principal stockholders should not be liable for the acts thereof.
The Carams did
Chapter IV – The Corporate Entity
Theory of Corporate Entity: Its effects
— A corporation has a juridical personality separate and distinct from the SHs
or members who compose it
— Issuance of certificate of incorporation marks beginning of the corporation’s
existence as a legal entity
— Not affected by personal rights, obligations, and transactions
— Stockholders have no claim on corporate property as owners—they only have
an inchoate right to it
— A corporation has no interest in the individual property of its stockholders,
unless transferred to the corporation
— A corporation, as a juridical person, is entitled to immunity against
unreasonable search and seizure
— A corporation is civilly liable for torts in the same manner
Stockholders of F Guanzon v Register of Deeds.
It is a transfer/conveyance of property. A corporation is a juridical person
separate and distinct from the stockholders. Properties registered in the name of
the corporation are owned by it as a separate entity. The shares held by
stockholders are their personal property and not the corporation.
Liquidation by stockholders after a corporation’s dissolution is not mere
partitioning of community property, but already a conveyance or transfer of title
to them from the corporation.
— The distribution of the corporate properties to the SHs was deemed not in
the nature of a partition among co-owners, but rather a disposition by the
corporation to the SHs as opposite parties to a contract
Caram v CA.
Filipinas Orient is a bona fide corporation, the principal stockholders of which are
the Carams. As such, the corporation, should alone be liable for its corporate acts
as duly authorized by its officers. It has a separate juridical personality and its
1
not contract the services of Arellano; it was only the results of the study made by
Arellano that was presented to them to induce them to invest.
Palay Inc v Clave.
GR— A corporation may not be made to answer for acts and liabilities of its
stockholders or those of the legal entities to which it may be connected and vise-
versa. Exception—the veil of corporate fiction may be pierced when:
1. it is used as a shield to further an end subversive of justice
2. it is used for purposes not intended by the law that created it
3. it is used to defeat public convenience, or:
4. justify a wrong
5. protect fraud
6. defend crime
7. perpetuate frad or confuse legitimate issues
8. circumvent the law or perpetuate deception
9. use as an alter-ego, adjunct or business conduit for the sole benefit
of the stockholders
He cannot be made personally liable just because he appeared to be the major
stockholder. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.
JG Summit Holdings Inc v CA.
The right of first refusal is a property right of PHILSECO shareholders,
KAWASAKI and NIDC, under the terms of their JVA. This right allows them to
purchase the shares of their co-shareholder before they are offered to a third
party. The agreement of co-shareholders to mutually grant this right to each
other, by itself, does not constitute a violation of the provisions of the
Constitution limiting land ownership to Filipinos and Filipino corporations. As
PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first
refusal can be validly assigned to a qualified Filipino entity in order to maintain the
60%-40% ratio. This transfer, by itself, does not amount to a violation of the
Anti-Dummy Laws, absent proof of any fraudulent intent.
No law disqualifies a person from purchasing shares in a landholding corporation
even if the latter will exceed the allowed foreign equity, what the law disqualifies
is the corporation from owning land. This is the clear import of the Constitution.
Tramat Mercantile Inc v CA.
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 (c) for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered 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; 6
or
4. He is made, by a specific provision of law, to personally answer for his corporate
action.
In the case at bench, there is no indication that petitioner David Ong could be
held personally accountable under any of the abovementioned cases.
Magsaysay-Labrador v CA.
Attempts by stockholders to intervene in suits against their corporations as in
this present case were struck down by the SC. A party may intervene under
remedial provisions if the stockholder has a legal interest in the matter in
litigation; but stockholders’ right in corporate property is purely inchoate and will
not entitle them to intervene in a litigation involving corporate property.
Shareholders are in no legal sense the owners of corporate property, which is
owned by the corporation as a distinct person.
Disregarding Corporate Entity/Piercing the Veil of Corporate Entity
— the main effect of disregarding the corporate fiction is that stockholders will
be held personally liable for the acts and contracts of the corporation whose
existence, at least for the purpose of the particular situation involved, is
ignored
2
— not to be confused with the de facto doctrine, where it may be presumed that
the corporation is de jure or even de facto and therefore not subject to
collateral attack
— when the court disregards the corporate entity in a proper case, it is not
denying corporate existence for all purposes, but merely refuses to allow the
corporation to use the corporate property
— Piercing is to prevent fraud or a wrong, and not for any other purpose
— where no fraud or injustice would be prevented as to make directors and
officers liable personally, doctrine does not apply
— Boyer-Roxas: piercing cannot be used or resorted to merely establish a
right or interest, and the SC denied piercing when it was employed to
justify under a theory of co-ownership the continued use and possession
by SHs of corporate properties
— In all piercing cases, the effect has always been to make the active or
intervening SH or officer liable for corporate debts and obligations
Classification of piercing cases:
(1) To commit FRAUD or justify a wrong, or defend a crime (Villa Rey, Palay,
Concept Builders)
a. There must be a fraud or evil motive in the affected transaction;
mere proof of control of the corporation—by itself—would not
justify piercing
b. Main action should seek for the enforcement of pecuniary claims
c. Corporate entity was used in the perpetration of the fraud or in
the justification of wrong or to escape personal liability
(2) as an ALTER EGO, business conduit of another person or entity, or mere
farce to defeat public convenience (La Campana, Marvel, Liddell,
Koppel, Indophil)
a. use of corporation as an alter ego is in direct violation of the
separate juridical entity doctrine
b. by not respecting the separate personality, others who deal with
the corporation are not also expected to be bound by the
separate personality of the corporation, and may treat the
interests of the controlling SH/officer/director and the
corporation as the same
 c. piercing alter ego may prevail even when no pecuniary claims are
sought to be enforced
d. since only the medium by which the business enterprise is
changed, then the veil may be pierced to allow the business
creditors to recover from whoever has actual control
(3) necessary to achieve EQUITY or justice
Cases where veil was pierced:
Marvel Bldg v David (corporate entity used to evade war profits taxes).
SC proved that Castro was the sole and exclusive owner and that the other
persons name in the articles of incorporation are mere dummies:
(1) Castro endorsed in blank the shares of stock in the name of the other
incorporators and maintained it in her possession.
(2) The dummy stockholders did not have incomes in such amounts in the
certificates during the time of the organization of the corporation or
after in order to enable them to pay in full for their subscriptions.
(3) The subscriptions were not receipted for and were deposited in the
corporation name but kept in Castro’s possession
(4) The stockholders or directors never appeared to have met to discuss the
business of the corporation
(5) Castro had advance large sums of money to the corporation without any
accounting and that the books were kept as if they belonged to Castro
alone
Jacinto v CA.
While on the face of the complaint there is no specific allegation that the
corporation is a mere alter ego of petitioner, subsequent developments, from the
stipulation of facts up to the presentation of evidence and the examination of
witnesses, unequivocably show that respondent Metropolitan Bank and Trust
Company sought to prove that petitioner and the corporation are one or that he is
the corporation. No serious objection was heard from petitioner.
(It was held that the piercing doctrine may be applied by the courts even when the
complaint does not seek its enforcement, so long as evidence is adduced during
trial as the basis for its application can be had. In other words, there must be
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evidentiary basis for application of the piercing doctrine during trial on the
merits.)
Concept Builders v NLRC.
SC summarized the probative factors considered when the corporate mask may be
lifted and the corporate veil may be pierced, when a corporation is but the alter
ego of a person or of another corporation:
(1) stock ownership by one or common ownership of both corporations
(2) identity of directors and officers
(3) manner of keeping corporate books and records
(4) methods of conducting the business.
The Court held that the conditions under which the juridical entity may be
disregarded very according to the peculiar facts and circumstances of each case.
No hard and fast rule can be accurately laid down, but certainly there are some
probative factors of identity that will justify the application of the piercing
doctrine.
The Court also applied the following tests in determining the applicability of the
piercing doctrine:
(1) control, not mere majority of complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked
(2) such control must have been used to commit fraud or wrong, to
perpetuate the violation of statutory or other positive legal duty, or
dishonest and unjust act in contravention of legal rights
(3) the aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of
The absence of any of these elements prevents the piercing doctrine. In applying
the instrumentality or alter ego doctrine, the courts are concerned with reality
and not form.
Both corporations had the same president, the same board of directors, the same
corporate officers, and substantially the same subscribers.
Under this circumstances, (sic) it cannot be said that the property levied upon by
the sheriff were not of respondents." Clearly, petitioner ceased its business
operations in order to evade the payment to private respondents of back wages
and to bar their reinstatement to their former positions. HPPI is obviously a
business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner
corporation.
Claparols v CIR.
It is very clear that the Claparols Corp which succeeded Claparols Steel and Nail
is the continuation and successor of the first entity and its emergence was
skillfully timed to avoid the financial liability that already attached to its
predecessor, Claparols Steel and Nail. Both corporations were owned and
controlled by Eduardo Claparols and there was no break in the succession and
continuity of the same business. This avoiding-the-liability scheme is very patent,
considering that 90% of the subscribed shares of Claparols Steel was owned by
Eduardo Claparols himself, and all assets of the dissolved Claparols Steel and Nail
were turned over to Claparols Steel Corp. It is very obvious that the second
corporation seeks the protective shield of a corporate fiction whose veil in the
present case could, and should be pierced as it was deliberately and maliciously
designed to evade the financial obligation to its employees.
Villa Rey Transit v Ferrer.
IT would appear that Villarama supplied the organization expenses and the assets
of Villa Rey such as trucks and equipment, and that there was no actual payment by
the original subscribers of the amounts of P95K and P100K as first and second
installments of the paid-up capital. The finances of the corporation was
manipulated and disbursed by Jose as they were his private funds, in such a way
that he appeared to be the actual owner-treasurer and not the wife.
Villarama made use of the money of the corporation and deposited it to his private
accounts, and the corporation paid for his expenses. He admitted that he mingled
corporate with his personal funds. All these are strong evidence that Villarama
had been much too involved in the affairs of Villa Rey and show that Villa Rey is his
alter ego.
The fiction of legal entity is urged as a means of perpetrating a fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the circumvention of
4
statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or a crime, the veil with which the law covers and isolates
the corporation from its members or stockholders who compose it will be lifted to
allow for its consideration merely as a aggregation of individuals. The Court
pierced the veil to enforce a non-competition clause entered into by its controlling
stockholder in his personal capacity.
Liddel v CIR (corporate entity was used to evade the payment of higher taxes).
Frank Liddell owned both corporations as his wife could not have had the money to
pay her subscriptions. Liddel Motors was the medium created by Liddel & Co to
reduce its tax liability. A taxpayer has the legal right to decrease, by means which
the law permits, the amount of what otherwise would be his taxes or altogether
avoid them; but a dummy corporation serving no business purposes other than as a
blind, will be disregarded.
Mere ownership by a single stockholder or by another corporation of all or nearly
all capital stocks of the corporation is not by itself a sufficient ground for
disregarding the separate corporate personality.
La Campana Coffee Factory v Kaisahan.
The Court disregarded the fiction of corporate existence and treated the two
companies as one. In alter ego cases, no pecuniary claim need be involved to allow
the courts to apply the piercing doctrine.
Cases where veil was NOT pierced:
IndoPhil Textile Mill Workers Union v Calica.
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 members or stockholders or the
corporation will be considered as the corporation, that is liability will attach
directly to the officers and stockholders.
In the case at bar, petitioner seeks to pierce the veil of corporate entity of
Acrylic, alleging that the creation of the corporation is a devise to evade the
application of the CBA between petitioner Union and private respondent Company.
While we do not discount the possibility of the similarities of the businesses of
private respondent and Acrylic, neither are we inclined to apply the doctrine
invoked by petitioner in granting the relief sought. The fact that the businesses
of private respondent and Acrylic are related, that some of the employees of the
private respondent are the same persons manning and providing for auxiliary
services to the units of Acrylic, and that the physical plants, offices and facilities
are situated in the same compound, it is our considered opinion that these facts
are not sufficient to justify the piercing of the corporate veil of Acrylic.
The legal corporate entity is disregarded only if it is sought to hold the officers
and stockholders directly liable for a corporate debt or obligation.
Secosa et al v Heirs of Erwin Suarez Franscisco.
For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.
The records of this case are bereft of any evidence tending to show the presence
of any grounds enumerated above that will justify the piercing of the veil of
corporate fiction such as to hold the president of Dassad Warehousing and Port
Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name
of Dassad Warehousing and Port Services, Inc., and not in the name of El
Buenasenso Sy. Raymundo Secosa is an employee of Dassad Warehousing and Port
Services, Inc. and not of El Buenasenso Sy. All these things, when taken
collectively, point toward El Buenasenso Sy’s exclusion from liability for damages
arising from the death of Erwin Francisco.
Yu v NLRC.
Neither may be said that petitioners and Tanduay Distillers are one and the same
as TDI, as seems to be the impression of respondents when they impleaded
petitioners as party respondents in their complaint for unfair labor practice,
illegal lay off, and separation benefits.
Such a stance is not supported by the facts. The name of the company for whom
the petitioners are working is Twin Ace Holdings Corporation. As stated by the
Solicitor General, Twin Ace is part of the Allied Bank Group although it conducts
the rum business under the name of Tanduay Distillers. The use of a similar
5
sounding or almost identical name is an obvious device to capitalize on the goodwill
which Tanduay Rum has built over the years. Twin Ace or Tanduay Distillers, on
one hand, and Tanduay Distillery, Inc. (TDI), on the other, are distinct and
separate corporations. There is nothing to suggest that the owners of DTI, have
any common relationship as to identify it with Allied Bank Group which runs
Tanduay Distillers.
We hold that the director of Labor relations acted with grave abuse of discretion
in treating the two companies as a single bargaining unit.
The fact that their businesses are related and that the 236 employees of Georgia
Pacific International Corporation were originally employees of Lianga Bay Logging
Co., Inc. is not a justification for disregarding their separate personalities.
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any other
legal entity to which it may be related (Palay, Inc vs. Clave)
Twin Ace was only a subsequent interested buyer. Only after First Pacific gave up
its efforts to acquire the assets did Twin Ace or Tanduay Distillers come into the
picture.
Another factor to consider is that TDI as a corporation or its shares of stock
were not purchased by Twin Ace. The buyer limited itself to purchasing most
of the assets, equipment, and machinery of TDI. Thus, Twin Ace or Tanduay
Distillers did not take over the corporate personality of TDI although they
manufacture the same product at the same plant with the same equipment and
machinery. Obviously, the trade name "Tanduay" went with the sale because
the new firm does business as Tanduay Distillers and its main product of rum
is sold as Tanduay Rum.
The circumstances of this case are different from the earlier decisions of the
Court in Labor cases where the veil of corporate fiction was pierced.
In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La
Campana (KKM), (93 Phil. 160 [1953], La Campana Coffee Factory, Inc. and La
Campana Gaugau Packing were substantially owned by the same person. They had
one office, one management, and a single payroll for both business. The laborers of
the gaugau factory and the coffee factory were also interchangeable, the workers
in one factory worked also in the other factory.
In Claparols vs. Court of Industrial Relations (65 SCRA 613 [1975], the Claparols
Steel and Nail Plant, which was ordered to pay its workers backwages, ceased
operations on June 30, 1956 and was succeeded on the very next day, July 1, 1957,
by the Clarapols Steel Corporation. Both corporations were substantially owned
and controlled by the same person and there was no break or cessation in
operations. Moreover, all the assets of the steel and nail plant were transferred
to the new corporation.
— Yu: when a transferee purchases only the assets of the transferor, the
transferee cannot be held liable for the labor claims and obligation for
reinstatement adjudged against the transferor
— there must be continuity of the identity of the owners in the business;
— the doctrine of business-enterprise transfer as to make the transferee liable
for the business obligations of the transferor is really a species of piercing
doctrine and would require a certain degree of continuity of the same business
by the same owners using the corporate fiction as a shield
Cease v CA.
In sustaining the theory that the estate of Forrest and Tiaong Milling are merged
as one personality and that the company is only the business conduit and alter ego
of Forrest, the TC correctly ruled that the company developed into a close family
corporation, with the Board and stockholders belonging to one family, the head of
which was Forrest who always retained the majority stocks and thus control and
management of its affairs.
The business of the corporation in question is largely the personal venture of
Forrest. The children were neither subscribers or purchasers of the stocks they
own. Their participation as nominal shareholders emanated solely from Forrest’s
gratuitous dole out of his own shares to the benefit of his children.
Delpher Trade v CA.
The DoE between Pachecos and Delpher cannot be considered a contract of sale.
There was no transfer of actual ownership. The Pacheco family merely changed
their ownership from one form to another, and it remained in the same hands.
6
The legal right of a taxpayer to decrease the amount of what otherwise could be
his taxes or avoid them cannot be doubted. As they are still the owners, Hydro has
no basis for its claim of RFR under the lease contract.
Parent-Subsidiary Relationship
— The general principles outlined in the preceding section apply to parent-
subsidiary corporations
— Taken alone, mere fact of ownership by the mother of all or substantially all
the stocks of another corporation is not sufficient to justify their being
treated as on entity
— If used to perform legitimate functions, the subsidiary’s existence may be
respected, and liability will be confined to that which arises from their
respective businesses
— The courts however, in the exercise of its equity jurisdiction, will step in to
prevent abuses and pierce the veil
— Liddell: mere fact that one or more corporations are owned and controlled by
a single SH is not of itself sufficient ground for piercing, but…
— … in Koppel: control of shareholdings of the corporation necessarily means by
itself control of the operations of the corporation!
— Although ownership of the controlling capital stock of the corporation by
itself would not authorize piercing, however, when existing together with
other factors, the courts have given much weight to such control feature to
pierce
Garnett v Southern Railway.
The Court finds the existence of two distinct companies. There is no evidence
that Southern dictated the management of Lenoir. In fact, Marius the manager
was in full control of its operations. He established prices, handled all negotiations
in CBAs. It paid local taxes, had local legal counsel, maintained Workmen’s
Compensation.
Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions
and pricing remained in the hands of Marius and was not dictated by Southern.
Marius operated the business as a going concern.
There are certain circumstances which if present in the proper combination, would
render the subsidiary an instrumentality:
 (1) parent owns all or most of the capital stock
(2) parent and subsidiary have common directors or officers
(3) parent finances the subsidiary
(4) parent subscribes to all capital stock of the subsidiary or causes its
incorporation
(5) subsidiary has grossly inadequate capital
(6) parent pays salaries and other expenses or losses of subsidiary
(7) subsidiary has substantially no business except with the parent or no
assets except those conveyed to the parent
(8) the subsidiary is described as a department in the books of the parent
(9) parent uses the property of the subsidiary
(10) directors of the subsidiary do not act independently but take orders from
the parent
(11) formal legal requirements of the subsidiary are not met
Since only two of the 11 indicia occur—the ownership of most of capital stock and
subscription by Southern to capital stock of Lenoir—Lenoir is not a subsidiary and
is a separate corporation. Thus there is no basis for the claim of Garrett with
Southern under the Federal Act
Jardine Davies Inc v JRB Realty Inc.
The Court categorically held in another case that a subsidiary has an independent
and separate juridical personality, distinct from that of its parent company; hence,
any claim or suit against the latter does not bind the former, and vice versa. In
applying the doctrine, the following requisites must be established: (1) control, not
merely majority or complete stock control; (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 acts in contravention of
plaintiff's legal rights; and (3) the aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. The records bear out
that Aircon is a subsidiary of the petitioner only because the latter acquired
Aircon's majority of capital stock. It, however, does not exercise complete control
over Aircon; nowhere can it be gathered that the petitioner manages the business
affairs of Aircon.
Koppel v Yatco (the subsidiary was so controlled by the parent that its separate
identity was hardly discernible, and became a mere alter ego of the parent and was
used to evade taxes).
7
The Court said that the virtual control of the shareholdings of a corporation would
lead to certain legal conclusions. It could not overlook the fact that in the
practical working of corporate organizations of the class to which the two entities
belonged, the holder or holders of the controlling part of the capital stock of the
corporation dominate not only the selection of the board of directors but more
often than not, also the action of that board.
It held that applying this to the case, it cannot be conceived how the Koppel Phils
could effectively go against the policies, decisions, and desires of the American
corporation… The American corporation held 99.5% of the capital stock of the Phil
corporation… In so far as the sales are concerned, Koppel Phils and Koppel
Industrial are for all intents and purposes one and the same, and the former is a
mere branch, subsidiary, or agency of the latter. The ff are facts which led to the
Court to conclude the above:
— share in the profits of Koppel Phils was left to the sole, unbridled
control of Koppel Industrial
— shares of stock of Koppel Phils are all owned by Koppel Industrial
(overwhelming majority)
— Koppel Phils acted as agent and representative of Koppel Industrial
— Koppel Phils alone bore the incidental expenses for transactions, such
as cable expenses
— Koppel Phils was fully empowered to instruct banks it deals with, if
purchasers were not able to pay the bank drafts to the bank as
payment for the purchases
— Koppel Phils makes good any deficiencies by deliveries from its own
stock
The application of the piercing doctrine is not a contravention of the principle that
the corporate personality of a corporation cannot be collaterally attacked. When
the piercing doctrine is applied against a corporation in a particular case, the court
does not deny legal personality… for any and all purposes. The application of the
piercing doctrine is therefore within the ambit of the principle of res judicata
that binds only the parties to the case and only to the matters actually resolved
therein.
— GR: separate personality
— Exception: cases where veil may be pierced
o There was a violation of rights or injury in all
these cases where veil was pierced
o Elements of ownership, control, mgt in the
corporate entity
 Inevitable that these will exist
 All elements have to be satisfied so the
corporate veil can be pierced
o What determines pierceability?
 Motive/intention
 Liability arising
 Injury or damage or loss
— Estate planning:
o No impediment to use corporate as vehicle for
estate planning
o Corporation can be put up by a single person
o Nothing prevents an individual from funding a
corporation
o To meet requirements of code, assign nominal
shares to persons
o If it is money, can be used to acquire assets;
still corporate-owned
o Even a 99.9% owner cannot distribute the property,
only the shares
— Cease: ideal, but there was a dispute
— Marvel had no compulsory heirs
— Delpher ruling on transfer is obiter
— Just defer: use corporate as a vehicle to distribute
what appears to be the estate
o But: you still have to distribute the shares
(dispose or donate)
o Mechanism to ensure that once you die, corporation
is dissolved
 Otherwise: Cease case 8
 Exit mechanism for those who want out