement with one Tuazon whereby she had leased to the latter her unused export sugar quota consisting of
1000 piculs at the rate of P2.80 per picul, or for a total of P2800, which was already in excess of her
obligation. Apparently, she mortgaged this lease agreement to the bank. However, PNB has placed obstacles to
the consummation of the lease, most important of which is insisting on a P3.0 per picul rate, which would
have earned only an additional P200 for PNB. The delay caused by said obstacles forced Tuazon to ditch
Tapnio. Thus, Tapnio filed her third-party complaint (based on tort) against PNB to recover from the latter any
and all sums of money which may be adjudged against her and in favor of Phil- Am plus moral damages,
attorneys fees and costs.

There is no question that Tapnios failure to utilize her sugar quota was due to the disapproval of the lease by
the PNB.

Issue
1. W/N PNB is liable for the damage caused to Tapnio.

2. COROLLARY: W/N a corporation can be liable for torts.

Held
1. YES. While PNB had the ultimate authority of approving or disapproving the proposed lease since the
quota was mortgaged to it, the law makes it imperative that every person must in the exercise of his rights
and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith. In other words, PNB should have exercised reasonable case. In this case, PNB failed to do so.
Certainly, it knew that the agricultural year was about to expire, that by its disapproval of the lease Tapnio
would be unable to utilize the sugar quota in question. In failing to observe the reasonable degree of care and
vigilance which the surrounding circumstances reasonably impose, PNB is consequently liable for the
damages caused on Tapnio.

2. YES. A corporation is civilly liable in the same manner as natural persons for torts, because generally
speaking, the rules governing the liability of a principal for a tort committed by an agent are the same whether
the principal be a natural person or a corporation, and whether the agent be a natural or artificial person. A
principal is liable for every tort which he expressly directs or authorizes, and this is just as true of a
corporation as of a natural person. A corporation is liable, therefore, whenever a tortious act is committed by
an officer or agent under express direction or authority from the stockholders or members acting as a body, or,
generally, from the directors as the governing body.

West Coast Life Ins. Co. v. Hurd, 27 Phil 401

Doctrines:
Corporations, as such, cannot commit a crime in which malicious intent or purpose is required. Criminal
actions, in these cases, are limited to the officials of such corporation.

Facts:
West Coast Life Insurance is a foreign life-insurance corporation duly organized in California and doing
business regularly and legally in the Philippines. In December 1912, an information was filed against the
corporation along with the general manager and the treasurer charging them of the crime of libel. The
information alleged that West Coast Life and the two others feloniously confederated to print and distribute
circulars to policy holders of Insular Life Insurance Company, stating that the rumor about it is true regarding
it being in a bad shape and its capital having been severely depleted. The CFI Judge, acting on this, issued a
summons (order to appear before the court) directed to the corporation and the other accused.

The corporation countered, saying that Court of First Instance has no power or authority to proceed against a
corporation, as such, criminally, to bring it into court for the purpose of making it amenable to the criminal
laws.

Issue
W/N a corporation can also be criminally charged.
Held
NO. First, the provisions of the General Orders (aka the 1900s Rules of Court), especially those which relate
to the defendants name, arraignment and counsel, and to demurrers and pleas, indicate clearly that the
legislature had no intention or expectation that corporations would be included among those who would fall
within the provisions thereof.
Second, the only process that a court can issue under the procedural laws is an order of arrest. As a necessary
consequence, the process issued in this case, a summons, is without express authorization of statute.
Third and most importantly, corporations cannot have malicious intent, an essential element in felonies. Under
the Spanish criminal law and procedure, a corporation could not have been proceeded against criminally; it
could not have committed a crime in which a willful purpose or a malicious intent was required. Criminal
actions are restricted or limited to the officials of such corporations and must never be directed against the
corporation itself.

Note:
There are cases in which corporations have been proceeded against criminally by indictment and have been
punished by the courts. However, in these cases, a statute, by express words or by necessary intendment,
included corporations within the persons who could offend against the criminal laws; and the legislature, at
the same time established a procedure applicable to corporations. In this case, the general criminal laws apply,
and nowhere in the laws is it mentioned that corporations can commit libel.

People v. Tan Boon Kong, 54 Phil. 607

Doctrines:
The corporation can act only through its officers and agents where the business itself involves a violation
law, the correct rule is that all who participate in it are criminally liable.

Facts:
During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the
purchase and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue
taxes upon is sales. However, he only declared P2.3 million in sales but in actuality the sales amounted to P2.5
million, therefore failing to declare for the purpose of taxation about P200,000, not having paid the
government P2,000 in taxes. Upon filing by the defendant of a demurrer, the lower court judge sustained said
motion on the ground that the offense charged must be regarded as committed by the corporation and not its
officials.

Issues:
1. W/N the defendant (Kong) as manager may be held criminally liable

Held/Ratio:
1. YES. Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because
it is contrary to a great weight of authority. The court pointed out that, a corporation can act only through its
officers and agents where the business itself involves a violation law, the correct rule is that all who participate
in it are criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of
taxation of the total amount of sales for year 1924. As such, the filing of false returns constitutes a violation of
law. Him being the author of the illegal act must be held liable.

Sia v. CA, 121 SCRA 655

Doctrine:
A corporate officer can be held personally liable for a crime committed in behalf of a corporation only if the
corporation was directly required by law to do the act in a given manner and the same law makes the person
who failed to act in such manner liable.

Facts:
Jose Sia was the the President and General Manager of the Metal Manufacturing Co. engaging in the
production of steel office equipment. In 1963, in the need for raw materials to be imported for the company,
he transacted under a trust receipt agreement with Continental Bank for purchase of steel sheets from Japan
where such materials shall be consigned to the same bank. The bank alleged that Sia failed to fulfill his
obligation of returning the sheets or accounting for the proceeds, if sold, which Sia willfully and unlawfully
misappropriated to his own personal benefit, to the damage of Continental Bank. The bank sues for Sia for
estafa.

Issue
W/N Sia, having only acted for and in behalf of the company as President, may be liable for estafa.

Held
NO. The Solicitor General pushes for the applicability of the Tan Boon Kong Doctrine, but the SC disagreed
for the following reasons:

1. A corporate officer can be held personally liable for a crime committed in behalf of a
corporation only if the corporation was directly required by law to do the act in a given
manner and the same law makes the person who failed to act in such manner liable. In all
criminal prosecutions, the existence of criminal liability for which the accused is made
answerable must be clear and certain. The act was committed prior to PD 115 (Trust
Receipts Transactions Regulation) which penalizes responsible officers. Only the RPC was
in force at that time, where we can see trust under estafa is not the same as the trust in
the commercial sense of trust receipts. Therefore, upholding the principle that all cases of
doubts must be resolved in favor of the accused, Sia must not be made liable.
2. The trust receipt agreement gives rise only to civil liability. The parties to such agreements
consciously entered into a purely commercial transaction where no criminal prosecution
which could give rise to imprisonment for non-payment of a debt.a debt that should be
exclusively paid by the Metal Company since Sia never intended to be equally liable as a
corporation.
Teehankees Concurring Opinon:
The acts committed by Sia were all corporate acts. There is no evidence that the corporate acts were
unauthorized, or that he had personally committed fraud or deceit, or that he personally benefited.

Ching v. Sec. of Justice, 481 SCRA 602

Doctrines
If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by imprisonment. However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.

Facts
Ching was the Senior VP of Philippine Blooming Mills Inc (PBMI). In Sept-Oct 1980, PBMI through Ching,
applied with RCBC for the issuance of commercial letters of credit to finance its importation of assorted
goods. RCBC approved the application, and irrevocable letters of credit were issued in favor of Ching.
Afterwards, the goods were purchased and delivered in trust to PBMI.

Ching signed 13 trust receipts as surety, acknowledging delivery of the goods. Under these receipts, Ching
agreed to hold the goods in trust for RCBC, with authority to sell but not by way of conditional sale, pledge or
otherwise. In case the goods were sold, hell turn over the proceeds as soon as he receives it and apply against
the relative acceptances and payment of other debts to RCBC. In case the goods remain unsold within the
given period, they will be returned to RCBC without need for demand. All goods whether manufactured
products or its proceeds whether in money, receivables or accounts will are RCBCs property.

Trust receipts matured but Ching failed to return the goods nor return their value amounting to
P6,940,280.66 despite demands. This prompted RCBC to file a criminal complaint for estafa in the Office
of the City Prosecutor of Manila. The Prosecutor found probable cause for estafa in relation to the Trust
Receipts Law. 13 informations were filed against Ching at the RTC of Manila. He then appealed to the DOJ
but was dismissed. Moved for reconsideration and the DOJ eventually reversed its previous decision. City
Prosecutor was ordered to withdraw the 13 informations. RCBC filed an MR which was denied.

In Feb 1995, the bank re-filed the criminal complaint for estafa with the City Prosecutor of Manila
again. Dec 1995, Prosecutor found no probable cause as petitioners liability was only civil, not criminal,
having signed the trust receipts as surety.

RCBC appealed the resolution to via petition for review. July 1999, DOJ reversed the resolution of the
City Prosecutor. It said that execution of said receipts is enough to indict Ching as the official
responsible for violating the Trust Receipts Law.

Issue
1. W/N the CA erred in ruling that no grave abuse of discretion amounting to lack or excess of jurisdiction
was committed by Secretary of Justice in deciding the resolutions.

2. W/N Ching should be held criminally liable

Held
1. NO, the CA is correct. Petitioner failed to establish that the Secretary of Justice committed grave abuse of
discretion in issuing the assailed resolutions. Indeed, Secretary acted in accord with law and the evidence.

2. YES. There is no dispute that Ching executed the 13 trust receipts and this proves that he is the official
responsible for the offense. Since a corporation cannot be proceeded against criminally because it cannot
commit crime in which personal violence or malicious intent is required, criminal action is limited to the
corporate agents guilty of an act amounting to a crime and never against a corporation itself.

Chings being Senior VP of the PBMI does not exculpate him from any liability. He cannot, thus, hide behind
the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate
officer cannot protect himself behind a corporation where he is the actual, present and efficient actor

Mambulao Lumber Co v. PNB, 22 SCRA 359

NPC V. Philipp Brothers Oceanic, Inc., 369 SCRA 629
ABC CBN Broadcasting Network v. CA, 301 SCRA 589
RCAA of Davao, Inc v. LRC & RD of Davao, 102 Phil. 596;
JG Summit Holdings v. CA, 450 SCRA 169
People v. Quasha, 93 Phil 333
Doctrines:
The Constitution does not prohibit the mere formation of public utility corporation without the required
formation of Filipino capital. What it does prohibit is the granting of a franchise or other form of authorization
for the operation of a public utility to a corporation already in existence but without the requisite proportion of
Filipino capital.

Primary franchise refers to the franchise which invests a body of men with corporate existence while
secondary franchise is the privilege to operate as a public utility after the corporation has already come into
being.

Facts:
William Quasha, a member of the Philippine Bar was charged in the CFI of Manila with falsification of a
public and commercial document. Having been entrusted with the preparation and registration of the articles
of incorporation of Pacific Airways Corporation, a domestic corporation engaged in business as a common
carrier, he caused it to appear that one Arsenio Baylon, a Filipino has subscribed to and was the owner of
60.005% of the subscribed capital stock. However, in truth, the real owner of said portion were American
citizens whose name did not appear in the articles of incorporation. The purpose of such was to circumvent the
constitutional mandate that no corporation shall be authorized to operate as a public utility in the Philippines
unless 60% of its capital stock is owned by Filipinos. CFI found him guilty. He appeals.

Issue:
W/N Quasha is guilty of falsification of public and commercial document.

Held/Ratio:
It is admitted that the money paid on Baylons subscription did not belong to him but to the American
subscribers to the corporate stock. Baylon explained that in the process of the organization of the corporation,
he was made a trustee for the American incorporators who had a difficulty in deciding what their respective
share holdings would be.

The falsification imputed in the accused consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee (or dummy) of his American co-incorporators, thus giving the impression that he
was the owner of the shares subscribed to by him which amounted to 60.005% of the subscribed capital stock.
Contrary to the lower courts assumption, the Constitution does not prohibit the mere formation of public
utility corporation without the required formation of Filipino capital. What it does prohibit is the
granting of a franchise or other form of authorization for the operation of a public utility to a
corporation already in existence but without the requisite proportion of Filipino capital.
For the mere formation of the corporation, Quasha was under no obligation to disclose the fact that he was
merely a trustee of his American co-incorporators. The Corporation Code likewise does not require such
revelation. In the absence of such obligation and of the alleged wrongful intent, Quasha cannot be legally
convicted of the crime with which he is charged.

Moreover, from the context of the law, the provision qualifies the terms, franchise, certificate, or any
other form of authorization with the phrase for the operation of a public utility. Therefore, it is clear that
the franchise meant is not the primary franchise that invests a body of men with corporate existence
but rather it pertains to the secondary franchise or the privilege to operate as a public utility after the
corporation has already come into being.

For a corporation to be entitled to operate a public utility, it is not necessary that it be organized with 60% of
its capital owned by Filipinos from the start. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer of shares to Filipino citizen. The converse
may also happen. The moment for determining whether the corporation is entitled to operate as a public utility
is when it applies for franchise, certificate, or any other form of authorization for that purpose. At that time,
the corporation must show that it has complied with the necessary capital requirements of Filipino capital.

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and McARTHUR MINING, INC. vs. REDMONT CONSOLIDATED MINES CORP)
Doctrine
The "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. However, when in the mind of the
Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it may apply the "grandfather rule."

Facts
Redmont took interest in mining and exploring certain areas of the province of Palawan. After inquiring with
DENR, it learned that the areas where it wanted to undertake exploration and mining activities were already
covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and
McArthur.

Redmont filed before the Panel of Arbitrators (POA) of the DENR 3 separate petitions for the denial of
petitioners applications for MPSA. Redmont alleged that at least 60% of the capital stock of McArthur,
Tesoro and Narra are owned and controlled by MBMI Resources, Inc., a 100% Canadian corporation. He also
argued that given that petitioners capital stocks were mostly owned by MBMI, they were likewise
disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.

In their answers, petitioners averred that they were:

- qualified persons under the Philippine Mining Act since MBMI own only 40% of the shares of each
petitioner, and that 60% is of the shares are still owned by Filipinos.

- that the best tool used in determining the nationality of a corporation is the "control test," embodied in
Sec. 3 of the Foreign Investments Act of 1991.
- that their nationality as applicants is immaterial because they also applied for Financial or Technical
Assistance Agreements (FTAA) which are granted to foreign-owned corporations
The Panel of Arbitrators (POA) disqualified petitioners for being considered as foreign corporations

Mined Adjudication Board (MAB) reversed decision of POA.

RTC and CA reversed decision of MAB.

Issue
WoN petitioners are foreign corporations

Ruling
There are two acknowledged tests in determining the nationality of a corporation: the control test and the
grandfather rule.CONTROL TEST (the liberal rule) - The first part of paragraph 7, DOJ Opinion No. 020,
stating shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality GRANDFATHER RULE (the stricter rule)
- the second part of the DOJ Opinion which provides, if the percentage of the Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall
be counted as Philippine nationality.

The court applied the grandfather rule because of the existence of doubt as to the nationality of petitioners
when it realized that petitioners had a common major investor, MBMI, a corporation composed of 100%
Canadians.

MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60% equity interest
of other majority shareholders of petitioners through joint venture agreements. The courts found that through a
web of corporate layering, it is clear that one common controlling investor in all mining corporations
involved is MBMI.

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails to
convince this Court. The corporations interested in circumventing our laws would clearly strive to have "60%
Filipino Ownership" at face value. It would be senseless for these applying corporations to state in their
respective articles of incorporation that they have less than 60% Filipino stockholders since the applications
will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the
application of the Constitution. It is apparent that it is the intention of the framers of the Constitution to apply
the grandfather rule in cases where corporate layering is present.

ON THE ISSUE OF PARTNERSHIP: The petitioners also challenged the ruling of CA that, McArthur,
Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI. They asserted that before this
particular partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than PhP 3,000. Being that there is no evidence of written agreement to form a partnership
between petitioners and MBMI, no partnership was created. (We all know this aint true. Partnership is first
and foremost a consensual contract)

With regard to the FTAA, it is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws.
IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF
CORPORATE FICTION
LBP v. CA, 364 SCRA 375
DOCTRINE: Though the veil of corporate fiction is granted by law, and can thus be pierced to hold
individuals liable, it cannot be pierced upon mere allegations. The burden is upon the party alleging fraud to
prove that the corporation was used to perpetuate such fraud or crime.

FACTS:
1. A credit arrangement was entered into for the benefit of the ECO Corporation, with the LBP. Total
amounting to about 26 million. These were taken from trust funds of the Phil. Virginia Tobacco
Administration. The funds were received by Onate.

2. ECO was unable to pay the loans when they became due. ECOs defense: financial crisis and capital flight
due to the Dewey Dee scandal.

3. ECO submits a Plan of Payment scheduling the dates and amounts that it can cover, as well as the setting
up of a financial company to cover their obligations. In the proposition, LBP would convert 9M into equity.
LBP rejects this plan. A revised plan of payment would be submitted, but this was denied too.

4. LBP files a collection case against ECO and Onate. The trial court ruled that it may collect from ECO, but
not from Onate. Hence, this appeal..

ISSUE:
Whether or not Onate may be impleaded as liable for the debts of ECO.

RULING
NO. The LBP alleges that: a) Onate is the majority stockholder of the corporation; b) The corporation is
actually named after him, (check out the initials); c) it was Onate who received the amounts on behalf of the
corporation; d) he was BOTH chairman AND treasurer of the ECO; e) There was never any showing that the
Board of Directors ever behaved like a corporation no meeting, no stockholders conference, no whatever.
Clearly, the ECO was set up as a kind of dummy for Onate to enter into loans.
Despite all these defenses, the Court ruled that Onate could not be impleaded, and the veil of corporate fiction
could not be pierced. Though this separate personality is granted by law upon the corporation, it cannot be
used to perpetuate fraud or malice, or protect people from committing crimes through the corporation.

However, the burden is upon the LBP to show that there was indeed an intent to defraud the same. In the
absence of bad faith, a stockholder cannot be held liable for the debts of a corporation. Material here is the
fact that ECO submitted a plan of payment, and a reverse plan of payment. Its also revealed that Onate
himself sought to pay for a portion of the debt, and the court said that these facts put together seem to
constitute good faith on the part of Onate in trying to save a company he has invested in.

Disposition: Petition is denied.

McLeod v. NLRC, 512 SCRA 222

Facts:
This is a petition for review to set aside the Decision and the Resolution of the Court of Appeals affirming the
decision of the National Labor Relations Commission.

John F. McLeod filed a complaint for retirement benefits and other benefits plus moral and exemplary
damages, attorneys fees plus interest against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile
Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu.

McLeod was first employed by Universal Textiles, Inc. (UTEX). He was then absorbed as Peggy Mills, Inc.,
(PMI) a corporation formed by Patricio Lim, UTEX[s President with Fylsin as controlling interest. PMI was
subsequently sold to Far Eastern Textile Mill (FETM) by way of dation in payment and PMI was subsequently
renamed as Sta. Rosa Textile (SRTI).

Respondents alleged that except for Peggy Mills, the other respondents are not proper persons in interest due
to the lack of employer-employee relationship between them and complainant. They further alleged that
Peggy Mills assets were acquired by Sta. Rosa Textile Corporation and that Filsyn and Far Eastern Textiles
are separate legal entities and have no employer relationship with complainant , hence, the complainant has no
cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu;

The respondent also argued that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills,
Inc. and that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile, Inc. (SRTI)and not as
private individual;

Mcleod, in his reply, alleged that all respondents being one and the same entities are solidarily liable for all
salaries and benefits and complainant is entitled to; that all respondents have the same address at 12/F B.A.
Lepanto Building, Makati City; that their counsel holds office in the same address; that all respondents have
the same offices and key personnel such as Patricio Lim and Eric Hu;

Mcleod further argued that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate
fraud and confuse legitimate issues

The Labor Arbiter rendered his decision holding all respondents as jointly and solidarily liable for
complainants money claims.

On appeal, the CA modified the decision of the labor arbiter ordering respondent PMI to pay complainant his
retirement pay.
The Court of Appeals rejected McLeods theory that all respondent corporations are the same corporate entity
which should be held solidarily liable for the payment of his monetary claims.

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same address; (2) all
were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano holds office at respondent
corporations address; and (4) all respondent corporations have common officers and key personnel, would not
justify the application of the doctrine of piercing the veil of corporate fiction.The Court of Appeals held that
there should be clear and convincing evidence that SRTI, FETMI, and Filsyn were being used as alter ego,
adjunct or business conduit for the sole benefit of Peggy Mills, Inc. (PMI), otherwise, said corporations should
be treated as distinct and separate from each other.
The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment with Lease, it
was clear that SRTI did not assume the liabilities PMI incurred before the execution of the contract. The Court
of Appeals held that McLeod failed to substantiate his claim that all respondent corporations should be treated
as one corporate entity. The Court of Appeals thus upheld the NLRCs finding that no employer-employee
relationship existed between McLeod and respondent corporations except PMI.

The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMIs financial obligation
to McLeod. The Court of Appeals stated that, on several occasions, despite his approval, Patricio refused and
ignored to pay McLeods retirement benefits. The Court of Appeals stated that the delay lasted for one year
prompting McLeod to initiate legal action. The Court of Appeals stated that although PMI offered to pay
McLeod his retirement benefits, this offer for P300,000 was still below the "floor limits" provided by law. The
Court of Appeals held that an employee could demand payment of retirement benefits as a matter of right.

The Court of Appeals stated that considering that PMI was no longer in operation, its "officer should be held
liable for acting on behalf of the corporation."

Issues:
WON the respondents may be held jointly and subsidiarily liable to Mcleod

Ruling:
NO. Only PMI is liable.

What took place between PMI and SRTI was dation in payment with lease. Here, PMI transferred its assets to
SRTI to settle its obligation to SRTI in the sum of P210,000,000. We are not convinced that PMI fraudulently
transferred these assets to escape its liability for any of its debts. PMI had already paid its employees, except
McLeod, their money claims.

There was also no merger or consolidation of PMI and SRTI.

Consolidation is the union of two or more existing corporations to form a new corporation called the
consolidated corporation. It is a combination by agreement between two or more corporations by which their
rights, franchises, and property are united and become those of a single, new corporation, composed generally,
although not necessarily, of the stockholders of the original corporations. Merger, on the other hand, is a
union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation
survives and continues the combined business.

The parties to a merger or consolidation are called constituent corporations. In consolidation, all the
constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except
the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the assets of the
dissolved corporations, and the surviving or consolidated corporation acquires all their properties, rights and
franchises and their stockholders usually become its stockholders.

The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations,
regardless of whether the creditors have consented or not to such merger or consolidation.

In the present case, there is no showing that the subject dation in payment involved any corporate merger or
consolidation. Neither is there any showing of those indicative factors that SRTI is a mere instrumentality of
PMI.

Moreover, SRTI did not expressly or impliedly agree to assume any of PMIs debts. Pertinent portions of the
subject Deed of Dation in Payment with Lease provide, thus:

McLeod could have presented evidence to support his allegation of employer-employee relationship between
him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or employment contracts,
payrolls, organization charts, SSS registration, personnel list, as well as testimony of co-employees, may serve
as evidence of employee status.33
It is a basic rule in evidence that parties must prove their affirmative allegations. While technical rules are not
strictly followed in the NLRC, this does not mean that the rules on proving allegations are entirely ignored.
Bare allegations are not enough. They must be supported by substantial evidence at the very least.

However, McLeod claims that "for purposes of determining employer liability, all private respondents are one
and the same employer" because: (1) they have the same address; (2) they are all engaged in the same
business; and (3) they have interlocking directors and officers.

A corporation is an artificial being invested by law with a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. While a corporation may exist
for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the
doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used
to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a corporation is the mere alter ego or business conduit of a person, or
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.

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly
and convincingly. It cannot be presumed. Here, we do not find any of the evils sought to be prevented by the
doctrine of piercing the corporate veil. Respondent corporations may be engaged in the same business as that
of PMI, but this fact alone is not enough reason to pierce the veil of corporate fiction.

Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas,
Makati City, can be explained by the two companies stipulation in their Deed of Dation in Payment with
Lease that "simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets
under terms and conditions stated hereunder."44

As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg., Paseo de
Roxas, Makati City, while FETMI held office at 18F, Tun Nan Commercial Building, 333 Tun Hwa South
Road, Sec. 2, Taipei, Taiwan, R.O.C. Hence, they did not have the same address as that of PMI.

In light of the foregoing, and there being no proof of employer-employee relationship between McLeod and
respondent corporations and Eric Hu, McLeod cause of action is only against his former employer, PMI.

On Patricios personal liability, it is settled that in the absence of malice, bad faith, or specific provision of
law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.

To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those acting for
and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by the
corporation, acting through its directors, officers, and employees, are its sole liabilities.

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently
unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs,
or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons;
(2) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not
forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally
and solidarily liable with the corporation; or (4) they are made by specific provision of law personally
answerable for their corporate action.

Considering that McLeod failed to prove any of the foregoing exceptions in the present case, McLeod cannot
hold Patricio solidarily liable with PMI.

Francisco Motors vs CA, 309 SCRA 72

Doctrine:
In the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act,
the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the
personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us
that the doctrine has been turned upside down because of its erroneous invocation.

Facts:
Francisco Motors Corporation (FMC) filed a complaint against Spouses Gregorio and Librada Manuel to
recover P3,412.06 representing the balance of the jeep body purchased, an additional sum of P20,454.80
representing the unpaid balance on the cost of repair of the vehicle; and P6,000 for cost of suit and attorneys
fees. In their answer, Spouses Manuel interposed a counterclaim for unpaid legal services by Gregorio
Manuel in the amount of P50,000 which was not paid by the incorporators, directors and officers of the
FMC. Manuel alleges that he represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, after the termination of the proceedings, his services
were not paid. Said family members, he said, were also incorporators, directors and officers of
petitioner.

FMC questions the propriety of its being made party to the case because it was not the real party in interest
but the individual members of the Francisco family concerned with the intestate case.
The RTC ruled in favor of Manuel and on appeal, the CA applied the doctrine of piercing the veil of
corporate fiction and held that the separate personality of the corporation may be disregarded, or the veil
of corporate fiction pierced, in cases where it is used as a cloak or cover for illegality, or to work an injustice,
or where necessary to achieve equity or when necessary for the protection of creditors. Equity and justice
demands FMCs veil of corporate identity be pierced and Gregorio Manuel be compensated for legal services
rendered to the heirs, who are directors of the plaintiff-appellant corporation.

Issue:
1. W/N the doctrine of piercing the veil of corporate fiction was properly applied.
Held/Ratio:
1. No. - Given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no
relevant application here. The rationale behind piercing a corporations identity in a given case is to remove
the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities.
However, in the case at bar, instead of holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered
to answer for the personal liability of certain individual directors, officers and incorporators concerned.
Hence, it appears that the doctrine has been turned upside down because of its erroneous invocation. Note
that according to private respondent Gregorio Manuel his services were solicited as counsel for members of
the Francisco family to represent them in the intestate proceedings over Benita Trinidads estate. These estate
proceedings did not involve any business of FMC. His move to recover unpaid legal fees through a
counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of
a jeep body could only result from an obvious misapprehension that FMCs corporate assets could be used to
answer for the liabilities of its individual directors, officers, and incorporators. Such result if permitted could
easily prejudice the corporation, its own creditors, and even other stockholders; hence, clearly inequitous to
petitioner. Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their personal
capacity. In conclusion, FMC cannot be held responsible for the personal obligations of its incorporators, but
the decision is without prejudice to the filing of the proper suit against concerned members of the Francisco
family in their personal capacity.

General Credit Corp. vs. Alsons 513 SCRA 225

Facts
General Credit Corporation (GCC), a finance and investment company, then known as
Commercial Credit Corporation (CCC), established CCC franchise companies in different urban centers of
the country. It applied for and was able to secure license from the then Central Bank (CB) of the
Philippines and the Securities and Exchange Commission (SEC) to engage also in quasi-banking activities.
Respondent CCC Equity Corporation (EQUITY) was organized by GCC for the purpose of taking
over the operations and management of the various franchise companies. Respondent Alsons Development
and Investment Corporation (ALSONS) and the Alcantara family, each owned, just like GCC, shares in the
aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.
In 1980, ALSONS and the Alcantara family, for a consideration of Two Million (P2,000,000.00)
Pesos, sold their shareholdings, a total of 101,953 shares, more or less, in the CCC franchise companies to
EQUITY. EQUITY issued ALSONS et al., a "bearer" promissory note for P2,000,000.00 with provisions
for damages and litigation costs in case of default.
Subsequently, the Alcantara family assigned its rights and interests over the bearer note to
ALSONS which became the holder thereof. But before the execution of the assignment deal, letters of
demand for interest payment were already sent to EQUITY, through its President, Wilfredo Labayen, who
pleaded inability to pay the stipulated interest, EQUITY no longer then having assets or property to settle
its obligation nor being extended financial support by GCC.
ALSONS, having failed to collect on the bearer note filed a complaint for a sum of money against
EQUITY and GCC. GCC is being impleaded as party-defendant for any judgment ALSONS might secure
against EQUITY and, under the doctrine of piercing the veil of corporate fiction, against GCC, EQUITY
having been organized as a tool and mere conduit of GCC.
 EQUITY stated by way of special and affirmative defenses in its cross-claim that it (EQUITY)
acted merely as intermediary or bridge for loan transactions and other dealings of GCC to its franchises and
the investing public; and is solely dependent upon GCC for its funding requirements, to settle, among
others, equity purchases made by investors on the franchises; hence, GCC is solely and directly liable to
ALSONS, the former (GCC) having failed to provide EQUITY the necessary funds to meet its obligations
to ALSONS.
GCC filed its answer to Cross-claim, stressing that it is a distinct and separate entity from
EQUITY and alleging, in essence that the business relationships with each other were always at arms
length.
Eventually, the trial court, on its finding that EQUITY was but an instrumentality or adjunct of
GCC and considering the legal consequences and implications of such relationship, came out with its
decision in favor of Alsons.
GCC went on appeal to the CA where it alleged among others that the trial court erred in holding
that there is a "Parent-Subsidiary" corporate relationship between EQUITY and GCC; in not holding that
EQUITY and GCC are distinct and separate corporate entities; and in applying the doctrine of "Piercing the
Veil of Corporate Fiction" in the case at bar.
CA affirmed the Trial Courts decision.

Issue
W/N there is absolutely no basis for piercing GCCs veil of corporate identity.

Ruling
No. The CA found valid grounds to pierce the corporate veil of GCC.

When the CA spoke of a justifying factor, the reference was to what the trial court said in its
decision, namely: the existence of "certain circumstances, taken together, gave rise to the ineluctable
conclusion that [respondent] EQUITY is but an instrumentality or adjunct of [petitioner] GCC." The SC
agrees with the CAs disposition on the application of the piercing doctrine.
The trial court enumerated no less than 20 documented circumstances and transactions, which,
taken as a package, indeed strongly supported the conclusion that respondent EQUITY was but an adjunct,
an instrumentality or business conduit of petitioner GCC. This relation, in turn, provides a justifying ground
to pierce GCCs corporate existence as to ALSONS claim in question.
A corporation is an artificial being vested by law with a personality distinct and separate from
those of the persons composing it as well as from that of any other entity to which it may be related. The first
consequence of the doctrine of legal entity of the separate personality of the corporation is that a corporation
may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it
may be connected or vice versa.
The notion of separate personality, however, may be disregarded under the doctrine, "piercing the
veil of corporate fiction", as in fact the court will often look at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical
personality of the corporation unifying the group. Another formulation of this doctrine is that when two (2)
business enterprises are owned, conducted and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are
distinct entities and treat them as identical or one and the same.
Whether the separate personality of the corporation should be pierced hinges on obtaining facts,
 appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with caution,
albeit the Court will not hesitate to disregard the corporate veil when it is misused or when necessary in the
interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law
covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These
are: 1) defeat of public convenience, as when the corporate fiction is used as vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime, or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or 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.

Umali vs CA, 189 SCRA 1990

Doctrines:
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate
fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations
personally liable thereof.

Facts:
This is a petition for review for the decision made by the CA reversing the decision of the trial courts, who
originally held the foreclosure of the petitioners property null and void.

The original complaint for annulment of title filed in the court a quo by herein petitioners included as party
defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the
Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera).

Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are
the owners of a parcel of land located in Lucena City which was given as security for a loan from the
Development Bank of the Philippines. For their failure to pay the amortization, foreclosure of the said
property was about to be initiated. This problem was made known to Santiago Rivera, who proposed to them
the conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged property to raise the
necessary fund. The Idea was accepted by the Castillo family and to carry out the project, a Memorandum of
Agreement was executed. Rivera obliged himself to pay the Castillos P70,000 after the execution of the
contract and P400,000 after the property had been converted into a subdivision.

Rivera armed with the agreement approached Cervantes, president of Bormaheco and bought a Caterpillar
Tractor with P50,000 down payment and the balance of P180,000 payable in installments. Slobec through
Rivera executed in favor of Bormaheco a chattel mortgage over the said equipment as security for the unpaid
balance. As further security, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP
(Insurance Corporation of the Phil.) as surety and Slobec as principal. The aforesaid surety bond was in turn
secured by an Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record) executed
by Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla
Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance
Corporation of the Philippines (ICP) as mortgagee. In giving the bond, ICP required that the Castillos
mortgage to them the properties in question.
There was a violation of the terms and conditions of the Counter-Guaranty Agreement, hence the properties of
the Castillos were foreclosed by ICP As the highest bidder with a bid of P285,212.00, a Certificate of Sale
was issued by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels
of land were issued by the Register of Deeds of Lucena City in favor of ICP

Subsequently, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM
Parts) the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles
over the lots in dispute so that said parcels of land. Thereafter, PM Parts, through its President, Mr. Modesto
Cervantes, sent a letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her
and her children to vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her
refusal to comply with his demands.

The heirs of the late Felipe Castillo filed an action for annulment of title before the CFI of Quezon contending
that all the aforementioned transactions are void for being entered into in fraud and without the consent and
approval of the CFI of Quezon before whom the administration proceedings was proceeding.

The CFI ruled in favor of the Heirs but on appeal to the CA, the latter reversed the decision of the trial court
and rendered the judgment subject of this petition.

Issues:
1. W/N the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and
Development Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales
Agreement, Chattel Mortgage and the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage are
all fraudulent and simulated, and should be declared null and void.

2. CORP RELATED: W/N the doctrine of piercing the veil of corporate entity should be applied against
the respondent-Corporations.

3. W/N there was a valid foreclosure of the mortgaged properties by ICP

4. W/N PM Parts is a buyer in good faith and therefore acquired valid title over the subject properties.

Held/Ratio:
1. NO, the evidence of record, overall does not convince us the validity of petitioners contention that the
contracts entered into by the parties are either absolutely simulated or downright fraudulent.

The SC stated that this was a question of fact. Respondent CA made several findings to the effect that the
questioned documents are valid and binding upon the parties, that there was no fraud employed by private
respondents in the execution thereof, and that, contrary to petitioners allegation, the evidence on record
reveals that petitioners had every intention to be bound by their undertakings in the various transactions had
with private respondents

The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really
desired or intended to either produce legal effects or in any way alter the juridical situation of the parties. The
subsequent act of Rivera in receiving and making use of the tractor subject matter of the Sales Agreement and
Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco, concomitant with
the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the
conclusion that petitioners had every intention to be bound by these contracts.

To set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and
convincing. We are not persuaded that such quantum of proof exists in the case at bar.

2. NO, while we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither
are we inclined to apply the doctrine invoked by petitioners in granting the relief sought.

Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of
persons.

The doctrine applies in the following instances, when corporation fiction is used:

1. Defeat public convenience;

2. Justify wrong, protect fraud, or defend crime;
3. As a shield to confuse the legitimate issues;
4. Where a corporation is the mere alter ego or business conduit of a person;
5. 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.
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate
fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations
personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure
sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to
respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that
private respondents were purposely formed and operated, and thereafter transacted with petitioners,
with the sole intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification
for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely
used as a shield to defraud creditors and third persons of their rights.

3. NO, the foreclosure of ICP is invalid. The above argument was premised on the fact that there was (1) no
written notice was furnished by Bormaheco to ICP anent the failure of Slobec in paying its obligation with the
former, plus the fact that no receipt was presented to show the amount allegedly paid by ICP to Bormaheco;
and (b) at the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had already
expired. In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (12)
months from its effectivity date, whereas Slobecs installment payment was to end on July 23, 1972.
Therefore, while ICP guaranteed the payment by Slobec of the balance of P180,000.00, such guaranty was
valid only for and within twelve (12) months from the date of effectivity of the surety bond, or until January
22, 1972. The default of Slobec during this period cannot be a valid basis for the exercise of the right to
foreclose by ICP since its surety contract had already been terminated. Furthermore, the failure of Bormaheco
to notify ICP in writing about Slobecs supposed default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate mortgage executed by petitioners in its favor
since it never incurred any liability under the surety bond. It cannot claim exemption from the required written
notice since its case does not fall under any of the exceptions hereinbefore enumerated. Lastly, it has been
held that where the guarantor holds property of the principal as collateral surety for his personal indemnity, to
which he may resort only after payment by himself, until he has paid something as such guarantor neither he
nor the creditor can resort to such collaterals. There is no doubt that said Agreement of Counter-Guaranty is
issued for the personal indemnity of ICP. Considering that the fact of payment by ICP has never been
established, it follows, pursuant to the doctrine above adverted to, that ICP cannot foreclose on the subject
properties,

4. NO, PM Parts in not a buyer in good faith. Although the doctrine of piercing the veil of corporate fiction is
not applicable in this case, its inapplicability has no bearing on the good faith or bad faith of private
respondent PM Parts. It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and,
later, as President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the
aforesaid several transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de
Guzman, who is the Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts.
These facts were admitted without qualification in the stipulation of facts submitted by the parties before the
trial court. Hence, the defense of good faith may not be resorted to by private respondent PM Parts which is
charged with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners.

China Banking Corp. vs. Dyne-Semi Electronics Corp., 494 SCRA 493
Francisco vs. Mejia, 362 SCRA 738
Doctrines:
US v. Milwaukee Refrigerator and Umali v. CA were cited.

With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable
with the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in
behalf of the corporation, within the scope of his authority and in good faith. In such cases, the officers acts
are properly attributed to the corporation. However, if it is proven that the officer has used the corporate
fiction to defraud a third party, or that he has acted negligently, maliciously or in bad faith, then the corporate
veil shall be lifted and he shall be held personally liable for the particular corporate obligation involved.

Facts:
Andrea Gutierrez was the owner of a parcel of land in Caloocan. This property was subdivided into five lots,
four of which are the subject of this controversy. The four lots were sold to Cardale Financing and Realty
Corporation for a consideration of P800,000. Cardale made an initial payment of P171,000, the balance
payable within a period of 5 years with an interest of 9% per annum. To secure the balance of the purchase
price, Cardale mortgaged 3 of the 4 parcels of land sold to it by Gutierrez to Gutierrez herself (hence, the deed
executed was sale with mortgage).

Cardale failed to pay. Gutierrez filed a suit for rescission. Cardale was represented by its VP and Treasurer,
herein petitioner Adalia Francisco. During the pendency of the suit, Gutierrez died and was substituted by
herein respondent Rita Mejia as the administrator of Gutierrezs estate. The case dragged on for 14 years.

Meanwhile, real property taxes for the mortgaged properties were not paid. As a result, the government levied
upon them. They became subject of an auction sale. The highest bidder was Merryland Development
Corporation, whose President was also Adalia Francisco. Eventually, titles were consolidated to Merryland.

Mejia filed a complaint for damages against Francisco, Merryland, and the Register Deeds of Caloocan City.
The trial court ruled in favor of Francisco. It was said that no sufficient proof of fraud on the part of Francisco
was adduced. The Court of Appeals reversed the decision of the trial court.

Issues:
1. W/N it is proper to pierce the corporate veil and hold Francisco liable

Held/Ratio:
1. YES, it was evident that Francisco was in bad faith, not informing Gutierrezs estate of the tax
delinquencies. Apparently, Francisco made use of her involvement in Cardale and Merryland to secure an
advantage for the latter. Cardale as the mortgagor had the duty of paying the taxes for the properties. Evidence
showed that Francisco as Cardales Treasurer, intended to conceal the delinquency in the payment of taxes so
that the properties may be levied upon and be the subject of an auction where Merryland could bid, which was
exactly what happened.

Mendoza v. Banco Real Dev. Bank, 470 SCRA 86

Heirs of Durano, Sr. vs. Uy, 344 SCRA 238
Tan Boon Bee vs. Jarencio, 163 SCRA 205
Azcor Mftng. Inc. vs. NLRC, 303 SCRA 26

V. CLASSIFICATION OF CORPORATIONS
Sawadjaan v. CA, 459 SCRA 516
Pioneer Surety vs. CA, 175 SCRA 668
Doctrines:
1. Can a defective attempt to form a corporation result at least in a Partnership?

General Rule: Yes. 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.

Exception: (Pioneer) 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.

2. COCHINGYAN: Pioneer is an exception because the supposed partners were passive. They had no
participation in the venture except to contribute stocks. They did not represent themselves to the public to be
partners.

Facts:
[This is a consolidated case; one is an appeal by Pioneer from the decision of the CA dismissing their
complaint against Lim, Bormaheco, the Cervanteses and Maglana. The second is an appeal by Jacob Lim
from the CAs decision ordering him to reimburse the contributions of Bormaheco, the Cervanteses and
Maglana. The relevant issue is found in the second case.]

Jacob Lim owned Southern Air Lines (SAL), a single proprietorship. In 1965, Lim went to Tokyo, Japan to
purchase from Japan Domestic Airlines (JDA) two (2) aircrafts and a set of necessary spare parts worth
$109,000, payable in installments. Pioneer insurance engaged itself as surety on behalf of Lim and executed a
surety bond in favor of JDA. Respondents Bormaheco Inc., Modesto and Francisco Cervantes and
Constancio Maglana contributed to the purchase of the aircrafts and spare parts. The funds were supposed
to be contributions to a new corporation proposed by Lim to expand his airline business. Lim,
Bormaheco, the Cervanteses and Maglana also executed an indemnity agreement whereby they engaged to be
solidarily liable to Pioneer in case the latter is forced to pay JDA. Moreover, Lim executed a deed of chattel
mortgage on the aircrafts as security for Pioneers suretyship.

Not long after, Lim defaulted on paying his installments. Pioneer was forced to pay JDA the remaining
balance of the purchase price. Pioneer instituted a case against Lim, Bormaheco, the Cervanteses and
Maglana for extrajudicial foreclosure with an application for a writ of preliminary attachment over the
aircrafts. Maglana, Cervanteses and Bormaheco, by way of a counterclaim, alleged that they were not
privy to the chattel mortgage contract and sought damages as well as recovery of their contributions
from Lim. The trial court upheld Pioneers claim against Lim but dismissed the claim against Maglana, the
Cervanteses and Bormaheco and ordered Lim to reimburse them the value they contributed to the purchase of
the aircrafts.

The CA dismissed Pioneers claim altogether but upheld the right of Bormaheco, Maglana and the
Cervanteses to be reimbursed their contribution. Thus this appeal was made. Lim contends that for failure to
incorporate, at the very least, what existed between him, Bormaheco Inc., the Cervanteses and Maglana
was a partnership wherein all of them shall be liable for the losses of the venture.

Issue:
1. W/N a partnership existed between Lim, Bormaheco Inc., Maglana, and the Cervanteses.

Held/Ratio:
1. NO. As a general rule, 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. 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. One who takes no part except to subscribe for stock in a
proposed corporation, which is never legally formed, does not become a partner.

A partnership relation between certain stockholders and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of
debts illegally contracted by the latter.

In the case at bar, the SC held that Lim had no intent to form a corporation with Bormaheco, Maglana and the
Cervanteses. What Bormaheco, Maglana and the Cervanteses made were mere contributions to a proposed
corporation. They did not intend to become partners. They were merely stockholders. The chattel mortgage
entered into was an action of Lim in his personal capacity and not as a representative of the supposed
partnership. They cannot be held liable for the losses.

Side Notes:
st
1. Pioneers case (1 case) was dismissed because the Court found out that Pioneer had their suretyship
reinsured with another company who already paid them for their loss.

2. Ano ba yung reinsurance bakit parating lumalabas? Reinsurance = The insurance company, pina-insure
yung risks na pinasok nila sa isa pang insurance company.

Shipside, Inc. vs. CA, 352 SCRA 2001

Baluyot vs. Holganza, 325 SCRA 248

VI. CORPORATE CONTRACT LAW

Remo, Jr. v IAC, 172 SCRA 405
Doctrines:
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.
The corporate fiction or the notion of legal entity may be disregarded when it is used to defeat public
convenience, justify wrong, protect fraud, or defend crime in which instances the law will regard the
corporation as an association of persons, or in case of two corporations, will merge them into one.

The corporate fiction may also be disregarded when it is the mere alter ego or business conduit of a person.

Facts:
Akron Customs Brokerage Corporation purchased thirteen trucks from private respondent (E.B. MARCHA
TRANSPORT COMPANY, INC.) for P525,000.00. The agreement being that Akron is to make a down
payment in the amount of P50,000.00 and that the balance shall be paid within 60 days from the date of the
execution of the agreement. The parties also agreed that until said balance is fully paid, the down payment of
P50,000.00 shall accrue as rentals of the 13 trucks.

The obligation was further secured by a promissory note executed by Coprada, the President and Chairman of
Akron, in favor of the said company. The note states that the balance is to be paid from the proceeds of a loan
obtained from the DBP within 60 days. After the lapse of 90 days, private respondent tried to collect from
Coprada but the latter promised to pay only upon the release of the DBP loan. Private respondent sent
Coprada a letter of demand, to which he replied that he was applying for a loan from the DBP from the
proceeds of which payment of the obligation shall be made.

Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. Akron
also failed to pay the rentals as agreed upon in their previous agreement.

Private respondent then filed a compliant for the recovery of P525,000.00 or the return of the 13 trucks with
damages against Akron and its officers and directors (one of which is the petitioner) with the CFI. Only
petitioner answered the complaint denying any participation in the transaction and alleging that Akron has a
distinct corporate personality.

In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended its
articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the
liability of Akron to private respondent.

The CFI ruled in favor of the plaintiff and against the defendants.

A motion for new trial filed by petitioner was denied so he appealed to the IAC wherein in due course a
decision was rendered setting aside the said decision as far as petitioner is concerned. However, upon the
respondents motion for reconsideration, the IAC set aside its previous decision and affirmed the decision of
the trial court.

Issues:
1. W/N petitioner should be liable to private respondent.

Held
NO. There is no basis to pierce the corporate veil of Akron and hold petitioner personally liable for its
obligation to private respondent. It was Coprada who negotiated with said respondent for the purchase of 13
cargo trucks and signed a promissory note to guarantee the payment of the unpaid balance of the purchase
price out of the proceeds of a loan he supposedly sought from the DBP. Petitioner did not sign the said
promissory note so he cannot be personally bound thereby.

Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was a
forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same
and not petitioner.

As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron Transport
International, Inc., petitioner alleges that the change of corporate name was in order to include trucking and
container yard operations in its customs brokerage of which private respondent was duly informed in a letter.
Indeed, the new corporation confirmed and assumed the obligation of the old corporation. There is no
indication of an attempt on the part of Akron to evade payment of its obligation to private respondent.

The fact that petitioner sold his shares in Akron to Coprada during the pendency of the case does not make
petitioner liable to the debt of Akron. Since petitioner has no personal obligation to private respondent, it is his
inherent right as a stockholder to dispose of his shares of stock anytime he so desires.

Firme v Bukal Enterprises, 414 SCRA 190

San Juan Structral Steels v CA, 296 SCRA 631
Facts
San Juan Structural and Steel Fabricators, Inc. and Motorich Sales Corporation entered into an
agreement for the transfer of the land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City. Metro Manila, containing an area of Four Hundred
Fourteen (414) square meters, covered by TCT No. (362909) 2876, on February 14, 1989. The terms of
payment include a P100,000-downpayment and the balance to be paid on or before March 2, 1989.
Come March 2, 1989, San Juan was ready to pay Motorich with a Metrobank Cashier's Check
No. 004223, however the latter, despite repeated demands refused to execute the Transfer of Rights/Deed
of Assignment which is necessary to transfer the certificate of title.
For its part, Motorich asserted that the President and Chairman of Motorich did not sign the
agreement and that Mrs. Gruenberg's signature on the agreement is inadequate to bind Motorich. The other
 signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required and such fact
was known to San Juan from the very beginning as it was presented a copy of the Transfer of Rights at the
time the Agreement was signed.
Both the lower court and the CA ruled in favor of Motorich, hence this appeal

Issue
Related to the Corp. topic: W/N Motorich is a close corporation?
Petitioner: The veil of corporate fiction of Motorich should be pierced, because the latter is a close
corporation. Being solely owned by the Spouses Gruenberg, the company can treated as a close corporation
which can be bound by the acts of its principal stockholder who needs no specific authority.

Ruling
NO. Section 96 of the Corporation Code defines a close corporation as follows: A close corporation, within
the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporation's
issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one
or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a
corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation within the meaning of
this Code. . . . .
The articles of incorporation of Motorich Sales Corporation does not contain any provision
stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From its articles, it is clear
that Respondent Motorich is not a close corporation. Motorich does not become one either, just
because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital
stock. The "[m]ere ownership by a single stockholder or by another corporation of all or
capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personalities." So, too, a narrow distribution of ownership does not, by itself, make
a close corporation.
Furthermore, such issue was belatedly raised in the sur-rejoinder before the Court of Appeals.
Thus, this Court cannot entertain said issue at this late stage of the proceedings. It is well-
settled the points of law, theories and arguments not brought to the attention of the trial court
need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be
raised for the first time on appeal. Allowing petitioner to change horses in midstream, as it
were, is to run roughshod over the basic principles of fair play, justice and due process.
The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the
controlling stockholder, may be considered as a binding corporate act and a board action as nothing more than
a mere formality." The present case, however, is not one of them. As stated by petitioner, Spouses Reynaldo
and Nenita Gruenberg own "almost 99.866%" of Respondent Motorich. Since Nenita is not the sole
controlling stockholder of Motorich, the aforementioned exception does not apply. Granting arguendo that the
corporate veil of Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal
property of Spouses Gruenberg, because the same was acquired during their marriage. There being no
indication that said spouses, who appear to have been married before the effectivity of the Family Code, have
agreed to a different property regime, their property relations would be governed by conjugal partnership of
gains. As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is
no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither
spouse can alienate, in favor of another, his or her interest in the partnership nor in any property belonging to
it; neither spouse can ask for a partition of the properties before the partnership has been legally dissolved."
Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of
property, the sale would still be invalid. Under this regime, "alienation of community property must have the
written consent of the other spouse or the authority of the court without which the disposition or encumbrance
is void." Both requirements are manifestly absent in the instant case.

CBTC v CA, 356 SCRA 671

PNB v Rittarato Group, 362 SCRA 216
Facts
PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing business in
Hong Kong, extended a letter of credit in favor of RITRATTO secured by real estate mortgages over 4 parcels
of land in Makati.

However, RITRATTO defaulted on payments, so PNB as agent of PNB Intl notified RITRATTO of the
foreclosure of the properties subject to the mortgage.

RITRATTO filed for a TRO against PNB. PNB filed a motion to dismiss on the TRO on the grounds of
failure to state a cause of action and the absence of any privity between the PNB (agent) and RITRATTO.

RITRATTO justified the TRO issued in applying the doctrine of "Piercing the Veil of Corporate Identity"
by stating that PNB is merely an alter ego or a business conduit of PNB Intl and that it was against mutuality
of contracts, since PNB was not a party to the letter of credit.

RTC granted TRO citing the case of Koppel Phil. Inc. vs. Yatco, reasoning that the separate corporate
entity may be disregarded where a corporation is the mere alter ego, or business conduit of a person or 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. (THIS IS NOT APPLICABLE IN THIS
CASE because in Koppel case, the court disregarded the separate existence of the parent and the subsidiary on
the ground that the latter was formed merely for the purpose of evading the payment of higher
taxes.)

CA agreed to the decision of the RTC.

Issue
W/n there is a cause of action against PNB, which is not a real party in interest being a mere agent by the PNB
Intl.

Ruling
NO CAUSE OF ACTION.

PNB as mere agent is not privy to the loan contracts entered into by respondents and PNB-IFL. PNB and
PNB-IFL are separate identities.

The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. The doctrine applies
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime,
or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere alter ego or
business conduit of a person, or 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.

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the
indicative factors that the former corporation is a mere instrumentality of the latter are present.

The parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the PNB was NOT sued because it is the parent company of PNB-IFL. Rather, the
PNB was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings.

A suit against an agent cannot without compelling reasons be considered a suit against the principal.

NOTE:
test in determining the applicability of the doctrine of piercing the veil of corporate fiction: The absence of
any one of these elements prevents "piercing the corporate veil."

1. Control, not mere majority or complete 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.

2. 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 rights;
and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

VII. ARTICLES OF INCORPORATION

Red Line Trans. v. Rural Transit, 60 Phil. 549
Republic Planters Bank v. CA, 216 SCRA 738 (1992)
P.C. Javier & Sons, Inc. v. CA, 462 SCRA 36
Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 [1919])
Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003)
Facts
In 1979, Ellice Agro was incorporated by Sps Manuel and Alicia Gala, along with their
children (Guia, Ofelia, Raul and Rita) and their encargados (Virgilio Galeon and Julian Jader), initially with
35,000 shares (worth 3.5M). Spouses paid their subscription with several parcels of land in Quezon and
Laguna.
Later, Manuel and Alicia subscribed to additional shares.
Subsequently, the siblings incorporated Margo Mgt and Devt Corp. Then, Manuel and Alicia
started moving their interest to Margo (basically, Ellice became majorly owned by Margo) and transferring
such interests to their children. Manuel transferred most of his shares to Raul.
In 1990, a special board meeting of Margo was held to elect new BOD. Raul became the new
Chair, Pres and GM; the Board immediately approved several actions including the commencement of
 proceeding to annul certain dispositions of Margos property made by Alicia. Ellice also subsequently held
an election, with Raul being the Chair, Pres and GM as well.
Respondents went to the SEC and filed for receivership and inspection of books of Ellice
alleging against petitioners mismanagement, diversion of funds, financial losses and dissipation of assets.
To retaliate to that, Petitioners filed for nullification of the said elections, BOD actions and return of titles
to real prop of Margo and Ellice in possession of respondents.
Cases were consolidated, SEC favored petitioners. SEC En Banc reversed and favored
respondents. CA affirmed En Banc decision.

Issue
W/N corporate veil of Ellice and Margo should be pierced as petitioners allege that all the properties owned
by the corp are basically properties of the Sps Gala?

Ruling
NO. Corp veil should not be pierced. Doctrine of Separate Corp Entity must be upheld.
Petioner says:
1. Lands were transferred to the Corp and to the children in order to circumvent
CARP law
2. In relation to #1, Corps were created for illegal purpose; transfers were absolutely
simulated; and petitioners did not receive their proportionate share as legitimes
(NB: Manuel subsequently died)
3. CA hastily decided the case in 2 days
4. Corps were merely business conduit of Manuel
5. There was failure to pay capital gains taxes and DST during the transfers.
Court explained:
1. Court respected the primary jurisdiction of the DARAB over such issues; if
truly there were any violation of the Agrarian Law, this should be lodged in the
said admin body.
2. Checking the AI, BL and even the transfer books reveal that there are no signs
of illegality; transfers were at most, relatively simulated; legal measures to
lessen taxes (tax planning) is an acceptable business practice; if petitioners had
issues with partition, it should be raised in the proceeding for settlement of
estate rather than in an intra-corp controversy.
3. Presumption of regularity; speedy disposition is a mark of diligence and
devotion
4. Petitioners failed to adduce evidence of fraud or that the corps were used as
mere alter-ego.
5. Issue was never raised in the SEC, En Banc nor in the CA, and SC is precluded
from passing upon the same

DOCTRINE ON CLOSE CORP (p447): The concept of a close corporation organized for the purpose of
running a family business or managing family property has formed the backbone of Philippine commerce and
industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings
into going concerns capable of providing them and their families with a modicum of material comfort and
financial security as a reward for years of hard work. A family corporation should serve as a reward for years
of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a
flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and
security that are the original driving forces behind the formation of family corporations and use these tenets in
order to facilitate more civil, if not more amicable, settlements of family corporate disputes.

(Mahirap nga naman maging mayaman, tapos yun mga tagapagmanaeither nangugulang sa co-heir or
nag-iisip na gingulangang sha ng co-heir nya! Iba na ang maraming pera for litigation; pati ayaw pamilya
nalalagay sa SCRA)

CA decision affirmed. Petition denied.

Hyatt Elevators & Escalators Corp. v. Goldstar Elevators, Phils., 473 SCRA
Lanuza v. Court of Appeals, 454 SCRA 2005
Facts
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700)
founders shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the
articles of incorporation. However, private respondents and their predecessors who were in control ofPMMSI
registered the companys stock and transfer book for thefirst time in 1978, recording thirty-three (33) common
shares as the only issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders
meeting was called and held on the basis of what was considered as a quorum of twenty-seven (27) common
shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and
Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders
shares and twelve (12) common shares owned by their father. The SEC hearing officer held that the heirs of
Acayan were entitled to the claimed shares and called for a special stockholders meeting to elect a new set of
officers.The SEC En Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock
and transfer book.

Issue
Whether or not it is the companys stock and transfer book, or its 1952 Articles of Incorporation, which
determines stockholders shareholdings, and provides the basis for computing the quorum.

Ruling
The basis is the AOI.
The articles of incorporation has been described as one that defines the charter of the corporation and the
contractual relationships between the State and the corporation, the stockholders and the State, and between
the corporation and its stockholders.

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the
corporation, but also on its shareholders. In the instant case, the articles of incorporation indicate that at the
time of incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders shares
and seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and outstanding
shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has
been made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made,
the date thereof and by and to whom made; and such other entries as may be prescribed by law. A stock and
transfer book is necessary as a measure of precaution, expediency and convenience since it provides the only
certain and accurate method of establishing the various corporate acts and transactions and of showing the
ownership of stock and like matters.

However, a stock and transfer book, like other corporate books and records, is not in any sense a public
record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written
therein. In fact, it is generally held that the records and minutes of a corporation are not conclusive even
against the corporation but are prima facie evidence only, and may be impeached or even contradicted by
other competent evidence. Thus, parol evidence may be admitted to supply omissions in the records or explain
ambiguities, or to contradict such records.

In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines supplanted
Act No. 1459. BP Blg. 68 provides:Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital
stock or majority of the members in the case of non- stock corporation.

Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be
founders shares or common shares. In the instant case, two figures are being pitted against each other those
contained in the articles of incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer
book, and completely disregarding the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors in interest of the said shares. This case is
one instance where resort to documents other than the stock and transfer books is necessary. The stock and
transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when the articles of incorporation show a significantly
larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book.

In the instant case, no less than the articles of incorporation declare the incorporators to have in their name
the founders and several common shares. Thus, to disregard the contents of the articles of incorporation would
be to pretend that the basic document which legally triggered the creation of the corporation does not exist and
accordingly to allow great injustice to be caused to the incorporators and their heirs.

Final Verdict: WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED.

VIII. BY-LAWS
Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997)
Facts
Grace Christian High School (GCHS) is an educational institution in Grace Village (QC?). Grace Village
Association, Inc. (GVAI)is the homeowners association in Grace Village. GVAI has an existing by-laws which
was already in effect since 1968. But in 1975, the board of directors made a draft amending the by-laws
whereby the representative of GCHS shall have a permanent seat in the 15-seat board. The draft however was
never presented to the general membership for approval. But nevertheless, the representative of GCHS held a
seat in the board for 15 years until in 1990 when a proposal was made to the board to reconsider the practice
of allowing the GCHS representative in taking a permanent seat. Thereafter, an election was scheduled for the
15 seat in the board. GCHS opposed the election as it insists that the election should only be for 14 directors
because it has a permanent seat. GVAI argued that GCHS claim has no basis because the 1975 proposed
amendment was never ratified. GCHS averred that it was ratified when it was allowed to take the seat for 15
years and as such its right has already vested.

Issue
Whether or not the representative from Grace Christian High School should be allowed to have a permanent
seat in the board of directors.

Ruling
No. The Corporation Code is clear when it provides that members of the board of a corporation must be
elected by the stockholders (stock corporation) or the members (non-stock corporation). Admittedly, there are
corporations who allow some of their directors to sit in the board without being elected but such practice
cannot prevail over provisions of law. Practice, no matter how long continued, cannot give rise to any vested
right if it is contrary to law. Further, there is no reason as to why a representative from GCHS should be given
an automatic seat. It should therefore go through the process of election. It cannot also be argued that the draft
of the by-laws in 1975 was ratified when GCHS was allowed to take its seat for 15 years without an election.
In the first place, the proposal was merely a draft and even if passed and approved by the general membership,
it cannot be given effect because it is void and contrary to the law. GCHS seat in the corporate board is at best
merely tolerated by GVAI.

Government of P.I. v. El Hogar Filipino, 50 Phil. 399

Facts
The Philippine Commission enacted Act No. 1459, also known as the Corporation Law, on March 1, 1906. El
Hogar Filipino, organized in 1911 under the laws of the Philippine Islands, was the first corporation organized
under Sec. 171-190 Act No. 1459, devoted to the subject of building and loan associations, their organization
and administration. In the said law, the capital of the corporation was not permitted to exceed P3M, but Act
No. 2092 amended the statute, permitting capitalization to the amount of ten millions. El Hogar took
advantage of the amendment of Act No. 1459 and amended its AOI as a result thereof, stating that the amount
of capital must not exceed what has been stated in Act No. 2092. This resulted to El Hogar having 5,826
shareholders, 125,750 shares with paid-up value of P8.7M. The corporation paid P7.16M to its withdrawing
stockholders. The Government of the Philippine Islands filed an action against El Hogar due to the alleged
illegal holding title to real property for a period exceeding five (5) years after the same was bought in a
foreclosure sale. Sec. 13(5) of the Corporation Law states that corporations must dispose of real estate
obtained within 5 years from receiving the title. The Philippine Government also prays that El Hogar be
excluded from all corporate rights and privileges and effecting a final dissolution of said corporation.
It appears from the records that El Hogar was the holder of a recorded mortgage on the San Clemente land as
security for a P24K loan to El Hogar. However, shareholders and borrowers defaulted in payment so El Hogar
foreclosed the mortgage and purchased the land during the auction sale. A deed of conveyance in favor of El
Hogar was executed and sent to the Register of Deeds of Tralac with a request that the certificate of title be
cancelled and a new one be issued in favor of El Hogar from the Register of Deeds of Tarlac. However, no
reply was received. El Hogar filed a complaint with the Chief of the General Land Registration Office. The
certificate of title to the San Clemente land was received by El Hogar and a board resolution authorizing
Benzon to find a buyer was issued. Alcantara, the buyer of the land, was given extension of time to make
payment but defaulted so the contract treated rescinded. Efforts were made to find another buyer. Respondent
acquired title in December 1920 until the property was finally sold to Felipa Alberto in July 1926. The interval
exceeded 5 years but the period did not commence to run until May 7, 1921 when the register of deeds
delivered the new certificate of title. It has been held that a purchaser of land registered under the Torrens
system cannot acquire the status of an innocent purchaser for value unless the vendor is able to place the
owners duplicate in his hands showing the title to be in the vendor. During the period before May 1921, El
Hogar was not in a position to pass an indefeasible title to any purchaser. Therefore, El Hogar cannot be held
accountable for this delay which was not due to its fault. Likewise, the period from March 25, 1926 to April
20, 1926 must not be part of the five-year period because this was the period where respondent was under the
obligation to sell the property to Alcantara prior to the contracts rescission due to Alcantaras non-payment.
Another circumstance causing the delay is the fact that El Hogar purchased the property in the full amount of
the loan made by the former owner which is nearly P24K when it was subsequently found that the property
was not salable and later sold for P6K notwithstanding El Hogars efforts to find a purchaser upon better terms

Issue
Whether the acts of respondent corporation merit its dissolution or deprivation of its corporate franchise and
to exclude it from all corporate rights and privileges.

Ruling
The circumstance that one of the provisions contained in the by-laws of a building and loan association is
invalid as conflicting with the express provision of statute is not a misdemeanor on the part of the corporation
for which the association can be penalized by the forfeiture of its charter.
The circumstance that the shareholders of a building and loan association do not attend the annual meetings in
sufficient number to constitute a quorum does not render the corporation subject to dissolution.

The directors of a building and loan association may lawfully fill vacancies occurring in the board of directors
in conformity with a by-law to this effect. Such officials, as well as the original directors, hold until
qualification of their successors.

The power to fix the compensation of the directors of a building and loan association pertains to the
corporation, to be determined in its by-laws; and where the amount of the compensation to be paid is thus
fixed, the court will not concern itself with the question of the propriety and wisdom of the measure of
compensation adopted.

Where a building and loan association makes a contract with its promoter and manager which contract is
expressly ratified in the by-laws of the association, by which the association concedes to him, in
consideration of valuable services rendered and to be rendered, a right to receive 5 per centum of the net
earnings of the association, this court will not, in a quo warranto proceeding where there is no allegation that
the contract was ultra vires or vitiated by fraud, order the dissolution of the corporation for entering into such
contract, on the mere ground that the compensation granted is excessive; nor will the court enjoin the
association from performing the same.

The shareholders of a corporation may in the by-laws define the qualifications of directors and require that
shares of a specified value shall be put up as security for their action. A provision in the by-laws disabling the
directors from receiving loans from the association is also valid.
IX. CORPORATE POWERS AND AUTHORITY
LBP v. COA, 190 SCRA 154
Facts
On 22 July 1980, the Board of Directors of the LBP issued Resolution No. 80-222 (Rollo, pp. 4-5, pp. 91-93)
fixing the new rates for penalty charges on past due loans/amortizations and other credit accommodations. The
Resolution also provided that "in cases of defaults in loan payment and other credit accommodations due to
unforeseen, highly justifiable reasons/circumstances beyond the control of the borrower such as damages due
to natural calamities, sickness, adverse government rulings or court judgments, duly processed and verified by
the lending units, penalty charges may be condoned/reduced by the Loan Executive Committee upon
recommendation of the appropriate lending units"

On 23 September 1986, LBP requested its Corporate Auditor to pass in audit its waiver of the penalty charges.
Said official questioned the waiver and opined that the power to condone interests or penalties is vested
exclusively in the COA but, in the absence of a categorical ruling on the matter applicable to a government
banking institution, referred the LBP request to the COA in a letter dated 20 January 1987.

Issue
Whether it is within the corporate powers of the Land Bank of the Philippines (LBP) to waive the penalty
charges of P9,636.36 on the loan of the Home Savings Bank and Trust Company (HSBTC).

Ruling
The power to write-off is not expressly granted in the LBP Charter. It can be logically implied however, from
LBP's authority to exercise the general powers vested in banking institutions as provided in the General
Banking Act. The clear intendment of its Charter is for LBP to be clothed not only with the express powers
granted to it, but also with those implied, incidental and necessary for the exercise of those express powers.
"The test to be applied is whether the act of the corporation is in direct and immediate furtherance of its
business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not" (Montelibano v. Bacolod-Murcia Milling Co. Inc., L-
15092, 18 May 1962, 5 SCRA 36).

Pilipinas Loan Co. vs. SEC, 356 SCRA 193

Manila Metal Container Corp. v. PNB, 511 SCRA 444

Doctrines:
Contracts or acts not made either by the Board of Directors or by a corporate agent duly authorized by the
Board are not binding on the corporation.

Facts:
Manila Metal Container mortgaged its 8, 015-square meter property in Mandaluyong to PNB as security for a
loan. Several amendments were made to the loan agreement, increasing the amount and extending the
payment period. Manila Metal failed to pay in time. PNB extrajudicially foreclosed the property. It was also
the winning bidder at P 911,532.21. The sale was annotated on the title on February 17, 1983, giving Manila
Metal until February 17, 1984 to redeem the property.
Manila Metal sent its first letter to PNB asking for an extension of the redemption period. PNB sent its first
reply stating that the request was pending at its Pasay City branch. Eventually, the redemption period expired
and a new title was issued to PNB.
Meanwhile, the Special Assets Management Department (SAMD) of PNB rendered a statement of account to
Manila Metal covering its total obligation in the amount of P 1,574,560.47. Manila Metal remitted P 725,000
as deposit to repurchase. SAMD also recommended to PNB that Manila Metal be allowed to repurchase the
Mandaluyong property at 47 cents less the amount in the statement of account. PNB wrote Manila Metal
informing the latter that SAMDs recommendation was rejected and that the repurchase price was set at P
2,660,000, the minimum market value of the property according to PNB. PNB likewise gave Manila Metal
until December 15, 1984 to accept the offer or else the P 725,000 remittance will be returned and the property
will be offered to other buyers. A series of offers and counter-offers ensued.
Manila Metals assertion was that it had already accepted SAMDs offer which was why it made the earlier
remittance (earnest money, allegedly). Again, offers and counter-offers were made until Manila Metal filed a
complaint for Annulment of Mortgage, and Specific Performance with damages.

Issues:
1. W/N there was a perfected contract of sale to repurchase the foreclosed property
2. W/N SAMDs purported offer was binding on the corporation

Held/Ratio:
1. NO. At no point was there a meeting of the minds as to the consideration.
2. NO. SAMD was not duly authorized by the Board of the Directors to enter into a
repurchase agreement. In fact, it was made quite clear to Manila Metal that the P 725,000
remittance was only accepted on the condition that the repurchase price was still subject to
the approval of the Board. Section 23 of the Corporation Code provides: Sec. 23. The
board of directors or trustees. - Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified. Every director must own at least one (1)
share of the capital stock of the corporation of which he is a director, which share shall
stand in his name on the books of the corporation. Any director who ceases to be the owner
of at least one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of non-stock corporations must be members
thereof. a majority of the directors or trustees of all corporations organized under this Code
must be residents of the Philippines.

Atrium Management Corp. vs. CA, 353 SCRA 23

Doctrines:
An ultra vires act is one committed outside the object for which a corporation is created as defined by the law
of its organization and therefore beyond the power conferred upon it by law. The term ultra vires is
distinguished from an illegal act, for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.

Personal liability of a corporate director, trustee, or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in the
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.

Facts:
Once upon a time, there were three companies, Hi-Cement Corporation, E.T. Henry and Co., and Atrium
Management Corporation. Hi-Cement issued 4 postdated crossed checks worth P2 million in favor of E.T.
Henry as payee. These were issued through Hi-Cements corporate signatories Lourdes M. de Leon (Lourdes)
as Hi-Cements treasurer and Antonio de las Alas as Chairman (but he died so nawala na sya sa eksena).

E.T. Henry was in need of cash right away, so it entered into a discounting agreement with Atrium. Before
entering into the agreement, E.T. Henry and Atrium first confirmed with Lourdes if this was possible and if
Hi-Cement would consent. She said that it was OK, and that the checks were issued to E.T. Henry as
payment of petroleum products. So the checks were then indorsed to Atrium.

When Atrium tried to collect on the checks, the drawee bank (unnamed) dishonored all four checks for the
reason payment stopped. Naturally, Atrium went to the courts to collect.

The trial court ruled that Lourdes, E.T. Henry, and Hi-Cement were solidarily liable for the payment of P2
million to Atrium. However, on appeal, the CA absolved Hi-Cement, saying Lourdes was not authorized to
issue the checks (constituting ultra vires acts), and the checks were not issued for valuable consideration.

Issue
1. W/N the issuance of the checks constituted an ultra vires act

2. W/N Lourdes (and de las Alas) were personally liable for the checks issued as corporate officers and
authorized signatories of the check

3. W/N Atrium is a holder in due course Held/Ratio:

Ruling
1. NO, the acts were not ultra vires. The issuance of the checks was for the procurement of a loan to finance
the activities of the corporation, and was well within the ambit of a valid corporate act, and hence, not an ultra
vires act. An ultra vires act is one committed outside the object for which a corporation is created as defined
by the law of its organization and therefore beyond the power conferred upon it by law. The term ultra vires
is distinguished from an illegal act, for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.

2. YES, Lourdes (and de las Alas, but he died so the case against him was dismissed) is personally liable on
the checks she issued, even if she was authorized to issue the checks, because she was negligent. Lourdes
signed the confirmation letter requested by E.T. Henry and Atrium for the rediscounting of the checks, even if
she was aware that the checks were strictly endorsed for deposit only to E.T. Henrys account and not to be
further negotiated (being a crossed check). Moreover, in the said confirmation letter, Lourdes said the checks
were for payment of petroleum products, when in fact they were for a financing agreement with E.T. Henry.
Due to her negligence, Atrium suffered damage, and therefore, she must be held personally liable (see 2nd
doctrine).

3. NO, Atrium is not a holder in due course, as it was aware that the checks were crossed. However, this
doesnt mean that it could no longer collect on the checks.

Woodchild Holdings, Inc. v. Roxas Electric, 436 SCRA 235

Doctrines:The apparent power of an agent is to be determined by the acts of the principal.

Facts:
Roxas Electric and Construction Company Inc (RECCI) owned 2 parcels of land, Lot 491-A-3-B1(B1) and
Lot 491-A-3-B2 (B2). RECCIs Board of Directors issued a resolution authorizing the corporation
through its President, Roberto Roxas, to sell B2 and to sign and execute the necessary documents4. Roxas
sold B2 to Woodchild Holdings Inc (WHI) through its President, Jonathan Dy, for P 5M who wanted to build a
warehouse in the land. In the Deed of Absolute Sale, Roxas also granted WHI a right of way over B1and
an option to purchase certain portions thereof in case the need arose as earlier requested by WHI. After
Roxas died, WHI demanded that RECCI sell a portion of B1 but it refused claiming it never authorized
Roxas to do so. WHI filed a case for specific performance and damages. The trial court ruled that RECCI was
estopped from disowning the apparent authority of Roxas under the Resolution of its Board finding WHI in
good faith. The CA reversed claiming that Roxas was merely authorized to sell B2 and therefore the
provisions in the deed of sale not binding to RECCI.

Issue:
1. W/N RECCI is bound by the provisions in the deed of absolute sale granting beneficial use and a right of
way and option to buy over a portion of B1

Held/Ratio:
1. NO. Contracts entered into by corporate officers beyond the scope of their authority are
unenforceable against the corporation unless ratified by the corporation, whether expressly or impliedly.
WHIs contention that by allowing Roxas to execute the deed of absolute sale and failing to disapprove the
same, RECCI gave him apparent authority to grant a right of way and option to buy over B1.
For the principle of apparent authority to apply, the WHI was burdened to prove the following: (a) the
acts RECCI justifying belief in the agency by the WHI; (b) knowledge by RECCI which is sought to be held;
and, (c) reliance thereon by WHI consistent with ordinary care and prudence.
The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the
agent. There is no evidence of specific acts made by the RECCI showing or indicating that it had full
knowledge of any representations made by Roxas to WHI that it had authorized Roxas to grant WHI an
option to buy B1, or to create a burden or lien thereon. There is no implied ratification when RECCI
received the P5M purchase price for B2. RECCI sold B2 to WHI and the latter took possession of the
property, building a warehouse. RECCI had a right to retain the P5M. For an act of the principal to be
considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any
other hypothesis than that he approved and intended to adopt what had been done in his name.
Ratification is based on waiver the intentional relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do independently of the unauthorized act of the agent.
Moreover, if a writing is required to grant an authority to do a particular act, ratification of that act
must also be in writing. Since RECCI had not ratified the unauthorized acts of Roxas, the same are
unenforceable.

NAPOCOR vs. Alonzo-Legasto, 443 SCRA 342

Central Textile Mills, Inc. v. NWPC, 260 SCRA368 (1996)
Madrigal & Co. v. Zamora, 151 SCRA 355 (1987)
Litonjua v. Eternit Corp. , 490 SCRA 204 (2006)
Islamic Directorate v. CA, 272SCRA 454 (1997);
Nielson & Co. v. Lepanto Consolidated Mining Co., ,26 SCRA 540
Doctrines:
Under Section 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered.

Facts:
In 1937, Lepanto entered into a Management Contract with Nielson. In this agreement, Nielson was to
manage and operate the Mankayan Mining Claim of Lepanto in consideration for
3. P2,500 a month and
4. 10% of dividends declared and paid.
In 1941, Lepanto declared dividends amounting to P175,000, 10% of which Nielson was entitled to (so,
P17,500). Lepanto never paid Nielson. During the liberation in 1945 (i.e., after World War II), Lepanto
unilaterally terminated the management contract with Nielson.

In 1958, Nielson instituted an action for its 10% share in the dividends declared by Lepanto in 1941. The suit
reached the SC and it decided against Lepanto in 1941. The suit between Nielson and Lepanto was suspended
in 1942 when the US Army bombarded the Mankayan mining claims, thus preventing Nielson from
complying with its obligation (i.e. operating and managing the claim). The tribunal further said that the
contract remained suspended even after the war was over in 1945 until 1948 when the mines were fully
operational; and that the management contract still had five years to go from 1948.

Thus, the SC stated that Nielson was entitled to 10% of the dividend declarations in 1949 and 1950 worth
P3M. Lepanto sought reconsideration of SCs decision in 1966. (1) What is the nature of the management
contract? Is it one of agency and hence terminable at the principals will or is it a contract of lease of services
which may be terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend even
though Lepanto is not a stockholder?

(Heres the gist they had a management contract that will pay Nielson 10% of dividends. However, due to
the war, the contract was suspended as per a stipulation in their contract that if theres force majure, they will
suspend the contract. Lepanto now contends that hes not entitled to pay the dividends because the contract is
done. He refuses to consider the war-time and rebuilding-of-the-mine-time as suspended periods.)

Issues:
W/N the nature of the Management Contract is one of a contract of lease of services which may be terminated
only upon agreed causes
CORP: W/N Nielson entitled to 10% of the stock dividend even though Lepanto is not a stockholder

Held/Ratio:

YES. Nielson was hired to manage and operate the mine of Lepanto. It was not allowed to make decisions
without Lepantos approval.

NO. Under Section 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. The understanding between Lepanto and Nielson was simply
to make the cash value of the stock dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock
dividends declared. It does not mean that the compensation of Nielson would be taken from the amount
actually declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be
issued to the stockholders as stock dividends, but from the other assets or funds of the corporation which are
not burdened by the dividends thus declared.

Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash;
(2) property; and (3) undistributed profits. Shares of stock are given the special name stock dividends only
if they are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property
then those shares do not fall under the category of stock dividends. A corporation may legally issue shares
of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its
indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange
of property, because services is equivalent to property.
It is the shares of stock that are originally issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock
unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder
in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends
declared cannot be issued to one who is not a stockholder of a corporation.
A stock dividend is any dividend payable in shares of stock of the corporation declaring or authorizing such
dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of
cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par.
When a corporation issues stock dividends, it shows that the corporations accumulated profits have been
capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money
or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been transferred from surplus to
assets and no longer available for actual distribution.
Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders
are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the
surplus, which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder;
the proportional interest of each stockholder remains the same .If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming part of the stock dividends are issued to a non-
stockholder then the proportion of the stockholders interest changes radically. Stock dividends are civil fruits
of the original investment, and to the owners of the shares belong the civil fruits.
The term dividend is that part or portion of the profits of the enterprise which the corporation, by its
governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund
actually set aside, and declared by the directors of the corporation as dividends and duly ordered by the
director, or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders
according to their respective interests.
Under Section 16 of the Corporation Law stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. And so, in the case at bar Nielson cannot be paid in shares of
stock which form part of the stock dividends of Lepanto for services it rendered under the management
contract.

Asia Investments Industries v. CA, 403 SCRA 452 (2003)

Atrium Management Corp. v. CA, 353 SCRA 23 (2001)
Doctrines:
An ultra vires act is one committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the power conferred upon it by law. The term ultra
vires is distinguished from an illegal act, for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.

Personal liability of a corporate director, trustee, or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in the directing its affairs, or (c) for conflict of interest, resulting in damages
to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by a specific provision of law, to personally answer for his corporate

action.

Facts:
Once upon a time, there were three companies, Hi-Cement Corporation, E.T. Henry and Co., and
Atrium Management Corporation. Hi-Cement issued 4 postdated crossed checks worth P2 million in
favor of E.T. Henry as payee. These were issued through Hi-Cements corporate signatories Lourdes
M. de Leon (Lourdes) as Hi-Cements treasurer and Antonio de las Alas as Chairman (but he died so
nawala na sya sa eksena).

E.T. Henry was in need of cash right away, so it entered into a discounting agreement with Atrium.
Before entering into the agreement, E.T. Henry and Atrium first confirmed with Lourdes if this was
possible and if Hi-Cement would consent. She said that it was OK, and that the checks were
issued to E.T. Henry as payment of petroleum products. So the checks were then indorsed to
Atrium.

When Atrium tried to collect on the checks, the drawee bank (unnamed) dishonored all four checks
for the reason payment stopped. Naturally, Atrium went to the courts to collect.

The trial court ruled that Lourdes, E.T. Henry, and Hi-Cement were solidarily liable for the payment
of P2 million to Atrium. However, on appeal, the CA absolved Hi-Cement, saying Lourdes was not
authorized to issue the checks (constituting ultra vires acts), and the checks were not issued for
valuable consideration.

Issues:
1. W/N the issuance of the checks constituted an ultra vires act
2. W/N Lourdes (and de las Alas) were personally liable for the checks issued as corporate officers and
authorized signatories of the check
3. W/N Atrium is a holder in due course

Held
1. NO, the acts were not ultra vires. The issuance of the checks was for the procurement of a loan to finance
the activities of the corporation, and was well within the ambit of a valid corporate act, and hence, not an ultra
vires act. An ultra vires act is one committed outside the object for which a corporation is created as defined
by the law of its organization and therefore beyond the power conferred upon it by law. The term ultra vires
is distinguished from an illegal act, for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.
2. YES, Lourdes (and de las Alas, but he died so the case against him was dismissed) is personally liable on
the checks she issued, even if she was authorized to issue the checks, because she was negligent. Lourdes
signed the confirmation letter requested by E.T. Henry and Atrium for the rediscounting of the checks, even if
she was aware that the checks were strictly endorsed for deposit only to E.T. Henrys account and not to be
further negotiated (being a crossed check).

Moreover, in the said confirmation letter, Lourdes said the checks were for payment of petroleum products,
when in fact they were for a financing agreement with E.T. Henry. Due to her negligence, Atrium suffered
damage, and therefore, she must be held personally liable (see 2nd doctrine).

3. NO, Atrium is not a holder in due course, as it was aware that the checks were crossed. However, this
doesnt mean that it could no longer collect on the checks.

Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003)
China Banking Corp. v. CA, 270 SCRA 503 (1997)
Doctrines:
General Rule: Third persons are not bound by the by-laws of a corporation since they are not privy thereto.

Exception: When third persons have actual knowledge or constructive knowledge of the same. However, this
knowledge of the by-laws must be present at the time of the perfection of the contract, and not only during the
proceedings.

Facts:
Galicano Calapatia, Jr. is a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI). He
pledged his Stock Certificate to petitioner China Banking Corp. (CBC). To assure that such agreement will be
honored by VGCCI, CBC wrote a letter requesting that the pledge agreement be recorded in the corporate
books, to which VGCCI replied in the affirmative.

Carpatia loaned P20,000 from CBC which was secured by the agreement. He failed to pay his obligations, so
CBC filed a petition for extrajudicial foreclosure before a notary public, requesting the latter to conduct a
public auction sale of the pledged stock. CBC informed VGCCI of this petition and requested that the pledged
stock be transferred to CBCs name and the same be recorded in the corporate books. However, VGCCI also
informed CBC that it will not be able to do so because Calapatia has unsettled accounts with the club. CBC
was the highest bidder in the auction and was issued the corresponding certificate of sale.

The debts of Calapatia with VGCCI have become due therefore it sent the demand the letters, but, as always
in all the cases, Calapatia was not able to pay. So VGCCI published a notice of auction sale of a number of its
stock certificates, including Calapatias own (under Sec. 3 Art. VIII of its by-laws, after a member shall have
been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club).
VGCCI informed Calapatia that he was no longer a member because his shares of stock were already sold.

Three years after, CBC informed VGCCI that it was the new owner by virtue of the auction sale, however,
VGCCI replied that for reason of delinquency, the same share of stock was sold at the public auction.

So of course, CBC protested and filed a case with the RTC of Makati for the nullification of the auction sale
and the issuance of a new stock certificate in its name. RTC dismissed the case for lack of jurisdiction (intra-
corporate dispute daw kasi), so CBC filed a complaint with SEC. It first held that VGCCI has the right not to
transfer the share to CBC until the liquidation of the delinquency, but it reversed the decision stating that CBC
has a prior right over the pledged share.

SEC dismissed VGCCIs MR so it turned to CA to seek redress. CA dismissed the case for lack of jurisdiction.
Hence, this appeal.

(Oke. So ung public auction ni CBC was in 1985, same year sinabi nya kay VGCCI ung nangyaring sale. Ung
public auction naman ni VGCCI was in 1986, despite its knowledge of the previous auction sale. And it is also
important to note that Carpatia has been delinquent in paying his monthly dues since 1975.)

Issues:
1. NOT SO MUCH RELATED: W/N SEC has jurisdiction.

2. W/N the by-laws of VGCCI can affect CBC.

Held
1. YES. The Commission has jurisdiction over any of the following relationships: 1) between the corporation
and the public; 2) between the corporation and its stockholders; 3) between the corporation and the state in so
far as its franchise, permit or license to operate is concerned; and 4) among the stockholders themselves.
VGCCI is contending that CBC is not among those enumerated since it is a third person as to the corporation.
So the test that should be applied first is whether CBC is a stockholder by virtue of the auction sale.

The transfer ownership to CBC through the public auction and the issuance of the corresponding Certificate of
Sale entitles CBC to have the said share registered in its name as a member of VGCCI. This was not assailed
by either VGCCI or Calapatia.
2. NO. VGCCI only began sending notices of delinquency to Calapatia after it was informed by CBC of its
foreclosure proceedings. Also, even though VGCCI acknowledged the pledge agreement between Calapatia
and CBC, it completely disregarded CBCs rights as a pledge by not informing it of the public auction it
initiated. However, VGCCI countered this by saying that CBC has actual knowledge of the by-laws of the
corporation (when VGCCI informed CBC that it cannot transfer and record the shares in the corporate book).
It cited Fleishcer v. Botica which stated that as a general rule, third persons are not bound by the by-laws of a
corporation since they are not privy thereto; however the exception to this is when third persons have actual or
constructive knowledge of the same. VGCCI is contending that CBC has actual knowledge and therefore must
be bound by the by-laws.

The Court ruled that in order to be bound, the third party must have acquired knowledge of the by-laws at the
time the agreement was entered into between him and the shareholder. In the case at bar, CBC was only
informed of the by-laws after it informed VGCCI of the public auction. Also, VGCCI could have easily
informed petitioner of its by-laws when it sent notice formally recognizing CBC as pledge of one of its shares
registered in Calapatias name.

TamWing Tak v. Makasiar, 350 SCRA 475 (2001)

Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706
Lopez Realty v. Fontecha, 247 SCRA183, 192 (1995)
Tuason & Co. v. Bolanos, 95 Phil. 106 (1954);
Doctrines:
Although a corporation has no power to enter into a partnership, it may nonetheless enter into a joint venture
w/ another where the nature of that venture is in line w/ the business authorized by its charter.

Facts:
This is an action for the recovery of possession of real property against Bolanos. Bolanos alleges
ownership of the land by prescription. The case was ruled in favor of Tuason (prescription does not run
against registered property).

On appeal, Bolanos alleges, among others, that the complaint by Tuason should have been dismissed for not
having been brought by the real party in interest. This is because the action is brought in behalf of JM
Tuason & Co. Inc. by Gregorio Araneta Inc., its managing partner.

Issue
W/N case should have been dismissed on the ground that the case was not brought by the proper party in
interest

Held
No. What Section 2, Rule 2 of the Rules of Court provide is that the action be brought in the name of, but not
necessarily by the real party in interest. While the complaint states that the plaintiff is represented herein by
its Managing Partner Gregorio Araneta, Inc., another corporation, there is nothing against one corporation
being represented by another person, natural or juridical, in a suit in court.

The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the theory that it is
illegal for two corporations to enter into a partnership is without merit. The true rule is that though a
corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with
another where the nature of that venture is in line with the business authorized by its charter.

There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio
Araneta, Inc. as its managing partner is not in line with the corporate business of either of them.