Commercial Law Review Online Examination

ROMINA E. VILLAMOR April 29, 2020

(1)

Within the context of Philippine law, a "corporation" is treated as 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. A corporation, being a creature of law, "owes its life to the state, its birth
being purely dependent on its will," it is "a creature without any existence until it has received the
imprimatur of the state acting according to law." A corporation will have no rights and privileges of a
higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its
state organs. (Tanyag v. Benguet Corporation)

A corporation has four (4) attributes:

(1) It is an artificial being;

(2) Created by operation of law;

(3) With right of succession;

(4) Has the powers, attributes, and properties as expressly authorized by law or incident to its
existence.

As to its Right of Succession. A corporation continues to exist irrespective of the change in the
composition of the members/stockholders either by death, withdrawal, incapacity, insolvency or
regardless of the transfer of interest or shares of stock. – Sometimes called the “right of immortality”
because the corporate existence goes on unhampered whatever happens to its stockholders as long as
its life is extended before it expires in the manner provided for by law. – By succession is not meant
that the corporation is immortal. It simply means that a corporation has a continuity of existence
independent of that of its members or shareholders.

Corporations are created :

a) By general law- private corporations are generally created under the provisions of the
Corporation Code, by filing the appropriate Articles of Incorporation with the SEC.
b) By special law – public corporations are called through special laws. Private corporations cannot
be created by special laws except GOCC’s.

Concession Theory is a principle in the creation of corporations, under which a corporation is an

artificial creature without any existence until it has received the imprimatur of the State acting according
to law, through SEC. The life of the Corporation is a concession made by the State.

Theory of corporate enterprise or economic unit states that the corporation is not merely an artificial
being, but more of an aggregation of persons doing business, or an underlying business unit.

Corporations may be classified as follows:

 [a] Stock corporations - [1] capital stock divided into shares; and [2] authorized to distribute profits

[b] Non-stock corporations - organized not for profit

(3)

As a general rule, the corporation itself cannot be held criminally liable for a crime committed by its
officers since it does not have malice. This is precisely because of the nature of the crime and the
penalty thereof. A corporation cannot be arrested and imprisoned for a crime punishable by
imprisonment. The exception is that when the corporation is held criminally liable by express provision
of the law. ( e.g, Trust Receipts Law, Anti Money Laundering Act)

While the corporation may be fined for such criminal offense if the law so provides, only the responsible
corporate officer can be imprisoned. (People vs. Tan Boon Kon, 1930) However, a director or officer can
be held liable for a criminal offense only when there is a specific provision of law making a particular
officer liable because being a corporate officer by itself is not enough to hold him criminally liable.

The corporation may however be prosecuted against for the civil liability under Violation of BP 22
(Gosiaco v. Ching)

A corporation may also be charged and prosecuted for a crime if the imposable penalty is fine. Even if
the statute prescribes both fine and imprisonment as penalty, corporation may be prosecuted, and if
found guilty may be fined (Ching v Sec, of Justice)

A corporation is also liable whenever a tortious act is committed by an officer or agent under the
express direction or authority of the stockholders or members acting as a body, or generally, from the
directors as the governing body (PNB v CA).

As to its right to recover moral damage, generally, the doctrinal rule is that the award of moral damages
cannot be granted in favor of a corporation because, being an artificial person and having existence only
in legal contemplation, it has no feelings, emotions, no senses, it cannot, therefore, experience physical
suffering and mental anguish, which can be experienced only by one having a nervous system. Art. 2216
(7) of the Civil Code, expressly authorizes the recovery of moral damages in cases of libel, slander or any
other form of defamation. It does not qualify whether the plaintiff is a natural or judicial person.
Exceptionally, when the corporation has a reputation that is debased, resulting in its humiliation in the
business realm. But in such a case, it is imperative for the claimant to present proof to justify the award.
It is essential to prove the existence of the factual basis of the damage and its causal relation to the
alleged damaging acts.

(5)

The Doctrine of Piercing the Veil of a Corporate Entity states that he 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.
The elements/ test to determine the application of the alter ego theory, which is also known as the
instrumentality theory are:

(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.

Ownership of a substantial portion is not enough to apply the doctrine, all the 3 aforesaid elements
must however be present.

The circumstances where the said doctrine may be applied:

a) the corporation's separate personality is not bona fide, such that it is only a conduit of another person

b) its business is controlled or maintained as a mere agency or adjunct of another, that it has no mind or
will of its own.

Some cases where the alter ego doctrine is applied are:

a) Where the corporation is merely a farce;

b) 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; and
c) when there is parent-company subsidiary

(6)

Upon showing that grounds exist, the corporate fiction may be pierced through any of the following:

1.By disregarding the separate personality of the corporation.

2.By holding the corporate officer liable for the corporate obligation.
3.By regarding the corporation as an association of persons or in case of two corps, treated
them as one and hold them liable as such.

The veil of corporate fiction may be pierced by proving in court that the notion of legal entity is being
used to defeat public convenience, justify wrong, protect fraud, or defend crime or the entity is just an
instrument or alter ego or adjunct of another entity or person.

(7)
The nationality of a corporation may be determined by the following tests:

1. Place of Incorporation Test – the nationality of a corporation is determined by the state of

incorporation, regardless of the nationality of the stockholders;

2. Control Test – uses the nationality of the controlling stockholders or members of the
corporation;

Under RA No. 7042, the Foreign Investment Act of 1991, the following are considered Philippine
Nationals:

1. a corporation organized under Philippine laws of which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino citizens;

2. a corporation organized abroad and registered as doing business in the Philippines under the
general law on corporations of which 100% of the capital stocks entitled to vote belong to Filipinos.

The Grandfather Rule is the method of attributing the shareholdings of a given corporate shareholder to
the second or even the subsequent tier of ownership to determine the ultimate ownership in a
corporation. This is consistent with the rule that the “beneficial ownership” of corporations engaged in
nationalized activities must reside in the hands of the Filipino citizens.

(11)

Section 18 of the Revised Corporation Code of the Philippines provides that a private
corporation under the code commences its corporate existence and juridical personality from the date
the Commission issues the Certificate of Incorporation under its official seal.

(14)

Under Sec. 115 of the RCCP, 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 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 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.

Any entry in the articles of incorporation may be amended except those accomplished facts such
as the names of the incorporators and the original directors because they are always the same even if
there is a change in the stockholders or directors.

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 months from the date of filing for a cause
not attributable to the corporation.

(18)

Ultra vires act is one committed outside the object for which a corporation is created as defined by the
law of its organization and therefore beyond the power conferred upon it by law.

Yes, ultra vires acts may be ratified by the approval of the Board and concurrence of the
stockholders representing at least two-thirds of the outstanding capital (or two-thirds of the members
whenever applicable).

The following are the effects of the ultra vires acts:

1. If the acts are illegal, they are void regardless of performance, ratification or estoppel;

2. If the acts are committed by agents within their authority, the corporation is liable for corporate
torts;

3. If the acts involve executed contracts, said contracts are effective and will stand as foundation of
rights acquired under it;

4. If the acts involve executory contracts, neither party can maintain an action; and

5. If the acts involve part executed and part executory contracts, the principle against unjust
enrichment shall apply.

Ultra Vires Acts vs. Illegal Acts

The term ultra vires is distinguished from an illegal act for the former is merely voidable which
may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be
validated.

Ultra Vires Acts vs. Acts that Do Not Comply with Formalities

If certain procedures or formalities are prescribed in the Articles of Incorporation or By-laws and
the same are not complied with, the resulting act is not ultra vires of the corporation. Thus, if the By-
laws prescribe a procedure in entering into contracts and the same was not complied with when the
contract involved in the case was executed, the contract may even be valid to third persons who are not
familiar with the By-laws.
Ultra Vires Acts vs. Unauthorized Acts

The act may be within the powers of the corporation but within the powers of the particular
officer. The latter is not an ultra vires act of the corporation but is sometimes referred to as an ultra
vires act of the officer. The law on agency applies. For instance, the authority of the agent must be in
writing in a sale of land through an agent under Article 1874 of the Civil Code, otherwise the sale shall be
void. Hence, if there is no written authority from the Board of Directors to sell the land in the form of a
Resolution, the sale of the realty by an officer shall be void.

(20)

Trust fund doctrine holds that the assets of a corporation as represented by its capital stock are "trust
funds" to be maintained unimpaired and to be used to pay corporate creditors in the sense that there
can be no distribution of such assets among stockholders without provision being first made for the
payment of corporate debts and that any such disposition of its assets to the prejudice of the creditors
of the corporation who extended credit to the corporation on the faith of its outstanding capital stock is
null and void. (Philippine Trust Co. vs Rivera, 144 Phil 469)

(21)

Business judgment rule states that the courts are barred from intruding into the business judgments of
the corporation, when the same are made in good faith.

(24)

Section 27 of the Revised Corporation Code provides that: Any director or trustee of a corporation may
be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of
the outstanding capital stock, or in a non-stock corporation, by a vote of at least two-thirds (2/3) of the
members entitled to vote: Provided, That such removal shall take place either at a regular meeting of
the corporation or at a special meeting called for the purpose, and in either case, after previous notice
to stockholders or members of the corporation of the intention to propose such removal at the meeting.
A special meeting of the stockholders or members for the purpose of removing any director or trustee
must be called by the secretary on order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital stock, or a majority of the members
entitled to vote. If there is no secretary, or if the secretary, despite demand, fails or refuses to call the
special meeting or to give notice thereof, the stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the stockholders or members. Notice of the
time and place of such meeting, as well as of the intention to propose such removal, must be given by
publication or by written notice prescribed in this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Section 23 of this Code.

(28)
 “The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of
an apparent authority, and it holds him out to the public as possessing the power to do those acts. The
doctrine of apparent authority does not apply if the principal did not commit any act or conduct which a
third party knew and relied upon in good faith as a result of the exercise of reasonable prudence.
Moreover, the agent’s acts or conduct must have produced a change of position to the third party’s
detriment. (Advance Paper Corporation & George Hawvs. Arma Traders Corp.)

(35)

Yes. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

(42)

No, the corporation cannot be compelled to declare dividends. Declaration of dividends is discretionary
upon the board. 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 declared (Republic Planters Bank V. Agana).

(51)

A derivative suit is an action brought by minority shareholders in the name of the corporation to redress
wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and
has been the principal defense of the minority shareholders against abuses by the majority. (Western
Institute of Technology, Inc. vs. Solas, 278 SCRA 216, G.R. No. 113032, August 21, 1997) The Court has
recognized that a stockholder's right to Institute a derivative suit is not based on any express provision
of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties
 (52)

The requisites for filing a derivative suit are:

(1) The party bringing suit should be a shareholder as of the time of the act or transaction complained of
the number of his shares not being material

(2) The party has tried to exhaust intra-corporate remedies, ie., he has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea;

(3) The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit. (Filipinas Port
Services, Inc. v. Go, G.R. No.

161886, March 16, 2007, 518 SCRA 453); 2 (4) No appraisal rights are available for the act/s complained
of; and

(5) The suit is not a nuisance or harassment suit (Sec. 1, Rule 8, Interim Rules of Procedure for Intra-
Corporate Controversies; Ching v. Subic Bay Golf and Country Club, Inc., G.R. No. 174353, September 10,
2014)

(60)

Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate
existence or business purpose. However, for the purpose only of winding up its affairs and liquidating its
assets, its corporate existence continues for a period of 3 years from such dissolution [Sec. 122].

Upon dissolution, the corporation ceases to be a juridical person and consequently can no longer
continue transacting its business.

The following are the modes of dissolving a corporation:

A. Voluntary

WHERE NO CREDITORS ARE AFFECTED

1. Notice of the meeting should be given to the stockholders or members by personal delivery or
registered mail at least 30 days prior to the meeting.

2. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in
the place where the principal office of said corporation is located. If no newspaper is published in such
place, then in a newspaper of general circulation in the Philippines.

3. The resolution to dissolve must be approved by the majority of the BOD/BOT and approved by the
stockholders representing at least 2/3 of the Outstanding Capital Stock or 2/3 of members. Non-voting
shares are entitled to vote in this matter [Sec. 6. Par 6(8)]
4. A copy of the resolution shall be certified by the majority of the BOD/BOT and countersigned by the
secretary.

5. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of
dissolution.

WHERE CREDITORS ARE AFFECTED

1. A petition shall be filed with the SEC containing the following: a. signature by a majority of its BOD or
BOT or other officers having management of its affairs; b. verified by its president, or secretary or one of
its director or trustees; c. all claims and demands against the corporation; and d. resolved upon by
affirmative vote of the stockholders representing at least 2/3 of the Outstanding Capital Stock or 2/3 of
members;

2. If the petition is sufficient in form and substance, the SEC shall issue an order fixing the date on or
before which objections to the petition may be filed. Such date shall not be less than 30 days nor more
than 60 days after the entry of the order.

3. A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of
general circulation, or if there is no newspaper in the city or municipality of the principal office, posting
for 3 consecutive weeks in 3 public places is sufficient.

4. A hearing shall be conducted 5 days after the lapse of the expiration of the time to file objections.

5. If the objections are insufficient or the material facts in the petition are true, judgment shall be
rendered dissolving the corporation and directing the disposition of assets. The judgment may include
appointment of a receiver.

a. As long as 2/3 vote is obtained, no member/ stockholder can prevent such dissolution unless the
majority stockholders acted in bad faith. The latter may be held liable for damages.

b. Even where there are creditors of the corporation who may be prejudiced by the dissolution, it is still
possible for the corporation to terminate its existence prior to the expiration of its term, provided said
creditors are given the opportunity to present their claims and objections so that their interests may be
protected.

BY SHORTENING OF CORPORATE TERM

A voluntary dissolution may be effected by amending the Articles of Incorporation to shorten the
corporate term; and upon approval of the expired shortened term, the corporation shall be deemed
dissolved without any further proceedings.

A publication of notice of dissolution is required and cannot be dispensed with by alleging that it was not
required in Sec. 120 and that no creditors will be prejudiced by its dissolution. [SEC Opinion, August 30,
1988]

SEC Opinion No. 06-20, March 13, 2006:

• If the shortened term expires before the SEC approval – the corporation will be dissolved upon the SEC
approval
• If the shortened term expires after the SEC approval – the corporation will be dissolved upon the
expiration of the shortened term

• If SEC fails to act within 6 months from filing of the amended Articles of Incorporation and shortened
term expires after the 6-month period – the corporation will be dissolved upon the expiration of the
shortened term.

• If SEC fails to act within 6 months from filing of the amended Articles of Incorporation and shortened
term expires before the 6-month period – the corporation will be dissolved at the end of the 6-month
period. [Campos]

B. Involuntary

BY EXPIRATION OF CORPORATE TERM

Once the period expires, the corporation is automatically dissolved without any other proceeding and it
cannot thereafter be considered a de facto corporation.

FAILURE TO ORGANIZE AND COMMENCE BUSINESS WITHIN 2 YEARS FROM INCORPORATION

Failure to formally organize and commence the transaction of its business or construction of its works
within 2 years - its corporate powers shall cease and the corporation shall be deemed dissolved [Sec.
22].

Dissolution in this case is automatic.

Formal organization includes not only the adoption of the by-laws but also the establishment of the
body which will administer the affairs of the corporation and exercise its powers

Failure to operate for at least 5 consecutive years after commencement of business - ground for
suspension or revocation of its corporate franchise or certificate of incorporation. However, dissolution
in this case is not automatic.

The corporation may show that the failure to commence its business or to continuously operate is due
to causes beyond its control

LEGISLATIVE DISSOLUTION

The inherent power of Congress to make laws carries with it the power to amend or repeal them.
Involuntary corporate dissolution may be effected through the amendment or repeal of the Corporation
Code [implied from Sec. 145, DE LEON].

The limitations on the power to dissolve corporations by legislative enactment are as follows:

1. Under the Constitution, the amendment, alteration, or repeal of the corporate franchise of a public
utility shall be made only “when the common good so requires”;
2. Under Sec. 145 of the Code, it is provided that: “No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any
such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of
this Code or of any part thereof”;

3. While Congress may provide for the dissolution of a corporation, it cannot impair the obligation of
existing contracts between the corporation and third persons, or take away the vested rights of its
creditors. [De Leon]

DISSOLUTION BY THE SEC ON GROUNDS UNDER EXISTING LAWS

A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and
hearing, on the following grounds [Sec. 6, par. i, PD 902-A]:

1. Fraud in procuring its certificate of registration

2. Serious misrepresentation as to what the corporation can or is doing to the great prejudice of or
damage to the general public

3. Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts
which would amount to a grave violation of its franchise

4. Continuous inoperation for a period of at least five years

5. Failure to file by-laws within the required period

6. Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period

7. Other grounds, such as:

a. Violation by the corporation of any provision of the Corporation Code [Sec. 144 BP 68]

b. In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of
the corporation as the only practical solution to the dispute [Sec. 104 BP 68]

Sec. 37 of the Corporation Code of the Philippines allows a corporation to “extend” as well as to
“shorten” its term of existence. Dissolving a corporation prior to its expiration, say 50 years, or whatever
the term fixed in the Articles of Incorporation, can be done by amending the Articles of Incorporation to
shorten the term or vice-versa. When the shorter term expires, then the corporation is automatically
dissolved, and its corporate assets liquidated.

A private corporation may shorten its term as stated in the Articles of Incorporation when approved by a
majority vote of the Board and ratified at a meeting by the stockholders representing at least 2/3 of the
outstanding capital stock/members. A written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, that in case of extension of the corporate term, any dissenting stockholder
may exercise his appraisal right under the conditions provided in this Code.

However, in the case of increase or reduction of capital stock, any change in a corporate term has to be
approved at a members’ or stockholders’ meeting. Unlike in increase or reduction of capital stock, any
stockholder who dissents to the extension or shortening of the term may exercise his appraisal right.

This is the procedure to be followed after the stockholders had approved it.

(1) File duly certified copy of the AOI as amended with the SEC; and

(2) Amendment takes effect upon SEC approval, except if SEC fails to act within 6 months from filing for
causes not attributable to the corporation, then the amendment will take effect even without SEC
approval.

(91)

A One-Person Corporation is a corporation with a single stockholder, who can only be a natural person
(who must be of legal age), trust or estate. As an incorporator, the “trust” does not refer to a trust entity
but rather pertains to the subject being managed by a trustee.

The Congress intended to exclude juridical persons from becoming an incorporator of an OPC. Likewise,
certain entities are not allowed to be incorporated as an OPC, including banks and quasi-banks, pre-
need, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and
-controlled corporations

(105)

A One-Person Corporation is a corporation with a single stockholder, who can only be a natural person
(who must be of legal age), trust or estate. As an incorporator, the “trust” does not refer to a trust entity
but rather pertains to the subject being managed by a trustee.

The Congress intended to exclude juridical persons from becoming an incorporator of an OPC. Likewise,
certain entities are not allowed to be incorporated as an OPC, including banks and quasi-banks, pre-
need, trust, insurance, public and publicly-listed companies, and non-chartered government-owned and
-controlled corporations

(106)

Section 131 of Republic Act No. 11232, otherwise known as the Revised Corporation Code of the
Philippines (RCC), provides for the conversion of an ordinary corporation into a One Person Corporation
(OPC). The aforesaid provision states that an ordinary stock corporation may apply for conversion into
an OPC when a single stockholder acquires all its stocks. Conversely, the OPC may also be converted into
a stock corporation after compliance with the requirements provided by law.

The guidelines further provides for the submission of the following requirements:

1.) An affidavit of conversion which must be executed by the single stockholder who has acquired all the
outstanding shares of the capital stock of the ordinary stock corporation and countersigned by the
corporation’s corporate secretary, setting forth the: total number of shares of the OSC issued and
outstanding, a list of stockholders of the OSC before the acquisition of all the outstanding shares by the
single stockholder, and, the name of the single stockholder who acquired all of the outstanding shares of
the capital stock of an OSC in his own name in the books of the corporation;

2.) Original copy of the document effecting the transfer(s); and,

3.) Articles of Incorporation of the OPC, duly prepared, signed and acknowledged by the single
stockholder and by the corporation’s treasurer in accordance with the SEC Guidelines on the
Establishment of an OPC.