BUSINESS ORG.

2 COURSE OUTLINE (2010)

I. INTRODUCTION ---
History/Origin – Roman times/Medieval period/ England/ USA
Philippine setting - Spanish regime/ US regime/Present

II. DEFINITIONS/ ATTRIBUTES OF A CORPORATION

A. Artificial Being - Sec. 2, Corp. Code; Art. 44 (3), Civil Code

a) Commencement of juridical personality for:

1. corporations
2. partnerships – registered / unregistered
3. associations –regd./ unregd. (Art. III, Sec 8, Constitution)
4. sole proprietorship – Mangila v. CA (GR 125027; 8/12/ 2002

b) Rights of a juridical person – Art. 46, Civil Code

Art. III, Sec. 1 and 2, Constitution
c) Criminal Liability -- Ching v. CA (Feb. 6, 2006)
d) Moral damages -- Herman Crystal, et. al v. BPI
(GR 172428, Nov. 2008)
Filipinas Broadcasting Network v. AMEC-BCCM
(GR 141994, Jan. 17, 2005)
ABS-CBN Corp. V. CA 361 Phil. 499 (1999)
Jardine Davies/Purefoods v. CA (GR 128066; 6/19/2000)
Mambulao Lumber v. PNB 130 Phil. 366 (1968)
Pp. v. Manero, Jr. (GR 86883-85, Jan. 29, 1993)

B. Created by Operation of Law – Art. XII, Sec. 16, Constitution

1. private corporations (distinguish from public corporations)
2. GOCCs
3. Corp. by prescription

C. Right of Succession – Rationale; Compare with partnership

(delectus personae) & sole proprietorship

D. Express/Implied/Incidental Powers - Corp. Code, Sec. 45, 36-44

III. COMPARISONS & DISTINCTIONS --- Corporations/Partnerships

Sole proprietorships
IV. DOCTRINE OF CORPORATE ENTITY

A. Doctrine/ Effects:

Gallagher v. Germania Brewing Co. 54 N.W. 115 (1893)

Magsaysay-Labrador v. CA. (1989) 180 SCRA 266
Stockholders of Guanzon v. Reg. of Deeds (1962) 6 SCRA 373
Caram v. CA (1987) 151 SCRA 373
Palay, Inc. v. Clave (1983) 124 SCRA 640
Dulay Enterprises v. CA (1993) 225 SCRA 678
San Juan Structural v. CA (1998) 296 SCRA 631
Tramat Mercantile v. CA (1994) 238 SCRA 14
Jacinto v. CA (1991) 198 SCRA 211
JG Summit Holdings v. CA (2007) 450 SCRA 169

B. Piercing the Corporate Veil:

Villa Rey Transit v. Ferrer (1968) 25 SCRA 845

Marvel Bldg. v. David (1954) 94 Phil. 376
Cease v. CA (1979) 93 SCRA 483
Secosa v. Heirs of Francisco (2004) 433 SCRA 273
Concept Builders v. NLRC (1996) 257 SCRA 149
Claparols v. CIR (1965) 65 SCRA 613
La Campana Coffee Factory v. Kaisahan (1953) 93 Phil 160
Pamplona Plantation v. Tinghil (2005) 450 SCRA 421
Yu v. NLRC (1995) 245 SCRA 134
Indo-Phil Textile Mills v. Calica (1992) 205 SCRA 698
Umali v. CA (1990) 189 SCRA 529

C. Parent-Subsidiary Relationship:

Yutivo v. CTA (1961) 1 SCRA 160

Koppel v. Yatco
Liddell & Co. v. CIR
Jardine Davis Inc. v. JRB Realty
PNB v. Ritratto Group
Pantranco v. NLRC.
(1946) 77 Phil 496
(1961) 2 SCRA 632
(2005) 463 SCRA 555
(2001) 362 SCRA 216
(G.R. No. 170689) March 17, 2009
V. CLASSES OF CORPORATIONS UNDER THE CORP. CODE

1. Sec. 3, 87, 88 --- stock and non-stock corporation

Case: Coll. of Int. Rev. v. Club Filipino (1962) 5 SCRA 321
2. Other classes of corporations under the Corporation Code:
Close corporation – Sec. 96
Special corporations – Educational, religious (Title XIII)
Foreign corporations --- Sec. 123
Others: subsidiary (wholly-owned v. majority owned), affiliate,
parent/holding company, joint venture corporation,
open vs. close, lay vs. religious, eleemosynary vs. civil
corp., etc.

VI. CREATION OF CORPORATION

1. Promotion (relate to Securities Regulation Code)

2. Incorporation
3. Formal organization and commencement of business operations

VII. INCORPORATION

1) Steps in incorporation
2) Sections 10 –19, 88, 96, 97
3) Articles of Incorporation– a) Sec. 14, 15,
b) Amendment of A/I – Sec. 16, Relate to:
Sec. 38.4 – power to amend
Sec. 6 – voting rights of non-voting shares
Sec. 81[1]--- appraisal right
Secs. 37, 38, 103 – mere written assent
c) Binding effect of amendment

Cases: Rivera case and RH Macy case

4) Citizenship requirements --- Sec. 140 ;

--- pertinent provisions of the
Constitution;
--- Foreign Investments Act (FIA) of 1991
(R.A. 7042, as amended);
--- other laws imposing maximum foreign
equity participation in corporations;
 --- “Philippine national” under the FIA
--- Phil. corporation under the Corp. Code
--- foreign corporation under the Corp. Code
5) Residence of corporation -
Case: Young Auto Supply Co. v. CA (1993) 223 SCRA 670

6) Name of corporation – (SEC Memo Circ. 14, Series of 2000)

Cases: Philips Export B.V. v. CA (1992) 206 SCRA 457
Lyceum of the Phils. v. CA (1993) 219 SCRA 610
Armco Steel Corp. v. SEC (L-54580 Dec. 29, 1987)
P.C. Javier & Sons, Inc. v. CA (2005) 462 SCRA 36

7) De jure corporations

8) De facto corporations – Sec. 20

(requisites, basis, powers, rights, liabilities, validity )
Cases: Pioneer Insurance v. CA (G.R. 84157)
(1989) 175 SCRA 668
Municipality of Malabang v. Benito (1969) 27 SCRA 533
Hall v. Piccio (1950) 86 Phil. 603
Cagayan Fishing Devt. v. Sandiko G.R. L-43350
(12/23/1937)
Harill v. Davis (1909) 168 F. 187

9) Corporation by Estoppel – Sec. 21

(rationale, liabilities, validity)
Cases: Asia Banking Corp. v. Standard Products Co.
(1924) 46 Phil. 145
Cranson v. Int’l Business Machines Corp. (1964)
234 Md. 477; 200 A. 2d 33
Salvatierra v. Garlitos et al. (1958) 103 Phil. 757
Albert v. University Publishing Co., Inc. (1965) 13 SCRA 84
Chiang Kai Shek School v. CA (1989) 172 SCRA 389
Lim Tong Lim v. Phil. Fishing Gear Industries (1999)
317 SCRA 728
Int’l Express Travel v. CA (2000) 343 SCRA 674

10) Corps. that are neither de jure, de facto, nor by estoppel

VIII. INTERNAL ORGANIZATION OF CORPORATIONS

1) By-laws – Sec. 36 (5); Secs. 46 and 47

a) Concept of by-laws
b) By-laws vs. Articles of Incorporation
c) Contents of by-laws
d) Procedure for adoption – (b.1) before incorporation
(b.2) after incorporation
e) Effect of non-adoption
f) Requisites for validity
g) Binding effect of by-laws
h) Amendment of by-laws and effectivity date

Cases: Loyola Grand Villas Homeowners v. CA (1997)

276 SCRA 681
Fleischer v. Botica Nolasco (1925) 47 Phil. 583
Govt. of P. I. v. El Hogar Filipino (50 Phil. 399; 1927)
Gokongwei Jr. v. SEC, et al. (1979) 89 SCRA 336
Grace Christian High School v. CA
( GR 108905; Oct. 23, 1997)
Thomson v. CA (298 SCRA 280)
Salafranca v. Philamlife (Pamplona) Homeowners
Asso. (300 SCRA 469)
China Banking Corp. v. CA ( 270 SCRA 503)

2) Commencement of Business ---- Sec. 22

3) Election of Directors & Officers --- Sec. 25

IX. CAPITAL STRUCTURE OF CORPORATIONS

A. Concepts:
1) Capital vis-à-vis Capital Stock
2) Shares of Stock vis-à-vis Stock Certificate
3) Authorized Capital Stock
4) Subscribed Capital Stock
5) Paid-in Capital
6) Outstanding Capital Stock – Sec. 137
7) Watered stock - Sec. 65
B. Trust Fund Doctrine - vis-à-vis corporate assets
- vis-à-vis subscribed capital stock

C. Doctrine of Equality of Shares

D. Classification of Shares – Rationale

- Sec. 6, 7, 8, 9
a) Par value shares
b) No par value shares
- issued price
- “deemed fully paid and non-assessable”
c) Common shares
d) Preferred shares – different types
e) Redeemable shares
f) Founders’ shares
g) Treasury shares
e) Voting shares
f) Non-voting shares

E. CASES ---
Republic Planters Bank v. Agana ( GR 51765; Mar. 3, 1997)
COCOFED v. RP ( GR Nos. 177857-58; 178193; 180705
promulgated Sept. 17, 2009) re conversion of shares

F. STOCKS & STOCKHOLDERS

Sec. 60 -73, 137, 90

1) Consideration for shares -----

Garcia v. Lim Chu Sing 59 Phil. 562 (1934)

Apodaca v. NLRC (172 SCRA 442)
National Exchange vs Dexter (51 Phil. 601; 1928)

2) Unpaid subscriptions -----

Velasco vs Poizat 37 Phil. 802 (1918)

Lingayen Gulf Electric vs Baltazar (93 Phil. 404; 1953)
Da Silva vs Aboitiz (44 Phil. 755; 1923)
Lumanlan vs Cura (59 Phil. 746; 1934)
China Banking Corp. v. CA GR 117604 (Mar. 26, 1997)

3) Rights of Unpaid Shares ----

Fua Cun v. Summers, et al. (1923) 44 Phil. 704

Baltazar v. Lingayen Gulf (1965) 14 SCRA 522
Nava v. Peers Mktg. Corp. (1976) 76 SCRA 65

4) Nature/Function of Stock Certificates ----

Tan v. SEC (206 SCRA 740)

5) Proof of Ownership of Shares ----

Nautica Canning Corp. Yumul GR 164588 (Oct. 19, 2005)

Lao v. Lao GR 170585 (Oct 6, 2008)

6) Restrictions on Transfer of Shares ---

Fleischer v. Botica Nolasco (1925) 47 Phil. 583

Thomson v. CA (298 SCRA 280)
Rural Bank of Salinas, Inc. v. CA (210 SCRA 510)

7) Validity of Transfers / Registration of Shares

Razon v. IAC GR 74306 (March 16, 1992)

Torres v. CA (278 SCRA 793)
Rivera v. Florendo (144 SCRA 647; 1986)
Lim Tay v. CA GR 126891 (Aug. 5, 1998)
Ponce v. Alsons Cement GR 139802 ( Dec. 10, 2002)
Rural Bank of Salinas, Inc. v. CA (210 SCRA 510)
Hager v. Bryan 19 PHIL 138 (1911)
Bitong v. CA 292 SCRA 503
Abejo v. De la Cruz 149 SCRA 654 (1987)

8) Unauthorized Transfers ----

Santamaria vs. Hongkong 89 Phil. 780 (1951)

De los Santos vs. McGrath 96 Phil. 577(1955)

9) Collateral Transfers ---

Uson v. Diosomito (61 Phil. 535; 1935)
Chua Guan vs. Samahang Magsasaka 62 Phil. 473 (1935)
Chemphil Export & Import v. CA (Dec. 12, 1995)

X. PRE-EMPTIVE RIGHT – Sec. 39 and 102

XI. CORPORATE POWERS

1) Express, Implied, Inherent - Sections 36 to 45

2) Ultra Vires Doctrine --- Sec. 45; Legal Consequences
Cases: RP v. Acoje Mining (1963) 7 SCRA 631
National Power Corp. v. Vera (1989) 170 SCRA 721
Govt. of the P.I. v. El Hogar Filipino 50 Phil. 399
Pirovano, et al v. De la Rama (1954) 96 Phil. 335
Harden, et al v. Benguet (1933) 58 Phil. 141
Bissel v. Michigan Southern 22 NY 258; 1860
 
XII. CONTROL & MANAGEMENT

1) Board of Directors/Trustees –
a) Sections 23, 27

Ramirez v. Orientalist Co. & Fernandez 38 Phil 634

Expert Travel & Tours, Inc v. CA 459 SCRA 147
Citibank NA v. Chua 220 SCRA 75
Boyer-Roxas v. CA 211 SCRA 470

b) Non-stock corp. – Sec. 92

c) Close corp. - Secs. 97 (par.1, no.2), 97 (par.2),

Sec.104 --provisional director

d) Special corporations – Educational --- Sec. 108

Religious – Sec. 110-113, Sec. 116 (6)

e) Meetings – Sec. 49, 53, 54

Close corp. – Sec. 97(3), 101

f) Elections - Sec. 24, 26, 27

 Removal – Sec. 28
Vacancy – Sec. 29

Valle Verde CC v. Africa GR 151969 (Sept. 4, 2009)

2) Officers – Sec. 25, 92 (par. 3), 97 (last par.), 26, 27, 31, 32

Yu Chuck v. Kong Li Po 46 Phil 608

Woodchild Holdings v. Roxas Electric 436 SCRA 235
Bd. Of Liquidators v. Heirs of Kalaw 20 SCRA 987

3) Board Committees - Sec. 35

Hayes v. Canada Atlantic & Plant S.S. Co., Ltd. (1910)

US Circuit CA, First Circuit 181 F. 289
4) Stockholders –

(a) Sec. 23 and other provisions of the Corp. Code requiring

stockholders’ action
(b) Meetings – Sec. 49, 50, 51, 52, 54, 55, 56, 57

c) Deadlocks in close corps – Sec. 104

XIII. DUTIES OF DIRECTORS & CONTROLLING

STOCKHOLDERS

1) Compensation of directors – Sec. 30

2) Duty of diligence/business judgment rule – Sec. 31

Benguet Electric Coop. v. NLRC 209 SCRA 55

3) Self-dealing directors- Sec. 32

Prime White Cement v. IAC 220 SCRA 103

4) Interlocking directors – Sec. 33

Gokongwei v. SEC et al. 89 SCRA 336

5) Doctrine of Corporate Opportunity – Sec. 34

6) Duty to stockholders - Special Facts Doctrine

 Strong v. Repide 41 Phil. 947

7) Duty to creditors – Steinberg v. Velasco 52 Phil. 953

8) Watered Stocks - Sec. 65

XIV. DEVICES AFFECTING CONTROL

1) Proxy device – Sec. 58

2) Voting trusts – Sec. 59
3) Pooling & voting agreements – Sec. 100
4) Cumulative voting – Sec. 24
5) Classification of shares – Sec. 6
6) Restriction on transfer of shares – Sec. 98
7) Prescribing qualifications for directors – Sec. 47 (5)
8) Management contracts – Sec. 44
9) “Super” votes; unusual voting/quorum requirements – Sec. 97

XV. RIGHT OF INSPECTION ---- Secs 74 - 75

Cases: Pardo v. Hercules Lumber 47 Phil. 965
Gonzales v. PNB 122 SCRA 490
Veraguth v. Isabela Sugar Co. 57 Phil. 266
Gokongwei v. SEC L- 45911, April 11, 1979

XVI. DERIVATIVE SUIT

Cases: Evangelista v. Santos 86 Phil. 387
Republic Bank v. Cuaderno 19 SCRA 671
SMC v. Khan L- 85339 (Aug. 11, 1989)
Yu v. Yukayguan GR 177549 (June 18, 2009)

XVII. MERGERS & CONSOLIDATION

XVIII: DISSOLUTION:

A. Modes of Dissolution:

1) Expiration of term – whether original, shortened, or

extended
2) Sec. 22
3) Voluntary – Sec. 118 (no creditors affected)
 Sec. 119 (creditors affected)
4) Involuntary - Sec. 121
- Quo warranto proceedings – jurisdiction with
RTC under Securities Regulation Code
5) Shortening corporate term – Sec. 120
6) Close Corporation – Sec. 105

B. Effects of Dissolution –

1) Juridical personality ceases – not even de facto

corporation; subject to collateral attack
2) Business discontinued except for winding up
3) 3-year pd after dissolution – for winding up and
liquidation only
4) Section 145
5) Cases: National Abaca v. Pore (2 SCRA 989)
Clemente v. CA (242 SCRA 717)

XIX. LIQUIDATION:
A. Sec. 122
B. Modes of Liquidation –
1) by Board of Directors
2) by trustees– 3- yr limit does not apply, provided
appointment of trustees is made within said
3-year period
3) by receiver appointed by RTC- same rule as above

REVIEW: National Abaca case and Clemente case

GR: Prohibition against distribution of assets except upon dissolution

and liquidation (Sec 122)

Exception: Sec. 8, 9, 38, 41, 43, 104, 105

OTHER CASES: 1) China Banking v. Michelin 58 Phil. 261

2) RP v. Marsman Dev. Corp 44 SCRA 418
3) Tan Tiong Bio v. CIR (GR No. L-15778,
April 23, 1962)

C. Non-stock Corporations - Sec. 94 to 95

XX. FOREIGN CORPORATIONS --- Sec. 123 – 136, 144

1. Definition and Right of Foreign Corporation – Sec. 123

2. Principle of Reciprocity – Sec. 123 and 125(10)

3. Application for a License– Sec. 125

4. Issuance of License by SEC /when to commence transacting

business in the Philippines/ duration for transacting business –
Sec. 126

5. What constitutes “doing business”

- continuity of transactions w/c are in pursuance of the
normal business of the corporation
(Mentholatum v. Mangaliman) 72 Phil. 525 (1941)
- Implementing rules of RA 7042 (Foreign Investments
Act of 1991, as amended)

6. What constitutes “not doing business”

- Test is if a company has no intention to repeat the
business activity and there is no element of continuity of
conduct of business
- Sec. 1 of implementing rules of RA 7042, as amended

2. Who may be resident agent – Sec. 127

3. Service of summons/ other legal processes:

a) Sec. 128 - foreign corp. w/c has a license to do
business in the Philippines
b) Sec. 14, Rule 14 of New Rules of Court – foreign
corp. doing business in the Phil. w/out a
license

9. Applicable Law: General Rule/ Exceptions - Sec.129

10. Amendments - Sec. 130 and 131

11. Merger or consolidation – Sec. 132 (applicable only to foreign
corps. authorized to do business in RP)
a) If with local corp. – no law authorizing the same
b)If with another foreign corp – Sec. 132
Absorbed corp – must file petition for w/drawal
Surviving corp – if it desires to continue in RP
the business of absorbed corp., must file own application
in acc. w/ Sec. 123. 125. 126. 128

12. Doing business without a license – Sec. 133

a) Foreign corp. CANNOT sue

(Granger Asso. v. Microwave Systems, Inc.)
189 SCRA 63 (1990)
Exception --- estoppel on part of party dealing w/ foreign
corp.
(Merrill Lynch Futures v. CA) 211 SCRA 824 (1992)

b) May be SUED under the doctrine of quasi-estoppel by

acceptance of benefits
(Marubeni Nederland BV v. Tensuan)
190 SCRA 105 (1990)

13. Not doing business in RP (not required to get a license)

a) CAN sue on the following:

- on an isolated transaction (Marshall Wells v. Elser)
46 Phil 71 (1924)
- to protect its reputation, name, and goodwill
(Gen. Garments Corp. v. Dir. Of Patents) 41 SCRA
50 (1971)
- infringement of trademark and unfair competition
(Le Chemise Lacoste v. Fernandez)
129 SCRA 377 (1984)
- Sec. 160 of R.A. 8293 (Intellectual Property Code)
- to enforce its right not arising out of a business
transaction
b) CAN BE SUED for actionable acts or omissions
- acts done vs. a person(s) in the Phil.
 - obligations incurred by its representative and fully
subsidized extension office in the Phil.
(Mavest Inc. v. Sampaguita Garment) 470 SCRA 440
[2005])

14. In relation to Nos. 5, 6, 12, and 13 above:

Agilent Technologies Singapore (PTE) Ltd. vs. Integrated
Silicon Technology Philippines Corp. , et al.
(G.R. No. 154618)       April 14, 2004

15. Enforceability of contracts of unlicensed foreign corporations ---

Lack of capacity at execution of contract cured by
subsequent registration of unlicensed foreign corp.
(Home Insurance Co. v. Eastern Shipping Lines) 123 SCRA 424

16. Revocation of License – Sec. 134 and 135

17. Withdrawal of foreign corp. – Sec. 136

XXI. JURISDICTION – Interim Rules of Procedure for Intra-

corporate Matters --- w/ the RTC
--- Securities Regulation Code

XXII. SECURITIES REGULATION CODE --- Exempt Transactions,

Tender Offer, etc.
Case: CEMCO v. Nat. Life Insurance
G.R 171815 (Aug. 7, 2007)