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SEC. 2.

Corporation defined

Q: Aircon is a subsidiary of Davies who owns Aircon’s majority of capital stock. Is Davies liable for
acts of Aircon?

A: No, Davies not liable because 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 existence of interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations. But
even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of
corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime. To warrant resort to this extraordinary remedy, there must be proof that
the corporation is being used as a cloak or cover for fraud or illegality, or to work injustice. Any piercing
of the corporate veil has to be done with caution. The wrongdoing must be clearly and convincingly
established. It cannot just be presumed. There is no evidence that Aircon was formed or utilized with
the intention of defrauding its creditors or evading its contracts and obligations. There was nothing
fraudulent in the acts of Aircon. It complied with its obligation in good faith, pursuant to its contract with
JRB Realty. Moreover, it bears stressing that the Davies was never a party to the contract. Privity of
contracts take effect only between parties, their successors-in-interest, heirs and assigns. Davies, which
has a separate and distinct legal personality from that of Aircon, cannot, therefore, be held liable.

SEC. 6. Classification of Shares. –

Q: Should the occupancy of stockholders in the property of their corporation be respected, even if
they are being evicted by board resolution, because they own an aliquot part of the corporation as

A: Properties owned by a corporation are owned by it as an entity separate and distinct from its

While shares of stocks are personal property, they do not represent property of the corporation. A share
of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to
that extent when distributed according to law and equity, but its holder is not the owner of any part of
the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property
or assets. The holder is not a co-owner or a tenant in common of the corporate property.