REPUBLIC ACT NO.

11232
AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES
Notes and Cases Part I
JGA Medina

I. Public, Private, Government Owned and Controlled Corporations:

The laws creating corporations, both public and private find their mandate under Article XII,
Sec. 16 of the in the Philippine Constitution:

“The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in
the interest of the common good and subject to the test of economic
viability.”

The RCC, on the other hand provides:

“Section 4. Corporations Created by Special Laws or Charters. — Corporations

created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are applicable.”

Philippine Society for the Prevention of Cruelty to Animals v.

Commission on Audit,
G.R. No. 169752, [September 25, 2007]:

“To determine whether a corporation is public or private is found in the totality of the relation
of the corporation to the State. If the corporation is created by the State as the latter's own
agency or instrumentality to help it in carrying out its governmental functions, then that
corporation is considered public; otherwise, it is private. Applying the above test, provinces,
chartered cities, and barangays can best exemplify public corporations. They are created by
the State as its own device and agency for the accomplishment of parts of its own public
works.”

Funa v. Manila Economic & Cultural Office (MECO)

G.R. No. 193462, [February 4, 2014], 726 PHIL 63:

“Government instrumentalities are agencies of the national government that, by reason of

some ‘special function or jurisdiction’ they perform or exercise, are allotted ‘operational
autonomy’ and are ‘not integrated within the department framework.’ Subsumed under the
rubric ‘government instrumentality’ are the following entities:

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 1. Regulatory agencies,
2. Chartered institutions,
3. Government corporate entities or government instrumentalities with
corporate powers (GCE/GICP), and
4. GOCCs’

GOCCs, therefore, are ‘stock or non-stock’ corporations ‘vested with functions relating to
public needs’ that are ‘owned by the Government directly or through its instrumentalities.’ By
definition, three attributes thus make an entity a GOCC: first, its organization as stock or
non-stock corporation; second, the public character of its function; and third, government
ownership over the same. Possession of all three attributes is necessary to deem an entity
a GOCC.”

In classifying MECO which was incorporated under the Corporation Code and is not
government owned, the Supreme Court noted that it “is uniquely situated as compared with
other private corporations. From its over-reaching corporate objectives, its special duty and
authority to exercise certain consular functions, up to the oversight by the executive
department over its operations — all the while maintaining its legal status as a non-
governmental entity — the MECO is, for all intents and purposes, sui generis.”

II. Definition and General Attributes.

SECTION 1. Title of the Code. – This Code shall be known as “The Revised
Corporation Code of the Philippines.”

SEC. 2. Corporation defined. – A corporation is an artificial being created by

operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.

Philippine National Bank v. Aznar,

G.R. Nos. 171805 & 172021, [May 30, 2011], 664 PHIL 461-482:
“. . . Section 2 of the Corporation Code (Batas Pambansa Blg. 68), which states that "[a]
corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by law or incident to its
existence."
As a consequence thereof, a corporation has a personality separate and distinct from those of
its stockholders and other corporations to which it may be connected. Thus, we had previously
ruled in Magsaysay-Labrador v. Court of Appeals that the interest of the stockholders over the
properties of the corporation is merely inchoate and therefore does not entitle them to
intervene in litigation involving corporate property, to wit:
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent,
remote, conjectural, consequential and collateral. At the very least, their interest
is purely inchoate, or in sheer expectancy of a right in the management of the

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 corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the
property of the corporation, it does not vest the owner thereof with any legal
right or title to any of the property, his interest in the corporate property being
equitable or beneficial in nature. Shareholders are in no legal sense the owners
of corporate property, which is owned by the corporation as a distinct legal
person.“
i. artificial being created by operation of law –

Tayag v. Benguet Consolidated, Inc.,

G.R. No. L-23145, [November 29, 1968]:

We start with the undeniable premise that, a corporation is an artificial being created by
operation of law . . . It owes its life to the state, its birth being purely dependent on its will. As
Berle so aptly stated: Classically, a corporation was conceived as an artificial person, owing its
existence through creation by a sovereign power. As a matter of fact, the statutory language
employed owes much to Chief Justice Marshall, who in the Dartmouth College decision,
defined a corporation precisely as an artificial being invisible, intangible, and existing only in
contemplation of law.

The well-known authority Fletcher could summarize the matter thus: A corporation is not in
fact and in reality a person, but the law treats it as though it were a person by process of
fiction, or by regarding it as an artificial person distinct and separate from its individual
stockholders.. It owes its existence to law. It is an artificial person created by law for certain
specific purposes, the extent of whose existence, powers and liberties is fixed by its
charter." Dean Pound's terse summary, a juristic person, resulting from an association of
human beings granted legal personality by the state, puts the matter neatly.

ii. having the right of succession –

Reynoso IV v. Court of Appeals,

G.R. Nos. 116124-25, [November 22, 2000], 399 PHIL 38-55:

“It was evolved to make possible the aggregation and assembling of huge amounts of capital
upon which big business depends. It also has the advantage of non-dependence on the lives
of those who compose it even as it enjoys certain rights and conducts activities of natural
persons.”

iii. with powers, attributes and properties expressly authorized by law or incident
to its existence –

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Philippine Society for the Prevention of Cruelty to Animals v.
Commission on Audit,
G.R. No. 169752, [September 25, 2007], 560 PHIL 385-409:

“. . . The corporation is a creature of the state. It is presumed to be incorporated for the benefit
of the public. It received certain special privileges and franchises, and holds them subject to
the laws of the state and the limitations of its charter. Its powers are limited by law. It can
make no contract not authorized by its charter. Its rights to act as a corporation are only
preserved to it so long as it obeys the laws of its creation. . . “

III. Classes and Types of Corporations.

a. Classes of Corporations:

SEC. 3. Classes of Corporations. - Corporations formed or organized under this

Code may be stock or nonstock corporations. Stock corporations are those
which have capital stock divided into shares and are authorized to distribute
to the holders of such shares, dividends, or allotments of the surplus profits
on the basis of the shares held. All other corporations are nonstock
corporations.

SEC. 86. Definition. - For purposes of this Code and subject to its provisions on
dissolution, a nonstock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers: Provided, That
any profit which a nonstock corporation may obtain incidental to its
operations shall, whenever necessary or proper, be used for the furtherance
of the purpose or purposes for which the corporation was organized, subject
to the provisions of this Title.

The provisions governing stock corporations, when pertinent, shall be applicable

to nonstock corporations, except as may be covered by specific provisions of this
Title.

b. Types of Corporation:

i. The regular corporation as defined in Sec. 3 of the Revised Code.

ii. The Closed Corporation -

SEC. 95. Definition and Applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provides that: (a)
all 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

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exceeding twenty (20); (b) all the issued stock of all classes shall be subject to
one (1) or more specified restrictions on transfer permitted by this Title; and (c)
the corporation shall not list in any stock exchange or make any public offering
of its stocks of any class. Notwithstanding the foregoing, a corporation shall
not be deemed 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.

Any corporation may be incorporated as a close corporation, except mining or

oil companies, stock exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested with public
interest in accordance with the provisions of this Code.

The provisions of this Title shall primarily govern close corporations: Provided,
That other Titles in this Code shall apply suppletorily, except as otherwise
provided under this Title.

iii. The Special Corporations:

SEC. 105. Incorporation. - Educational corporations shall be governed by special

laws and by the general provisions of this Code.

SEC. 107. Classes of Religious Corporations. - Religious corporations may be

incorporated by one (1) or more persons. Such corporations may be classified
into corporations sole and religious societies.

Religious corporations shall be governed by this Chapter and by the general

provisions on nonstock corporations insofar as applicable.

SEC. 108. Corporation Sole. - For the purpose of administering and managing,
as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder of such
religious denomination, sect or church.

SEC. 109. Articles of Incorporation. - In order to become a corporation sole, the

chief archbishop, bishop, priest, minister, rabbi, or presiding elder of any
religious denomination, sect or church must file with the Commission articles of
incorporation . . .

SEC. 114. Religious Societies. - Unless forbidden by competent authority, the

Constitution, pertinent rules, regulations, or discipline of the religious
denomination, sect or church of which it is a part, any religious society, religious

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 order, diocese, or synod, or district organization of any religious denomination,
sect or church, may, upon written consent and/or by an affirmative vote at a
meeting called for the purpose of at least two-thirds (2/3) of its membership,
incorporate for the administration of its temporalities or for the management
of its affairs, properties, and estate by filing with the Commission, articles of
incorporation . . .

SEC. 116. One Person Corporation. - A One Person Corporation is a corporation

with a single stockholder: Provided, That only a natural person, trust, or an
estate may form a One Person Corporation.

Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed

companies, and non-chartered government-owned and controlled corporations
may not incorporate as One Person Corporations: Provided, further, That a
natural person who is licensed to exercise a profession may not organize as a
One Person Corporation for the purpose of exercising such profession except as
otherwise provided under special laws.

iv. Corporations vested with public interest and/or governed by special laws
identified in Sec. 22 of the Revised Code.

IV. De Jure, De Facto and Corporations by Estoppel.

a. De jure -

Hall v. Piccio,
G.R. No. L-2598, [June 29, 1950], 86 PHIL 603-607

All the parties . . . know, or ought to know, that the personality of a corporation begins to exist
only from the moment such certificate is issued - not before

SEC. 18. Registration Incorporation and Commencement of Corporate

Existence. – A person or group of persons desiring to incorporate shall submit
the intended corporate name to the Commission for verification. If the
Commission finds that the name is distinguishable from a name already
reserved or registered for the use of another corporation, not protected by
law and is not contrary to law, rules and regulations, the name shall be
reserved in favor of the incorporators. The incorporators shall then submit
their articles of incorporation and bylaws to the Commission.

If the Commission finds that the submitted documents and information are
fully compliant with the requirements of this Code, other relevant laws, rules
and regulations, the Commission shall issue the certificate of incorporation.

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 A private corporation organized under this Code commence its corporate
existence and juridical personality from the date the Commission issues the
certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute a
body corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.

b. de facto –

SEC. 19. De facto corporations. – The due incorporation of any corporation

claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.

Seventh Day Adventist Conference Church of Southern Phil. Inc. v.

Northeastern Mindanao Mission of Seventh Day Adventist, Inc.,
G.R. No. 150416, [July 21, 2006], 528 PHIL 647-657

“There are stringent requirements before one can qualify as a de facto corporation:

(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.
Corporate existence begins only from the moment a certificate of incorporation is issued.

"The de facto doctrine thus effects a compromise between two conflicting

public interest[s] — the one opposed to an unauthorized assumption of
corporate privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with
corporations."

Generally, the doctrine exists to protect the public dealing with supposed
corporate entities, not to favor the defective or non-existent corporation.

c. Corporation by Estoppel -

Lozano v. De los Santos,

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G.R. No. 125221, [June 19, 1997], 340 PHIL 563-570):

“Corporation by estoppel is founded on principles of equity and is designed to prevent

injustice and unfairness. It applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third persons. Where there is no
third person involved and the conflict arises only among those assuming the form of a
corporation, who therefore know that it has not been registered there is no corporation by
estoppel.”

Sec. 20. Corporation by Estoppel. – All persons who assume to act as a

corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality as a defense.

Anyone who assumes an obligation to an ostensible corporation as such,

cannot resist performance thereof on the ground that there was in fact no
corporation.

Vda. de Salvatierra v. Garlitos,

G.R. No. L-11442, [May 23, 1958], 103 PHIL 757-764):

“There can be no question that a corporation when registered has a juridical personality
separate and distinct from its component members or stockholders and officers such that a
corporation cannot be held liable for the personal indebtedness of a stockholder even if he
should be its president (Walter A. Smith Co. vs. Ford, SC-G. R. No. 42420) and conversely, a
stockholder or member cannot be held personally liable for any financial obligation by the
corporation in excess of his unpaid subscription. But this rule is understood to refer merely to
registered corporations and cannot be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is obvious — since an
organization which before the law is non-existent has no personality and would be
incompetent to act and appropriate for itself the powers and attribute of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so without authority
and at their own risk. And as it is an elementary principle of law that a person who acts as an
agent without authority or without a principal is himself regarded as the principal, possessed
of all the rights and subject to all the liabilities of a principal, a person acting or purporting to
act on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent (Fayvs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's
Commercial Laws of the Philippines, Fifth Ed., p. 689-690). “

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V. General Requirements:

a. Persons involved in establishing a corporation:

SECTION 5. Corporators and Incorporators, Stockholders and Members. —

Corporators are those who compose a corporation, whether as stockholders
or shareholders in a stock corporation or as members in a nonstock
corporation. Incorporators are those stockholders or members mentioned in
the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.

b. Subscription

SEC. 59. Subscription Contract. - Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract.

SEC. 60. Pre-incorporation Subscription. - A subscription of shares in a

corporation still to be formed shall be irrevocable for a period of at least six (6)
months from the date of subscription, unless all of the other subscribers
consent to the revocation, or the corporation fails to incorporate within the
same period or within a longer period stipulated in the contract of subscription.
No pre-incorporation subscription may be revoked after the articles of
incorporation is submitted to the Commission.

SEC. 63. Issuance of Stock Certificates. - No certificate of stock shall be issued

to a subscriber until the full amount of the subscription together with interest
and expenses (in case of delinquent shares), if any is due, has been paid.

c. Incorporator Requirements and Restrictions:

SECTION 10. Number and Qualifications of Incorporators. — Any person,

partnership, association or corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes: Provided, That natural persons who are licensed to
practice a profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to organize as a
corporation unless otherwise provided under special laws. Incorporators who
are natural persons must be of legal age.

Each incorporator of a stock corporation must own or be a subscriber to at

least one (1) share of the capital stock.

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 A corporation with a single stockholder is considered a One Person
Corporation as described in Title XIII, Chapter III of this Code.

The One Person Corporation does away with the cumbersome requirement of the old law that
there should be at least five (5) incorporators who should all be natural persons. As pointed
out by the framers of the Revised Code, the five incorporators requirement has for so long
served as stumbling block for investors.1

d. Corporate Name.

SECTION 17. Corporate Name. — No corporate name shall be allowed by the

Commission if it is not distinguishable from that already reserved or registered
for the use of another corporation, or if such name is already protected by law,
or when its use is contrary to existing law, rules and regulations.

A name is not distinguishable even if it contains one or more of the following:

(a) The word "corporation", "company", "incorporated", "limited",

"limited liability", or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word or
phrase.

The Commission, upon determination that the corporate name is: (1) not
distinguishable from a name already reserved or registered for the use of
another corporation; (2) already protected by law: or (3) contrary to law, rules
and regulations, may summarily order the corporation to immediately cease
and desist from using such name and require the corporation to register a new
one. The Commission shall also cause the removal of all visible signages,
marks, advertisements, labels, prints and other effects bearing such corporate
name. Upon the approval of the new corporate name, the Commission shall
issue a certificate of incorporation under the amended name.

If the corporation fails to comply with the Commission's order, the

Commission may hold the corporation and its responsible directors or officers
in contempt and/or hold them administratively, civilly and/or criminally liable
under this Code and other applicable laws and/or revoke the registration of
the corporation.

1
Sen. Drilon in his sponsorship speech of Sen. Bill 1280.

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The standard set for the use of a particular corporate name in the Revised Code word is
“distinguishable” as opposed to the old law’s standard which is “identical or deceptively or
confusingly similar”. In his sponsorship speech, Sen. Drilon . . .

Refusal to change a name when so ordered by the Commission results in penalties:

SEC. 159. Unauthorized Use of Corporate Name; Penalties. - The

unauthorized use of a corporate name shall be punished with a fine ranging
from Ten thousand pesos (P10,000.00) to Two Hundred Thousand Pesos
(P200,000.00).

e. Corporate Term.

SECTION 11. Corporate Term. — A corporation shall have perpetual

existence unless its articles of incorporation provides otherwise.

Corporations with certificates of incorporation issued prior to the effectivity

of this Code, and which continue to exist, shall have perpetual existence,
unless the corporation, upon a vote of its stockholders representing a majority
of its outstanding capital stock, notifies the Commission that it elects to retain
its specific corporate term pursuant to its articles of incorporation: Provided,
That any change in the corporate term under this section is without prejudice
to the appraisal right of dissenting stockholders in accordance with the
provisions of this Code.

A corporate term for a specific period may be extended or shortened by

amending the articles of incorporation: Provided, That no extension may be
made earlier than three (3) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Commission: Provided, further, That such extension of the
corporate term shall take effect only on the day following the original or
subsequent expiry date(s).

A corporation whose term has expired may apply for a revival of its corporate
existence, together with all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and liabilities existing prior
to its revival. Upon approval by the Commission, the corporation shall be
deemed revived and a certificate of revival of corporate existence shall be
issued, giving it perpetual existence, unless its application for revival provides
otherwise.

No application for revival of certificate of incorporation of banks, banking and

quasi-banking institutions, preneed, insurance and trust companies, non-stock

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 savings and loan associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall be approved
by the Commission unless accompanied by a favorable recommendation of the
appropriate government agency.

This provision does away with the old law’s fifty year term for corporations and follows the
modern trend that corporations, being artificial beings created by law, should have perpetual
existence.2 Note should be taken that for corporations incorporated under the old law, their
term of existence are automatically changed to that of perpetuity unless the a majority of the
stockholders vote to retain its original term. As for corporations which have expired terms,
they may apply for a revival of the corporation although it is unclear as to what votes of the
stockholders are required to support such revival.

f. Capital Stock –

SECTION 12. Minimum Capital Stock Not Required of Stock Corporations. —

Stock corporations shall not be required to have a minimum capital stock,
except as otherwise specifically provided by special law.

g. The Articles of Incorporation -

SECTION 13. Contents of the Articles of Incorporation. — All corporations

shall file with the Commission articles of incorporation in any of the official
languages, duly signed and acknowledged or authenticated, in such form and
manner as may be allowed by the Commission, containing substantially the
following matters, except as otherwise prescribed by this Code or by special
law:

(a) The name of the corporation;

(b) The specific purpose or purposes for which the corporation is being
formed. Where a corporation has more than one stated purpose, the
articles of incorporation shall indicate the primary purpose and the
secondary purpose or purposes: Provided, That a nonstock corporation
may not include a purpose which would change or contradict its nature
as such;
(c) The place where the principal office of the corporation is to be located,
which must be within the Philippines;
(d) The term for which the corporation is to exist, if the corporation has
not elected perpetual existence;
(e) The names, nationalities, and residence addresses of the incorporators;

2
Sen. Drilon in his sponsorship speech of Sen. Bill 80 noted that the Philippines is one of the few countries in
the world that sets limits to the corporate term.

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 (f) The number of directors, which shall not be more than fifteen (15) or
the number of trustees which may be more than fifteen (15);
(g) The names, nationalities, and residence addresses of persons who shall
act as directors or trustees until the first regular directors or trustees
are duly elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names,
nationalities, and residence addresses of the original subscribers,
amount subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par value, if
applicable;
(i) If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence addresses of the contributors, and amount
contributed by each; and
(j) Such other matters consistent with law and which the incorporators
may deem necessary and convenient.

An arbitration agreement may be provided in the articles of incorporation

pursuant to Section 181 of this Code.

The articles of incorporation and applications for amendments thereto may be

filed with the Commission in the form of an electronic document, in
accordance with the Commissions rules and regulations on electronic filing.

The allowance of an arbitration clause as part of the Articles of Incorporation and the
By-Laws is another innovation of the Revised Code and is meant to encourage parties to
resort to arbitration in case of disputes instead of going to the regular courts.

SECTION 14. Form of Articles of Incorporation. — Unless otherwise

prescribed by special law, the articles of incorporation of all domestic
corporations shall comply substantially with the following form:

Articles of Incorporation
of
________________________
(Name of Corporation)
The undersigned incorporators, all of legal age, have voluntarily
agreed to form a (stock) (nonstock) corporation under the laws of
the Republic of the Philippines and certify the following:

First: That the name of said corporation shall be

"________________, Inc., Corporation or OPC";

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Second: That the purpose or purposes for which such corporation is
incorporated are: (If there is more than one purpose, indicate
primary and secondary purposes);

Third: That the principal office of the corporation is located in the

City/Municipality of ____________, Province of
____________________, Philippines:
Fourth: That the corporation shall have perpetual existence or a
term of ________ years from the date of issuance of the certificate
of incorporation;

Fifth: That the names, nationalities, and residence addresses of the

incorporators of the corporation are as follows:

Name Nationality Residence

_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________

Sixth: That the number of directors or trustees of the corporation

shall be _____________; and the names, nationalities, and
residence addresses of the first directors or trustees of the
corporation are as follows:

Name Nationality Residence

_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________
_______________ _______________ _______________

Seventh: That the authorized capital stock of the corporation is

___________ PESOS (P______), divided into ________ shares with
the par value of _________ PESOS (P______) per share. (In case all
the shares are without par value): That the capital stock of the
corporation is __________________ shares without par value.
(In case some shares have par value and some are without par
value): That the capital stock of said corporation consists of
_____________________ shares, of which ___________________

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shares have a par value of _________________ PESOS
(P__________) each, and of which ____________________ shares
are without par value.

Eighth: That the number of shares of the authorized capital stock

above-stated has been subscribed as follows:

Name of Subscriber Nationality No. of Shares Subscribed Amount Subscribed

Amount Paid

(Modify No. 8 if shares are with no-par value. In case the

corporation is nonstock, Nos. 7 and 8 of the above articles may be
modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified
persons, stating the names, nationalities, and residence addresses
of the contributors or donors and the respective amount given by
each.)

Ninth: That ________________ has been elected by the subscribers

as Treasurer of the Corporation to act as such until after the
successor is duly elected and qualified in accordance with the
bylaws, that as Treasurer, authority has been given to receive in the
name and for the benefit of the corporation, all subscriptions,
contributions or donations paid or given by the subscribers or
members, who certifies the information set forth in the seventh
and eighth clauses above, and that the paid-up portion of the
subscription in cash and/or property for the benefit and credit of
the corporation has been duly received.

Tenth: That the incorporators undertake to change the name of the

corporation immediately upon receipt of notice from the
Commission that another corporation, partnership or person has
acquired a prior right to the use of such name, that the name has
been declared not distinguishable from a name already registered
or reserved for the use of another corporation, or that it is contrary
to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or
activity reserved for Filipino citizens shall provide the following):

"No transfer of stock or interest which shall reduce the ownership

of Filipino citizens to less than the required percentage of capital
stock as provided by existing laws shall be allowed or permitted to
be recorded in the proper books of the corporation, and this

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 restriction shall be indicated in all stock certificates issued by the
corporation."

IN WITNESS WHEREOF, we have hereunto signed these Articles of

Incorporation, this _________ day of ___________, 20___ in the
City/Municipality of _____________, Province of
_______________, Republic of the Philippines.

_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
_________________ _________________
(Names and signatures of the incorporators)
_________________________________
(Name and signature of Treasurer)

The foregoing form would indicate that notarization of the Articles of Incorporation is no
longer necessary since the notarization potion as appearing in the old law3 no longer appears
in the Revised Code.

g. Amendment –

SECTION 15. Amendment of Articles of Incorporation. — Unless otherwise

prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code. The articles of
incorporation of a nonstock corporation may be amended by the vote or
written assent of majority of the trustees and at least two-thirds (2/3) of the
members.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Amendments to
the articles shall be indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the corporate secretary and a
majority of the directors or trustees, with a statement that the amendments
have been duly approved by the required vote of the stockholders or
members, shall be submitted to the Commission.

3
Sec. 15, B.P. 68.

Page 16 of 45
The amendments shall take effect upon their approval by the Commission or
from the date of filing with the said Commission if not acted upon within six
(6) months from the date of filing for a cause not attributable to the
corporation.

h. Grounds for disapproval –

SECTION 16. Grounds When Articles of Incorporation or Amendment May be

Disapproved. — The Commission may disapprove the articles of incorporation
or any amendment thereto if the same is not compliant with the requirements
of this Code: Provided, That the Commission shall give the incorporators,
directors, trustees, or officers a reasonable time from receipt of the
disapproval within which to modify the objectionable portions of the articles
or amendment. The following are grounds for such disapproval:

(a) The articles of incorporation or any amendment thereto is not

substantially in accordance with the form prescribed herein;
(b) The purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral or contrary to government rules and
regulations;
(c) The certification concerning the amount of capital stock subscribed
and/or paid is false; and
(d) The required percentage of Filipino ownership of the capital stock
under existing laws or the Constitution has not been complied with.

No articles of incorporation or amendment to articles of incorporation of

banks, banking and quasi-banking institutions, preneed, insurance and trust
companies, NSSLAs, pawnshops, and other financial intermediaries shall be
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that
such articles or amendment is in accordance with law.

SECTION 18. Registration, Incorporation and Commencement of Corporate

Existence. — A person or group of persons desiring to incorporate shall submit
the intended corporate name to the Commission for verification. If the
Commission finds that the name is distinguishable from a name already
reserved or registered for the use of another corporation, not protected by law
and is not contrary to law, rules and regulations, the name shall be reserved in
favor of the incorporators. The incorporators shall then submit their articles of
incorporation and bylaws to the Commission.

Page 17 of 45
 If the Commission finds that the submitted documents and information are
fully compliant with the requirements of this Code, other relevant laws, rules
and regulations, the Commission shall issue the certificate of incorporation.

A private corporation organized under this Code commences its corporate

existence and juridical personality from the date the Commission issues the
certificate of incorporation under its official seal and thereupon the
incorporators, stockholders/members and their successors shall constitute a
body corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.

i. Non-use and non-operation -

SEC. 21. Effects of Non-Use of Corporate Charter and Continuous Inoperation.

- If a corporation does not formally organize and commence its business
within five (5) years from the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the day following the end of the
five (5)-year period.

However, if a corporation has commenced its business but subsequently

becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation under
delinquent status.

A delinquent corporation shall have a period of two (2) years to resume

operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall issue
an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation's certificate of
incorporation.

The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction.

VI. Classes and Types of Shares.

Teng v. Securities and Exchange Commission,

G.R. No. 184332, February 17, 2016.

Page 18 of 45
A certificate of stock is a written instrument signed by the proper officer of a corporation
stating or acknowledging that the person named in the document is the owner of a designated
number of shares of its stock. It is prima facie evidence that the holder is a shareholder of a
corporation. A certificate, however, is merely a tangible evidence of ownership of shares of
stock. It is not a stock in the corporation and merely expresses the contract between the
corporation and the stockholder. The shares of stock evidenced by said certificates,
meanwhile, are regarded as property and the owner of such shares may, as a general rule,
dispose of them as he sees fit, unless the corporation has been dissolved, or unless the right
to do so is properly restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action.

SEC. 61. Consideration for Stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;
(c) Labor performed for or services actually rendered to the corporation;
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained earnings to stated
capital;
(f) Outstanding shares exchanged for stocks in the event of reclassification or
conversion;
(g) Shares of stock in another corporation; and/or
(h) Other generally accepted form of consideration.

Where the consideration is other than actual cash, or consists of intangible

property such as patents or copyrights, the valuation thereof shall initially be
determined by the stockholders or the board of directors, subject to the
approval of the Commission.

Shares of stock shall not be issued in exchange for promissory notes or future
service. The same considerations provided in this section, insofar as applicable,
may be used for the issuance of bonds by the corporation.

The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred by
the articles of incorporation or the bylaws, or if not so fixed, by the
stockholders representing at least a majority of the outstanding capital stock
at a meeting duly called for the purpose.

Page 19 of 45
SEC. 6. Classification of Shares. - The classification of shares, their
corresponding rights, privileges, or restrictions, and their stated par value, if
any, must be indicated in the articles of incorporation. Each share shall be
equal in all respects to every other share, except as otherwise provided in the
articles of incorporation and in the certificate of stock.

The shares in stock corporations may be divided into classes or series of

shares, or both. No share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, That there shall always be a class or series of
shares with complete voting rights.

Holders of non-voting shares shall nevertheless be entitled to vote on the

following matters:

(a) Amendment of the articles of incorporation;

(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation
other corporations;
(g) Investment of corporate funds in another corporation or business in
accordance with this Code; and
(h) Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote required

under this Code to approve a particular corporate act shall be deemed to refer
only to stocks with voting rights.

The shares or series of shares may or may not have a par value: Provided, That
banks, trust, insurance, and preneed companies, public utilities, building and
loan associations, and other corporations authorized to obtain or access funds
from the public, whether publicly listed or not, shall not be permitted to issue
no- par value shares of stock.

Preferred shares of stock issued by a corporation may be given preference in

the distribution of dividends and in the distribution of corporate assets in case
of liquidation, or such other preferences: Provided, That preferred shares of
stock may be issued only with a stated par value. The board of directors,
where authorized in the articles of incorporation, may fix the terms and

Page 20 of 45
 conditions of preferred shares of stock or any series thereof: Provided, further,
That such terms and conditions shall be effective upon filing of a certificate
thereof with the Securities and Exchange Commission, hereinafter referred to
as the "Commission".

Shares of capital stock issued without par value shall be deemed fully paid
and nonassessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided, That no-par value
shares must be issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not
be available for distribution as dividends.

A corporation may further classify its shares for the purpose of ensuring
compliance with constitutional or legal requirements.

a. Common Share and Doctrine of equality of shares:

A common stock represents the residual ownership interest in the corporation. It is a basic
class of stock ordinarily and usually issued without extraordinary rights or privileges and
entitles the shareholder to a pro rata division of profits. Preferred stocks are those which
entitle the shareholder to some priority on dividends and asset distribution. Both shares are
part of the corporation's capital stock. Both stockholders are no different from ordinary
investors who take on the same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profit and losses of the enterprise.
Moreover, under the doctrine of equality of shares — all stocks issued by the corporation are
presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences. (Heirs of Gamboa v. Teves, G.R. No. 176579
(Resolution), October 9, 2012.

b. Preferred shares -

Republic Planters Bank v. Agana, Sr.,

G.R. No. 51765, [March 3, 1997], 336 PHIL 1-14)

“Preferred Shares which is “one which entitles the holder thereof to certain preferences over
the holders of common stock. The preferences are designed to induce persons to subscribe
for shares of a corporation. The most common forms may be classified into two: (1) preferred
shares as to assets; and (2) preferred shares as to dividends. … Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation . . . Dividends are payable only when
there are profits earned by the corporation and as a general rule, even if there are existing
profits, the board of directors has the discretion to determine whether or not dividends are to

Page 21 of 45
be declared. Shareholders, both common and preferred, are considered risk takers who invest
capital in the business and who can look only to what is left after corporate debts and liabilities
are fully paid.”

c. Redeemable shares:

SEC. 8. Redeemable Shares. - Redeemable shares may be issued by the

corporation when expressly provided in the articles of incorporation. They are
shares which may be purchased by the corporation from the holders of such
shares upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and upon such
other terms and conditions stated in the articles of incorporation and the
certificate of stock representing the shares, subject to rules and regulations
issued by the Commission.

Republic Planters Bank v. Agana, Sr.,

G.R. No. 51765, [March 3, 1997], 336 PHIL 1-14)

“Redeemable shares are shares usually preferred, which by their terms are redeemable at a
fixed date, or at the option of either issuing corporation, or the stockholder, or both at a
certain redemption price. A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation. The present Code allows redemption of shares even if there
are no unrestricted retained earnings on the books of the corporation. However,
while redeemable shares may be redeemed regardless of the existence of unrestricted
retained earnings, this is subject to the condition that the corporation has, after such
redemption, assets in its books to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as they
mature.”

e Founder’s Shares -

SEC. 7. Founders' Shares. - Founders' shares may be given certain right and
privileges not enjoyed by the owners of other stocks. Where the exclusive
right to vote and be voted for in the election of directors is granted, it must be
for a limited period not to exceed five (5) years from the date of incorporation:
Provided, That such exclusive right shall not be allowed if its exercise will
violate Commonwealth Act No. 108, otherwise known as the "Anti-Dummy La
Republic Act No. 7042, otherwise known as the "Foreign Investments Act
1991"; and other pertinent laws.

f. Treasury Shares -

Page 22 of 45
 SEC. 9. Treasury Shares. - Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors.

SEC. 56. Voting Right for Treasury Shares. - Treasury shares shall have no
voting right as long as such shares remain in the Treasury.

SEC. 173. Outstanding Capital Stock Defined. - The term "outstanding capital
stock", as used in this Code, shall mean the total shares of stock issued under
binding subscription contracts to subscribers or stockholders, whether fully or
partially paid, except treasury shares.

Commissioner of Internal Revenue v. Manning,

G.R. No. L-28398, [August 6, 1975], 160 PHIL 726-741)

“Although authorities may differ on the exact legal and accounting status of so-called "treasury
shares," they are more or less in agreement that treasury shares are stocks issued and fully
paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares, but being in the treasury they do not
have the status of outstanding shares. Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as
long as it is held by the corporation as a treasury share, participates neither in dividends,
because dividends cannot be declared by the corporation to itself, nor in the meetings of the
corporation as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control
of the corporation, though it still represents a paid-for interest in the property of the
corporation.”

g. Such other shares or classes for the purpose of ensuring compliance with
constitutional or legal requirements.

An example is when a corporation which is required to be at least 60% Filipino owned issues
“A” shares which are strictly for Filipinos only and “B” shares which may be owned by both
Filipinos and Foreigners.

VII. Nationality of Corporations:

a. Determination of Nationality of Corporations

i. Incorporation Test: Where incorporated.

Page 23 of 45
 ii. Control Test: A corporation is a Philippine National if it is organized under the
laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines.

iii. Grandfather Test: Tracing the owners of the corporate shareholders to

determine ultimate percentage of ownership by foreigners.

The constitution and various laws enacted by Congress limits to Filipinos and corporations sixty
per centum of whose capital is owned by such citizens, certain areas of business and
investment. Determination of whether or not a domestic corporation is a Filipino corporation
is therefore critical.

There are basically only two tests in determining the nationality of domestic corporations, the
Voting Control Test where the voting power determines nationality and the Grandfather Rule
where the totality of the shareholding of the component corporations and shareholders
determines nationality.

The standard test is the Control Test as defined in the Foreign Investment Act of 1991, as
follows:

“Section 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; of a

domestic partnership or association wholly owned by citizens of the Philippines; or
a corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of
which one hundred percent (100%) of the capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled
to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of the Philippines, in order
that the corporation, shall be considered a "Philippine national."

The more stringent Grandfather Rule provides “the combined totals in the Investing
Corporation and the Investee Corporation must be traced (i.e.,"grandfathered") to determine

Page 24 of 45
the total percentage of Filipino ownership. Moreover, the ultimate Filipino ownership of the
shares must first be traced to the level of the Investing Corporation and added to the shares
directly owned in the Investee Corporation .... “4 The test, therefore, goes into the nationality
of the persons and entities who act as stockholder of the corporation.

To illustrate:

1. JV-ONE is 60% owned Juan dela Cruz (Filipino) and 40% by Foreign Corp.

2. JV-TWO is 60% owned by JV-ONE and 40% by Foreign Corp.

3. JV3-THREE is 60% owned by JV-TWO and 40% by Foreign Corp.

Under the Control Test, JV-ONE, JV2 TWO, and JV-THREE are all Filipino corporations as they
are 60% owned by Filipinos or Corporations 60% owned by Filipinos. Under the more stringent
Grandfather Rule, however, JV-THREE’s foreign percentage shareholding ownership be traced
back to JV-TWO then to JV-ONE thus revealing the true foreign percentage ownership.

Narra Nickel Mining & Development Corp. v. Redmont Consolidated

Mines Corp., G.R. No. 195580, [April 21, 2014], 733 PHIL 365-490)

“The control test is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation. 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.” ||

b. The PLDT Nationality Cases:

Gamboa v. Teves
G.R. No. 176579, June 28, 2011
Penned by Justice Carpio

Facts: PLDT’s total outstanding capital stock are divided into common shares (22.15%) and
preferred shares (77.85%). The common shares are 64.27% foreign owned while Filipinos own
99.44% of the preferred shares. PLDT claims compliance with 60% - 40% Filipino requirements
since 77.85% of PLDT shares is Filipino owned.

Ruling:

“Section 11 of Art. XII limits franchises, certificates, or any other form of

authorization for the operation of a public utility to citizens of the Philippines

4
Narra Nickel Mining & Development Corp. v. Redmont Consolidated Mines Corp., G.R. No. 195580, [April 21, 2014], 733 PHIL 365-490

Page 25 of 45
 or to corporations or associations organized under the laws of the Philippines,
at least sixty per centum of whose capital is owned by such citizens. x x x The
participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be
citizens of the Philippines.”

The crux of the controversy is the definition of the term "capital." Does the term "capital" in
Section 11, Article XII of the Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting preferred shares)?

x x x

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in
the hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership
of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State's grant of authority to operate a public utility. The
undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting
and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of
a public utility.

x x x

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to
include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the State's
constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas of investment to
Filipino citizens, such as the exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. The Court should never open to foreign
control what the Constitution has expressly reserved to Filipinos for that would be a betrayal
of the Constitution and of the national interest. The Court must perform its solemn duty to
defend and uphold the intent and letter of the Constitution to ensure, in the words of the
Constitution, "a self-reliant and independent national economy effectively controlled by
Filipinos."

WHEREFORE, we . . . rule that the term "capital" in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares, and not to the total outstanding capital stock
(common and non-voting preferred shares).”

Heirs of Gamboa v. Teves,

Page 26 of 45
G.R. No. 176579 (Resolution), October 9, 2012: 5
Penned by Justice Carpio

“Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine
whether a corporation is a "Philippine national."

x x x

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress
enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended,
which defined a "Philippine national" as follows:

x x x

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen,
or a domestic corporation at least "60% of the capital stock outstanding and entitled to vote"
is owned by Philippine citizens.6
x x x

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation.

Final Word

The Constitution expressly declares as State policy the development of an economy

"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals, who
are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or
associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The
FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is
essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights,
as well as with full beneficial ownership. This is precisely because the right to vote in the
election of directors, coupled with full beneficial ownership of stocks, translates to effective
control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term "capital"

5 Resolution on the Motion for Reconsideration.

6
Otherwise known as the Voting Control Test.

Page 27 of 45
openly invites alien domination of economic activities reserved exclusively to Philippine
nationals. Therefore, respondents' interpretation will ultimately result in handing over
effective control of our national economy to foreigners in patent violation of the Constitution,
making Filipinos second-class citizens in their own country.”

Securities and Exchange Commission (“SEC”)

issued Memorandum Circular No. 8-2013 on
May 20, 2013.

“The Circular was issued pursuant to the Supreme Court’s directive in the case of Gamboa v.
Teves, where the Court interpreted the term “capital” in Article XII, Section 11 of the 1987
Constitution to refer “only to shares of stock entitled to vote in the election of directors.”
Under the Circular, for purposes of determining compliance with the nationality restrictions,
the required percentage of Filipino ownership shall be applied to both

(a) the total number of outstanding shares of stock entitled to vote in the election of
directors, AND

(b) the total number of outstanding shares of stock, whether or not entitled to vote in the
election of directors.“

Jose M. Roy III, vs Chair Herbosa,

G.R. No. 207246, Nov. 22, 2016.
Penned by Justice Caguioa

Facts: Petitioner Roy questions Memorandum Circular No. 8-2013. He seeks to apply the 60-
40 Filipino ownership requirement separately to each class of shares of a public utility
corporation, whether common, preferred non-voting, preferred voting or any other class of
shares.

Ruling:

“Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling
interest requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino
nationals in the voting stocks; it moreover requires the 60-40 percentage ownership in the
total number of outstanding shares of stock, whether voting or not. The SEC formulated SEC-
MC No. 8 to adhere to the Court's unambiguous pronouncement that "[f]ull beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights is required." 79 Clearly, SEC-MC No. 8 cannot be said to have been issued with
grave abuse of discretion
x x x

Page 28 of 45
The definition of "beneficial owner" or "beneficial ownership" in the Implementing Rules and
Regulations of the Securities Regulation Code ("SRC-IRR") is consistent with the concept of
"full beneficial ownership" in the FIA-IRR.

As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means any person
who, directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power (which includes the power to vote or direct the voting
of such security) and/or investment returns or power (which includes the power to dispose
of, or direct the disposition of such security) . . . ."

While it is correct to state that beneficial ownership is that which may exist either through
voting power and/or investment returns, it does not follow, as espoused by the minority
opinion, that the SRC-IRR, in effect, recognizes a possible situation where voting power is not
commensurate to investment power. That is a wrong syllogism. The fallacy arises from a
misunderstanding on what the definition is for. The "beneficial ownership" referred to in the
definition, while it may ultimately and indirectly refer to the overall ownership of the
corporation, more pertinently refers to the ownership of the share subject of the question: is
it Filipino-owned or not?

As noted earlier, the FIA-IRR states:

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid or not,
but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine

nationals, mere legal title is not enough to meet the required Filipino equity.
Full beneficial ownership of the stocks, coupled with appropriate voting rights
is essential. Thus, stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals.

The emphasized portions in the foregoing provision is the equivalent of the so-called
"beneficial ownership test." That is all.

The term "full beneficial ownership" found in the FIA-IRR is to be understood in the context of
the entire paragraph defining the term "Philippine national." Mere legal title is not enough to
meet the required Filipino equity, which means that it is not sufficient that a share is registered
in the name of a Filipino citizen or national, i.e., he should also have full beneficial ownership
of the share. If the voting right of a share held in the name of a Filipino citizen or national is
assigned or transferred to an alien, that share is not to be counted in the determination of the
required Filipino equity. In the same vein, if the dividends and other fruits and accessions of

Page 29 of 45
the share do not accrue to a Filipino citizen or national, then that share is also to be excluded
or not counted.

x x x

Given that beneficial ownership of the outstanding capital stock of the public utility
corporation has to be determined for purposes of compliance with the 60% Filipino ownership
requirement, the definition in the SRC-IRR can now be applied to resolve only the question of
who is the beneficial owner or who has beneficial ownership of each "specific stock" of the
said corporation. Thus, if a "specific stock" is owned by a Filipino in the books of the
corporation, but the stock's voting power or disposing power belongs to a foreigner, then that
"specific stock" will not be deemed as "beneficially owned" by a Filipino.

Stated inversely, if the Filipino has the "specific stock's" voting power (he can vote the stock
or direct another to vote for him), or the Filipino has the investment power over the "specific
stock" (he can dispose of the stock or direct another to dispose it for him), or he has both (he
can vote and dispose of the "specific stock" or direct another to vote or dispose it for him),
then such Filipino is the "beneficial owner" of that "specific stock" — and that "specific stock"
is considered (or counted) as part of the 60% Filipino ownership of the corporation. In the end,
all those "specific stocks" that are determined to be Filipino (per definition of "beneficial
owner" or "beneficial ownership") will be added together and their sum must be equivalent
to at least 60% of the total outstanding shares of stock entitled to vote in the election of
directors and at least 60% of the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

To reiterate, the "beneficial owner or beneficial ownership" definition in the SRC-IRR is

understood only in determining the respective nationalities of the outstanding capital
stock of a public utility corporation in order to determine its compliance with the percentage
of Filipino ownership required by the Constitution.
x x x

Ultimately, the key to nationalism is in the individual. Particularly for a public utility
corporation or association, whether stock or non-stock, it starts with the Filipino shareholder
or member who, together with other Filipino shareholders or members wielding 60% voting
power, elects the Filipino director who, in turn, together with other Filipino directors
comprising a majority of the board of directors or trustees, appoints and employs the all
Filipino management team. This is what is envisioned by the Constitution to assure effective
control by Filipinos. If the safeguards, which are already stringent, fail, i.e., a public utility
corporation whose voting stocks are beneficially owned by Filipinos, the majority of its
directors are Filipinos, and all its managing officers are Filipinos, is pro-alien (or worse,
dummies), then that is not the fault or failure of the Constitution. It is the breakdown of
nationalism in each of the Filipino shareholders, Filipino directors and Filipino officers of that

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corporation. No Constitution, no decision of the Court, no legislation, no matter how ultra-
nationalistic they are, can guarantee nationalism.”

XIII. Corporate Fiction:

i. Separate Juridical Personality -

Good Earth Emporium, Inc. v. Court of Appeals,

G.R. No. 82797, [February 27, 1991], 272 PHIL 373:

“A corporation has a personality distinct and separate from its individual stockholders or
members. Being an officer or stockholder of a corporation does not make one's property also
of the corporation, and vice-versa, for they are separate entities (Traders Royal Bank v. CA,
G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152 SCRA 482). Shareowners are in no
legal sense the owners of corporate property (or credits) which is owned by the corporation
as a distinct legal person (Concepcion Magsaysay-Labrador v. CA, G.R. No. 58168, December
19, 1989). As a consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's
debt or credit that of the corporation (Prof. Jose Nolledo's "The Corporation Code of the
Philippines, p. 5, 1988 Edition, citing Professor Ballantine). “

Lim v. Court of Appeals,

G.R. No. 124715, [January 24, 2000], 380 PHIL 60:

“It is settled that a corporation is clothed with personality separate and distinct from that of
the persons composing it. It may not generally be held liable for that of the persons composing
it. It may not be held liable for the personal indebtedness of its stockholders or those of the
entities connected with it.

Rudimentary is the rule that a corporation is invested by law with a personality distinct and
separate from its stockholders or members. In the same vein, a corporation by legal fiction
and convenience is an entity shielded by a protective mantle and imbued by law with a
character alien to the persons comprising it.”

ii. Piercing the Veil –

Livesey v. Binswanger Phils., Inc.,

G.R. No. 177493, [March 19, 2014],

“Piercing the veil of corporate fiction is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful
purposes. Under the doctrine, the corporate existence may be disregarded where the entity
is formed or used for non-legitimate purposes, such as to evade a just and due obligation, or

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to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the fiction will be
disregarded and the individuals composing it and the two corporations will be treated as
identical.“

Kukan International Corporation v. Reyes,

G.R. No. 182729, [September 29, 2010]

“In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations

Commission, the Court revisited the subject principle of piercing the veil of corporate fiction
and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks 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
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 as 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. . . .

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

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.”

Zambrano v. Philippine Carpet Manufacturing Corp.,

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G.R. No. 224099, June 21, 2017
“A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence. It has a personality separate and distinct from the persons composing it, as
well as from any other legal entity to which it may be related.
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation.
For reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.
Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.
Further, the Court's ruling in Philippine National Bank v. Hydro Resources Contractors
Corporation is enlightening, viz.:
The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used
as a 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.
xxx xxx xxx
In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality
theory, namely:
(1) Control, not mere majority or complete stock 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 plaintiff's legal right; and
(3) The aforesaid control and breach of duty must have proximately caused
the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test requires
that the subsidiary be completely under the control and domination of the
parent. It examines the parent corporation's relationship with the subsidiary.
It inquires whether a subsidiary corporation is so organized and controlled and
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 its affairs are so conducted as to make it a mere instrumentality or agent of
the parent corporation such that its separate existence as a distinct corporate
entity will be ignored. It seeks to establish whether the subsidiary corporation
has no autonomy and the parent corporation, though acting through the
subsidiary in form and appearance, "is operating the business directly for
itself."
The second prong is the "fraud" test. This test requires that the parent
corporation's conduct in using the subsidiary corporation be unjust, fraudulent
or wrongful. It examines the relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the parent corporation uses the
subsidiary in a way that harms the plaintiff creditor. As such, it requires a
showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that
the defendant's control, exerted in a fraudulent, illegal or otherwise unfair
manner toward it, caused the harm suffered. A causal connection between the
fraudulent conduct committed through the instrumentality of the subsidiary
and the injury suffered or the damage incurred by the plaintiff should be
established. The plaintiff must prove that, unless the corporate veil is pierced,
it will have been treated unjustly by the defendant's exercise of control and
improper use of the corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory
requires the concurrence of three elements: control of the corporation by the
stockholder or parent corporation, fraud or fundamental unfairness imposed
on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent
or unfair act of the corporation. The absence of any of these elements
prevents piercing the corporate veil. [Citations omitted]
The Court finds that none of the tests has been satisfactorily met in this case.
Although ownership by one corporation of all or a great majority of stocks of another
corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, these circumstances are insufficient to establish an alter ego
relationship or connection between Phil Carpet on the one hand and Pacific Carpet on the
other hand, that will justify the puncturing of the latter's corporate cover.
This Court has declared that "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." It has likewise ruled that 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."

Maricalum Mining Corp. v. Florentino,

G.R. Nos. 221813 & 222723, July 23, 2018

“The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: (a)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion

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of an existing obligation; (b) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or (c) 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. This principle is basically
applied only to determine established liability. However, piercing of the veil of corporate
fiction is frowned upon and must be done with caution. This is because 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.

A parent or holding company is a corporation which owns or is organized to own a substantial

portion of another company's voting shares of stock enough to control or influence the
latter's management, policies or affairs thru election of the latter's board of directors or
otherwise. However, the term "holding company" is customarily used interchangeably with
the term "investment company" which, in turn, is defined by Section 4 (a) of Republic Act (R.A.)
No. 2629 61 as "any issuer (corporation) which is or holds itself out as being engaged primarily,
or proposes to engage primarily, in the business of investing, reinvesting, or trading in
securities."

In other words, a "holding company" is organized and is basically conducting its business by
investing substantially in the equity securities of another company for the purposes of
controlling their policies (as opposed to directly engaging in operating activities) and "holding"
them in a conglomerate or umbrella structure along with other subsidiaries. Significantly, the
holding company itself — being a separate entity — does not own the assets of and does not
answer for the liabilities of the subsidiary or affiliate. The management of the subsidiary or
affiliate still rests in the hands of its own board of directors and corporate officers. It is in
keeping with the basic rule a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from
the people comprising it. The corporate form was created to allow shareholders to invest
without incurring personal liability for the acts of the corporation.

While the veil of corporate fiction may be pierced under certain instances, mere ownership of
a subsidiary does not justify the imposition of liability on the parent company. It must further
appear that to recognize a parent and a subsidiary as separate entities would aid in the
consummation of a wrong. Thus, a holding corporation has a separate corporate existence and
is to be treated as a separate entity; unless the facts show that such separate corporate
existence is a mere sham, or has been used as an instrument for concealing the truth.
In the case at bench, complainants mainly harp their cause on the alter ego theory. Under this
theory, piercing the veil of corporate fiction may be allowed only if the following elements
concur:

1) Control — not mere stock control, but complete domination — not

only of finances, but of policy and business practice in respect to the

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 transaction attacked, must have been such 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 a fraud
or a wrong, to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of
plaintiffs legal right; and

3) The said control and breach of duty must have proximately caused the
injury or unjust loss complained of.

The elements of the alter ego theory were discussed in Philippine National Bank v. Hydro
Resources Contractors Corporation, to wit:

x x x

Again, all these three elements must concur before the corporate veil may be pierced
under the alter ego theory. Keeping in mind the parameters, guidelines and indicators for
proper piercing of the corporate veil, the Court now proceeds to determine whether
Maricalum Mining's corporate veil may be pierced in order to allow complainants to
enforce their monetary awards against G Holdings.

I. Control or Instrumentality Test

In Concept Builders, Inc. v. National Labor Relations Commission, et al., the Court first laid
down the first set of probative factors of identity that will justify the application of the
doctrine of piercing the corporate veil, viz.:

1) Stock ownership by one or common ownership of both corporations.

2) Identity of directors and officers.
3) The manner of keeping corporate books and records.
4) Methods of conducting the business.
Later, in Philippine National Bank v. Ritratto Group, Inc., et al., the Court expanded the
aforementioned probative factors and enumerated a combination of any of the following
common circumstances that may also render a subsidiary an instrumentality, to wit:

1) The parent corporation owns all or most of the capital stock of the
subsidiary;
2) The parent and subsidiary corporations have common directors or
officers;
3) The parent corporation finances the subsidiary;

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 4) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation;
5) The subsidiary has grossly inadequate capital;
6) The parent corporation pays the salaries and other expenses or losses
of the subsidiary;
7) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation;
8) In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of the
parent corporation, or its business or financial responsibility is referred
to as the parent corporation's own;
9) The parent corporation uses the property of the subsidiary as its own;
10) The directors or executives of the subsidiary do not act independently
in the interest of the subsidiary but take their orders from the parent
corporation; and
11) The formal legal requirements of the subsidiary are not observed.

x x x

However, mere presence of control and full ownership of a parent over a subsidiary is not
enough to pierce the veil of corporate fiction. It has been reiterated by this Court time and
again that 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.

II. Fraud Test

The corporate veil may be lifted only if it has been used to shield fraud, defend crime,
justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. To
aid in the determination of the presence or absence of fraud, the following factors in the
"Totality of Circumstances Test" may be considered, viz.:

1) Commingling of funds and other assets of the corporation with those

of the individual shareholders;
2) Diversion of the corporation's funds or assets to non-corporate uses
(to the personal uses of the corporation's shareholders);
3) Failure to maintain the corporate formalities necessary for the
issuance of or subscription to the corporation's stock, such as formal
approval of the stock issue by the board of directors;
4) An individual shareholder representing to persons outside the
corporation that he or she is personally liable for the debts or other
obligations of the corporation;

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 5) Failure to maintain corporate minutes or adequate corporate records;
6) Identical equitable ownership in two entities;
7) Identity of the directors and officers of two entities who are
responsible for supervision and management (a partnership or sole
proprietorship and a corporation owned and managed by the same
parties);
8) Failure to adequately capitalize a corporation for the reasonable risks
of the corporate undertaking;
9) Absence of separately held corporate assets;
10) Use of a corporation as a mere shell or conduit to operate a single
venture or some particular aspect of the business of an individual or
another corporation;
11) Sole ownership of all the stock by one individual or members of a single
family;
12) Use of the same office or business location by the corporation and its
individual shareholder(s);
13) Employment of the same employees or attorney by the corporation
and its shareholder(s);
14) Concealment or misrepresentation of the identity of the ownership,
management or financial interests in the corporation, and
concealment of personal business activities of the shareholders (sole
shareholders do not reveal the association with a corporation, which
makes loans to them without adequate security);
15) Disregard of legal formalities and failure to maintain proper arm's
length relationships among related entities;
16) Use of a corporate entity as a conduit to procure labor, services or
merchandise for another person or entity;
17) Diversion of corporate assets from the corporation by or to a
stockholder or other person or entity to the detriment of creditors, or
the manipulation of assets and liabilities between entities to
concentrate the assets in one and the liabilities in another;
18) Contracting by the corporation with another person with the intent to
avoid the risk of nonperformance by use of the corporate entity; or the
use of a corporation as a subterfuge for illegal transactions; and
19) The formation and use of the corporation to assume the existing
liabilities of another person or entity.

Aside from the aforementioned circumstances, it must be determined whether the

transfer of assets from Maricalum Mining to G Holdings is enough to invoke the equitable
remedy of piercing the corporate veil. The same issue was resolved in Y-I Leisure Phils.,
Inc., et al. v. Yu where this Court applied the "Nell Doctrine" regarding the transfer of all
the assets of one corporation to another. It was discussed in that case that as a general

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rule that where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:

1) Where the purchaser expressly or impliedly agrees to assume such

debts;
2) Where the transaction amounts to a consolidation or merger of the
corporations;
3) Where the purchasing corporation is merely a continuation of the
selling corporation; and
4) Where the transaction is entered into fraudulently in order to escape
liability for such debts.

If any of the above-cited exceptions are present, then the transferee corporation
shall assume the liabilities of the transferor.

x x x

Settled is the rule that where one corporation sells or otherwise transfers all its assets to
another corporation for value, the latter is not, by that fact alone, liable for the debts and
liabilities of the transferor. In other words, control or ownership of substantially all of a
subsidiary's assets is not by itself an indication of a holding company's fraudulent intent to
alienate these assets in evading labor-related claims or liabilities.

x x x

To be clear, the presence of control per se is not enough to justify the piercing of the
corporate veil.

III. Harm or Casual Connection Test

In WPM International Trading, Inc., et al. v. Labayen, the Court laid down the criteria for
the harm or casual connection test, to wit:
In this connection, we stress that the control necessary to invoke the
instrumentality or alter ego rule is not majority or even complete stock control
but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own,
and is but a conduit for its principal. The control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control
and breach of duty must proximately cause the injury or unjust loss for which
the complaint is made. (emphases and underscoring supplied)

Proximate cause is defined as that cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the

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 result would not have occurred. More comprehensively, the proximate legal cause is that
"acting first and producing the injury, either immediately or by setting other events in
motion, all constituting a natural and continuous chain of events, each having a close
causal connection with its immediate predecessor, the final event in the chain immediately
effecting the injury as a natural and probable result of the cause which first acted, under
such circumstances that the person responsible for the first event should, as an ordinary
prudent and intelligent person, have reasonable ground to expect at the moment of his
act or default that an injury to some person might probably result therefrom." 91 Hence,
for an act or event to be considered as proximate legal cause, it should be shown that such
act or event had indeed caused injury to another.”

d. Right to Moral Damages:

Filipinas Broadcasting Network, Inc. v. Ago Medical &

Educational Center-Bicol Christian College of Medicine,
G.R. No. 141994, [January 17, 2005], 489 PHIL 380.

“A juridical person is generally not entitled to moral damages because, unlike a natural person,
it cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock. The Court of Appeals cites Mambulao Lumber Co. v.
PNB, et al. to justify the award of moral damages. However, the Court's statement in
Mambulao that "a corporation may have a good reputation which, if besmirched, may also be
a ground for the award of moral damages" is an obiter dictum.

Nevertheless, AMEC's claim for moral damages falls under item 7 of Article 2219 of the Civil
Code. This provision expressly authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219 (7) does not qualify whether the plaintiff
is a natural or juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.”

e. Liability for Negligence.

Professional Services, Inc. v. Natividad,

G.R. Nos. 126297, 126467 & 127590, [January 31, 2007], 542 PHIL
464-496):

“We now proceed to the doctrine of corporate negligence or corporate responsibility. Recent
years have seen the doctrine of corporate negligence as the judicial answer to the problem of
allocating hospital's liability for the negligent acts of health practitioners, absent facts to
support the application of respondeat superior or apparent authority. Its formulation
proceeds from the judiciary's acknowledgment that in these modern times, the duty of
providing quality medical service is no longer the sole prerogative and responsibility of the
physician. The modern hospitals have changed structure. Hospitals now tend to organize a

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highly professional medical staff whose competence and performance need to be monitored
by the hospitals commensurate with their inherent responsibility to provide quality medical
care.

The doctrine has its genesis in Darling v. Charleston Community Hospital. There, the Supreme
Court of Illinois held that "the jury could have found a hospital negligent, inter alia, in failing
to have a sufficient number of trained nurses attending the patient; failing to require a
consultation with or examination by members of the hospital staff; and failing to review the
treatment rendered to the patient.". . . On the basis of Darling, other jurisdictions held that a
hospital's corporate negligence extends to permitting a physician known to be incompetent
to practice at the hospital. With the passage of time, more duties were expected from
hospitals, among them: (1) the use of reasonable care in the maintenance of safe and
adequate facilities and equipment; (2) the selection and retention of competent physicians;
(3) the overseeing or supervision of all persons who practice medicine within its walls;
and (4)the formulation, adoption and enforcement of adequate rules and policies that ensure
quality care for its patients. Thus, in Tucson Medical Center, Inc. v. Misevich, it was held that a
hospital, following the doctrine of corporate responsibility, has the duty to see that it meets
the standards of responsibilities for the care of patients. Such duty includes the proper
supervision of the members of its medical staff. And in Bost v. Riley, the court concluded that
a patient who enters a hospital does so with the reasonable expectation that it will attempt to
cure him. The hospital accordingly has the duty to make a reasonable effort to monitor and
oversee the treatment prescribed and administered by the physicians practicing in its
premises.

. . . Not only did PSI breach its duties to oversee or supervise all persons who practice medicine
within its walls, it also failed to take an active step in fixing the negligence committed. This
renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article 2180 of the
Civil Code, but also directly liable for its own negligence under Article 2176.”

f. Liability for Crimes.7

Ching v. Secretary of Justice,

G.R. No. 164317, [February 6, 2006], 517 PHIL 151-178:

“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.

7
Application of Corporate Criminal Liability can be found in Secs. 165, 166, 167, 170 and 171. Under Sec. 179 (g), the SEC
may hold corporations in direct and indirect contempt.

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A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author
of the crime upon whom the penalty is to be inflicted. When a criminal statute designates an
act of a corporation or a crime and prescribes punishment therefor, it creates a criminal
offense which, otherwise, would not exist and such can be committed only by the corporation.
But when a penal statute does not expressly apply to corporations, it does not create an
offense for which a corporation may be punished. On the other hand, if the State, by statute,
defines a crime that may be committed by a corporation but prescribes the penalty therefor
to be suffered by the officers, directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer such penalty. Corporate officers
or employees, through whose act, default or omission the corporation commits a crime, are
themselves individually guilty of the crime.

The principle applies whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to those, who, by
virtue of their managerial positions or other similar relation to the corporation, could be
deemed responsible for its commission, if by virtue of their relationship to the corporation,
they had the power to prevent the act. Moreover, all parties active in promoting a crime,
whether agents or not, are principals. Whether such officers or employees are benefited by
their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative
fact.”

` IX. Internal Organization:

Loyola Grand Villas Homeowners (South) Association, Inc. v. C.A.,

G.R. No. 117188, [August 7, 1997], 342 PHIL 651-669

“As Fletcher aptly puts it:

It has been said that the by-laws of a corporation are the rule of its life, and
that until by-laws have been adopted the corporation may not be able to act
for the purposes of its creation, and that the first and most important duty of
the members is to adopt them. This would seem to follow as a matter of
principle from the office and functions of by-laws. Viewed in this light, the
adoption of by-laws is a matter of practical, if not one of legal, necessity.
Moreover, the peculiar circumstances attending the formation of a
corporation may impose the obligation to adopt certain by-laws, as in the case
of a close corporation organized for specific purposes. And the statute or
general laws from which the corporation derives its corporate existence may
expressly require it to make and adopt by-laws and specify to some extent
what they shall contain and the manner of their adoption. The mere fact,
however, of the existence of power in the corporation to adopt by-laws does

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 not ordinarily and of necessity make the exercise of such power essential to
its corporate life, or to the validity of any of its acts."

SEC. 45. Adoption of Bylaws. - For the adoption of bylaws by the corporation,
the affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members in case
of nonstock corporations, shall be necessary. The bylaws shall be signed by
the stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the inspection of the
stockholders or members during office hours. A copy thereof, duly certified
by a majority of the directors or trustees and countersigned by the secretary
of the corporation, shall be filed with the Commission and attached to the
original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, bylaws may be

adopted and filed prior to incorporation; in such case, such bylaws shall be
approved and signed by all the incorporators and submitted to the
Commission, together with the articles of incorporation.

In all cases, bylaws shall be effective only upon the issuance by the
Commission of a certification that the bylaws are in accordance with this
Code.

The Commission shall not accept for filing the bylaws or any amendment
thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution, or other
special corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such
bylaws or amendments are in accordance with law.

Fleischer v. Botica Nolasco Co., Inc.,

G.R. No. 23241, [March 14, 1925], 47 PHIL 583-594).

“As general rule, the by-laws of a corporation are valid if they are reasonable and calculated
to carry into effect the objects of the corporation, and are not contradictory to the general
policy of the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs.
Ainswoth, 71 Ala., 436; 46 Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable
and for a corporate purpose, and always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land. They must infringe the policy
of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge the substantial rights of

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stockholder or member, affect rights of property or create obligations unknown to the law.
(People's Home Savings Bank vs. Superior Court, 104 Cal., Co., 649; 43 Am. St. Rep., 147;
Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)”

“By-laws are the product of the agreement of the stockholders or member and establish the
rules for the internal government of the corporation. It therefore cannot bind third persons
not privy to it.” (Campos, Book I).

Gokongwei, Jr. v. Securities and Exchange Commission,

G.R. No. L-45911, [April 11, 1979], 178 PHIL 266-341)

“The validity or reasonableness of a by-law of a corporation is purely a question of law. 9

Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of law. 10
This rule is subject, however, to the limitation that where the reasonableness of a by-law is a
mere matter of judgment, and one upon which reasonable minds must necessarily differ, a
court would not be warranted in substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have exercised their authority. “

SEC. 46. Contents of Bylaws. - A private corporation may provide the following
in its bylaws:

(a) The time, place and manner of calling and conducting regular or
special meetings of the directors or trustees;
(b) The time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members thereof;
(c) The required quorum in meetings of stockholders or members and the
manner of voting therein;
(d) The modes by which a stockholder, member, director, or trusted may
attend meetings and cast their votes;
(e) The form for proxies of stockholders and members and the manner of
voting them;
(f) The directors' or trustees' qualifications, duties and responsibilities,
the guidelines for setting the compensation of directors or trustees
and officers, and the maximum number of other board
representations that an independent director or trustee may have
which shall, in no case, be more than the number prescribed by the
Commission;
(g) The time for holding the annual election of directors or trustees and
the mode or manner of giving notice thereof;
(h) The manner of election or appointment and the term of office of all
officers other than directors or trustees;
(i) The penalties for violation of the bylaws;

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(j) In the case of stock corporations, the manner of issuing stock
certificates; and
(k) Such other matters as may be necessary for the proper or convenient
transaction of its corporate affairs for the promotion of good
governance and anti- graft and corruption measures.

An arbitration agreement may be provided in the bylaws pursuant to Section

181 of this Code.

SEC. 47. Amendment to Bylaws. - A majority of the board of directors or

trustees, and the owners of at least a majority of the outstanding capital
stock, or at least a majority of the members of a nonstock corporation, at a
regular or special meeting duly called for the purpose, may amend or repeal
the bylaws or adopt new bylaws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a nonstock
corporation may delegate to the board of directors or trustees the power to
amend or repeal the bylaws or adopt new bylaws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal the bylaws
or adopt new bylaws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or
majority of the members shall so vote at a regular or special meeting.

Whenever the bylaws are amended or new bylaws are adopted, the
corporation shall file with the Commission such amended or new bylaws and,
if applicable, the stockholders' or members' resolution authorizing the
delegation of the power to amend and/or adopt new bylaws, duly certified
under oath by the corporate secretary and a majority of the directors or
trustees.

The amended or new bylaws shall only be effective upon the issuance by the
Commission of a certification that the same is in accordance with this Code
and other relevant laws.

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