CORPORATION LAW

(Updated 17 August 2020)

l. p. ignacio ©
I. Corporation

Definition (Sec. 2, CCP)

- an artificial being; it is created by operation of law; has right of succession; has power, attribute and
properties expressly authorized by law and incident to its existence.

An artificial being

Cases: 1. Tayag v. Benguet Consolidated, 26 SCRA 242 (1996)

- An artificial being, invisible, intangible, and existing only in contemplation of law.
- 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.

2. Stonehill v. Diokno, 20 SCRA 383 (19 June 1967)

- Petitioners (corporate officers) have no cause of action to assail the legality of the contested warrants and
of the seizures made in pursuance thereof, for the simple reason that said corporations have their respective
personalities, separate and distinct from the personality of the petitioners, regardless of the amount of shares of stock
or of the interest of each of them in said corporations, and whatever the offices they hold therein may be. Indeed, it is
well settled that the legality of a seizure can be contested only by the party whose rights have been impaired thereby,
and that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third parties.
Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers
and things seized from the offices and premises of the corporations adverted to, since the right to object to the
admission of said papers in evidence belongs exclusively to the corporations, to whom the seized effects belong, and
may not be invoked by the corporate officers in proceedings against them in their individual capacity.

3. Bache & Co. (Phil), Inc. v. Ruiz, 37 SCRA 823 (27 Feb 1971)
- A corporation is entitled to immunity against unreasonable searches and seizures. A corporation is, after
all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a
collective body it waives no constitutional immunities appropriate to such body. Its property cannot be taken without
just compensation. It can only be proceeded against by due process of law, and is protected against unlawful
discrimination.

4. Bataan Shipyard & Engineering Co., Inc. v. PCGG, 150 SCRA 181, 22 May 1987
- The right against self-incrimination has no application to juridical persons.

*Private corporations are persons within the scope of the constitutional guaranties insofar as their properties are
concerned and are entitled to the protection afforded by the due process of law and equal protection of law clause in
the Bill of Rights (see Smith Bell & Co. v. Natividad, 40 Phil 136)

Right of succession

- A corporation continuous 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.

Powers, attributes and properties of a corporation

Case: Monfort Hermanos Agricultural Dev’t. Corp v. Monfort, GR No. 152542, 08 July 2004
- A corporation has no power except those expressly conferred on it by the Corporation Code and those that
are implied or incidents to its existence. In turn, a corporation exercises said powers through its board of directors
and/or its duly authorized officers and agents. Thus, it has been said that the power of a corporation to sue and be
sued in any court is lodged with the board of directors that exercises its corporate powers. In turn, physical acts of
the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the board of directors.

Doctrine of limited or special capacity (Secs. 2 & 36, CCP)

A corporation has only such powers as are expressly granted and those that are necessarily implied from
those expressly granted or those which are incidental to its existence.

Interest of stockholders over corporate property

Case: PNB v. Aznar, et al., GR No. 171805/ Aznar v. PNB, GR No. 172021, 30 May 2011
- The interest of stockholders over the properties of the corporation is merely inchoate and therefore does
not entitle them to intervene in litigation involving corporate property.

Creation of a corporation: (Section 4, CCP; Sec. 16, Art. XII of the Constitution)

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Cases: 1. Tayag v. Benguet Consolidated, 26 SCRA 242 (1968)
- A corporation is a creature without any existence until it has received the imprimatur of the state acting
according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than
that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly
not excluding the judiciary, whenever called upon to do so.

2. NDC v. Phil. Veterans Bank, 192 SCRA 257 (1990)

- A private corporation, which is neither owned nor controlled by the government, cannot be validly created
by special law.
- A private corporation created pursuant to a special law is a nullity, and such special law is unconstitutional
for being violative of the constitutional provision.

***A private corporation can only be formed in accordance with a general law on the subject such as the
Corporation Code.

CONCESSION THEORY: The corporation cannot exist without concession, i.e., the consent or approval of the state.

THEORY OF BUSINESS ENTERPRISE: Apart from the issue of whether there was duly constituted a juridical
person, the existence of the business enterprise by which several contracts and transactions were pursued requires
the protection of the commercial expectations of the public who dealt in good faith with the apparent corporation.

Juridical persons under Art. 44, Civil Code

1) The State and its political subdivisions;
2) Other corporations, institutions and entities for public interest or purposes, created by law;
3) Corporations, partnerships and associations for private interest or purpose.

The Boys Scout of the Philippines is a public corporation

As presently constituted, the Boy Scouts of the Philippines still remains an instrumentality of the national
government. It is a public corporation created by law for a public purpose, attached to the DECS pursuant to its
Charter and the Administrative Code of 1987. It is not a private corporation which is required to be owned or
controlled by the government and be economically viable to justify its existence under a special law. Thus the test of
economic viability clearly does not apply to public corporations dealing with governmental functions, to which the
category of the BSP belongs (BSP v. COA, GR No. 177131, 07 June 2011).

PNCC is a private corporation

Although the majority or controlling shares of the Philippine National Construction Corporation (PNCC)
belonged to the Government, the PNCC was essentially a private corporation due to its having been created in
accordance with the Corporation Code, the general corporation statute (Hermanos Oli Mfg. & Sugar Corp. v. Toll
Regulatory Board, 742 SCRA 395, 26 November 2014).

Corporations incorporated under the Corporation Code, not covered by the Civil Service Law

- Clark Development Corporation, a government-owned or controlled corporation without an original charter,

was incorporated under the Corporation Code. Pursuant to Article IX-B, Sec. 2(1), the civil service embraces only
those government-owned or controlled corporations with original charter. As such, respondent Clark Development
Corporation and its employees are covered by the Labor Code and not by the Civil Service Law (Salenga v. CA, 664
SCRA 635).

Nationality/citizenship of a corporation

Control test – the nationality of a corporation is determined by the controlling stockholders

Place of incorporation test – a corporation is a national of the country under whose law the corporation was organized
(Sec. 123, CCP).

Place of principal business test -- the corporation is a national of the place where its principal office or center of
management is located.

Grandfather Rule: It is a method of determining the nationality of a corporation which in turn is owned by another
corporation by breaking down the equity structure of the shareholders of the corporation. The percentage of shares
held by the second corporation in the first is multiplied by the latter’s own Filipino equity, and the product of these
percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation. This applies only if the
Filipino equity is less than 60% of the outstanding capital of a corporation that owns shares in a partly nationalized
enterprise—at least 60% must be owned by Philippine nationals (Aquino, Philippine Corporate Compendium).

Application of the grandfather rule and the control test:

Narra Nickel Mining vs Redmont, GR 185590, 21 April 2014: Narra Nickel Mining vs Redmont, G.R. No.
195580, 28 January 2015

Capital and common shares and foreign ownership

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 The term “capital” in Section 11, Article XII of the 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 comprising both of common and non-voting preferred shares (Gamboa v. Teves, 652 SCRA 690, 28 June
2011; Gamboa v. Teves, GR No. 176579, 09 October 2012)

The full beneficial ownership test

Roy v. Herbosa, G.R. No. 207246, November 22, 2016

Residence of a domestic corporation

Cases: 1. Young Auto Supply v. CA, 223 SCRA 670 (1993)

- A corporation has no residence in the same sense in which this term is applied to a natural person. But for
practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is
located as stated in the articles of incorporation.

2. Clavecilla Radio System v. Antillo, 19 SCRA 379 (1967)

- To allow and action to be installed in any place where the corporation maintains its branch offices, would
create confusion and work untold inconvenience to said entity. By the same token, a corporation is not allowed to file
personal actions in a place other than its principal place of business unless such is also the residence of a co-plaintiff
or a defendant.

3. Sy v. Tyson, 199 SCRA 367 SCRA 367 (1982)

- The principal business or office of the corporation is its residence for purposes of venue of suit or action.
The residence of its president is not the residence of the corporation because a corporation has a personality
separate and distinct from that of its officers and stockholders.

Venue of suit against a corporation

A corporation can be sued in its principal office not where its branch office is located. To allow an action
against a corporation to be instituted in any place where a corporate entity has its branch offices would create
confusion and work untold inconvenience to the corporation. (Clavecilla Radio System v. Antillon, GR No. L-22238,
18 February 1967)

Criminal action against a corporation, its officers

Cases: 1. Time, Inc. v. Reyes, 39 SCRA 303 (1971)

- Since a corporation is a mere legal fiction, no criminal action can lie against a corporation whether such
corporation be a resident or non-resident.

2. West Coast Life, Ins. v. Hurd, 27 Phil. 401 (1914)

- The rule is only natural persons are criminally liable. Juridical persons like a corporation are not liable. A
corporation cannot be proceeded against criminally and as such it cannot commit a crime in which a willful purpose or
a malicious intent is required.
3. Cruzvale, Inc. v. Eduque, 589 SCRA 534, 18 June 2009
- It is basic that only corporate officers shown to have participated in the alleged anomalous acts may be
held criminally liable.

4. Sia v. People, 121 SCRA 655 [1983]

- There are instances where the law specifies the officers who shall be criminally liable/responsible for acts
done in behalf of the corporation and violative of such law, like PD 1612 (the Anti-Fencing Law) and BP 22 (Bouncing
Checks Law), or that an officer of the corporation can be held criminally liable for acts or omissions done in behalf of
a corporation only where the law directly requires the corporation to do an act in a given manner. The performance of
the act is an obligation directly imposed by law on the corporation.

5. People v. Tan Boon Kong, 54 Phil 607(1930)

- A corporation is a mere legal fiction; it does not have the essential element of malice.

Criminal liability under the Corporation Code

In the recent case of Ang-Abaya, et al. v. Ang, et al. (573 SCRA 129 [2008]), the Court had the occasion to
enumerate the requisites before the penal provision under Section 144 of the Corporation Code may be applied in
case of violation of a stockholder or member’s right to inspect the corporate books/records as provided for under
Section 74 of the Corporation Code (Sy Tiong Shiou v. Sy Chim, 582 SCRA 517, 30 March 2009).

Separate personality not a shield to commit crime

The existence of the corporate entity does not shield from prosecution the corporate agent who knowingly
and intentionally caused the corporation to commit a crime. Thus, petitioners cannot hide behind the cloak of the
separate corporate personality of the corporation to escape criminal liability (Republic Gas Corp. v. Petron Corp., 698
SCRA 666, 17 June 2013).

Criminal liability of a corporation

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
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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.
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.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the
separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect
himself behind a corporation where he is the actual, present and efficient actor (Ching v. Sec. of Justice, G. R. No.
164317, February 6, 2006).
The general rule is that corporate officers are not liable for acts done on behalf of the corporation. Corporate
officers will only be criminally liable if they participated in the unlawful act, but are not liable criminally for acts
performed by other officers or agents thereof (Luis B. Reyes, Revised Penal Code, Book One, Fourteenth Edition,
1998, page 480, par. 5)

Criminal Liability/Separate Personality

A member of the Board of Directors of a corporation cannot, by reason of such membership, be held liable
for the corporation’s probable violation of Batas Pambansa (BP) Blg. 33 (Federated LPG Dealers Association v. del
Rosario, 808 SCRA 272, 09 November 2016).

Moral damages
Moral damages are awarded when the claimant suffers "physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury." "These damages must
be understood to be in the concept of grants, not punitive or corrective in nature, calculated to compensate the
claimant for the injury suffered." Its award is "aimed at a restoration, within the limits possible, of the spiritual status
quo ante; and therefore, it must be proportionate to the suffering inflicted."
A corporation is not a natural person. It is a creation of legal fiction and "has no feelings[,] no emotions, no senses[.]"
A corporation is incapable of fright, anxiety, shock, humiliation, and physical or mental suffering. "Mental suffering can
be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life[.]" A
corporation, not having a nervous system or a human body, does not experience physical suffering, mental anguish,
embarrassment, or wounded feelings. Thus, a corporation cannot be awarded moral damages.

There is no standing doctrine that corporations are, as a matter of right, entitled to moral damages. The existing rule
is that moral damages are not awarded to a corporation since it is incapable of feelings or mental anguish.
Exceptions, if any, only apply pro hac vice.
(Noell Whessoe, inc., v. Independent Testing Consultants, Inc., Petrotech Systems, Inc., and Liquigaz Philippines
Corp., GR No. G.R. No. 199851, 07 November 2018, J. Leonen)

Cases: 1. Mambulao Lumber v. PNB, 22 SCRA 359 (1968)

- A corporation may have a good reputation which, if besmirched, may also be a ground for moral damages.

2. Solid Homes, Inc. v. CA, 275 SCRA 267 (1997)

- Moral damages cannot be awarded to a corporation. A corporation—being an artificial person which has no
feelings, emotions or senses, and which cannot experience physical suffering or mental anguish—is not entitled to
moral damages.

3. ABS-CBN v. CA, 301 SCRA 572 (1999)

- The award of moral damages cannot be granted in favor of a corporation in because, being an artificial
person and having an existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot,
therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous
system. The statement in People v. Manero and Mambulao Lumber v. PNB that a corporation may recover moral
damages if it has a good reputation that is debased resulting in social humiliation is an OBITER DICTUM.

4. Jardine Davies v. CA, 333 SCRA 684

- Moral damages may be awarded to a corporation whose reputation has been besmirched.

5. NPC v. Philipp Brothers, 369 SCRA 629 (2001)

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 - Moral damages are not, as a general rule, granted to a corporation. While it is true that besmirched
reputation is included in moral damages, it cannot cause mental anguish to a corporation, unlike in the case of a
natural person, for a corporation has no reputation in the sense that an individual has, and besides, it is inherently
impossible for a corporation to suffer mental anguish.

DISSENTING opinion of Justice Melo: He maintains the view that a corporation may have a good reputation
which, if besmirched, may also be a ground for the award of moral damages.

6. Filipinas Broadcasting Network, Inc. v. Ago Medical, 448 SCRA 413, 17 January 2005
- A corporation may claim damages if it 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.
Moreover, where the broadcast is libelous per se, the law implies damages. In such a case, evidence of an
honest mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. Neither
in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the
recovery of s some damages

7. Employees Union of Bayer Phils. v. Bayer Phils., Inc., 636 SCRA 473, 06 December 2010
- As a general rule, a corporation cannot suffer nor be entitled to moral damages. A corporation, and by
analogy a labor organization, being an artificial person and having an existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows and griefs of life
—all of which cannot be suffered by an artificial, juridical person.

Corporate liability for tort

A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking,
the rules governing liability of a principal or master for a tort committed by an agent or servant are the same whether
the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which he expressly directs or
authorizes, and is just as true of a corporation as of a natural person (PNB v. CA, 83 SCRA 237).

Doctrine of legal entity

The corporation is a juridical person with a personality separate and distinct from each shareholder. It also
means that the stockholders or a corporation are different from the corporation itself (Sec. 2, CCP; Seaoil Petroleum
Corp. v. Autocorp, 569 SCRA 387, 17 October 2008).

Piercing the veil of corporate entity

This is an equitable doctrine developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes (PNB v. Ritratto, 362 SCRA 216 [216]). This is the doctrine to
the effect that that the separate personality of a corporation may be disregarded if such entity is used to defeat public
convenience, justify a wrong, protect fraud, or defend a crime (Kopple v. Yatco, 77 Phil 496). But this cannot be
availed by one who is not a victim of fraud or wrong (Traders Royal Bank v. CA, 269 SCRA 15 [1997]).

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. However, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to promote justice. Hence, when
the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat labor laws, this separate personality of the corporation may be disregarded or
the veil of the corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation. The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is but the alter ego of a person or another corporation. (Heirs of Pajarillo vs. Court of
Appeals, et al., G.R. No. 155056-57, October 19, 2007). When the separate personality of the corporation is
disregarded, the corporation will be treated merely as an association of persons and the stockholders or members will
be considered as the corporation, i.e., liability will attach personally or directly to the officers and stockholders (Yao,
Sr. v. People, GR No. 168306, 19 June 2007).
It settled that where it shows that business entities are owned, controlled, and conducted by the same
parties, law and equity will disregard the legal fiction that they are distinct and shall treat them as one entity in order
to protect the rights of third persons (Leo’s Restaurant and Bar Café v. Bensing, 806 SCRA 596, 19 October 2016).

The doctrine of piercing the veil of corporate fiction 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
case or business conduit of a person, or when 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 (Sarona v.
NLRC, 663 SCRA 394 [2012]; de Castro v. CA, 805 SCRA 265, 05 October 2016).

Liability when corporate fiction is pierced

When a corporate veil is pierced, the corporation’s liability becomes personal to the person directly
responsible for and who acted in bad faith in committing the illegal dismissal or any act violative of the Labor Code.
(Jose Emmanuel Guillermo v. Crisanto Uson, GR No. 198967, 07 March 2016). And SOLIDARY…
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Cases: 1. Seaoil Petroleum v. Autoccorp Group, 569 SCRA 387, 17 October 2008
- It is a settled rule that a corporation has a personality separate and distinct from its stockholders or
members, and is not affected by the personal rights, obligations and transactions of the latter.

2. Harpoon Marine Services, Inc. v. Francisco, 644 SCRA 394, 02 March 2011
- Obligations incurred by corporate officers are not theirs but the direct accountabilities of the corporation
they represent.

3. Times Transportation v. Sotello, GR No. 163786, 16 Feb. 2005

- Piercing the corporate veil is warranted only in cases when the separate legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two corporations, the law
will regard the corporations as merged into one. It 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 transaction attacked; (2) such control must have been used 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 a legal right;
and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.

4. Uy v. Villanueva, 526 SCRA 73 (2007)

- Corporate officers are not personally liable for the money claims of discharged corporate employees,
unless they acted with evident malice and bad faith in terminating their employment.
- The general rule is that obligations incurred by the corporation acting through its directors, officers and
employees, are its sole incurred liabilities. However, solidary liability may be incurred but only under the following
exceptional circumstances: 1) When directors and trustees or, in appropriate cases, the officers of a corporation: a.
vote or assent to patently unlawful acts of the corporation; b. act in bad faith or with gross negligence in directing the
corporate affairs; c. are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members
and other persons, 2) when a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3) When a director,
trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the
corporation, or 4) When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.

5. Matugina Wood Products v. CA, 263 SCRA 490 & Del Rosario v. NLRC, 187 SCRA 777
- In order to justify piercing the veil of corporate fiction, the wrongdoing must be clear and convincing. It
cannot be presumed.

6. Filmerco v. CA, 149 SCRA 193

- The doctrine of piercing the veil of corporate fiction does not apply to service of summons.

7. Jose Emmanuel Guillermo v. Crisanto Uson, GR No. 198967, 07 March 2016

- The general principle of separate personality of a corporation does not excuse its officers from their
obligation to labor.

Obligations incurred by corporate officers are not their personal liability

1) Obligations incurred by the directors, officers and agents of a corporation while acting as corporate
agents, are not their personal liability but the direct accountability of the corporation they represent (Cuenco v.
Talisay Tourist Sports Complex, Inc., 569 SCRA 626, 17 Oct. 2008).

2) The general rule is that obligations incurred by the corporation acting through its directors, officers and
employees, are its sole incurred liabilities. However, solidary liability may be incurred but only under the following
exceptional circumstances: 1) When directors and trustees or, in appropriate cases, the officers of a corporation: a.
vote or assent to patently unlawful acts of the corporation; b. act in bad faith or with gross negligence in directing the
corporate affairs; c. are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members
and other persons, 2) when a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3) When a director,
trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the
corporation, or 4) When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action (Uy v. Villanueva, 526 SCRA 73 [2007]).
3) Corporate officers are not personally liable for the money claims of discharged corporate employees,
unless they acted with evident malice and bad faith in terminating their employment (Uy v. Villanueva, 526 SCRA 73
[2007]).

4) To hold a director personally liable for debts of the corporation and thus pierce the veil of corporate fiction,
the bad faith or wrong doing of the director must be established clearly and convincingly (Carag v. NLRC, 520 SCRA
28 [2007).

5) Obligations incurred by corporate officers are not theirs but the direct accountabilities of the corporation
they represent (Harpoon Marine Services, Inc. v. Francisco, 644 SCRA 394, 02 March 2011).

Corporate directors and officers not liable for illegal termination of corporate employees

As a rule, corporate directors and officers are not liable for the illegal dismissal termination of a corporation’s
employees (Saudi Arabian Airlines (Saudia) v. Rebesencio, 746 SCRA 14014 January 2015).

Liability of directors for debts of the corporation

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 Carag vs. NLRC, et al., G.R. No. 147590, April 2, 2007 - -

This case also raises this issue: when is a director personally liable for the debts of the corporation? The
rule is that a director is not personally liable for the debts of the corporation, which has a separate legal personality of
its own. Section 31 of the Corporation Code lays down the exceptions to the rule, as follows:
Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. x x x x

Section 31 makes a director personally liable for corporate debts if he wilfully and knowingly votes for or
assents to patently unlawful acts of the corporation. Section 31 also makes a director personally liable if he is
guilty of gross negligence or bad faith in directing the affairs of the corporation.

Section 31 of the Corporation Code makes a director personally liable for corporate debts if he willfully and
knowingly votes for or assents to patently unlawful acts of the corporation. It also makes a director personally liable if
he is guilty of gross negligence or bad faith in directing the affairs of the corporation (Park Hotel v. Soriano, 680
SCRA 328, 10 September 2012).

Principle of limited liability

As a consequence of its status as a distinct legal entity, a corporation incurs its own liabilities and is legally
responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a
corporation, the corporate debt or credit is not the debt or credit of the stockholder (PNB v. Hydro Resources
Contractors Corp., 693 SCRA 294, 13 March 2013).

Piercing the veil of corporate fiction & interlocking directors

Absent any allegation or proof of fraud or other public policy considerations, the existence of interlocking
directors, officers and stockholders is not enough justification to pierce the veil of corporate fiction (Hacienda Luisita,
Inc. v. PARC, 660 SCRA 525, 22 November 2011).

Disregard of corporate personality

In exceptional cases, courts find it proper to breach corporate personality in order to make directors, officers,
or owners solidarily liable for the companies’ acts (Alert Security and Investigation Agency, Inc. v. Pasawilan, 657
SCRA 655, 14 Sept. 2011). Exceptional cases: to defeat public convenience, justify wrong, protect fraud, defend
crime, defeat labor laws, Sec. 31 Corp. Code

Separate personality of a subsidiary

Cases: 1. Pantranco Employees Association (PEA-PTGWO) v. NLRC, 581 SCRA 598, 17 March 2009
- The mere fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient
to justify their being treated as one entity—if used to perform legitimate functions, a subsidiary’s separate existence
shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising
in their respective businesses.

2. Martinez v. CA, GR No. 131673, 10 September 2004

- Mere ownership by a single stockholder or by another corporation of all or newly all of the capital stocks of
a corporation is not by itself sufficient ground to disregard the separate corporate personality. The substantial identity
of the incorporators of two or more corporations does not warrantly imply that there was fraud so as to justify the
piercing of the writ of corporate fiction. To disregard the said separate juridical personality of a corporation, the
wrongdoing must be proven clearly and convincingly.

The Instrumentality Rule or The Alter Ego Rule

- Under this rule, corporate existence will be disregarded where a corporation (subsidiary) is so organized
and controlled and its affairs so conducted as to make it only an adjunct and instrumentality of another corporation
(parent corporation), and parent corporation will be responsible for the obligations of its subsidiary. (Black's Law
Dictionary, 6th ed.)
- The so-called "instrumentality" or "alter ego" rule states that when a corporation is so dominated by
another corporation that the subservient corporation becomes a mere instrument and is really indistinct from
controlling corporation, then the corporate veil of dominated corporation will be disregarded, if to retain it results in
injustice. (Black's Law Dictionary, 6th ed.)
- The control necessary to invoke the rule is not majority or even complete stock control but such domination
of instances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and it but a conduit for its principal (Concept Builders v. NLRC, 257 SCRA 151).

Franchise of a corporation

Cases: 1. JRS Business Corp. v. Imperial Ins. Inc., 11 SCRA 634 (1964)

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 - The right to operate a messenger and express delivery service, by virtue of a legislative enactment, is
admittedly a secondary franchise and, as such, is subject to levy and sale on execution together with and including all
the property necessary for the enjoyment thereof.

2. Manila Jockey Club v. CA, 300 SCRA 181 (1998)

- Franchise laws are privileges conferred by the government on corporations to do that which does not
belong to the citizens of the country generally by common right. As a rule, a franchise springs from contracts between
the sovereign power and the private corporation for purposes of individual advantage as well as public benefit. Thus,
a franchise partakes of a double nature and character. In so far as it affects or concerns the public, it is public juris
and subject to government control. The legislative may prescribe the conditions and terms upon which it may be held,
and the duty of grantee to the public exercising it.

Liability of corporate agents

Case: Uy v. Villanueva, 526 SCRA 73 (2007)

- Corporate officers are not personally liable for the money claims of discharged corporate employees,
unless they acted with evident malice and bad faith in terminating their employment.
- The general rule is that obligations incurred by the corporation acting through its directors, officers and
employees, are its sole incurred liabilities. However, solidary liability may be incurred but only under the following
exceptional circumstances: 1) When directors and trustees or, in appropriate cases, the officers of a corporation: a.
vote or assent to patently unlawful acts of the corporation; b. act in bad faith or with gross negligence in directing the
corporate affairs; c. are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members
and other persons, 2) when a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3) When a director,
trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the
corporation, or 4) When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.

De facto corporation (Section 20, CCP)

Case: Seventh Day Adventist Conference Church of Southern Philippines, Inc. v. Northeastern Mindanao Mission
of seventh Day Adventists, Inc., 496 SCRA 215, 21 July 2006
- The filing of articles of incorporation and the issuance of the certificate of incorporation and the issuance of
the certificate of incorporation are essential for the existence of a de facto corporation. An organization not
registered with the Securities and Exchange Commission (SEC) cannot be considered a corporation in any
concept, not even as a corporation de facto.

When a corporation maybe regarded as an association

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
(Park Hotel v. Soriano, 680 SCRA 328, 10 September 2012).

Corporation by estoppel (Section 21, CCP)

Estoppel: Arts. 1431 & 1439, Civil Code

Cases: 1. Lim Tong Lim v. Phil. Fishing Gear, 317 SCRA 728 (1999)
- A third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and
received benefits from it may be barred from denying its corporate existence in a suit brought against the alleged
corporation.

2. International Express v. CA, 343 SCRA 674 (2000)

- It is a settled principle in corporation law that any 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 for and for other acts performed as such agent.
- The doctrine of corporation by estoppel applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant ground of defective incorporation.
3. Lozano v. de los Santos, 274 SCRA 452 (1997)
- 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.

II. Shares of stock (Sections 6-9, CCP)

Cases: 1. Republic Planters Bank v. Agana, 269 SCRA 1 (1997)

- The declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained
earnings, as the case may be (Sec. 16, CCP)
- 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 be
declared.
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 - Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings (Sec.
8, CCP) subject to the condition that the corporation has, after such redemption, assets in its books to cover debts
and liabilities inclusive of capital stock. Hence, redemption may not be made where the corporation is insolvent or will
cause insolvency.

2. Lirag Textile Mills v. SSS, 153 SCRA 338 (1987)

- A stockholder, whether preferred or not, sinks or swims with the corporation and there is no obligation to
return the value of his shares by means of repurchase if the corporation incurs losses and financial reverses, much
less guarantee such repurchase through surety.
- Preferred stockholders are not creditors of the corporation. They are merely given certain preferences over
common stockholders in case of liquidation but not the rights of a creditor.

Sale of shares of stock

In a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the
transfer of ownership of the stocks purchased (Fil-Estate Gold and Dev’t., Inc. v. Vertex Sales and Trading, Inc., 698
SCRA 272, 10 June 2013).

Stock certificate & street certificate

In Santamaria v. HSBC, 89 Phil. 780 (1951), the Supreme Court held that when a stock certificate is
endorsed in blank by the owner thereof, it constitutes what is termed as "street certificate" (Guy v. Guy, 680 SCRA
214, 05 September 2012).

Doctrine of Equality of Shares (Sec. 6)

- Except as otherwise provided by the Articles of Incorporation (AI) and stated in the certificate of stock,
each share shall in all respects equal to each other share.
- In the absence of any provision in the AI and in the certificate of stock to the contrary, all stocks, regardless
of their class, nomenclature, enjoy the same rights and privileges and subject to same liabilities.

III. Articles of Incorporation (Sections 14-17, CCP)

Case: Castillo v. Balinghasay, 440 SCRA 442, 18 October 2004

- One of the rights of a stockholder is the right to participate in the control and management of the
corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of
corporate stock, and as such is a property right. The stockholder cannot be deprived of the right to vote his stock nor
may the right be essentially impaired, either by the legislature or by the corporation, without his consent, through
amending the charter, or by the by laws.

The Doctrine of Relation

Under this doctrine, when the delay in effecting or filing the amended articles of incorporation for the
extension or corporate term is due to an insuperable interference occurring without the corporation's intervention
which could not have been prevented by prudence, diligence, and care, the same will be treated as having been
effected before the expiration of the original term of the corporation.

IV. Corporate name (Sec. 18, CCP)

Section 3 of the Revised Guidelines in the Approval of Corporate and Partnership Names states that if there
be identical, misleading or confusingly similar name to one already registered by another corporation or partnership
with the Securities and Exchange Commission (SEC), the proposed name must contain at least one (1) distinctive
word different from the name of the company already registered (GSIS Family Bank-Thrift Bank [formerly
Comsavings Bank, Inc.] vs. BPI Family Bank, 771 SCRA 284, 23 September 2015).

 A corporation’s right to use its corporate and trade name is a property right, a right in rem which it may
assert or protect against the whole world in the same manner as it may protect its tangible property against
trespass or conversion (Philips Export B.V. vs. CA, 206 SCRA 457).

• Statutory limitation: The proposed name must not be:

a. identical; or
b. deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law; or
c. patently deceptive, confusing or contrary to law; or
d. contrary to existing laws.

Cases: 1. Mga Kaanib sa Iglesia v. Iglesia ng Dios, 372 SCRA 171, (2001)
- Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one
adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the
exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a
suit for injunction against the new corporation to prevent the use of the name.

2. Lyceum v. CA, 219 SCRA 610 (1993)

- The policy underlying the prohibition in Section 18 against the registration of a corporate name which is
“identical or deceptively or confusingly similar” to that of any existing corporation or which is “patently deceptive” or
9
“patently confusing” or “contrary to existing laws,” is the avoidance of fraud upon the public which would have
occasion to dealt with the entity concerned, the evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations.

Corporate name: confusing similarity

• In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as
to mislead a person using ordinary care and discrimination. And even without such proof of actual confusion
between the two corporate names, it suffices that confusion is probable or likely to occur.
• Petitioner's corporate name is "GSIS Family Bank — A Thrift Bank" and respondent's corporate name is "BPI
Family Bank." The only words that distinguish the two are "BPI," "GSIS," and "Thrift." The first two words are
merely the acronyms of the proper names by which the two corporations identify themselves; and the third word
simply describes the classification of the bank.
• The overriding consideration in determining whether a person, using ordinary care and discrimination, might be
misled is the circumstance that both petitioner and respondent are engaged in the same business of banking.
"The likelihood of confusion is accentuated in cases where the goods or business of one corporation are
the same or substantially the same to that of another corporation.”

TWO REQUISITES THAT MUST BE PROVEN IN ORDER TO FALL INTO THE PROHIBITION OF THE LAW ON
THE RIGHT TO EXCLUSIVE USE OF A CORPORATE NAME

To fall within the prohibition of the law on the right to the exclusive use of a corporate name, two requisites must be
proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either
(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or to any other name already
protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
(GSIS FAMILY BANK — THRIFT BANK [Formerly Comsavings Bank, Inc., vs. BPI FAMILY BANK, G.R. No. 175278,
September 23, 2015, Jardeleza J)

The priority of adoption rule

• The applicant must be a prior registrant of a corporate name in order to have a prior right under the priority
adoption rule adoption rule
Hence, RCP has acquired the right to use the word "Refractories" as part of its corporate name, being its
prior registrant. RCP was incorporated on October 13, 1976 and since then continuously used the corporate name
"Refractories Corp. of the Philippines." Meanwhile, IRCP only started using its corporate name "Industrial
Refractories Corp. of the Philippines" when it amended its Articles of Incorporation on August 23, 1985.
BPI was incorporated in 1969 as Family Savings Bank and in 1985 as BPI Family Bank. GSIS, on the
other hand, was incorporated as GSIS Family — Thrift Bank only in 2002, or at least seventeen (17) years after BPI
started using its name.

Doctrine of secondary meaning

Case: Phil. Nut Industry v. Standard Brands, Inc., 65 SCRA 577 (1975)
- In the law of trademark, the doctrine is to the effect that a word or phrase originally incapable of exclusive
appropriation with reference to an article on the market, be geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one produces with reference to his article that, in that
trade and to that branch of purchasing public, the word or phrase has come to mean that the article was his product.

Effect of change of corporate name

Case: Republic Planters Bank v. CA, 216 SCRA 738 (1992)

- The change of name by a corporation has no more effect upon the identity of the corporation than a
change in name by a natural person has upon the identity of such person.
- It is the same corporation with a different name.

V. The Board and Officers of the Corporation (Sections 23- 35, CCP)

The three-fold duties of the BOD

Case: Alliance Dev’t. Corp. v. Radstock Securities Limited, 607 SCRA 413, 04 December 2009
- The members of the board of directors have a three-fold duty: duty of obedience, duty of diligence, and
duty of loyalty.

Board of Directors/Compensation

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 It is well-settled that directors of corporations presumptively serve without compensation, so that while the
director, in assigning themselves additional duties, act within their power, they nonetheless act in excess of their
authority by voting for themselves compensation for such additional duties (Agdao Landless residents Association,
Inc. v. Maramion, 806 SCRA 74, 17 October 2016).

Doctrine of Apparent Authority/ Doctrine of Ostensible Agency/ Holding Out Theory

Apparent authority, or what is sometimes referred to as the “holding out” theory, or the doctrine of ostensible
agency, imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions
of a principal or an employer in somehow misleading the public into believing that the relationship or the authority
exists (Megan Sugar Corp. v. RTC, Br. 68, 650 SCRA 100, 01 June 2011).
Although the general rule is that “no person, not even its officers, can validly bind a corporation” without the
authority of the corporation’s board of directors, the Supreme Court (SC) has recognized instances where third
persons’ actions bound a corporation under the doctrine of apparent authority or ostensible agency. (Ayala Land, Inc.
v. ASB Realty Corp., GR No. 210043, 26 September 2018).

The doctrine 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 within the scope of an apparent authority, and it holds him out to the
public as possessing the power to do those acts. (Advance paper Corp. v. Arma Traders Corp., GR No. 176897, 11
December 2013)

A corporation like the United Coconut Planters Bank (UCPB) is liable to third persons where it knowingly
permits its officer, or any other agent, to perform acts within the scope of his general or apparent authority, holding
him out to the public as possessing power to do these acts (UCPB v. Planters Products, Inc., 672 SCRA 285, 13
June 2012).

Cases: 1. Banate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21, 13 July 2010
- The authority to act for and to bind a corporation may be presumed from acts of recognition in other
instances when the power was exercised without any objection from its board of shareholders.
- Apparent authority is determined only by the acts of the principal and not by the acts of the agent.

2. Prudential Bank and Trust Co (now BPI) v. Abasolo, 631 SCRA 367, 27 September 2010
- A banking corporation is liable to innocent third persons where the representation is made in the course of
its business by an agent acting within the general scope of his authority even though, in the particular case, the agent
is secretly abusing his authority and attempting to perpetuate fraud upon his principal or some person, for his own
ultimate benefit.

3. Premiere Dev’t. Bank v. CA, GR No. 159352, 14 April 2004

- If a private corporation intentionally or negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that apparent authority is real as to innocent persons
dealing in good faith with such officers or agents.

Authority to represent a corporation

A party dealing with a president of a corporation is entitled to assume that he has the authority to enter, on
behalf of the corporation, into contracts that are within the scope of the powers of said corporation and that do not
violate any statute or rule on public policy. (Ayala Land, Inc. v. ASB Realty Corp., GR No. 210043, 26 September
2018)

Case: Cebu Mactan Members Center, Inc. v. Tsukuhara, 593 SCRA 172, 17 July 2009
- The general rule is that, in the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation.
Also: Cagayan Valley Drug Corp. v. CIR, 545 SCRA 10 [2008]
Westmont Bank v. Inland Construction and Devt. Corp., 582 SCRA 230, 23 March 2009

Ratification of unauthorized acts

The law allows a corporation to ratify the unauthorized acts of its corporate officer. With the ratification by
petitioner NYK-Fil of Raneses accomplishing the verification and certification of non-forum shopping which
accompanied petitioners’ petition for certiorari before the Court of Appeals, said petitioner had substantially complied
with the requirements of the law. Any defect in the signing of the verification and certification of non-forum shopping,
or even excused the non-compliance therewith, this Court a fortiori should allow the timely submission of such
requirements, albeit the proof of the authority of the signatory was put forward only after (NYK-Fil Ship Management,
Inc. v. Talavera, 571 SCRA).

De facto officer:

Case: Cojuangco v. Roxas, 195 SCRA 797 (1991)

- On who is elected by persons not entitled to vote are deemed as de facto officers. De facto officers who in
good faith assumed their duties and responsibilities as duly elected members of the board are legally entitled to the
emoluments of the office including salary, fees and other compensation attached to the office until they vacate the
same.
- The acts of a de facto officer are valid and binding as between the corporation and its stockholders or
members. They are also valid and binding as to third persons dealing with them in ignorance of their want of legal
right to the office.

Effect when a stockholder executes a Voting Trust Agreement

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Case: Lee v. CA, 205 SCRA 752 (1992) (Sec. 23)
- A voting trust agreement results in the separation of the voting rights of a stockholder from his other rights
such as the right to receive dividends, the right to inspect the books of a corporation, the right to sell interests in the
assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the
corporation.
- A voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation
consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said
shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement.
Creation of an office in the by-laws

Cases: 1. Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12, (2010)
- The creation of an office pursuant to or under a By-Law enabling provision is not enough to make a
position a corporate office.
- The statement in Tabang, to the effect that offices not expressly mentioned in the By-laws but were created
pursuant to a By-law enabling provision were also considered corporate officers was plainly obiter dictum).
- The power to elect the corporate officers was discretionary power that the law exclusively vested in the
Board of Directors, and could not be delegated to subordinate officers or agents.

2. March II Marketing, Inc. v. Joson, GR No. 171993, 12 December 2011

-Though the Board of directors may create appointive positions other than the positions of corporate officers,
the persons occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation
Code. Unless and until the corporation's by-laws is amended for the inclusion of General Manager in the list of its
corporate officers, such position cannot be considered as a corporate office within the realm of Section 25 of the
Corporation Code.

Power to Elect Corporate Officers

Verily, the power to elect the corporate officers was a discretionary power that the law exclusively
vested in the Board of Directors, and could not be delegated to subordinate officers or agents (Matling
Industrial and Commercial Corporation vs. Coros, 633 SCRA 12, G.R. No. 157802 October 13, 2010)

Teleconference now legally possible

In this age of modern technology, the courts may take judicial notice that business transactions may be
made by individuals through teleconferencing. In the Philippines, teleconferencing and videoconferencing of
members of the board of directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities
and Exchange Commission issued SEC memorandum No. 15, on November 30, 2011, providing the guidelines to be
complied with related to such conferences (Expertravel & Tours, Inc. v. CA and Korean Airlines, GR No. 152392, 26
May 2005).

Question

In the November 2010 stockholders meeting of Greenville Corporation, eight (8) directors were elected to
the board. The directors assumed their posts in January 2011. Since no stockholders' meeting was held in November
2011, the eight directors served in a holdover capacity and thus continued discharging their powers. In June 2012,
two (2) of Greenville Corporation's directors- Director A and Director B - resigned from the board. Relying on Section
29 of the Corporation Code, the remaining six (6) directors elected two (2) new directors to fill in the vacancy caused
by the resignation of Directors A and B. Stockholder X questioned the election of the new directors, initially, through a
letter-complaint addressed to the board, and later (when his letter-complaint went unheeded), through a derivative
suit filed with the court. He claimed that the vacancy in the board should be filled up by the vote of the stockholders of
Greenville Corporation. Greenville Corporation's directors defended the legality of their action, claiming as well that
Stockholder X's derivative suit was improper.
A) Is the filing of a derivative suit by X proper?
B) Whether the remaining directors of the Board of Greenville validly elected the two (2) new directors to fill
in a vacancy caused by the resignation of A and B.

ANS. A) YES. The derivative suit filed by X is proper. It complied with the requisites for a derivative suit
which are as follows: a) the party bringing the suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material; b) he has tried to exhaust intra-corporate remedies, i.e.,
has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his
plea; and c) the cause of action actually devolves on the corporations, the wrong doing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit (Legaspi Towers 300, Inc. v.
Muer, GR No. 170782, 18 June 2012).

B) NO. It should be filled up by the stockholders in a meeting called for the purpose. The separation is not
by resignation but by the expiration of the term. The holdover period is not part of the term of office of a member of
the board of directors. The holdover period is NOT part of the director’s original term of office, nor is it another term;
the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of
directors continue to serve in a holdover capacity, it implies that the office has a fixed term, which has expired,
and the incumbent is holding the succeeding term (Valle Verde Country Club Inc. v. Africa, 598 SCRA 202, 04
September 2009).

VI. Powers of a corporation (Sections 36-45, CCP)

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Doctrine of limited or special capacity (Secs. 2 & 36, CCP)

A corporation has only such powers as are expressly granted and those that are necessarily implied from
those expressly granted or those which are incidental to its existence.

Case: Monfort Hermanos Agricultural Dev’t. v. Monfort, GR No. 152542, 08 July 2004
- A corporation has no power except those expressly conferred on it by the Corporation Code and those that
are implied or incidents to its existence. In turn, a corporation exercises said powers through its board of directors
and/or its duly authorized officers and agents. Thus, it has been said that the power of a corporation to sue and be
sued in any court is lodged with the board of directors that exercises its corporate powers. In turn, physical acts of
the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the board of directors.

Business judgment rule

Case: PSE v. CA, 281 SCRA 232 (1997)

- Question of policy and management are left to the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their judgment for the judgment of the board of
directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts.

Ultra vires acts (Section 45, CCP)

(“beyond the powers”/ “mischievous doctrine”)

Acts done by the corporate officer beyond the scope of their authority cannot bind the corporation unless it
has ratified such acts expressly or is estopped from denying them. (Ayala Land, Inc. v. ASB Relaty Corp., GR
No.210043, 26 September 2018)

Cases: 1. Atrium v. CA, 353 SCRA 23, 28 Feb. 2001

- An 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. 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.

2. AF Realty v. Dieselman, 373 SCRA 385, 16 Jan. 2002

- Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall
be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf,
so may he board of directors of a corporation validly delegate some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a
corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected
with, the performance of authorized duties of such director, are held not binding on the corporation.

VII. By laws (Sections 46-48, CCP)

Cases: 1. ChinaBank v. CA, 270 SCRA 503 (1997)

- In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the
transaction or agreement between said third party and the shareholder was entered into.

2. Grace Christian High v. CA, 281 SCRA 133 (1997)

- The amendment in the by-laws giving a seat as a permanent member of the board of directors is contrary
to law. As such, the fact that for fifteen years it has not been challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain
validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the
association to waive invalidity. For that matter the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no provision of the by-laws can be adopted if it is
contrary to law.

3. Loyola Grand Villas v. CA, 276 SCRA 681 (1997)

- There can be no automatic corporate dissolution simply because the incorporators failed to abide by the
required filing of the by-laws embodied in Section 46 of the Corporation Code.
- There is no outright “demise” of corporate existence. It is however, a ground for dissolution after due notice
and hearing. The SEC may also suspend or revoke, after due notice and hearing, the franchise of certificate of
registration.

4. Thomson v. CA, 298 SCRA 280 (1998)

- The authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict
the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities
and procedure to be followed in effecting transfer.

5. Salafranca v. Phil-am, 300 SCRA 469 (1998)

- The right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of
management prerogative or business judgment. However this right, extensive as it may be, cannot impair the
obligation of existing contracts or rights.

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Creation of an office in the by-laws

Cases: 1. Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12, (2010)
- The creation of an office pursuant to or under a By-Law enabling provision is not enough to make a
position a corporate office.
- The statement in Tabang, to the effect that offices not expressly mentioned in the By-laws but were created
pursuant to a By-law enabling provision were also considered corporate officers was plainly obiter dictum).
- The power to elect the corporate officers was discretionary power that the law exclusively vested in the
Board of Directors, and could not be delegated to subordinate officers or agents.

2. March II Marketing, Inc. v. Joson, GR No. 171993, 12 December 2011

-Though the Board of directors may create appointive positions other than the positions of corporate officers,
the persons occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation
Code. Unless and until the corporation's by-laws is amended for the inclusion of General Manager in the list of its
corporate officers, such position cannot be considered as a corporate office within the realm of Section 25 of the
Corporation Code.

VIII. Trust fund doctrine

Cases: 1. Turner v. Lorenzo Shipping Corp., 636 SCRA 13, 24 November 2010
- Under the trust fund doctrine, the capital stock, property and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors, who are preferred in distribution of corporate assets.

2. Donnina C. Halley v. Printwell, Inc., GR No. 157549, 30 May 2011

- The trust fund doctrine is not limited to reaching the stockholder's unpaid subscriptions. The scope of the
doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate debts. All assets and property belonging to
the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders,
regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim.

Interest of stockholders over corporate property

The interest of stockholders over the properties of the corporation is merely inchoate and therefore does not
entitle them to intervene in litigation involving corporate property (PNB v. Aznar, et al., GR No. 171805/ Aznar v.
PNB, GR No. 172021, 30 May 2011).

IX. Meetings (Sections 49-59, CCP)

Proxy voting & Voting Trust Agreement (VTA):

Case: Lee v. CA, 205 SCRA 752 (1992) (Sec. 23)

- A voting trust agreement results in the separation of the voting rights of a stockholder from his other rights
such as the right to receive dividends, the right to inspect the books of a corporation, the right to sell interests in the
assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the
corporation.
- A voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation
consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said
shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement

Quorum – basis of computation

Case: Llanuza v. CA, 454 SCRA 54, 28 March 2005

- The Articles of Incorporation (AI) and not the stock and transfer book (STB) should be the basis of the
quorum. The STB cannot be used as a sole basis for determining the quorum as it does not reflect the totality of
shares which have been subscribed, more so when the AI show a significantly larger amount of shares issued and
outstanding as compared to that listed in the STB.
- Quorum is based on the totality of the shares of which have been subscribed and issued whether it be
founders’ shares or common shares.
- One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the
corporate officers failed to keep its records accurately. A corporation’s records are not the only evidence of the
ownership of stock in a corporation.
- In fact, the acts and conduct of the parties may even constitute sufficient evidence of one’s status as a
shareholder or member.

Notice of meeting

For a stockholders’ special meeting must be met with respect to notice, quorum and place. One (1) of the
requirements is a previous written notice sent to all stockholders at least one week prior to the scheduled meeting,
unless otherwise provided in the by-laws (Guy v. Guy, 790 SCRA 288, 19 April 2016).
  The provisions only require the sending/mailing of the notice of stockholders’ meeting to the stockholders of
the corporation. Sending/mailing is different from filing or service under the Rules of Court. Had the lawmakers
intended to include the stockholder’s receipt of the notice, they would have clearly reflected such requirement in the
law (Guy v. Guy, 790 SCRA 288, 19 April 2016).
Effect of improper sending of notice of meeting
14
 [T]he MSC Oversight Committee is neither empowered by law nor the MSC by-laws to call a meeting and
the subsequent ratification made by the stockholders did not cure the substantive infirmity, the defect having set in at
the time the void act was done. The defect goes into the very authority of the persons who made the call for the
meeting. It is apt to recall that illegal acts of a corporation which contemplate the doing of an act which is
contrary to law, morals or public order, or contravenes some rules of public policy or public duty, are, like similar
transactions between individuals, void. They cannot serve as basis for a court action, nor acquire validity by
performance, ratification or estoppel. The same principle can apply in the present case. The void election of 17
December 1997 cannot be ratified by the subsequent Annual Stockholders' Meeting. (JOSE A. BERNAS, et al., vs.
JOVENCIO F. CINCO, et al., G.R. Nos. 163356-57, July 1, 2015)

X. Stockholders and shares (Sections 60-73, CCP)

Certificate of stock

A stock certificate is prima facie  evidence that the holder is a shareholder of the corporation, but the
possession of the certificate is not the sole determining factor of one’s stock ownership. A certificate of stock is
merely: – x x x the paper representative or tangible evidence of the stock itself and of the various interests therein.
The certificate is not stock in the corporation but is merely evidence of the holder’s interest and status in the
corporation, his ownership of the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the
existence of a share in stock or the creation of the relation of shareholder to the corporation. (GRACE BORGOÑA
INSIGNE, DIOSDADO BORGOÑA, OSBOURNE BORGOÑA, IMELDA BORGOÑA RIVERA, AND ARISTOTLE
BORGOÑA PETITIONERS, VS. ABRA VALLEY COLLEGES, INC. AND FRANCIS BORGOÑA, RESPONDENTS,
GR. No. 204089, July 29, 2015).

Cases: 1. Makati Sports Club, Inc. v. Cheng, 620 SCRA 103, 16 June 2010
- The certificate is not a stock in the corporation but is merely evidence of the holder’s interest and status in
the corporation, his ownership of the share represented thereby—it is not in law the equivalent of such ownership,
and while it expresses the contract between the corporation and the stockholder, but is not essential to the existence
of a share of stock or the nature of the relation of shareholder to the corporation.
- The corporation’s obligation to register is ministerial upon the buyer’s acquisition of ownership of the share
of stock—the corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers.

2. Lincoln Phils. v. CA, 293 SCRA 92 (1988)

- A stock certificate is merely evidence of a share of stock not the share itself.

3. Bitong v. CA, 292 SCRA 503 (1988)

- Even in the absence of a certificate of stock, a stockholder solely on the strength of the recording in the
book, can exercise all the rights of a stockholder, including the right to file a derivative suit. No need to present a
separate deed of sale or proof of transfer of shares.
- A stock issued without authority and in violation of law is void and confers no right on the person to whom it
is issued and subjects him to no liability.
- A mere typewritten statement advising a stockholder of the extent of his ownership in a corporation without
qualification and/or authentication cannot be considered a certificate of stock.

Is PCGG a shareholder of PHC?

PHILCOMSAT & PHILCOMSAT HOLDINGS CORPORATION (PHC) VS. SANDIGANBAYAN & PCGG,
G.R. NO. 203023. JUNE 17, 2015

Street certificate

In Santamaria v. HSBC, 89 Phil. 780 (1951), the Supreme Court held that when a stock certificate is
endorsed in blank by the owner thereof, it constitutes what is termed as "street certificate" (Guy v. Guy, 680 SCRA
214, 05 September 2012).

Transfer of shares

In determining the validity of the transfer of shares through purchase, we resort to Section 63 of the
Corporation Code, which pertinently provides:

Section 63. Certificate of stock and transfer of shares. – x x x Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books
of the corporation.

In this regard, the Court has instructed in Ponce v. Alsons Cement Corporation (G.R. No. 139802,
December 10, 2002, 393 SCRA 602, 612) that:

15
 x x x [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders
and third persons on the other, the corporation looks only to its books for the purpose of determining who its
shareholders are.  It is only when the transfer has been recorded in the stock and transfer book that a corporation
may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part
of the corporation to recognize such rights as it is mandated by law to recognize arises.

Nonetheless, in Lanuza v. Court of Appeals  (G.R. No. 131394, March 28, 2005, 454 SCRA 54, 67) the
Court has underscored that the STB is not the exclusive evidence of the matters and things that ordinarily are or
should be written therein, for parol evidence may be admitted to supply omissions from the records, or to explain
ambiguities, or to contradict such records, to wit:
x x x [A] stock and transfer book is the book which records the names and addresses of all stockholders
arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the
date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and
to whom made; and such other entries as may be prescribed by law.  A stock and transfer book is necessary as a
measure of precaution, expediency and convenience since it provides the only certain and accurate method of
establishing the various corporate acts and transactions and of showing the ownership of stock and like
matters.  However, a stock and transfer book, like other corporate books and records, is not in any sense a
public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be
written therein.  In fact, it is generally held that the records and minutes of a corporation are not conclusive
even against the corporation but are prima facie  evidence only, and may be impeached or even contradicted
by other competent evidence.  Thus, parol evidence may be admitted to supply omissions in the records or
explain ambiguities, or to contradict such records.
(GRACE BORGOÑA INSIGNE, DIOSDADO BORGOÑA, OSBOURNE BORGOÑA, IMELDA BORGOÑA RIVERA,
AND ARISTOTLE BORGOÑA PETITIONERS, VS. ABRA VALLEY COLLEGES, INC. AND FRANCIS BORGOÑA,
RESPONDENTS, G.R. No. 204089, July 29, 2015)

Transfer of shares & recording the STB

All transfers of share of stock must be registered in the corporate books in order to be binding on the
corporation.
An owner of shares of stock cannot be accorded the rights pertaining to a stockholder – such as the right to
call for a meeting and the right to vote, or to be voted for – if his ownership of such shares is not recorded in the
Stock and Transfer Book (F & S Velasco Company, Inc. v. Madrid, 774 SCRA 388, 10 November 2015).

Cases: 1.Rural Bank of Lipa v. CA, GR No. 124535, 28 Sept. 2001, 366 SCRA 188
- The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares
from the lawful owner to the transferee.

2. Chemphil v. CA, 251 SCRA 257, 12 December 1995

- Only absolute transfers of shares of stock are required to be recorded in the corporation’s stock and
transfer book in order to have force and effect as against third persons. Hence, the attachment lien is not required to
be registered in the books of the corporation to be valid and effective against the corporation and third party.

3. VC Ponce v. Cement, GR No. 139802, 10 Dec. 2002, 393 SCRA 602

- A transfer of a share of stock not recorded in the stock and transfer book is non-existent as far as the
corporation is concerned. From the corporation’s point of view, the transfer is not effective until it is recorded.
- Before the transferee may ask for the issuance of stock certificate, he must first cause the registration of
the transfer and thereby enjoy the status of stockholder insofar as the corporation is concerned. A corporate
secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock
certificates.

When corporation is bound by unrecorded transfer of shares

When there is a substantial compliance with the requirement of the law even if actual recording has not been made,
like when: 1) the notice given to a corporation of the sale of the shares and presentation of the endorsed
certificate of stock for transfer is equivalent to registration;
2) a wrongful refusal of the corporation to record the transfer will not deprive an unrecorded
purchaser of the right to vote at the stockholders’ meeting.

Sec. 63 of the Corporation Code will not apply if it is the corporation itself who unduly refused to accept the tender of
payments of stocks and unduly refuse to recognize the assignment of rights based on Subscription Agreements it
issued. This provision could not be the source of rights of corporations who employed dubious machinations to justify
their refusal (Interport Resoources Corp. v. Securities and Specialist, Inc., GR No. 154069, 06 June 2016).

Sales of shares of stock

In a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the
transfer of ownership of the stocks purchased (Fil-Estate Gold and Dev’t., Inc. v. Vertex Sales and Trading, Inc., 698
SCRA 272, 10 June 2013).

Death of stockholder and the rights of the heirs

The corporation's obligation to register is ministerial upon the buyer's acquisition of ownership of the shares
of stock -- the corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers (Makati Sports Club, Inc. v. Cheng, 621 SCRA 103, 16 June 2010).
16
Case: Puno v. Puno Enterprises, Inc., 599 SCRA 585, 11 September 2009
- Upon the death of a shareholder, the heirs do not automatically become stockholders of the corporation
and acquire the rights and privileges of the deceased as shareholder of the corporation—the stocks must be
distributed first to the heirs in estate proceedings, and the transfer of the stocks must be recorded in the books of the
corporation.
- During such interim period, the heirs stand as the equitable owners of the stocks, the executor or
administrator duly appointed by the court being vested with the legal title to the stock.

***Restrictions on transfer of stock not allowed. It is a personal and private property; the owner has the right to
dispose off his stock in any manner he/she wishes. The transfer, however, maybe regulated.

Collection of unpaid subscription

Unpaid claim-meaning

Case: Chinabank v. CA, 26 March 1997, 270 SCRA 503

- The term “unpaid claim” refers to “any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from any transaction.

Notice of call

Case: Baltazar v. Lingayen Gulf, 14 SCRA 522 (1965)

- If a stockholder in a stock corporation subscribes to a certain number of shares of stock, and makes partial
payments for which he is issued a certificate of stock, he is entitled to vote the latter notwithstanding the fact that he
has not paid the balance of his subscription which has been called for payment or declared delinquent.
- If the entire subscribed shares of stock are not paid, the paid shares of stock may not be deprived of the
right to vote, until the entire subscribed shares of stock are fully paid, including interest.

Dividends in a corporation

Case: Republic Planters Bank v. Agana, 269 SCRA 1 (1997)

- The declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained
earnings, as the case may be (Sec. 16, CCP)
- 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 be
declared.

Capital and common shares and foreign ownership

The term “capital” in Section 11, Article XII of the 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 comprising both of common and non-voting preferred shares (Gamboa v. Teves, 652 SCRA 690, 28 June
2011).
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.
(Gamboa v. Teves, GR No. 176579, 09 October 2012)

***40% foreign ownership cap relates only to common shares and not to the total outstanding capital stock (common
and non-voting preferred shares).

The full beneficial ownership test

(Roy v. Herbosa, G.R. No. 207246, November 22, 2016)

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) x x x."

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

Derivative suit

17
 A derivative suit “is an action field by stockholders to enforce a corporate action.” A derivative suit, therefore,
concerns “a wrong to the corporation itself.” The real party-in-interest is the corporation, not the stockholders filing the
suit. The stockholders are technically nominal parties but are nonetheless the active persons who pursue the action
for and on behalf of the corporation (Florete, Jr. v. Florete, Sr., 781 SCRA 255, 20 January 2016).
In derivative suits, the corporation concerned must be impleaded as party (ibid.).

A derivative suit is one which is instituted by a shareholder or member of a corporation, for and in behalf of
the corporation for its protection from acts committed by directors, trustees, corporate officers, and even third persons
(Agdao Landless residents Association, Inc. v. Maramion, 806 SCRA 74, 17 October 2016).

For a derivative suit to prosper, it is required that the minority stockholder suing for and in behalf of the
corporation must allege in his complain that he is suing on a derivative cause of action on behalf of the corporation
and all other stockholders similarly situated who may wish to join him in the suit (Go v. Distinction Properties Dev't.
and Construction, Inc., 671 SCRA 461, 25 April 2012).

The stockholder’s right to file a derivative suit is not based on any express provision of the Corporation
Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by
the corporation and its stockholders (Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453, 18 June 2012).

The filing of a Complaint for the Declaration of Nullity of Elections by a shareholder against the officers and
the corporation due lack of quorum is NOT a derivative suit.

Where a stockholder or member is denied the right of inspection, his suit would be individual because the
wrong is done to him personally and not to the other stockholders or the corporation. Where the wrong is done to a
group of stockholders, as where preferred stockholders’ rights are violated, a class or representative suit will be
proper for the protection of all stockholders belonging to the same group. But where the acts complained of constitute
a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual
stockholder or member. (Go v. Distinction Properties Dev't & Construction, Inc., 671 SCRA 461, 25 April 2012).

May the suing stockholders in a derivative suit claim damage for themselves?

NO because in such kind of action the injury cause was to the corporation primarily. To allow the SH to claim
damages for themselves would result in appropriation by, and distribution among them of a part of the corporate
assets before dissolution of the corporation and liquidation of its debts and liabilities which is not allowed by law
(Ramos v. CB, 41 SCRA 565).

Nuisance or harassment suit

In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the
following: (1) The extent of the shareholding or interest of the initiating stockholder or member; (2) Subject matter of
the suit; (3) Legal and factual basis of the complaint; (4) Availability of appraisal rights for the act or acts complained
of; and (5) Prejudice or damage to the corporation, partnership, or association in relation to the relief sought ( Ang v.
Ang, 699 SCRA 272, 19 June 2013).

Intra-corporate controversy

An intra-corporate controversy is one which "pertains to any of the following relationships: (1) between the
corporation, partnership or association and the public; (2) between the corporation, partnership or association and the
State in so far as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or
association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or
associates themselves (Go v. Distinction Properties Dev't. and Construction, Inc., 671 SCRA 461, 25 April 2012).

A corporate officer’s dismissal is always a corporate act or an intra-corporate controversy

A corporate officer’s dismissal is always a corporate act, or an intra-corporate controversy which arises
between a stockholder and a corporation (Okol v. Slimmers World, 608 SCRA 97, 11 Dec. 2009).

An accounting demand by a stockholder of association dues from a condominium is intra-corporate in

nature.

The case before the RTC involved an intra-corporate dispute--the Moreno spouses were asking for an
accounting of the association dues and were questioning the manner the petitioner calculated the dues assessed
against them. These issues are alien to the first case that was initiated by Salvacion--a third party to the petitioner-
Moreno relationship--to stop the extrajudicial sale on the basis of the lack of the requirements for a valid foreclosure
sale (Chateau de Baie Condominium Corp. v. Moreno, 644 SCRA 288, 23 February 2011; also Wack Wack
Condominium Corp., et al. v. CA, et al., 215 SCRA 850, 23 November 1992).

A complaint by a condominium unit owner against the condominium corporation for violation of the master
deed of restrictions of the condominium and for alleged misrepresentation in their circulated flyers and brochures as
to the facilities or amenities that would be available to the condominium is an intra-corporate controversy (Go v.
Distinction Properties, Dev’t., GR No. 194024, 25 April 2012).

Mode of appeal in intra-corporate dispute

18
 The appropriate mode of appeal in an intra-corporate dispute is a petition for review under Rule 43 of the
Rules of Court (Phil Overseas Communications Corporation (POTC) v. Africa, 700 SCRA 453, 03 July 2013; Dee
Ping Wee v. lee Hiong Wee, 629 SCRA 145 [2010]).

Status or Relationship Test and Controversy Test in intra-corporate controversy

- Applying what has come to be known as the relationship test, it has been held that the types of actions
embraced by the following definition include the following suits: (a) between the corporation, partnership or
association and the public; (b) between the corporation, partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership or association and the State insofar as its franchise,
permit or license to operate is concerned; and, (d) among the stockholders, partners or associates themselves. As
the definition is broad enough to cover all kinds of controversies between stockholders and corporations, the
traditional interpretation was to the effect that the relationship test brooked no distinction, qualification or any
exemption whatsoever.

- The better policy in determining which body has jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of the question that is the subject of their controversy. Under
that nature of the controversy test, the dispute must not only be rooted in the existence of intra-corporate
relationship, but must also refer to the enforcement of the parties' correlative rights and obligations under the
Corporation Code as well as the internal and intra-corporate regulatory rules of the corporation. The combined
application of the relationship test and the nature of the controversy test, consequently, become the norm in
determining whether a case is an intra-corporate controversy or is purely civil in character. (Strategic Alliance Dev't.
Corp. v. Star Infrastructure Dev't. Corp., 635 SCRA 380, 17 Nov. 2010).

Under the nature-of-the-controversy test, the dispute must not only be rooted in the existence of an intra-
corporate relationship, but must also refer to the enforcement of the parties’ correlative rights and obligations under
the Corporation Code, as well as the internal and intra-corporate regulatory rules of the corporation (de Castro v. CA,
805 SCRA 265, 05 October 2016).

The SEC and the jurisdiction over intra-corporate controversy

MANUEL LUIS C. GONZALES AND FRANCIS MARTIN D. GONZALES, v. GJH LAND, INC. G.R. No. 202664,
November 20, 2015): What is the proper course of action if a commercial case was raffled to a regular court
instead of a special commercial court?
The proper course of action was not for the commercial case to be dismissed; instead, the regular court
should first refer the case to the Executive Judge for re-docketing as a commercial case; thereafter, the Executive
Judge should then assign said case to the designated Special Commercial Court in the station, if only one court is
designated as such.
Where the RTC acquiring jurisdiction over the case has multiple special commercial court branches, the
Executive Judge, after re-docketing the same as a commercial case, should proceed to order its re-raffling
among the said special branches.
  If the RTC acquiring jurisdiction has no branch designated as a Special Commercial Court, then it should
refer the case to the nearest RTC with a designated Special Commercial Court branch within the judicial region.
Upon referral, the RTC to which the case was referred to should re-docket the case as a commercial case, and then:
(a) if the said RTC has only one branch designated as a Special Commercial Court, assign the case to the sole
special branch; or (b) if the said RTC has multiple branches designated as Special Commercial Courts, raffle off the
case among those special branches.

Roman, Jr. v. SEC, 791 SCRA 638, 01 June 2016

Beyond doubt is the authority of the SEC to hear cases regardless of whether an action involves issues
cognizable by the RTC, provided that the SEC could only act upon those which are merely administrative and
regulatory in character. In other words, the SEC was never dispossessed of the power to assume jurisdiction over
complaints, even if these are riddled with intra-corporate allegations, if their invocation of authority is confined only to
the extent of ensuring compliance with the law and the rules, as well as to impose fines and penalties for violation
thereof; and to investigate even motu proprio whether corporations comply with the Corporation Code, the SRC and
the implementing rules and regulations.
  It is beyond question that the Securities and Exchange Commission (SEC), as a regulator, has broad
discretion to act on matters that relate to its express power of supervision over all corporations, partnerships or
associations who are the grantees of primary franchise and/or license or permit issued by the Government. Such
grant of express power of supervision, necessarily includes the power to create a management committee
following the doctrine of necessary implication.

 Criminal cases for violation of the RSA/SRC: DOJ or SEC?

Baviera v. Paglinawan, GR No. 168380, 08 Feb. 2007

A criminal charge for violation of the Securities Regulation Code is a specialized dispute. Hence, it
must first be referred to an administrative agency of special competence, i.e., the SEC. Under the doctrine of
primary jurisdiction, courts will not determine a controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the
specialized knowledge and expertise of said administrative tribunal to determine technical and intricate matters of
19
fact. The Securities Regulation Code is a special law. Its enforcement is particularly vested in the SEC.
Hence, all complaints for any violation of the Code and its implementing rules and regulations should be
filed with the SEC. Where the complaint is criminal in nature, the SEC shall indorse the complaint to the DOJ
for preliminary investigation and prosecution as provided in Section 53.1 of the RSA.
A corporate officer’s dismissal is always a corporate act or an intra-corporate controversy (Okol v. Slimmers
World Int’l., 608 SCRA 97, 11 December 2009).

Where the complaint for illegal dismissal concerns a corporate officer, however, the controversy
falls under the jurisdiction of the Securities and Exchange Commission (SEC) [now with the RTC], because
the controversy arises out of intra-corporate or partnership relations between and among stockholders,
members, or associates, or between any or all of them and the corporation, partnership, or association of which they
are stockholders, members, or associates, respectively; and between such corporation, partnership, or association
and the State insofar as the controversy concerns their individual franchise or right to exist as such entity; or because
the controversy involves the election or appointment of a director, trustee, officer, or manager of such corporation,
partnership, or association. Such controversy, among others, is known as an intra-corporate dispute. (Matling
Industrial and Commercial Corporation vs. Coros, 633 SCRA 12, G.R. No. 157802 October 13, 2010)

XI. Corporate Books and Records (Sections 74-75, CCP)

Shareholder’s right to inspect corporate books/records

(TERELAY INVESTMENT AND DEVELOPMENT CORPORATION vs. CECILIA TERESITA J. YULO, G.R.
No. 160924. August 05, 2015)

May a SH holding in his name only one share avail of the right to inspect corporate books?
Yes. Such right is available to any SH, no matter how small his interest in the corporation maybe. The right
is exercised during reasonable hours on business days (Sec. 74 , CCP).

Corporate secretary to make entries in books

Case: Torres, Jr. v. CA, 278 SCRA 793 (1997)

- It is the corporate secretary’s duty and obligation to register valid transfer of stocks and if a corporate
officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.

XII. Merger and Consolidation (Sections 76- 80, CCP)

A merger does not become effective upon the mere agreement of the constituent corporations. All the
requirements specified in the law must be complied with in order for merger to take effect. Here, Bancommerce and
TRB remained separate corporations with distinct corporate personalities.

What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in
consideration of Bancommerce’s assumption of identified recorded liabilities of TRB including booked contingent
accounts. There is no law that prohibits this kind of transaction especially when it is done openly and with appropriate
government approval. (BANK OF COMMERCE vs. RADIO PHILIPPINES NETWORK, INC., ET. AL., G.R. No.
195615, April 21, 2014, J. Abad)

Human beings are not embraced in the term "assets and liabilities"; Surviving corporations are not
mandated to absorb employees of the non-surviving corporation

- In legal parlance, human beings are never embraced in the terms "assets and liabilities."
- The Corporation Code does not mandate the absorption of the employees of the non-surviving corporation
by the surviving corporation in the case of merger (BPI v. BPI Employees Union-Davao Chapter-Federation of Unions
in BPI Unibank, 627 SCRA 590, 10 August 2010).

CONTRA: The surviving corporation becomes bound by the employment contracts entered into by the absorbed
corporation. These employment contracts are not terminated. They subsist unless their termination is
allowed by law. The acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment contracts (Phil.
Geothermal, Inc. Employees Union v. Unocal Phils. Inc. [now Chevron], 804 SCRA 286, 28 September
2016).

Cases: 1. Babst v. CA, 350 SCRA 341 (2001)

- In the merger of two existing corporations, one of the corporations survives and continues the business,
while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation.

2. PNB v. Andrada, GR No. 142935, 17 April 2002, 381 SCRA 244

- A corporation that purchases the assets of another will not be liable for the debts of a selling corporation
provided the former acted in good faith and paid adequate consideration for such assets, except when any of the
following circumstances is present:

1) Where the purchaser expressly or impliedly agrees to assume the debts;

2) Where the transaction amounts to merger or consolidation;
3) Where the purchasing corporation is merely a continuation of the selling corporation;
4) Where the transaction is fraudulently entered into to escape liability.

Constituent & surviving corporations

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 The parties to a merger or consolidation are called constituent corporations.
In consolidation, all the constituents are dissolved and absorbed by the new consolidated enterprise. In
merger, all constituents, except the surviving corporation, are dissolved. In both cases, however, there is no
liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation acquires all the
properties, rights and franchises and their stockholders usually become its stockholders. The surviving or
consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the
creditors have consented or not to such merger of consolidation (Mcleod v. NLRC, 512 SCRA 222)

Fictitious/shell companies

Shell companies have no significant assets, staff or operational capacity. They pose a serious red flag as a
bidder on public contracts, because they often hide the interests of project or government officials, concealing a
conflict of interest and opportunities for money laundering (Republic v. Mega Pacific eSolutions, Inc., 794 SCRA 414,
27 June 2016).

De facto merger

"a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of
another corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end
up with the business enterprise of the target corporation; whereas, the target corporation would end up with basically
its only remaining assets being the shares of stock of the acquiring corporation." (BANK OF COMMERCE vs. RADIO
PHILIPPINES NETWORK, INC., ET. AL., G.R. No. 195615, April 21, 2014)

Business-enterprise transfer rule

The rule envisions a situation where the transferee corporation’s interest is not limited to the assets acquired
but covers its business operations, including its goodwill.
As a consequence of the transfer, the selling corporation is merely left with its judicial existence, devoid of its
industry and earning capacity. In effect, the corporation is rendered incapable of continuing its operation or
accomplishing its corporate purpose.
The business-enterprise transfer rule aims to protect creditors of the business by allowing them a remedy
against the new owner of the assets and business enterprise. Otherwise, creditors would be left ‘holding the bag’
because they may not be able to recover from the transferor who has ‘disappeared with the loot’ or against the
transferee who can claim that he is a purchaser in good faith and for value. (Y-l Leisure Phils. et al., v. James Yu, GR
No. 207161, 08 September 2015).
***
Sometime in 1997, Mt. Arayat Dev’t. Co. Inc. (Madci), a real estate development company, sold shares of a
golf and country club to the public. James Yu bought and fully paid 500 golf and 150 country club shares for
P650,000.00. Three years later, James found out that the supposed site of the club was non-existent. He demanded
for the return of his money from Madci. Due to the failure to pay, James sued Madci, He included Y-l Leisure Phils.,
Yats Int’l. Ltd. And Y-l Clubs and Resorts, Inc. (YIL) in his complaint because, in 1999, Madci sold substantially all of
its assets, consisting of 120 hectares of land in Pampanga, to them.
By selling the 120 hectares of land, which all that Madci had for purposes of accomplishing its objective to
operate a golf and country club, to YIL, Madci rendered itself incapable or unable to continue the business for which it
was incorporated. YIL, which was in the business of developing real estate properties for leisure and tourism
purposes, continued the business of Madci and undertook the development of the golf course. Thus, YIL inherited the
liabilities of Madci because it acquired all of the assets of the latter.
YIL was held jointly and severally liable with Madci in satisfying Yu’s demand for payment. (Y-l Leisure
Phils. et al., v. James Yu, GR No. 207161, 08 September 2015).
In a business-enterprise transfer, the transferee is liable for the debts and liabilities of his transferor arising
from the business enterprise conveyed (Y-l Leisure Phils. et al., v. James Yu, GR No. 207161, 08 September 2015,
770 SCRA 56).
Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered (Y-l Leisure Phils. et al., v. James Yu, GR No. 207161, 08 September 2015, 770 SCRA 56).

Nell Doctrine

- The Nell Doctrine states the general rule that the transfer of all assets of a corporation to another shall not
render the latter liable to the liabilities of the transferor.
-The exception of the Nell Doctrine, which finds its legal basis under Section 40, provides that the transferee
corporation assumes the debts and liabilities of the transferor corporation because it is merely a continuation of the
latter’s business.
- The first exception under the Nell Doctrine, where the transferee corporation expressly or impliedly agrees
to assume the transferor’s debts, is provided under Article 2047 of the Civil Code.
- The second exception under the Nell Doctrine, as to the merger and consolidation of corporations, is well-
established under Sections 76 to 80, Title X of the Corporation Code. If the transfer of assets of one (1) corporation to
another amounts to a merger or consolidation, then the transferee corporation must take over the liabilities of the
transferor.
(Y-l Leisure Phils. et al., v. James Yu, GR No. 207161, 08 September 2015, 770 SCRA 56).

XIII. Appraisal Right (Sections 81-86, CCP)

Case: Turner v. Lorenzo Shipping Corp., 636 SCRA 13, 24 November 2010

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 - A stockholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the
Corporation Code.
- The right of appraisal may be exercised when there is a fundamental change in the charter or articles of
incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate
action is taken. It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to
retire from the corporation.
- No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover the payment. In case the corporation has no available unrestricted retained earnings in
its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and dividend rights shall immediately be restored

FUNDAMENTAL CHANGES (SEC. 6)

A B I S I M I D / slempo
a. amendment of Articles of Incorporation
b. adoption and amendment of by-laws;
c. sale, lease, exchange, mortgage, pledge or disposition of all or substantially all of corporate property;
d. merger or consolidation of capital stock
e. incurring, creating or increasing bonded indebtedness;
f. increase or decrease of capital stock
g. investments of corporate funds in another corporation or another business purpose; &
h. corporate dissolution

UNRESTRICTED RETAINED EARNINGS

Refer to the undistributed earnings of the corporation which have not been allocated for any managerial,
contractual or legal purposes and which are free for distribution to the SH as dividends (CCP No. 1 “SEC Rules
Governing Redeemable and Treasury Shares,“ Sec. 2).

EXERCISE OF APPRAISAL RIGHT

1. Written demand within 30 days after voting; deemed a waiver if not made.
2.  If no agreement on the fair value of the shares w/in a period of 60 days from approval of corporate
action, to be determined by three disinterested persons. Findings and award of the majority of the appraisers
shall be final. Corporation shall pay w/in 30 days after award. 
3.  All rights of SH, including voting and dividend rights, shall be suspended from the time of demand, except
the right to receive payment of the fair value of the shares.
4.  Submit certificate of stock w/in 10 days from demand. Upon failure, corporation has option to terminate
rights of SH.
5.  If the proposed corporate action is implemented or effected, the corporation shall pay SH, upon the
surrender of the certificates of stock.  

XIV. Non-stock Corporations (Sections 87-95, CCP)

Board of Trustees

The second paragraph of Section 108 of the Corporation Code, although setting the term of the members of
the Board of Trustees at five years, contains a proviso expressly subjecting the duration to what is otherwise provided
in the articles of incorporation or by-laws of the educational corporation—that contrary provision controls on the term
of office (Barayuga v. Adventist University of the Philippines, 656 SCRA 640, 17 August 2011).
On occupying an office in a hold-over capacity could be removed at any time, without cause, upon the
election or appointment of his successor (Barayuga v. Adventist University of the Philippines, 656 SCRA 640, 17
August 2011).

Voting Rights

The provision in Section 89 of the CCP is explicit on the right of a member to vote by mail. Voting by mail
must be clearly set forth in the by-laws subject to SEC approval and such terms and conditions that that may be
imposed by the Commission before it can be exercised by the members. Considering the absence of a provision
allowing mail voting in the by-laws, all votes cast by mail is violative of the cited proviso of the Code (SEC Opinion
No. 04-50 dated 2-17-04).

Limitations in voting rights of members

Section 89 of the Corporation Code pertaining to non-stock corporations provides that "(t)he right of the
members of any class or classes (of a non-stock corporation) to vote may be limited, broadened or denied to the
extent specified in the articles of incorporation or the by-laws." This is an exception to Section 6 of the same code
where it is provided that "no share may be deprived of voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code. Hence, the stipulation in the By-Laws providing for the
election of the Board of Directors by districts is a form of limitation on the voting rights of the members of a non-stock
corporation as recognized under the aforesaid Section 89. Section 24 of the Code, which requires the presence of a
majority of the members entitled to vote in the election of the board of directors, applies only when the directors are
elected by the members at large, such as is always the case in stock corporations by virtue of Section 6 (Luis Ao-as,
et al. v. CA, GR No. 128464, 20 June 2006).
Dead members are not counted for quorum and voting purposes

In a non-stock corporation, membership is personal and non-transferrable unless the articles of

incorporation or by-laws states otherwise. Section 91 states that termination extinguishes all the rights of a member

22
of the corporation, unless otherwise stated in the articles of incorporation. Hence, dead members are not to be
counted in determining the requisite vote in corporate matters of the requisite quorum in the members' meeting (Tan
v. Sycip, 499 SCRA 216, 17 August 2006).

Termination of membership

Section 91 of the Corporation Code of the Philippines provides that membership in a non-stock, nonprofit
corporation shall be terminated in the manner and for the cases provided in its articles of incorporation or the bylaws
(Agdao Landless residents Association, Inc. v. Maramion, 806 SCRA 74, 17 October 2016).

XV. Close Corporations (Sections 96-105, CCP)

Cases: 1. Dulay Ent. V. CA, 225 SCRA 678 (1993)

- In a close corporation, a board resolution authorizing the sale or mortgage of a property is not necessary to
bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after having knowledge of the meeting.

2. San Juan Structural v. CA, 296 SCRA 631 (1998)

- The 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 personalities. So, too, a
narrow distribution of ownership does not, by itself, make a close corporation.

Liability for tort

Case: Naguiat v. NLRC, 269 SCRA 564 (1997)

- A stockholder who actively engaged in the management or operation of the business and affairs of a close
corporation shall be personally liable for corporate torts unless the corporation has obtained a reasonable adequate
liability insurance.

CORPORATE TORT: “Tort” consists in the violation of a right given or the omission of a duty imposed by law. Simply
stated, tort is a breach of a legal duty. Article 283 of the Labor Code mandates the employer to grant separation pay
to employees in case of closure or cessation of operations of establishment or undertaking not due to serious
business losses or financial reverses.

XVI. Special Corporations (Sections 106-116, CCP)

Term of office of trustees in an educational institution

- The second paragraph of Section 108 of the Corporation Code, although setting the term of the members
of the Board of Trustees at five years, contains a proviso expressly subjecting the duration to what is otherwise
provided in the articles of incorporation or by-laws of the educational corporation -- that contrary provision controls on
the term of office.
- One occupying an office in a hold-over capacity could be removed at any time, without cause, upon the
election or appointment of his successor. (Barayuga v. Adventist University of the Philippines,655 SCRA 640, 17
August 2011).

Religious corporations (Sections 109-115, CCP)

Cases: 1. Long v. Basa, 366 SCRA 113, 27 Sept. 2001

- The expulsion of some members of a religious corporation without previous notice is valid as it is in accordance with
its by-laws—a member maybe expelled by the Board, through a resolution, without giving that erring member any
notice prior to his expulsion. The resolution need not even state the reason for such action. The Corporation Code
leaves the matter of ecclesiastical discipline to the religious group concerned.

2. Canete v. CA, 171 SCRA 13 (1989)

- The use of properties of a “religious congregation” in case of schism, is controlled by the numerical majority of the
members. The minority in choosing to separate themselves into a distinct body, can claim no rights in the property
from the fact that they once had been members.

***Section 116 of the Corp. Code (as well as Sec. 160 of the former Corporation Law) does not provide for a
term of existence of religious corporations whether classified as a corporation sole or corporation aggregate. As such,
the law intends that religious organizations may exist perpetually (SEC Opinion dated 10 Dec. 1981). Moreover,
where the articles of incorporation does not provide for a term of existence, it shall be understood that the intention is
for the corporation to exist for an indefinite period (SEC Opinion dated 23 Oct. 1995) [SEC Opinion No.45 dated 28
Nov. 2004]).

Corporation Sole

Cases: 1. Roman Catholic Apostolic Church v. LRC, 102 Phil. 596 (1957)
- A corporation sole does not have any nationality. But for purposes of applying our nationalization laws,
nationality is determined not by the nationality of its head but by the nationality of the members of the sect in the
Philippines.

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 2. Iglesia Evangelica Metodista en las Islas Filipinas (IEMELIF) (Corporation Sole), Inc. v. Lazaro, 625
SCRA 224, 06 July 2010
- The Corporation Code provides no specific mechanism for amending the articles of incorporation of a
corporation sole; Section 109 of the Corporation Code allows the application to religious corporations of the general
provisions governing non-stock corporations.
- Although a non-stock corporation has a personality that is distinct from those of its members who
established it, its articles of incorporation cannot be amended solely through the action of its board of trustee. The
amendment needs the concurrence of at least two thirds of its membership.

Pre-need plans

Republic Act (R.A.) No. 8799, otherwise known as The Securities Regulation Code, defines “pre-need plans”
as “contracts which provide for the performance of future services or the payment of future monetary considerations
at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or
insurance coverage, and includes life, pension, education, interment, and other plans which the Commission may
from time to time approve (Abrera v. Barza, 599 SCRA 534, 11 September 2009).

XVII. Dissolution (Sections 117-122, CCP)

The power of the SEC

Case: Gamboa v. Teves, 652 SCRA 690, 28 June 2011

- Under Sec. 5(m)of the Securities Regulation Code, the SEC is vested with the power and function to
suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided for by law.

Effect of non-filing of by-laws within the prescribed period

Case: Loyola Grand Villas v. CA, 276 SCRA 681 (1997)

- There can be no automatic corporate dissolution simply because the incorporators failed to abide by the
required filing of the by-laws embodied in Section 46 of the Corporation Code.
- There is no outright “demise” of corporate existence. It is however, a ground for dissolution after due notice
and hearing. The SEC may also suspend or revoke, after due notice and hearing, the franchise of certificate of
registration.

At the very least, the corporation may be considered a de facto corporation whose right to exist may not be
inquired into in a collateral manner (Sawadjaan v. CA, 08 June 2005).

Liquidation

Cases: 1. Gelano v. CA, 103 SCRA 90 (1991)

- After the expiration of the 3-year period, the corporation ceased to exist for all purposes and it can no
longer sue or be sued. Hence, the need to appoint a trustee to enable it to prosecute and defend suits by or against
the corporation beyond the 3-year period.
- The counsel who prosecuted and defended the interest of the corporation, who appeared for and in behalf
of the corporation, may be considered a trustee of the corporation at least with respect to the matter in litigation only.
- The word “trustee” as used in the corporation statute must be understood in its general concept which
could include the counsel to whom was entrusted the prosecution of the suit filed by the corporation. The purpose in
the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditors
and stockholders.

2. Reburiano v. CA, 301 SCRA 342 (1999)

- The law specifically allows a trustee to manage the affairs of the corporation in liquidation. Consequently,
any supervening fact, such as the dissolution of the corporation, repeal of a law, or any other fact of similar nature
would not serve as an effective bar to the enforcement of such right.

3. Phil. Veterans Bank Union v. Vega, 360 SCRA 33, 28 June 2001
- Liquidation, in corporation law, connotes a winding up or setting with creditors and debtors. It is the winding
up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets
to case, discharging liabilities and dividing surplus or loss. On the opposite end of the spectrum is rehabilitation which
connotes a reopening or reorganization. Rehabilitation contemplates a continuance of corporate life and activities in
an effort to restore and reinstate the corporation to its former position of successful operation and solvency.
- The concept of liquidation is diametrically opposed or contrary to the concept of rehabilitation, such that
both cannot be undertaken at the same time. To allow the liquidation proceedings to continue would seriously hinder
the rehabilitation.

3-year winding up

Case: Pepsi Cola v. CA, 443 SCRA 580, 24 November 2004

24
- Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner
continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending
suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of
its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that
period.

Effect if claim is not presented within the 3year period

The claims by and against the corporation which is not presented within the 3year period shall be
unenforceable against it as the corporate entity no longer exists. An action for the recovery of debts of the
corporation may, however, be brought against the liquidator after the lapse of the 3year period (Republic v. Marsman
L-18956, 27 April 1972).
Actions pending by or against the corporation when the 3year period expires are abated for after for after
said period, the corporation becomes defunct and ceases to be an entity capable of suing and being sued (Gelano v.
CA, 103 SCRA 90 (1981).

A corporation's board of directors is not rendered functus officio by is dissolution

A corporation's board of directors is not rendered functus officio by is dissolution. Since Section 122 allows a
corporation to continue its existence for a limited purpose, necessarily there must be a board of that will continue
acting for and on behalf of the dissolved corporation for that purpose (Aguirre II v. FQB+7, Inc., 688 SCRA 242, 09
January 2013).

XVIII. Foreign Corporations (Sections 123- 136, CCP)

License to do business

The purpose of the law in requiring that foreign corporations doing business in the country be
licensed to do so, is to subject the foreign corporations to the jurisdiction of our courts (Continental
Micronesia, Inc. v. Basso, 771 SCRA 329, 23 September 2015).

Cases: 1. Steelcase, Inc. v. Design International Selections, Inc., 670 SCRA 64 (2012)
- The appointment of a distributor in the Philippines is not sufficient to constitute "doing business" unless it is
under the full control of the foreign corporation. On the other hand, if the distributor is an independent entity which
buys and distributes products, other than those of the foreign corporation, for its own name and its own account, the
latter cannot be considered to be doing business in the Philippines. It should be kept in mind that the determination of
whether a foreign corporation is doing business in the Philippines must be judged in light of the attendant
circumstances.
- While it is essential to uphold the sound public policy behind the rule that denies unlicensed foreign
corporations doing business in the Philippines access to our courts, it must never be used to frustrate the ends of
justice by becoming an all-encompassing shield to protect unscrupulous domestic enterprises from foreign entities
seeking redress in our country.

2. Agilent Tech Singapore v. Integrated Silicon Tech, GR No. 154618, 14 April 2004
- Principles regarding the right of a foreign corporation to bring suit in Philippine courts:

1) If a foreign corporation (FC) does business in the Philippines without a license, it cannot sue before
Philippine Courts.
2) If a FC is not doing business in the Philippines, it needs no license to sue before Philippine Courts on an
isolated transaction or on a cause of action entirely independent of any business transaction.
3) If a FC does business in the Philippines without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from challenging the FC’s corporate personality in a suit
before Philippine courts; and
4) If a FC does business in the Philippines with the required license, it can sue on Philippine courts on any
transaction.

- DOING BUSINESS: It implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions normally incident to or in
progressive prosecution of the purpose and subject of its organization. To constitute “doing business,” the activity to
be undertaken in the Philippines is one that is for profit-making.

- Two tests to determine whether a FC is doing business in the country:

1) SUBSTANTIVE TEST: Whether the FC is continuing the body of the business or enterprise for which it
was organized or whether it was substantially retired from it and turned it over to another.

2) CONTINUITY TEST: It implies a continuity of commercial dealings and arrangements, and

contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose and object of its
organization.

"Doing Business" is defined in Sec. 3(d) RA No. 7042 (Foreign Investment Act of 1991) and Rule I, Sec. 1(f),
Implementing Rules and Regulations.
1. Soliciting order;
2. Service contracts;

25
 3. Opening offices, whether called liaison offices or branches;
4. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the
Philippines for a period or periods totalling 180 days or more;
5. Participating in the management, supervision or control of any domestic business, firm or entity or
corporations in the Philippines; or
6. Any other acts or acts that imply continuity of commercial dealings or arrangements, and contemplate to that
extent, performance normally incident to, and progressive prosecution of, commercial gain or of the purpose
and object of the business organization.

Soliciting purchases does not constitute doing business

To constitute "doing business," the activity undertaken in the Philippines should involve profit-making.
"Soliciting purchases" has been deleted from the enumeration of acts or activities which constitute "doing business."
A foreign company that merely imports goods from a Philippine exporter, without opening an office or appointing an
agent in the Philippines, is not doing business in the Philippines (Cargill, Inc. v. Intra Strata Assurance Corp., 615
SCRA 304, 15 March 2010).

Participating in a bidding for a modern marine container terminal constitute "doing business"

Participating in the bidding process constitutes "doing business" because it shows the foreign corporation's
intention to engage in business here. The bidding for the concession contract is but an exercise of the corporation's
reason for its existence (European Resources and Technologies, Inc. v. Ingeniuburo Birkahn + Nolte,
Ingeniurgesellschaft mbh, 435 SCRA 246, 26 July 2004).

3. Avon Insurance v. CA, 278 SCRA 312 (1997)

- The purpose of the law in requiring that a foreign corporation doing business in the country licensed to do so, is to
subject the foreign corporation doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign
corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority
to do business may successfully thought unfairly plead such neglect or illegal act to as to avoid service and thereby
impugn jurisdiction of the local courts.

4. Columbia Pictures v. CA, 261 SCRA 144 (1996)

- It is not the absence of the prescribed license which debars the foreign corporation from access to our
courts. In other words, although a foreign corporation is without license to transact business in the Philippines, it does
not follow that it has no capacity to bring an action. Such license is not necessary if it is not engaged in business in
the Philippines.
- A foreign corporation will not be regarded as doing business in the state simply because it enters into
contracts with residents of the state, where such contracts are consummated outside the state.
- The institution of a suit or the removal thereof is neither the making of a contract nor the doing of business
within a constitutional provision placing a foreign corporation’s license to do business in the state under the same
regulations, limitations and liabilities with respect to such acts as domestic corporations. Merely engaging in litigation
has been considered as not a sufficient minimum contract to warrant the exercise of jurisdiction over a foreign
corporation.

5. Home Insurance Company v. Eastern Shipping, 123 SCRA 424

- The contract entered into by a foreign corporation conducting business in the Philippines without a license
is not necessarily void ab initio. Any defect may subsequently be cured if the foreign corporation subsequently
obtains a license to do business. Only the right to sue is affected.

Exception: When a corporation doing business in the Philippines without a license may sue in Philippine
courts.

A foreign corporation doing business in the Philippines without license may sue in Philippine courts a Filipino
citizen or a Philippine entity that had contracted with and benefited from it. A party is estopped from challenging the
personality of a corporation after having acknowledged the same by entering into a contract with it. The principle is
applied to prevent a person contracting with a foreign corporation from later taking advantage of its non-compliance
with statutes, chiefly in cases where such person has received the benefits of the contract (Global Business
Holdings, Inc. [formerly Global Business Bank, Inc.] v. Surecompsoftware, B.V., GR No. 173463, 13 October 2010).

***** ***** ***** ©LPI

The surviving corporation becomes bound by the employment contracts entered into by the absorbed
corporation

 The surviving corporation becomes bound by the employment contracts entered into by the absorbed
corporation. These employment contracts are not terminated. They subsist unless their termination is allowed by law.
The acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily includes the
rights and obligations of the absorbed corporation under its employment contracts (Phil. Geothermal, Inc. Employees
Union v. Unocal Phils. Inc. [now Chevron], 804 SCRA 286, 28 September 2016).

Contra: Human beings are not embraced in the term "assets and liabilities" (BPI Case) **
Intra-corporate controversy

Applying the relationship test, both Belo and Santos are named shareholders in Belo Medical Group’s Articles of
Incorporation and General Information Sheet for 2007. The conflict is clearly intra-corporate as it involves two (2)
shareholders—although the ownership of stocks of one (1) stockholder is questioned (Belo Medical Group, Inc. v.
Santos, 838 SCRA 142, 30 August 2017).

26
Applying the nature of the controversy test, this is still intra-corporate dispute. The Complaint for interpleader seeks a
determination of the true owner of the shares of stock registered in Santos’ name (ibid.).

In intra-corporate controversies, all orders of the trial court are immediately executory (Oca v. Cutodio, 832 SCRA
615, 26 July 2017).

The nature of the controversy test requires that the dispute itself must be intrinsically connected with the regulation of
the corporation, partnership or association (dy Teban Trading, Inc. v. Dy, 832 SCRA 533, 26 July 2017).

*****

27