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Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Case Title; Topic Union Glass v. SEC Government Regulation of Corporations Quick Facts CHAPTERS I and II1 Pioneer Glass mortgaged to DBP its assets in order to get loans. DBP was able to get control of the majority of the common shares of stocks because of the payment scheme of Pioneer Glass. When Pioneer Glass suffered serious liquidity problems such that it could no longer meet its financial obligations with DBP, it entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full satisfaction of the corporation's obligations Holifena, a stockholder, instituted the complaint contesting the dacion en pago Union Glass is a lessee of the Pioneer Glass plant Held/Ratio/Doctrine SEC has NO jurisdiction.

Janz Hanna Ria N. Serrano

The fact that the controversy at bar involves the rights of petitioner Union Glass who has no intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. Since petitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule or jurisdiction. The SC added however that for Hofileas complaint against Union Glass to prosper, final judgment must first be rendered in the issue of the validity of the dacion en pago, which is a prejudicial question, the resolution of which is a logical antecedent of the issue involved in the action against petitioner Union Glass. The Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the regular courts only if and when the SEC rendered final judgment annulling the dacion en pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith. SEC has original and exclusive jurisdiction "the issue is not the ownership of shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the Corporation of which he is secretary." The dispute at bar is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary to perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of Telectronics as the purchaser thereof. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged preemptive rights in the case of the Abejos' shares and alleged loss of the certificates and lack of consent and consideration in the case of Virginia Braga's shares. Such dispute clearly involves controversies "between and among stockholders," as to the Abejos' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with the right to elect the corporate officers and the management and control of its operations. Such a dispute and case clearly fall within the jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A. Insofar as the Bragas and their corporate secretary's refusal on behalf of the

Abejo v. dela Cruz Government Regulation of Corporations

dispute between the principal stockholders of Pocket Bell: spouses Abejo sold their shares to Telectronics, making the latter the majority stockholder before the sale, the erstwhile majority stockholders were the Bragas Corporate Secretary refused to transfer the certificate of stock in Telectronics name Bragas asserting that they have preemptive rights This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute. The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and Exchange Commission, while the Abejos and Telectronics, as new majority shareholders, claim the contrary.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

corporation Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and misrepresentation employed by them to keep themselves in control of the corporation to the detriment of Telectronics (as buyer and substantial investor in the corporate stock) and the Abejos (as substantial stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy between and among the majority and minority stockholders as to the transfer and disposition of the controlling shares of the corporation, falling under paragraph (b) of Sec 5 PD 902-A. As pointed out by the Abejos, Pocketbell is not a close corporation, and no restriction over the free transferability of the shares appears in the Articles of Incorporation, as well as in the bylaws 10 and the certificates of stock themselves, as required by law for the enforcement of such restriction. An intra-corporate controversy is one which arises between a stockholder and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies between stockholders and corporations.

Magalad v. Premier Financing Corporation

Premiere is a financing company engaged in soliciting and accepting money market placements or deposits. Premiere, with expired permit to issue commercial papers and with intention not to pay or defraud its creditors, induced and misled Magalad into making a money market placement of P50,000.00 at 22% interest per annum for which it issued a receipt as well as two (2) post-dated checks in the total sum of P51,079.00 and assigned to Magalad its receivable from a certain David Saman for the same amount. Drawee bank dishonored the checks for lack of sufficient funds to cover the amount. Despite demands by Magalad for the replacement of said checks with cash, Premiere, for no valid reason, failed and refused to honor such demands and due to fraudulent acts of Premiere.

Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of money paid to said corporation, the recovery of which would originally fall within the jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a category of relationship within the SEC jurisdiction. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (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 so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987). The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the interest of the investing public. For the liability to pay taxes to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary of a business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood.

CIR v. Club Filipino Stock and Non-Stock Corporations

Club Filipino, Inc. de Cebu is a civic corporation, owning and operating a club house, a bowling alley, a golf course, and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and -its golf-course. The club is operated mainly with funds derived from membership fees and dues.

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant. The Collector of Internal Revenue assessed against and demanded from the Club, percentage taxes on its gross receipts as well as fixed taxes and compromise penalty. The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review.

Janz Hanna Ria N. Serrano

Having found as a fact that the Club was organized to develop and cultivate sports of all, class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assests, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above). It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit making club. The fact that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (see. 3, Act No. 1459). In the case at bar, while the respondent Club's capital stock is divided into shares, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. "A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, nonprofit, non-stock organizations, unless the intent to the contrary is manifest and patent."

Manuel R. Dulay Ent. v. CA Close Corporations

Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject property since 1973 while at the same time managing the Dulay Apartment as his shareholdings

In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject 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 which, in this case,

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
in the corporation was subsequently increased by his father. Manuel Dulay by virtue of Board Resolution No. 186 of petitioner corporation sold the subject property to private respondents spouses, Maria Theresa and Castrense Veloso in the amount of P300,000.00. The parties then executed a Memorandum to the Deed of Absolute, giving Manuel Dulay within two (2) years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was however, not annotated. Thereafter private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of P250,000.00 which was duly annotated. The subject property was sold on April 1, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure, upon default of Veloso to pay the loan. Veloso then executed a Deed of Absolute Assignment of the Right to Redeem in favor of Manuel Dulay assigning her right to repurchase the subject property from private respondent Torres. As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject property within the one year statutory period for redemption, private respondent Torres sought to consolidate his ownership over the property. Petitioner Virgilio Dulay appeared in court to intervene in said case alleging that Manuel Dulay was never authorized by the petitioner corporation to sell or mortgage the subject property, and sought to cancel the sheriff sale to Torres and regain possession of the property. petitioner Virgilio Dulay failed to do.

Janz Hanna Ria N. Serrano

It is relevant to note that although a corporation is an entity which has a personality distinct and separate from its individual stockholders or members, the veil of corporate fiction may be pierced when it is used to defeat public convenience, justify wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct and separate from. its stockholders or members is therefore confined to its legitimate uses and is subject to certain limitations to prevent the commission of fraud or other illegal or unfair act. When the corporation is used merely as an alter ego or business conduit of a person, the law will regard the corporation as the act of that person. The Supreme Court had repeatedly disregarded the separate personality of the corporation where the corporate entity was used to annul a valid contract executed by one of its members. Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed without the knowledge and consent of the other members of the board of directors cannot be sustained. Virgilio is very much privy to the transactions involved. To begin with, he is an incorporator and one of the board of directors designated at the time of the organization of Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the said entity is loosely referred to as a family corporation'. The nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial instincts of the individual members of such an aggrupation of which Manuel R. Delay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father whose name identifies their corporation. Petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject property to private respondents by Manuel Dulay is valid and binding. The sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the former and not a personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and treasurer but also the general manager of the corporation. The corporation, was a closed family corporation, where the incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general manager almost had absolute control over the business and affairs of the corporation. Estoppel does not apply where Veterans Bank invoked the questioned PD when Pres Marcos was still absolute ruler and his decrees were absolute law. Not a single act or issuance of Marcos was ever declared unconstitutional as long as he was in power. In this case, Veterans Bank has not been paid a single centavo on its claim, which was kept pending for more than 7 years. The new corporation, New Agrix Inc, is neither owned nor controlled by the government. The DC was merely required to extend a loan of not more than P10M to New Agrix Inc. it is entirely private and so should have been organized under the Corporation Law. The Court thus declared

NDC v. Phil. Veterans Bank

AGRIX executed in favor of Phil Veterans Bank a REM over 3 parcels of land. During the existence of the mortgage, AGRIX went bankrupt. Veterans Bank than filed a claim with the AGRIX Claims Committee for the payment of its loan credit. Agrix and NDC refused to recognize the claim, invoking PD 1717 which ordered the rehabilitation of the Agrix Group of Companies is administered by the National Development Company. Sec 4(1) thereof provides all mortgages and other liens attached to the assets of the dissolved corporations are hereby extinguished. Agrix proceeded to cancel the mortgage lien in light of the PD.

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
TC annulled the entire PD 1717. NDC appeals. It claims that since Veterans Bank invoked questioned PD when it filed a claim with the Agrix Claims committee, it is thus estopped from questioning the validity of the PD which also provides that all mortgages attached to properties of Agrix shall be extinguished the PD 1717 as unconstitutional.

Janz Hanna Ria N. Serrano

Does a defective incorporation result into a partnership? NO. 1. If parties intended to create a corporation, then a partnership arrangement cannot be created in its stead since such is not within their intent 2. Important differences between the corporation and partnership, such as limited liability, centralized management, and easy transferability of shares are by themselves strong factors to be bound by a corporate agreement It is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se. Where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized. However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist, and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution. A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter. In this case, it was established by the evidence contrary to Lims postulations, that Cervantes, Bormacheo, and Maglana contributed the amount needed by Lim to put up the corporation as he promised, which he received. It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts. (When parties come together intending to form a corporation, but no corporation is formed due to some legal cause: (1) parties who intended to participate or actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto corporation (2) parties who took no part except to subscribe for stock in a proposed

Pioneer Insurance v CA

Southern Airlines was a single proprietorship. Its owner entered into contracts of sale over aircrafts Pioneer Insurance and Surety Corporation as surety executed and issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. Lim had duly received the amount of P151,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts. The indemnitors then executed two (2) separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond. Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for Pioneers suretyship. Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts. Pioneer also filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

corporation, do not become partners with the subscribers engaged in the business of the corporation) CHAPTER III A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field Name is one of its attributes, an element of its existence, and essential to its identity. The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person; and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him. A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another Section 18 of Corp code cannot be any clearer. To come within its scope, 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) 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 existing law. The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption The second requisite no less exists in this case. 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. In so doing, the Court must look to the record as well as the names themselves. What is lost sight of, however, is that PHILIPS is a trademark or trade name which

Philips Export BV v. CA Corporate Name

Petitioner prays for the removal of the word "PHILIPS" from private respondent's corporate name.

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

was registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name. The policy underlying the prohibition in Section 18 is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. It is claimed by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." Petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and

Lyceum of the Phils. v. CA Corporate Name

Lyceum of Baguio asserts that it has exclusive rights to the use of the word Lyceum in its name

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other. Their argument does not hold water. Their defense that they should first be formally notified of the change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., before they will continue paying their loan obligations to respondent bank presupposes that there exists a requirement under a law or regulation ordering a bank that changes its corporate name to formally notify all its debtors. After going over the Corporation Code and Banking Laws, as well as the regulations and circulars of both the SEC and the Bangko Sentral ng Pilipinas (BSP), we find that there is no such requirement. This being the case, this Court cannot impose on a bank that changes its corporate name to notify a debtor of such change absent any law, circular or regulation requiring it. Such act would be judicial legislation. The formal notification is, therefore, discretionary on the bank. Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of all debtors of banks of any change in corporate name, such notification remains to be a mere internal policy that banks may or may not adopt. In the case at bar, though there was no evidence showing that petitioners were furnished copies of official documents showing the First Summa Savings and Mortgage Banks change of corporate name to PAIC Savings and Mort gage Bank, Inc., evidence abound that they had notice or knowledge thereof. Several documents establish this fact. As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the apparently conflicting decisions: I. The color of authority requisite to the organization of a de facto municipal corporation may be: 1. A valid law enacted by the legislature; 2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet been declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state.; II. There can be no de facto municipal corporation unless either directly or potentially, such a de jure corporation is authorized by some legislative fiat; III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face; IV. There can be no de facto corporation created to take the place of an existing de jure corporation, as such organization would clearly be a usurper. In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid

PC Javier & Sons, Inc. et. al. v. CA Corporate Name

Petitioner liable to PAIC Savings and Mortgage Bank, formerly known as First Summa Savings Bank. Petitioner argues that they were legally justified to withhold payments because they werent notified of the change in banks name

Malabang v. Benito De Facto Corporations Law Subsequently Declared Void

Petitioners brought the action for prohibition to nullify EO 386 creating the municipality of Malabang, Lanao del Sur

Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

law giving corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is no other valid statute to give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, this Court granted a similar petition for prohibition and nullified an executive order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was created in 1961, before section 68 of the Administrative Code, under which the President had acted, was invalidated. 'Of course the issue of de facto municipal corporation did not arise in that case. Where parties procure a charter or file articles of association under a general law, thereby secure the color of a legal incorporation, believe that they are a corporation, and use the supposed franchise of the corporation in good faith, and third parties deal with them as a corporation, they become a corporation de facto and exempt from individual liability to such third parties, although there are unknown defects in the proceedings for their incorporation Parties who actively engage in businesses for profit under the name and pretense of a corporation which they know neither exists nor has any color of existence may not escape individual liability because strangers are led by their pretense to contract with their pretended entity as a corporation. In such cases they act as the agents of a principal that they know does not exist, and they are liable under a familiar rule where there is no responsible principal Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the articles were filed (requisites for valid incorporation). The Securities and Exchange Commission has not issued the corresponding certificate of incorporation. The personality of a corporation begins to exist only from the moment such certificate is issued not before. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its stockholders may not probably claim "in good faith" to be a corporation. Under the statue it is to be noted that it is the issuance of a certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith."

Harril v. Davis De Facto Corporations - Substantial or colorable compliance

The four defendants, after having agreed to form a corporation, ordered goods from the plaintiff even before they filed their articles of incorporation. And after they had filed such articles in one of the two public offices required by law, they ordered additional goods. This is an action to recover the purchase price of said goods from the defendants as partners Counsel for defendants argue with much force and persuasiveness that they escape liability because they became a corporation de facto

Hall v. Piccio2 De Facto Corporations - Substantial or colorable compliance

On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto. Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. On 2 December 1947, the said articles of incorporation were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation. On 22 March 1948, pending action on the articles of incorporation by the


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
aforesaid governmental office, Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case, alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action. After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of Brown, et. al., appointed Pedro A. Capuciong as the receiver of the properties thereof, upon the filing of a P20,000 bond. Hall and Hall offered to file a counter-bond for the discharge of the receiver, but Judge Piccio refused to accept the offer and to discharge the receiver. Whereupon, Hall and Hall instituted the present special civil action with the Supreme Court. At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error.

Janz Hanna Ria N. Serrano

This is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.

ABC v. Standard Products Corporation by Estoppel

There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances taking the case out of the rules stated. Under the circumstances of the case, the officer (Cranson) of a defectively incorporated association may not be subjected to personal liability There, is as we see it, a wide difference creating a corporation by means of the de facto doctrine and estopping a party, due to his conduct in a particular case, from setting up the claim of no incorporation When there is a concurrence of the 2 elements necessary for the application of the de facto doctrine, there exists an entity which is a corporation de jure agains all persons but the state. On the other hand, the estoppels theory is applied only to the facts of each particular case and may be invoked even when there is no corporation de facto. Accordingly, even though one or more of the requisites of a de facto corporation are absent, we think that this factor does not preclude the application of the estoppels doctrine in a proper case, as in the one at bar. There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president and conversely, a stockholder or member cannot be held personally liable for any financial

Cranson v. IBM Corporation by Estoppel

Due to an oversight by the lawyer of which Cranson wasnt aware, the certificate of incorporation signed and acknowledged in May 1961 was not filed until November. Between that time Cransons corporation purchased 8 typewriters from IBM

Salvatierra v. Garlitos, et. al. Corporation by Estoppel

Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent. Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction. It is true that Rule 3, Section 1, of the Rules of Court clearly provides that "only natural or juridical persons may be parties in a civil action." It is also not denied that the school has not been incorporated. However, this omission should not prejudice the private respondent in the assertion of her claims against the school. Having been recognized by the government, it was under obligation to incorporate under the Corporation Law within 90 days from such recognition. It appears that it had not done so at the time the complaint was filed notwithstanding that it had been in existence even earlier than 1932. The petitioner cannot now invoke its own non-compliance with the law to immunize it from the private respondent's complaint. There should also be no question that having contracted with the private respondent every year for thirty two years and thus represented itself as possessed of juridical personality to do so, the petitioner is now estopped from denying such personality to defeat her claim against it. According to Article 1431 of the Civil Code, "through estoppel an admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying on it." As the school itself may be sued in its own name, there is no need to apply Rule 3,

Chiang Kai Shek School v. CA3

Fausta F. Oh reported for work at the Chiang Kai Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment for the next semester. Oh was shocked. She had been teaching in the school since 1932 for a continuous period of almost 33 years. And now, out of the blue, and for no apparent or given reason, this abrupt dismissal. She demanded separation pay, social security benefits, salary differentials, maternity benefits and moral and exemplary damages. The original defendant was the Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could not be sued, the complaint was amended. Certain officials of the school were also impleaded to make them solidarily liable with the school. Court of First Instance of Sorsogon dismissed the complaint. On appeal, its decision was set aside by the respondent court, which held the school suable and liable while absolving the other defendants


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

Section 15, under which the persons joined in an association without any juridical personality may be sued with such association. Besides, it has been shown that the individual members of the board of trustees are not liable, having been appointed only after the private respondent's dismissal Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having 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 respondent bank as an artificial person. There is no intracorporate nor partnership relation between petitioner and private respondent. The controversy between them arose out of their plan to consolidate their respective jeepney drivers' and operators' associations into a single common association. This unified association was, however, still a proposal. It had not been approved by the SEC, neither had its officers and members submitted their articles of consolidation in accordance with Sections 78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the SEC. The doctrine of corporation by estoppel advanced by private respondent cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of the court. 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. Even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. "The reason behind this doctrine is obvious an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence

LBC Express, Inc. v. CA.

President suing LBC because of lately-delivered parcel. TC awarded corporation moral damages

Lozano v. delos Santos

upon the request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers' Association, Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of officers who shall be given the sole authority to collect the daily dues from the members of the consolidated association; elections were held on October 29, 1995 and both petitioner and private respondent ran for president; petitioner won; private respondent protested and, alleging fraud, refused to recognize the results of the election; private respondent also refused to abide by their agreement and continued collecting the dues from the members of his association despite several demands to desist. Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction was lodged with the Securities and Exchange Commission (SEC).

Lim Tong Lim v. Phil. Fishing Gear Industries, Inc.4 Corporation by Estoppel

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated 7 February 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (PFGI). They claimed that they were engaged in a business venture with Lim Tong Lim, who however was not a signatory to the agreement. The buyers, however, failed to pay for the fishing nets and the floats; hence, PFGI filed a collection suit against Chua, Yao and Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. Lim filed the Petition for Review on Certiorari. Lim argues, among others, that


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him.

Janz Hanna Ria N. Serrano

assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent." The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits. On the other hand, 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. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. There is no dispute that PFGI is entitled to be paid for the nets it sold. The only question here is whether Lim should be held jointly liable with Chua and Yao. Lim contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Although technically it is true that Lim did not directly act on behalf of the corporation; however, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. Both RA 3135 (the Revised Charter of the Philippine Amateur Athletic Federation) and PD 604 recognized the juridical existence of national sports associations. This may be gleaned from the powers and functions granted to these associations (See Section 14 of RA 3135 and Section 8 of PD 604). The powers and functions granted to national sports associations indicate that these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with juridical capacity. However, while national sports associations may be accorded corporate status, such does not automatically take place by the mere passage of these laws. It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. The Philippine Football Federation did not come into existence upon the passage of these laws. Nowhere can it be found in RA 3135 or PD 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the manner by which these entities may acquire juridical personality. Section 11 of RA 3135 and Section 8 of PD 604 require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the

Intl Express Travel v. CA5

IETTSI, through its managing director, wrote a letter to the Philippine Football Federation, through its president, Henri Kahn, wherein the former offered its services as a travel agency to the latter. The offer was accepted. IETTSI secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. For the tickets received, the Federation made two partial payments, then through the Project Gintong Alay, paid some more On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the Federation. Thereafter, no further payments were made despite repeated demands. IETTSI sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation. Kahn filed his answer with counterclaim, while the Federation failed to file its answer and was declared in default by the trial court. In due course, the trial court rendered judgment and ruled in favor of IETTSI and declared Henri Kahn personally liable for the unpaid obligation of the Federation. The complaint of IETTSI against the Philippine Football Federation and the counterclaims of Henri Kahn were dismissed, with costs against Kahn. Only Henri Kahn elevated the decision to the Court of Appeals. On 21 December 1994, the appellate court rendered a decision reversing the



Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
trial court. IETTSI filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995. IETTSI filed the petition with the Supreme Court.

Janz Hanna Ria N. Serrano

Philippine, Amateur Athletic Federation under RA 3135, and the Department of Youth and Sports Development under PD 604. This fact of recognition, however, Henri Kahn failed to substantiate. A copy of the constitution and by-laws of the Philippine Football Federation does not prove that said Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. As such, Henry Kahn should be held liable for the unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal 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 becomes personally liable for contract entered into or for other acts performed as such agent. As president of the Federation, Henri Kahn is presumed to have known about the corporate existence or non-existence of the Federation. The Court cannot subscribe to the position taken by the appellate court that even assuming that the Federation was defectively incorporated, IETTSI cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence. The doctrine of corporation by estoppel is mistakenly applied by the appellate court to IETTSI. The application of the doctrine applies to a third party only when he tries to escape liabilities on a contract from which he has benefited on the irrelevant ground of defective incorporation. Herein, IETTSI is not trying to escape liability from the contract but rather is the one claiming from the contract. Section 46 reveals the legislative intent to attach a directory, and not mandatory, meaning for the word ''must" in the first sentence thereof. The second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws "within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus: "In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will not render void any acts of the corporation which would

Loyola Grand Villas Homeowners v. CA6

Loyola Grand Villas Homeowners Association (LGVHAI) was organized on 8 February 1983 as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of Home Insurance and Guaranty Corporation (HIGC), as the sole homeowners' organization in the said subdivision under Certificate of Registration 04-197. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. To the officers' consternation, they discovered that there were two other organizations within the subdivision the Loyola Grand Villas Homeowners (North) Association Incorporated (North Association) and the Loyola Grand Villas Homeowners (South) Association Incorporated (South Association). The North Association was registered with the HIGC on 13 February 1989 under Certificate of Registration 04-1160 covering Phases West II, East III, West III and East IV. It submitted its by-laws on 20 December 1988. In July 1989, when Soliven inquired about the status of LGVHAI,



Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its bylaws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in the registration of the South Association with the HIGC on 27 July 1989 covering Phases West I, East I and East II. It filed its by-laws on 26 July 1989. These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAI's certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI. otherwise be valid."

Janz Hanna Ria N. Serrano

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. And even if such omission has been rectified by Presidential Decree 902-A, and under the express grant of power and authority to the SEC, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. Mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation The Code empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. Section 35 of Act No. 1459 (now Sec. 63) contemplates no restriction as to whom they may be transferred or sold. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law GR: the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land

Fleischer v. Botica Nolasco7 International Organization of Corporation: By-Laws

March 13, 1923: Manuel Gonzales made a written statement to the Botica

Nolasco, Inc., requesting that 5 shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name o He also acknowledged in said written statement the preferential right of the corporation to buy said five shares June 14, 1923: he withdraw and cancelled his written statement of March 13, 1923 o Nolasco replied that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc., November 15, 1923: Fleischer filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of 5 shares of fully paid stock of Botica Nolasco Co (Nolasco) by purchase from their original owner, Manuel Gonzalez Despite repeated demands, Nolasco refused to register said shares in his name in the books of the corporation caused him damages amounting to P500 Nolasco's defense: article 12 of its by-laws: it had preferential right to buy the shares at the par value of P100/share, plus P90 as dividends corresponding to the year 1922 offer was refused by Fleischer Trial Court: favored Fleischer and ordered the shared be registered

o o

A by-law cannot take away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
upon the right of sale.

Janz Hanna Ria N. Serrano

Government v. El Hogar8 International Organization of Corporation: By-Laws

The Phil govt instituted a quo warranto proceeding against EL Hogar for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights anf privileges and effecting a final dissolution of the corpo. March 1906-Corpo law came into effect. Sec 171 to 190 are on building and loan association. El Hogar-first corpo in the Phil. Under the law then, the capital of an association was not permitted to exceed 3M but then amended to 10M. The by-laws of the corpo states a provision that: the BOD, by vote of an absolute majority of its members, is empowered to CANCEL SHARES AND RETURN TO THE OWNER thereof the balance resulting from the liquidation thereof, whenever, by reason of their conduct of any other motive, the continuation as members of the owners of such shares is not desirable. The govt questioned the validity because it conflicts with the Corpo Law which declares that the BOARD SHALL NOT HAVE THE POWER TO FORCE THE SURRENDER AND WITHRAWAL OF UNMATURED STOCK EXCEPT IN CASE OF LIQUIDATION OF THE CORPORATION OR OF FORFEITURE OF THE STOCK FOR DELINQUENCY. The govt asserts that because of the existence of the provision in the by-law, it justifies its dissolution. There is also a provision in the by-laws that the directors shall elect from amoing the shareholder members to fill the vacancies that may occur in the BOD until the election at the general meeting. Another cause of action of the govt was based on the BODs failure to hold annual meetings and fill vacancies. Third cause of action is the fact the directors of El Hogar have been receiving large compensation because the by-laws provide a 5% of the net profit shown by the annual balance sheet to be distributed to the directors in proportion to their attendance at meetings of the board. Fourth cause of action: Procedures to adopt when one is elected as a BOD=P5000 pay-up of shares as securityonly the rich can be BOD and the waiver to receive loans form the corpo ISSUE: WON El Hogar may be dissolved on such grounds. CHAPTER IV9

By-law cannot operate to defeat his rights as a purchaser who obtained them in good faith and for a valuable consideration NO. The by-law (1st) is a mere nullity and could not be enforced if the directors attempt to do so. In the second cause of action, unless the law or the charter of the corporation expressly provides that an office shall become at the expiration of the term of office for which the officer was elected, the general rule is to allow the officier to hold over until his successor is duly qualified. MERE FAILURE OF A CORPO TO ELECT OFFICERS DOES NOT TERMINATE THE TERM OF EXISTING OFFICERS AND DISSOLVE THE CORPORATION. On the third cause of action as to the compensation of the BOD=the question must be of the validity of the measure and not the propriety and wisdom of the measure adopted. The power to fix the compensation they shall receive, if any, is left to the corporation to be determined by the by-laws. The remedy is in the hands of the stockholders. On the fourth cause of action: The Corpo Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and the requirement of security from them for the proper discharge of the duties of their offce.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Stockholders of T. Guanzon v. Register of Deeds of Manila Theory of Corporate Entity: Its Effects In September 1960, 5 stockholders of the F.Guanzon and Sons executed a certificate of liquidation of the assets of the corpo because of the resolution of the SH which they adopted dissolving the corporation. They have distributed among themselves in propoertion to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties. The certificate of liquidation was presented to the Register of Deeds of Mla but WAS DENIED. Grounds for denial: 1) number of parcels not certified to in the acknowledgement 2) fees not paid 3) documentary stamps werent attached to the documents 4) judgment of the court approving the dissolution and directing the disposition of the assets of the corpo need to be presented ISSUE: Commissioner of Land Registration=the issues hinged on WON the certificate of liquidation merely involves a distribution on the corporation assets or a transfer or conveyance. If it were a conveyance, there would be a need to reflect on the certificate a statement of the numbers of parcels of land involved in the distribution in the acknowledgement appearing therein. Documentary stamps are more expensive if its a transfer rather than distribution. Caram v. CA Theory of Corporate Entity: Its Effects CLR held that it is a transfer or conveyance. The plaintiff filed a claim for the payment of the preparation of the project study and his technical services that led to the organization of the defendant corporation. He demands the solidary liability of the petitioners and their codefendants. The petitioners contend that they had no contract with the private resp and that their position was that they are mere subsequent investors in the corporation that was later created. Caram et al asserted that they shouldnt be held solidary liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia. ISSUE: WON the petitioners themselves are ALSO and PERSONALLY liable for such expenses and if so to what extent (solidary or jointly?) CA held: Yes they should be jointly and severally liable for the said amount. Not only the defendant corporation but all other def who were involved in the preparatory stages of the incorporation (those who caused the preparation and/or benefited from the project study and the technical services) must be liable. Presidential Executive Assistant Clave directed petitioners Palay and Onstott (the president) to refund jointly and severally Dumpit as resolved by the National SC: Not liable. SC: Agree with the CLR.

Janz Hanna Ria N. Serrano

A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate. The share of stock only typifies an aliquot part of the corpo property, and it only gives the extent of the proceeds when it is distributed AND ITS HOLDER IS NOT THE OWNER OF ANY PART OF THE CAPITAL OF THE CORPO. When the purpose of the liquidation is to transfer the title from the corporation to the stockholders in proportion to their shareholdings, this transfer cannot be effected without the corresponding deed of conveyance from the corporation to stockholders.

There was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof responsible. Bona fide corporation=the corporation should alone be liable for its corporate acts as duly authorized by its officers and directors. The Carams did not contract with the plaintiff. It is only the result of such services that they were persuaded to invest in the proposed airline. Even if they have benefited, there is no justification to hold them personally liable. Otherwise, all other stockholders of the corpo including those who came in later, and regardless of the amoung of their shareholdings, would be equally and personally liable. The Carams are willing to be liable but that they are only questioning total liability. The petitioners are not liable at all, jointly or jointly and severally. 1) Judicial action for the rescission is not necessary when it is provided in the contract that it may be revoked and cancelled for violation of any of its

Palay v. Clave Theory of Corporate Entity: Its Effects




Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Housing Authority because the corporation extrajudically foreclosed the parcel of land which Dumpit contracted with them under a Contract to Sell. DP was paid, installments were done. Par. 6 of the contract provided for an automatic foreclosure upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period, WITHOUT THE NEED OF NOTICE AND WITH FORFEITURE OF ALL INSTALLMENTS PAID. Dumpit (presumably) defaulted thus the foreclosure and thus the charge because he was not even notified. He wrote after 6 yrs and asking for an update of his account and request that his rights be assigned to Lourdes Dizon. Long been rescinded and has already been resold. NHA found them jointly and severally liable to refund Dumpit because the rescission is void in the absence of any judicial or notarial demand. ISSUES raised: 1) Is demand mandatory or may be dispensed with by stipulation? 2) May pet be held liable for the refund for the installments made? 3) Doctrine of piercing the veil of corporate fiction has application 4) Pres Exec Asst committed grave abuse of discretion NIDC entered into a JVA with Kawasaki for the construction, operation and management of the SNS (Subic Natl Shipyard) which became PHILSECO. Under the contract, NIDC and Kawasaki shall contribute 330M for the capitalization of the PHILSECO in the proportion of 60-40 respectively. Contract states to grant the right of first refusal should either of them decide to sell, assign or transfer its interest. In the provision it states that right of the first refusal shall be given EXCEPT when the transferee is a corporation owned or controlled by the government or by Kawasaki affiliates. NIDC transferred its rights to PNB and subsequently was transferred to the National Govt pursuant to AO No. 14. Pres Aquino established COP (comm on privatization) and APT (asset privatization trust) to take title to and possession of, conserve, manage, and dispose of non-performing assets of the National Govt. Trust agreement was entered into by the National Govt and APT where the latter is the trustee in the Govts share in PHILSECO. Because of a quasi-reorganization of PHILSECO to settle its huge obligation to PNB, govts shareholdings increased to 97% reducing Kawasakis shareholdings. In the interest of the national economy, COP and APT deemed it best to sell the govts share to private entities. Negotiations insued bet APT and Kawasaki and they agreed that the latters right to first refusal be exchanged for the right to top by 5% the highest bid for the 2)

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terms and conditions. BUT in the cited cases, there was at least A WRITTEN NOTICE sent to the defaulter informing him of the rescission. RULE: Resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns, then subject to judicial determination. Rescission is ineffective and inoperative because of the lack of notice of resolution (UP vs Angeles) and 3) No. There is no badge of fraud on pets part. They had relied, albeit mistakenly, on par 6 of its contract. There was no proof that the petitioner used the corporation to defraud private responded. RULE: Mere ownership by a single stockholder or by another corporation or all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Disposition: Corpo is directed to refund Dumpit.

J.G. Summit Holdings v. CA

THE SC HELD: (which reverses its previous ruling) a. Philseco is not a public utility because a shipyard is not a public utility. No law declares it to be. b. Nothing in the JVA prevents Kawasi from acquiring more than 40% of PHILSECO c. Exchange for right to top did not violate the principles of competitive bidding JG Summit filed the case to SC en banc claiming that there was executive interference when Camacho forwarded to Davide the case to be part of the Courts agenda for resolution. HELD by SC on en banc: a. The right to top was an express reservation. It is a well-settled rule that were such reservation is made in an Invitation to Bid, the higest or lowest bidder, as the case may be, is not entitled to an award as a matter of right. The right to top was a condition imposed on all bidders equally, based on APTs exercise of its discretion in deciding on how best to privatize the govts shares in PHILSECO. There is no executive interference since the memorandum was merely noted to acknowledge its filing and no further legal significance. The decision of the Court should be based on contract law and not on policy considerations. Right of first refusal or right to top cannot be exercised by a consortium which is not the proper party granted such right.

b. c. d. e.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
said shares. Kawasaki would be entitled to name a company in which it was a stockholder, which could exercise the RIGHT TO TOP. It elected Philayards Holdings (PHI). From ABSR (rules for the bidding), it was stipulated that from the moment the highest bid becomes acceptable to the govt, Philyards shall have 30 days to top the highest which is to top 5%. They need to notify APT if they will exercise such right and deposit 10% of the highest bid plus 5% within 30 days. They shall be sent a notice as a preferred bidder and would have 90 days to pay the balance. JG Summit bid for 2B with an acknowledgment of Kawasakis right to top. PHILYARDS exercised its right to top and fully paid the balance. JG Summit questioned the offer of PHI to top its bid on the ff grounds: a. b. c. d. e. Kawasaki/PHI consortium was composed of Kawasaki, mitsui, Keppel, SM Group, ICTSI, and Insular Life and this violated the ASBR bec the last 4 companies were the losing bidder ONLY Kawasaki could exercise the right to top Giving right to top to PHI constituted unwarranted benefit to a third part No right of first refusal can be exercised in a public bidding or auction sale JG Summit consortium was not estopped from questioning the proceedings. f.

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The 60-40 arises from contract and constitution and need not be a public utility to exercise such partition.

There is nothing in the ASBR that bars the losing bidders from joining either the winning bidder (should the right to top is not exercised) or Kawasaki/PHI (should it exercise its right to top as it did), to raise the purchase price. There was no proof of fraud. The main goal of the case is to dispose the shares of a corporation which the govt sought to privatize. HELD by SC on Reconsideration: a. Mutual rights of first refusal under the JVA bet Kawasaki and NIDC is valid. Right of first refusal is a property right of PHILSECO. It is even valid to allow PHILSECOs equity be owned by Kawasaki by more than 40% because what would be affected would not be the foreign corporations stockholders ownership but the capacity of the corporation to own landit is disqualified to own land.

Right of first refusal pertains to the shareholders while the capacity to own land pertains to the corporation. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land. What was transferred was the right of first refusal (and subsequently the right to top) as to the shares, which are immovable property, and not as to the land which PHILSECO owns or holds, which are movable. The prohibition is only to the acquisition of the land and not to the acquisition of the shares.

CA: JG is estopped from questioning because it knew from the start the right to top granted to Kawasaki/philyards. SC: Philseco shipyard is a public utility whose capitalization must be 60% Filipinoowned. That the right to top granted to Kawasaki was illegal not only because it violates the rules on competitive bidding, but more so, because it allows foreign corporations to own more than 40% equity in the shipyard. And that even when JG had the opportunity to review the ASBR, it cannot be estopped to question an illegal and inequitable provision thereof. Thus SC voided the transfer of the national govt share in Philseco to Philyard and upheld the right of JG Summit. Reconsideration was filed by Philyard to SC on three basic issues: a. Is Philseco a public utility? b. WON under the 1977 JVA, Kawasaki can exercise right of first refusal only up to 40% of the total capitalization c. WON right to top granted to Kawasaki violates the principles of competitive bidding. Melchor dela Cuesta doing business under Farmers Machineries sold a tractor to Tramat Mercantile whose president is David Ong. In payment, Ong issued a check which replaced an earlier postdated check.

Tramat Mercantile Inc v. CA

The contract between dela Cuesta and Tramat was ABSOLUTE SALE and not conditional and that dela Cuesta did not violate any warranty on the sale of the tractor.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Tramat sold the tractor, together with a lawn mower fabricated by it, to Nawasa. David Ong caused a stop payment of the check when NAWASA refused to pay the tractor and lawn mover after discovering that aside from stated defects of the lawn mover, the engine sold by de la Cuesta was a reconditioned unit. Dela Cuesta filed for recovery and attys fees. Ong answered that dela Cuesta has no cause of action and that the questioned transaction was between Tramat and Farmers and that they payment was stopped because the tractor had been priced as brand new and not as a reconditioned unit. Paus version: Dela Cuesta sold a tractor with a 1.3 engine to Tramat and the latter sold this same tractor to MWSS together with a fabricated lawn mower. Tramat caused a stop payment bec Nawasa refused to pay Tramat because it found out that the lawn mower had defects and that the tractors engine was reconditioned and not brand new. Dela Cuesta filed for recovery. The reason why the lawn mower was defective was because Tramat fabricated it and it was shown that it had no experience in fabricating one. Its competitor Alpha Machinery had stopped manufacturing the same. It was the fabrication of Tramat that was the root of all the problems. The engine did not function not because it was reconditioned but because it was made to do what it cannot.

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If it was conditioned on the acceptance of MWSS then why did it issue a check in payment of the item and even long after MWSS had complained about the defect, why did it still draw a check to an increased amount? But it was an error to hold Ong jointly and severally liable to dela Curste because ong had acted not in his personal capacity but as an officer of a corporation, but as an officer of Tramat. Personal liability of a corporate director, trustee, or officer, along (although not necessarily) with the corporation may so validly attach, as a rule, only when a. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto. He agrees to hold himself personally and solidarily liable with the corporation or He is made, by a specific provision of law, to personally answer for his corporate action (Article 144, Corpo Code and Trust Receipts Law Sec. 13).

b. c. d.

Marvel Bldg. v. David Disregarding Corporate Entity

Plaintiffs brought this action as stockholders of Marvel enjoining the CIR from selling at public auction various properties, three lands with buildings, which were under the name of the corporation. Seized by CIR and detained for the collection of war profits taxes assessed against Maria Castro. Plaintiffs assert that these properties belong to the corpo and not to Maria. RTC: CIR failed to prove that Maria is the true owner of all the stock certificates of the corpo. An evidence susceptible of two interpretations, the interpretation which would deprive one of property without the due process of the law should not be made. Sec. of Finance: considered the report of a special committee assigned to study the war profit taxes of Mrs. Castro recommended the collection of war profits taxes and instructed the CIR to collect the same.

Not the corpos but Marias as the true sole owner. Evidence: 1) Endorsement in blank of the shares of stock issued in the name of the other incorporators, and the possession thereof by Marai. All of the certificates EXCEPT that in the name of Maria were endorsed in blank by the subscribers. (witnesses Auino as IR examiner, Mariano as examiner, and Llamado, USec of Finance). Plaintiffs are claiming that these endorsement could have been superimposed however the court said that it is a mere possibility and the circumstances prove that they were not superimposed. 2) The stockholders did not have incomes in such amounts during the time of the organization or immediately thereto as to enable them to pay in full for their supposed subscriptions. Proved by their tax return or the absence thereof. There was a prima facie case that Castro had furnished all the money that the Marvel Building Corpo had. 1) If they really wanted to prove that they paid for the subscription, they could have just showed receipts to testify their payments. But they refused to do so.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

There was evidence that there were 25 certificates which were signed by the president. There is evidence of the motive of Castro to evade taxes. IF YOU ARE THE TRUE OWNERS OF THE SHARES, YOU WILL ALWAYS ASK FOR RECEIPTS AS PROOF OF PAYMENT FOR YOUR SUBSCRIPTION. The interest of the petitioners here are purely inchoate, at the very least, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereofd and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. The share of stock represents a proportionate or aliquot interest in the property of the corporation but it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct person. The petitioners cannot claim the right to intervene on the strength of the transfer of shares allegedly executed by the senator. The corporation did not keep books and records. No transfer was ever recorded, much less effected as to prejudice third parties. The transfer must be registered in the books of the corporation to affect third persons. The law on corporations is explicit. Sec 63 of the Corpo Code provides: 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. They are separate corporations. CBA does not extend to Acrylic. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exists, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders or the corporation will be considered as the corporation, that is liability will attach directly to the officers and stockholders. In Umali vs. CA, it was emphasized that the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation.

Magsaysay-Labrador v. CA Disregarding Corporate Entity

Adelaida Rodriguez-Magsaysay, widow and special administratix of the late Sen. Magsaysay, brought against Panganiban, SUBIC, FILMANBANK and the Register of Deeds of Zambales an action. She alleged that she and her husband acquired thru conjugal funds a parcel of land with improvement known as Pequena Island and that after the death of her husband, she discovered an annotation at the back of the TCT that the land was acquired thru his husbands separate capital. Her husband executed an assignment to SUBIC and SUBIC executed a mortgage in favor of FILMANBANK. She questions the validity of the acts and alleged that these were done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital consent to the annotation was not obtained, and that the change made by the Register of Deeds of the titleholders was effected without the approval of the Commissioner of Land Registration and that her husband executed the Deed of Assignment by mistake, violence or intimidation. And that the assignment in favor of SUBIC was without consideration and consequently null and void. The sisters of the senator filed for intervention of the ground that their brother conveyed to them of his shareholdings in SUBIC and as assignees of 41% of the total outstanding shares of such stocks, they have a substantial and legal interest in the subject matter. Indophil Textile Mill Workers Union-PTGWO is a labor organization duly registered with DOLE and is the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills Inc. Calica is the Voluntary Arbiter or the NCMB of DOLE while Indophil is a corporation engaged in the manufacture, sale, and export of yarns or various kinds and of materials of kindred character and its plants are in Bulacan. The corporation and the union executed a CBA. Indophil Acrylic Manufacturing Corp was formed and registered with SEC. Acrylic applied for incentives with the BOI under the Omnibus Investments Code. Application was approved on a preferred non-pioneer status. Workers of Acrylic unionize and a CBA was executed. However, the petitioner union claimed that the plant facilities build and set up by Acrylic should be considered as an extension or expansion of the facilities of resp Company based on the CBA which states that the agreement shall apply to the companys facilities and installations and to any extension and expansion thereat. In other words, they are claiming that they are part of the Indophil agreement unit.

Indo Phil Textile Mills v. Calica Disregarding Corporate Entity


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Pet: Both corp are engaged in the same line of business i.e. manufacture and sale of yarns of various counts and kinds of of other materials of kindred character or nature. Resp: Thru SolGen argues that Acrylic is not an alter ego or an adjunct or business conduit of private resp because it has a separate business purpose. INDOPHIL: engage in the business of manufacturing yarns of various counts and kinds and textiles. ACRYLIC: manufacture, buy, sell, at wholesale basis, barter, import, export and otherwise deal in yarns of various counts and kinds. Acrylic cannot manufacture textiles while Indophil cannot buy or import yarns. Petitioners alleged that: the two corp have their physical plants, offices and facilities in the same compound b. many of Indos machines were transferred and installed and being used in Acrylic. c. Services of a number of units, departments and sections are being provided to Acrylic. Employees of private resp are the same persons manning and servicing Acrylic Jacinto is the President and General Manager of Inland Industries and under the Trust Receips, applied for a Letter of Credit and paid this loan under the Bills of Exchange to Metropolitan Bank and Trust Co. The company failed to pay thus the charge against him and the company to pay jointly and severally the plaintiff. In the reconsideration, Inland chose not to join him in this appeal. The allegation of the bank is that Inland and Jacinto are one and the same. There was nothing in the transactions that states that he was doing the transactions in his official capacity. RTC: He is in fact the corporation itself. No mention that he did transactions in his official capacity. CA: dismissed Jacintos appeal. Although Jacinto asserted that the principles of piercing the fiction of corporate entity should be applied with great caution and not precipitately, because a dual personality by a corporation and its stockholders would defeat the principal purpose which a corporation is formed. It is not undisputed that Jacinto and his wife own the major shares of stocks which is 52%. Jacinto even asserts that he is not the President of the Corporation and that there are different officers. But in the evidence, he was the one who sighed the trust receipts as president and manager. Concept Builders Inc is a domestic corporation engaged in the construction business and the respondents were employed as laborers, carpenters and riggers. a.

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Jacinto v. CA Disregarding Corporate Entity

ISSUE: WON the piercing of the veil was valid even when it was not alleged in the complaint. HELD: Yes. While on the face of the complaint, there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the present of evidence and the examination of witnesses, unequivocably prove that petitioner and the corporation are one of that he is the corporation. No serious objection was heard from petitioner. Sec. 5 or Rule 10 of Rules of Court states that when evidence is presented by one party with the express or implied consent of the adverse party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall be considered as if they have been raised in the pleadings. There is implied consent to the evidence thus presented when the adverse party fails to object thereto.

Concept Builders v. NLRC Disregarding Corporate Entity

HPPI is liable. Conduit or alter ego of CBI. Probative Factors of identity that will justify the application of the doctrine of


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
The resp were served individual written notices of termination of employement by pet and igt was stated that the contracts of employment had expired and the project in which they were hired had been completed. But the resp found out that the corp engaged the services of sub-contractors whose workers performed the functions of priv resp. They thus filed a complaint for illegal dismissal, unfair labor practice and non-payment of some sums. LA: Reinstate private resp and pay them back wages. Thus the reconsideration to NLRC by the corpo. NLRC: Dismissed the recon and made a finding as to the amount of the back wages. LA issued a write of execution directing the sheriff to execute decision and partial satisfaction of the amoung was garnished from the corps debtor MWSS. Said amount was turned to NLRC cashier. Alias writ of execution was issued by LA but the guards of the petitioner refused to let the alias be served on the ground that the corporation no longer occupy the premises. The corporation occupying the premises is Hydro Pipes Phil Inc (HPPI) and not by Concept Builders. Sheriff recommended a break-open be issued to enable him to enter petitioners premises so that he could proceed with an auction sale. The day before the scheduled auction, the vice-president Cuyegkeng filed a thirdparty claim with the LA alleging that the properties sought to be levied were properties of HPPI. Resp filed motion for the issuance of Break-Order alleging the HPPI and Concept Buildiers were owned by the same incorporator/stockholders. They also alleged that the pet temporarily suspended the business operations in order to evade its legal obligations to them. In support of their claim against HPPI, the private resp presented copies of the GIS which HPPI submitted to SEC. Pet claims that HPPI and Concept are two separate corporations and are engaged in two different kinds of businesses. HPPImanufacturing CBI construction. LA still issued the order and ordered sheriff to proceed with the auction sale. NLRC denied reconsideration. CIR ordered the petitioners Claparols et al to pay back wages and bonuses to private respondents for its unfair labor practices which was filed by Allied Workers Association because of the dismissal from the Claparols Steel and Nail Plant. CIR found Mr. Claparols guilty of union busting and of having dismissed the complainants because of their union activities. piercing the corporate veil: 1. 2. 3. 4.

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Stock ownership by one or common ownership of both corporations Identity of directors and officers The manner of keeping corporate books and records Methods of conducting the business

SEC explained the instrumentality rule which courts have applied in disregarding the separate juridical personality of corporations: The test in determining the said doctrine: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances by of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will, or existence of its own; Such control must have been used by the defendant to commit fraud or wrong to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.



The absence of any one of these elements prevents piercing the corporate veil. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation. This case cited Claparols vs CIR on the avoid-the-liability scheme 90% of the second corp is owned by the first corp. Twin requirements of due notice and hearing were complied with. Third-party and pet claimants were given the opportunity to submit evidence.

Claparols v. CIR Disregarding Corporate Entity

The Claparols Steel and Nail Plant was SUCCEEDED by the Claparols Steel Corporation. It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor, the CSNP. Both predecessor and successor were owned and controlled by Eduardo Claparols and there was no break in the succession.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Records show that the Claparols Steel Corporation was established on July 1, 1957 succeeding the Claparols Steel and Nail Plant which ceased operations on June 30, 1957 and that the Claparols Steel Corp stopped operations on Dec. 7, 1962. Corp cannot reinstate the workers and that if they are entitled to back wages, only limited to 3 months based on Sta Cecilia Sawmills vs CIR and since Claparols stopped operations in 1962, reemployment cannot go beyond that date. Villa Rey Transit v. Ferrer Disregarding Corporate Entity Villarama was an operator of a bus transportation under Villa Rey Transit pursuant to certificates of public convenience granted to him by the PSC which authorized to operate 32 buses in various routes from Pangasinan to Mla and viceversa. He sold 2 certs to Pantranco with the condition that Villarama shall not apply for 10 years for any TPU service identical or competing with Pantranco. Three months after, Villa Rey Transit INC (CORPO) was organized and Natividad Villarama was the treasurer and one of the incorporators and Natividad subscribed to 1,000 of its stocks. After a month CORPO bought 5 certs of Public convenience, 49 buses, tools and equip from VALENTIN FERNANDO. On the day of the execution of the contract, the parties applied to PSC for its approval with a prayer for the issuance of provisional authority in favor of the CORPO to operate the service. PSC granted with a condition that it may be modified or revoked by the Commission. But before PSC could make a final action on the application, the Sheriff levied two of the five certs of public convenience pursuant to a write of execution issued by the RTC of Pangasinan in favor of Eusebio Ferrer against VALENTIN FERNANDO. Public bidding was executed and highest bidder is Ferrer. FERRER SOLD the two certs to Pantranco and jointly submitted to PSC the approval of the sale. Pantranco then prayed for provisional auth to operate the service involved in the said certs. TWO SALES are therefore before the PSC, FERNANDO-CORPO (VILLA REY) and FERRER-PANTRANCO. PSC orders, during pendency and before final resolution, PANTRANCO shall be the one to operate provisionally the services under the two certs. CORPO questioned. Villarey filed for the annulment of the sheriffs sale. Ferrer and Pantranco averred that the CORPO had no valid title to the certs because the contract where they acquired the certs from Fernando was subject to a suspensive conditionthe approval of the PSC which had not been fulfilled. Thus sheriff levy and sale, then Ferrer sale to Pantranco were valid. Pantranco filed a third-party complaint against Mr. Jose Villarama, alleging that the corporation and Villarama are the same and that they were disqualified from operating the two cers because of the stipulation that Villarama shall not apply for

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AVOID-THE-LIABILITY scheme: very patent. 90% of the subscribed shares of stocks of the 2nd corp was owned by the Claparols himself and ALL assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging CSC.(Conveyance? There must be a notarized conveyance and proof of tax payment?) Pierce the veil of corporation. Adjunt, business conduit or alter ego, fiction of separate and distinct corporate entities should be disregarded. ISSUES: a) b) HELD: Shall not apply for 10 years for any TPU service identical to the buyer valid? To existing or only to new lines? If yes, does it bind the corporation?

Villarama and the Villa Rey Transit Inc is one and the same. Villarama made it appear that he was not an incorporator nor a stockholder and that he did not have a sufficient fund to invest. That it was his wife who was an incorporator with the least subscribed shares and was elected treasurer. But the funds were managed by the treasurer in such a way and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the rights of the stockholder. Evidence: Initial cash capitalization of the corporation was mostly financed by Villarama. The initial 105K, the 85K of it was covered by VIllaramas personal check. Employees of the bank testified that the drawer of the check was Jose Villarama himself. Accountant of the corpo testified that the first and second installment for the subscriptions from the original subscribers were received but he was directed by JV to make vouchers liquidating the sums and it was made to appear that a part of the installment was payment to Villarama for an equipment purchased from him and that 100,000 was loaned as advances to the stockholders. There were no amount of money that had actually passed hands among the parties involved. Initial months of the operation, JV purchased and paid with his personal checks Ford trucks for the Corpo, the checks being drawn by JV. It appeared that JV supplied the organizations expenses and assets and there was no actual payment by the subscribers. JV used the corpos money and deposited them in his personal accounts and that the corpo has paid his personal accounts. He even admitted that he mingled the corpo funds with his own money. Gasoline purchases of the corpo were made in his name and his reason was that he wanted the corpo to benefit from the rebates that he receives. No coard of Resolution allowing him to hold the corpos fund when he is not treasurer and was only a part-time manager.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
a TPU service identical with Pantranco for 10 years. The decision of the RTC were: (which Pantranco questions) a) Villarey and Jose Villarama are two distinct and separate personalities and entities b) Restriction in the contract between Villa Rey and Pantranco was null and void c) Sheriff sale was null and void d) No damages awarded to Pantranco against Villarama

Janz Hanna Ria N. Serrano

With all the foregoing evidence, he cannot just be a part-time general manager. The corpo is his alter ego. He did not deny any of the abovementioned allegations, he just offered excuses. Management and disposition of funds were controlled by JV and it is impossible to segregate and identify which money belonged to whom. Corpo law-acts and conduct of the corporation be carried out in its own corporate name because it has its own personality. The veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. VILLA REY TRANSIT IS AN ALTER EGO OF JV AND THAT THE RESTRICTIVE CLAUSE IN THE CONTRACT ENTERED INTO BY THE LATTER AND PANTRANCO IS ALSO ENFORCEABLE AND BINDING AGAINST THE CORPO. RULE: SELLER OR PROMISSOR MAY NOT MAKE USE OF A CORPORATE ENTITY AS A MEANS OF EVADING THE OBLIGATION OF THIS OWN COVENANT. WHERE THE CORPORATION IS SUBSTANTIALLY THE ALTER EGO OF THE COVENANT OR TO THE RESTRICTIVE AGREEMENT, IT CAN BE ENJOINED FROM COMPETING WITH THE COVENANTEE. Intention of the restriction: To eliminate the seller as a competitor of the buyer for ten years along the lines of operation covered by the certificate or public convenience. APPLY (shall not apply), was broadly used. Prior authorization is needed before any one can operate a TPU service, whether the service consists in a new line or an old one acquired from a previous operator.

Secosa et. al. v. Heirs of Erwin Suarez Francisco10 Disregarding Corporate Entity

On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of Manila. At the same time, Petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc. Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled the scene of the collision. Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and

The seller cannot compete with the buyer and he has bound himself not to do so. While it may be true that Sy is the president of petitioner Dassad Warehousing and Port Services, Inc., such fact is not by itself sufficient to hold him solidarily liable for the liabilities adjudged against his co-petitioners. It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of its stockholders or members. It has a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality. A corporations authority to act and its liability for its actions are separate and apart from the individuals who own it. The so-called veil of corporate fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the



Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Dassads President, El Buenasucenso Sy. The trial court rendered a decision in favor of respondents and ordered the petitioners herein to pay jointly and severally damages. Petitioners then appealed said Decision to the CA, which affirmed the Trial Courts Decision in toto.

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corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. Neither may be said that petitioners and Tanduay Distillers are one and the same as TDI, as seems to be the impression of respondents when they impleaded petitioners as party respondents in their complaint for unfair labor practice, illegal lay off, and separation benefits. Such a stance is not supported by the facts. The name of the company for whom the petitioners are working is Twin Ace Holdings Corporation. As stated by the Solicitor General, Twin Ace is part of the Allied Bank Group although it conducts the rum business under the name of Tanduay Distillers. The use of a similar sounding or almost identical name is an obvious device to capitalize on the goodwill which Tanduay Rum has built over the years. Twin Ace or Tanduay Distillers, on one hand, and Tanduay Distillery, Inc. (TDI), on the other, are distinct and separate corporations. There is nothing to suggest that the owners of DTI, have any common relationship as to identify it with Allied Bank Group which runs Tanduay Distillers. The fact that their businesses are related and that the 236 employees of Georgia Pacific International Corporation were originally employees of Lianga Bay Logging Co., Inc. is not a justification for disregarding their separate personalities. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related (Palay, Inc vs. Clave) The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only a subsequent interested buyer. At the time when termination notices were sent to its employees, TDI was negotiating with the First Pacific Metro Corporations for the sale of its assets. Only after First Pacific gave up its efforts to acquire the assets did Twin Ace or Tanduay Distillers come into the picture. Respondents-employees have not presented any proof as to communality of ownership and management to support their contention that the two companies are one firm or closely related. The doctrine of piercing the veil of corporate entity applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or where a corporation is the mere alter ego or business conduit of a person (Indophil Textile Mill Workers Union vs. Calica) To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed. Another factor to consider is that TDI as a corporation or its shares of stock were not purchased by Twin Ace. The buyer limited itself to purchasing most of the assets, equipment, and machinery of TDI. Thus, Twin Ace or

Yu v. NLRC Disregarding Corporate Entity

Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay Distillery, Inc. (TDI). 22 employees of TDI, including private respondents employees, received a memorandum from TDI terminating their services, for reason of retrenchment, effective 30 days from receipt thereof or not later than the close of business hours on April 28, 1988. On April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary restraining order against their retrenchment. The labor arbiter issued the restraining order the following day. However, due to the 20-day lifetime of the temporary restraining order, and because of the on-going negotiations for the sale of TDI to the First Pacific Metro Corporation, the retrenchment pushed through. The instant petition involves only the 4 individual respondents herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos. On June 1, 1988, or after respondents-employees had ceased as such employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed the business name Tanduay Distillers. The employees filed a motion to implead herein petitioners James Yu and Wilson Young, doing business under the name and style of Tanduay Distillers, as party respondents in said cases. Petitioners filed an opposition thereto, asserting that they are representatives of Tanduay Distillers an entity distinct and separate from DTI, the previous owner, and that there is no employer-employee relationship between Tanduay Distillers and private respondents. Respondents-employees filed a reply to the opposition stating that petitioner of TDI labor union of Tanduay Distillers' decision to hire everybody with a clean slate on a probation basis.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

Tanduay Distillers did not take over the corporate personality of TDI although they manufacture the same product at the same plant with the same equipment and machinery. Obviously, the trade name "Tanduay" went with the sale because the new firm does business as Tanduay Distillers and its main product of rum is sold as Tanduay Rum. There is no showing, however, that TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate corporation. In point of fact TDI is now herein a party respondent represented by its own counsel. In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana (KKM), (93 Phil. 160 [1953], La Campana Coffee Factory, Inc. and La Campana Gaugau Packing were substantially owned by the same person. They had one office, one management, and a single payroll for both business. The laborers of the gaugau factory and the coffee factory were also interchangeable, the workers in one factory worked also in the other factory. In Claparols vs. Court of Industrial Relations (65 SCRA 613 [1975], the Claparols Steel and Nail Plant, which was ordered to pay its workers backwages, ceased operations on June 30, 1956 and was succeeded on the very next day, July 1, 1957, by the Clarapols Steel Corporation. Both corporations were substantially owned and controlled by the same person and there was no break or cessation in operations. Moreover, all the assets of the steel and nail plant were transferred to the new corporation. In fine, the fiction of separate and distinct corporate entities cannot, in the instant case, be disregarded and brushed aside, there being not the least indication that the second corporation is a dummy or serves as a client of the first corporate entity. In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two separate and distinct entities, the order for Tanduay Distillers (and petitioners) to reinstate respondents-employees is obviously without legal and factual basis. Yu: when a transferee purchases only the assets of the transferor, the transferee cannot be held liable for the labor claims and obligation for reinstatement adjudged against the transferor there must be continuity of the identity of the owners in the business; the doctrine of business-enterprise transfer as to make the transferee liable for the business obligations of the transferor is really a species of piercing doctrine and would require a certain degree of continuity of the same business by the same owners using the corporate fiction as a shield In sustaining the theory that the estate of Forrest and Tiaong Milling are merged as one personality and that the company is only the business conduit and alter ego of Forrest, the TC correctly ruled that the company developed into a close family corporation, with the Board and stockholders belonging to one family, the head of which was Forrest who always retained the majority stocks and thus control and management of its affairs. Generally, a corporation is invested by law with a personality separate and distinct from that of the persons composing it as well as from that of any other legal entity to which it may be related. The notion of corporate entity will be pierced or disregarded and the corporation will be treated as an association of

Cease v. CA Disregarding Corporate Entity

1908-one Forrest L Cease, one predecessor in interest of the parties together with 5 other American citizens organized the Tiaong Milling and Plantation Company but in the course of its existence, Cease was able to buy out all other original incorporators but in the name of his children Ernest, Cecilia, Teresita, Benjamin, Florence and Bonifacia Tirante. Charter lapsed in June 1958 but there were no showing that there was a liquidation process. In 1959, Cease died and an extrajudicial partition of was disposed but this is exactly the problem because two of his children wanted actual division while the other wanted reincorporation.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Those opposing incorporated the FL Cease Plantation Co. and registed it with the SEC but the the two sons wanted settlement of the estate and filed that the two corporations be declared as one. Plaintiffs wanted the properties to be placed under receivership but the defendants filed a bond so that these properties remain in their possession. On the eve of the expiration of the 3-year period provided by law for the liquidation of corporations, the BOARD OF LIQUIDATORS of Tianong Milling executed an assignment and conveyance of properties and trust agreement in favor of FL Cease as Trustee of the Tianong Milling so that during the motion, the judge ordered that the trustee be included as party defendant. RTC: Divide the properties. The properties of the TMPC are also properties of the FLC and thus the estate should be divided among the heirs. Transfer and Conveyance with Trust Agreement is null and void. FLC is removed as trustee. Thus the petition to the Supreme Court, on mandamus. Petitioners argue that no evidence has been found to support the conclusion that the registered properties of Tiaong Milling are also properties of the estate of Cease and that for 50 years these properties were registered under Act No. 496 in the name of Tiaong Siblings Deflin and Pelagia Pacheco co-owned Lot No 1095 which they leased to Construction Components. The lease contract had a right of first refusal provision in favor of the lessee. CCI then assigned its rights to Hydro Pipes, which included the RFR, with the consent of the Pachecos. The Pachecos then executed a deed of exchange of the property with Delpher Trades Corp for 2,500 shares, or a total value of P1,500,000. Delpher is a family corporation organized by the children of the Pachecos in order to perpetuate their control over the property and avoid taxes. The transfer of shares in exchange for the land are equivalent to a 55% majority stake in Delpher, with the remaining 45% also in the hands of the Pacheco family (they call it estate planning). Hydro argues that Delpher is a corporate entity separate from the Pachecos and is not their alter ego or business conduit, and that the transfer was in the nature of a sale which prejudiced their RFR and supports their claim to exercise the right under the terms granted to Delpher. Delpher claims there was no transfer of ownership in the nature of a sale prejudicing the RFR of Hydro, because the corporation is a mere alter ego or conduit of the Pachecos, hence Delpher and Pachecos should be deemed one and the same. Thus there was no sale and that the Pachecos merely exchanged the land for shares of stock in their own corporation. Hydro sues for reconveyance exercising its RFR under the same terms of the transfer to Delpher. TC rules ifo Hydro, and the CA affirms.

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persons or where there are two corporations, they will be merged into one, the one being merely regarded as part or instrumentality of the other. The business of the corporation in question is largely the personal venture of Forrest. The children were neither subscribers or purchasers of the stocks they own. Their participation as nominal shareholders emanated solely from Forrests gratuitous dole out of his own shares to the benefit of his children.

Delpher Trade v. IAC Disregarding Corporate Entity

The DoE between Pachecos and Delpher cannot be considered a contract of sale. There was no transfer of actual ownership. The Pacheco family merely changed their ownership from one form to another, and it remained in the same hands. After incorporation, one becomes a stockholder by subscription or purchasing stock directly from the corporation or from the individual owners thereof. In this case, the Pachecos became owners of the corporation by subscription, which is an agreement to take and pay for original unissued shares of a corporation formed or to be formed. It is significant in this case that the Pachecos took no par value shares in exchange for the properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of shares of the issuing corporation. The capital stock of a corporation issuing only no-par shares is not set forth by a stated amount of money, but is expressed to be divided into a stated number of shares. This indicates that a shareholder of say 100 shares is an aliquot sharer in the assets of the corporation, no matter what the value of the shares are. By ownership of 2500 shares, the Pachecos have control over Delpher, which makes it a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher to take control of the properties and save on inheritance taxes. The records do no point to anything objectionable about this estate planning scheme. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or avoid them cannot


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

Garrett is a wheel molder employed by Lenoir Car Works who claims and sues for Workmens Compensation under the Federal Employers Liability Act because of injuries contracted from silica dust which permeated the foundry. He contends that since Southern Railway acquired the entire capital stock of Lenoir and so completely dominated it that it was merely an instrumentality or subsidiary of Southern, he is considered an employee of Southern and thus entitled under the Act mentioned for recovery. He cites the ff facts: All directors and officers of Lenoir are employees of southern Southern owns all stock of Lenoir except 5 shares All profits of Lenoir went to Southern Claims of Lenoir employees for accidents are handled by Southern Litigation against Lenoir is handled by Southern General accounting of Lenoir is handled by Southern Lenoir sold to Southern $30M of its products compared to $4.5M to other buyers Southern, countered with the ff facts in support of its contention that it is not the parent of Lenoir: Management of Lenoir is vested in its manager, Henry Marius, who is in the payroll of Lenoir and has no other connection with Southern except holding and proxy voting for Southern Marius establishes the pricing of Lenoir products and all Lenoir sales are the result of his business judgment Lenoir does not sell to Southern exclusively, and Southern does not buy from Lenoir exclusively or substantially, and that it buys from Lenoir just as it buys from other sellers Lenoirs corporate and accounting offices are in Washington DC in a building owned by Southern; but it is still based in Tennessee Lenoir is a specialty business and Southern has not in any way been in a position to direct or supervise the operations of Lenoir Lenoir is a duly qualified employer under the Tennessee Workmens Compensation Act and suits and claims similar to Garretts have been covered by that law Lenoir maintains a separate bank account and has never intermingled its funds with Southern Lenoir and Southern keep separate books and pay their own taxes Lenoirs general accounting and legal is handled by its own departments in Lenoir City be doubted. As they are still the owners, Hydro has no basis for its claim of RFR under the lease contract. The Court finds the existence of two distinct companies. There is no evidence that Southern dictated the management of Lenoir. In fact, Marius the manager was in full control of its operations. He established prices, handled all negotiations in CBAs. It paid local taxes, had local legal counsel, maintained Workmens Compensation. Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions and pricing remained in the hands of Marius and was not dictated by Southern. Marius operated the business as a going concern. The facts do not reveal the intimacy and inseparability of control which would lead one to believe that Southern and Lenoir are one and the same. It was also not an agent of Southern because it was not a common carrier by railroad to make it liable under the Federal Act. It was not an operator of a terminal, performed no switching or transportation functions at all. It was a manufacturer and Garrett was one of its employees. There are certain circumstances which if present in the proper combination, would render the subsidiary an instrumentality: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) parent owns all or most of the capital stock parent and subsidiary have common directors or officers parent finances the subsidiary parent subscribes to all capital stock of the subsidiary or causes its incorporation subsidiary has grossly inadequate capital parent pays salaries and other expenses or losses of subsidiary subsidiary has substantially no business except with the parent or no assets except those conveyed to the parent the subsidiary is described as a department in the books of the parent parent uses the property of the subsidiary directors of the subsidiary do not act independently but take orders from the parent formal legal requirements of the subsidiary are not met

Garnett v. Southern Railway Co. Parent-Subsidary Relationship

Since only two of the 11 indicia occurthe ownership of most of capital stock and subscription by Southern to capital stock of Lenoir Lenoir is not a subsidiary and is a separate corporation. Thus there is no basis for the claim of Garrett with Southern under the Federal Act It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or illegality.

Jardine Davies v. JRB Realty Inc Parent-Subsidary Relationship

Jardine Davies was impleaded as defendant in a performance suit, considering that Aircon was a subsidiary of the petitioner.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

This is the doctrine of piercing the veil of corporate fiction which applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. The rationale behind piercing a corporation's identity is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon's corporate legal existence can just be disregarded. The Court categorically held in another case that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice versa. In applying the doctrine, the following requisites must be established: (1) control, not merely majority or complete stock control; (2) such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest acts in contravention of plaintiff's legal rights; and (3) the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon's majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from the petitioner. In the instant case, there is no evidence that Aircon was formed or utilized with the intention of defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm of air conditioners, complied with its obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith, pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning units did not satisfy the respondent despite several adjustments and corrective measures. The Court said that the virtual control of the shareholdings of a corporation would lead to certain legal conclusions. It could not overlook the fact that in the practical working of corporate organizations of the class to which the two entities belonged, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the board of directors but more often than not, also the action of that board. It held that applying this to the case, it cannot be conceived how the Koppel Phils could effectively go against the policies, decisions, and desires of the American corporation Neither can it be conceived how the Phil corporation could avoid following the directions of the American corporation in every other transaction where they had both to intervene, in view of the fact that the American

Koppel(Phil) v. Yatco Parent-Subsidary Relationship

(the subsidiary was so controlled by the parent that its separate identity was hardly discernible, and became a mere alter ego of the parent and was used to evade taxes) . Koppel Industrial and Car Company is a corporation organized and existing under the laws of the State of Pennsylvania. They are not licensed to do business in the RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of stock of the said company (the remaining 5 were owned by the 5 officers of Koppel Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a prospective client. Koppel Phils however quoted a higher price for the buyer than that quoted by Koppel Industrial. Koppel Phils then cabled to ship the merchandise to Manila. Koppel Phils received a %age of the profits realized or its share of the losses on the transactions. Koppel also returned a sum allotted as payment of commercial


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
brokers tax of 4%. Koppel Industrial demanded from Koppel Phils the sum of P64,122.51 as merchants sales tax of 1 % of the share of Koppel Phils in the profits.

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corporation held 99.5% of the capital stock of the Phil corporation In so far as the sales are concerned, Koppel Phils and Koppel Industrial are for all intents and purposes one and the same, and the former is a mere branch, subsidiary, or agency of the latter. The ff are facts which led to the Court to conclude the above: share in the profits of Koppel Phils was left to the sole, unbridled control of Koppel Industrial shares of stock of Koppel Phils are all owned by Koppel Industrial (overwhelming majority) Koppel Phils acted as agent and representative of Koppel Industrial Koppel Phils alone bore the incidental expenses for transactions, such as cable expenses Koppel Phils was fully empowered to instruct banks it deals with, if purchasers were not able to pay the bank drafts to the bank as payment for the purchases Koppel Phils makes good any deficiencies by deliveries from its own stock The application of the piercing doctrine is not a contravention of the principle that the corporate personality of a corporation cannot be collaterally attacked. When the piercing doctrine is applied against a corporation in a particular case, the court does not deny legal personality for any and all purposes. The application of the piercing doctrine is therefore within the ambit of the principle of res judicata that binds only the parties to the case and only to the matters actually resolved therein. The Court, agreeing with the CIR, held that Frank Liddell owned both corporations as his wife could not have had the money to pay her subscriptions. Such fact alone though not sufficient to warrant piercing, but under the proven facts alone, Liddel Motors was the medium created by Liddel & Co to reduce its tax liability. A taxpayer has the legal right to decrease, by means which the law permits, the amount of what otherwise would be his taxes or altogether avoid them; but a dummy corporation serving no business purposes other than as a blind, will be disregarded. A taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in the proper cases may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transaction as the person accordingly taxable. Mere ownership by a single stockholder or by another corporation of all or nearly all capital stocks of the corporation is not by itself a sufficient ground for disregarding the separate corporate personality. Substantial ownership in the capital stock of a corporation entitling the shareholder a significant vote in the corporate affairs allows them no standing or claims pertaining to corporate affairs. Where a corporation is a dummy and serves no business purpose and is intended only as a blind, the corporate fiction may be ignored. Substantial ownership in the capital stock of a corporation entitling the SH to a significant vote in corporate affairs allows then no standing or claims pertaining to corporate affairs. Mere ownership by a single SH or by another corporation of all or nearly all capital stock of a corporation is not of itself sufficient ground for

Liddell and Co. v. CIR Parent-Subsidary Relationship

(corporate entity was used to evade the payment of higher taxes) Liddell & Co was engaged in importing and retailing cars and trucks. Frank Liddell owned 98% of the stocks. Later Liddell Motors Inc was organized to do retailing for Liddell & Co. Franks wife owned almost all of that corporations stocks. Since then, Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the CIR considered the sales by Liddell Motors to the public as the basis for the original sales tax.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
La Campana Coffee Factory v. Kaisahan Parent-Subsidary Relationship Tan Tong and family owned and controlled 2 corporations: one engaged in the sale of coffee and the other in starch. Both corporations had one office, one management, and one payroll, and the laborers of both corporations were interchangeable. The 60 members of the labor association in the coffee and starch factories demanded higher wages addressed to La Campania Starch and Coffee Factory. La Campania Coffee sought dismissal on the ground that the starch and coffee factory are two distinct juridical persons. Tan Tong had been in the business of buying and selling gaugau under the tradename La Campana Gaugau Packing in BInondo and was transferred to QC since 1932. In 1950, Tan Tong and his family as sole incorporators and stockholders, organized a family corporation known as the La Campana Coffee Factory Co. with its office located in the same place. Tan Ton entered into a CBA with the PLOW union but Tan Tongs employees later formed their own organization know as the KMLC (see above). The members of the union, 66 members, demanded for higher wages and more privileges and the demand addressed to La Campana Starch and Coffee Factory which this union just designated to the company. CHAPTER V11 McArthur v. Times Printing Co. Liability of Corporation for Promoters Contracts Times Printing has Nimocks and others as promoters. Through the latter, McArthur was contracted for his services as advertising solicitor for one year. In 1890, he was discharged in violation of the contract, thus the filing of the complaint for damages for break of contract. Defenses of Time: a. b. Not for any stated time but from week to week. He was discharged for a good cause

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disregarding the separate corporate personality CIR found that they are just one and the same. That La Campana Gaugau Packing is just a business name. And that even when Tan Tong leased the land to his son the manager of the coffee company, he did so only when the case was already pending, and that the advertisements in delivery trucks states that it is just one entity and that the employees or laborers of gaugau company receive their pay from the same persons which are also holding the coffee factory and there is only one payroll and they separate the payrolls only when the case was filed. One office, all trucks are used by both companies. It is to be noted that they questioned CIRs jurisdiction because the number of the Coffee factory is below 31, the jurisdictional number, however this loses its force when we hold that the two companies are just one business. A subsidiary or auxiliary corporation which is created by a parent corporation merely as an agency for the latter may sometimes be regarded as identical with the parent corporation, especially if the stockholders or officers of the two corporations are substantially the same or their system of operation unified.

While a corporation is not bound by engagements made on its behalf by its promotres before its organization, it may, after its organization, make such engagements its own contracts. The BODs formal action would only be necessary where there would be any similar original contract but not a requisite in such adoption or acceptance, which may be expressed or implied. It may be inferred from the acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of the corporation to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the company have express or implied authority to make. Statute of Frauds would not apply, for terms not to be performed within one year from the making of the contract because the liability of the corporation under the circumstances does not rest upon any principle of the law of agency but upon the immediate and voluntary acts of the company. The promoters act of ratifying in behalf of the corporation, is loosely applied because, ratification implies an existing person, on whose behalf the contract might have been made. There cannot, in law be a ratification of a contract which could not have been

He was contracted on and after October 1, when the company would be organized but in fact it was actually organized in October 16 but the corporation has commenced operations from October 1 when the publication of the paper was stared by the promoters. But on April or in 6 months time, he was discharged. The BOD never took any formal action with reference to his contract but the shareholders, directors and officers of the corporation knew of this contract at the time of the organization or were inform of it and none of them objected but on the contrary, retained plaintiff in the employment of the company without other or new contract as to his services.



Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

made binding on the ratifier at the time it ws made, because the ratifier was not then in existence. In this case, adoption is what ruled because adoption is the making of a contract as of the date of the adoption and not as of some former date. Cagayan Fishing was not yet in existence when Tabora sold to it his lands. It was not even a de facto corp at the time, thus not being in legal existence it does not yet possess juridical capacity to enter into contracts. The Tabora contract was entered into not only between him and a non-existent corporation, but between him as owner and the same Tabora, his wife and others, as mere promoters of the corporation. They could not have acted as agents for a projected corporation since that which had no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. The SC refused to extend the doctrine of ratification which would result in the commission of injustice or fraud to third parties. Tabora owned a majority of the shares subscribed and paid. Tabor was also one of the directors, and title remained under Taboras name. Sandiko the buyer dealt with Tabora directly and considered him as the owner. Even PNB treated Tabora as the owner, not the corporation. Thus Cagayan Fishing never really purchased the lands, and thus it did not have the right to dispose by sale to Sandiko. There are circumstances where the acts of promoters may be ratified by the corporation, but in Cagayan the SC declined to extend the doctrine of ratification which would result in the commission of injustice or fraud, because the object of the contracts were treated as personal assets and not corporate assets Ratification is the key element in upholding the validity and enforceability of promoters contracts

Cagayan Fishing Dev. Co. v. Teodoro Sandiko Liability of Corporation for Promoters Contracts

Manuel Tabora is the registered owner of four parcels of land in Linao, Aparri, Cagayan, and he wanted to build a Fishery. He loaned from PNB P8,000 and to guarantee, it mortgaged the said parcels of land. In May 1930, he sold the parcels to Cagayan Fishing Development which was only in the process of incorporation, in consideration of P1 and making the corporation assume the mortgages in favor of PNB and Severina Buzon and that the title of the land shall not be transferred to the company until the company has fully paid Taboras indebtedness. The articles of incorporation were filed on Oct. 22, 1930 or 5 months after the sale and after 6 days after, the company sold the parcels of land to Sandiko for 42,000 on the reciprocal obligation that Sandiko will shoulder the three mortgages. He executed a promissory note that he shall be 25,300 after a year with interest and on the promissory notes, the parcels were mortgage as security. Sandiko defaulted, thus the action for payment. The lower court held that deed of sale was invalid because of vice in consent and repugnancy to law. The corporation filed a motion for reconsideration.

Builders Duntile Co. v. Dunn Mfg. Co. Corporate Rights under Promoters Contract WE Dunn Company manufactures machinery for making duntile, a hollow building tile. Samuels told Gaston the agent of Dunn that he was organizing a company to manufacture the duntiles. Samuels preferred to organize the corporation and then make the contract for the machinery. Gaston wanted to make the contract first, then form the corporation after. Samuels then made the contract ordering the machinery from WE Dunn, which also provided for the free services of an experienced serviceman (Aaron) for 5 years to insure proper installation. WE Dunn accepted the contract, and the machinery was shipped to Samuels. Aaron the serviceman began setting up the machinery. Meantime, the articles of the Builders Duntile (Samuels company) was filed. Operations for the manufacture of the duntiles then started. It turns out that the duntiles made were so inferior in quality and practically value-less for building purposes, because the machinery had been installed improperly by Aaron the service guy, and had even used the wrong formula for the mixing. Builders (not Samuels) sues WE Dunn Co. to recover on the contract made before the corporation formed.

The case turns on the right of a corporation to sue upon a contract made in its behalf by one of its promoters before it was organized. A corporation has the power to adopt a contract of its promoters, and one of the effects of this adoption is that the contract becomes that of the corporation . But the power to adopt must only be limited to such contracts as the corporation itself can make or is authorized to make. In this case it was clear that the contract was made by Samuels in behalf of the projected corporation, and after it was formed, the incorporators took over the whole thing and ratified all that had been done in its behalf. To deny the corporation the right to sue for damages for breach of contract and the loss it sustained by reason of the first agents negligence and improper acts would be to deny it all remedy for the breach of contract, for Samuels did not make the contract for himself, and he personally did not sustain any damages. It was the corporation that sustained the damages resulting from the breach. The corporation was the real party in interest, and brought suit in its own name. The contract, though made in the name of Samuels was, as all parties knew, made in his name for the benefit of the corporation to be organized. He was one of the


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

promoters but had no intention of buying it for himself. Though there was no formal assignment of the contract to the corporation, its action to bring suit were an adoption of the contract.

Rizal Light and Ice Co. v. PSC and Morong Electric Co. Corporate Rights under Promoters Contract

Case involves two (2) petitions of the Rizal Light & Ice Co., Inc., (1) to review and set aside the orders of respondent Public Service Commission cancelling and revoking the certificate of public convenience and necessity and forfeiting the franchise of Rizal, and (2) to review and set aside the decision of the Commission granting a certificate of public convenience and necessity to respondent Morong Electric Co., Inc to operate an electric light, heat and power service in the municipality of Morong, Rizal. Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a holder of a certificate of public convenience to operate an electric light, heat and power service in the same municipality of Morong, Rizal, and that the approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition. The Commission, in its decision dated March 13, 1963, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain said service. The Commission found that Morong Electric is a corporation duly organized and existing under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is financially capable of operating an electric light, heat and power service, and that at the time the decision was rendered there was absence of electric service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong, Rizal, it claims, in effect, that Morong Electric should not have been granted the certificate of public convenience and necessity because (1) it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate; (2) it is not financially capable of undertaking an electric service, and (3) petitioner was rendering efficient service before its electric plant was burned, and therefore, being a prior operator its investment should be protected and no new party should be granted a franchise and certificate of public convenience and necessity to operate an electric service in the same locality.

The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission. Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. Before that date, or pending the issuance of said certificate of incorporation, the incorporators cannot be considered as de facto corporation. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. The fact that a company is not completely incorpor ated at the time the grant is made to it by a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the corporation is organized. While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized. An ordinance granting a privilege to a corporation is not void because the beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance. It is enough that organization is complete prior to the passage and acceptance of the ordinance. The reason is that a privilege of this character is a mere license to the corporation until it accepts the grant and complies with its terms and conditions.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise not only perfected a contract between the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in the application of Morong Electric. The conclusion herein reached regarding the validity of the franchise granted to Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing Development Co., Inc. vs. Teodoro Sandiko, where it was held that a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business. It should be pointed out, however, that this Court did not say in that case that the rule is absolute or that under no circumstances may the acts of promoters of a corporation be ratified or accepted by the corporation if and when subsequently organized. Of course, there are exceptions. It will be noted that American courts generally hold that a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized. Although a franchise may be treated as a contract, the eventual incorporation after the grant of the franchise and its acceptance thereof, as well as the efforts made to prosecute the application not only perfected a contract but cured the deficiency Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or accept a contract made by promoters in behalf of the corporation before its incorporation General Rulepromoters are personally liable on their contracts, though made in behalf of a corporation to be formed. Exceptionif the contract is made in behalf of the corporation and the other party agrees to look to the corporation and not to the promoters for payment. In this case, Quaker was well aware that the corporation was not yet formed and even urged that the contract be made in the name of the to-be formed corporation. The entire transaction contemplated the corporation as the contracting party. Thus personal liability does not attach. There was clearly an intent on the part of Quaker to contract with the corporation and not with the promoters.

Quaker Hill v. Parr Personal Liability of Promoter on Pre-Incorporation Contracts

Parr et al while in the course of negotiations with Quaker Hill Inc, a NY corporation, for the former to purchase nursery stock, undertook to organize a separate corporation to be known as the Denver Memorial Nursery Inc. Two orders for nursery stock were signed by Parr in behalf of Denver Memorial which to the knowledge of Quaker was not yet formed. The nursery stock was then delivered to Parr and was planted with the help of Quaker. A substitute order was then made, with the name Mountain View Nurseries instead of Denver Memorial, which never actually came into being. Because of name confusion, it was subsequently called Mountain View Nurseries. Its articles were filed but the companies never functioned as going concerns. After Mountain View was formed, a new note and contract was submitted to Parr et al, containing the name Mountain View as contracting party. Quaker then referred to the company as Mountain View. Mountain View became financially troubled, and Quaker sues Parr et al (in his personal capacity)on the ground that the corporation was not yet formed at the time the sales contract was made and that Parr et al as promoters should be personally liable. Action to recover secret profits made by Bigelow and Lewisohn, promoters of the Old Dominion Copper. Bigelow and Lewisohn framed a scheme for the capitalization of Old Dominion for $3,750,000, then sell to the corporation for $3,250,000 their property worth $1M but having a market value of not over $2M, and then sale to the general public at par for cash of the remaining $500,000 of stock, and all this without providing Old Dominion with any independent board of officers to pass upon the wisdom of the purchase and without disclosing the

Old Dominion Copper Mining and Smelting Co v. Bigelow Fiduciary Relationship between Corporation and Promoter

Notwithstanding this fiduciary relation, the promoter may sell property to the company which he is promoting. In order that the contract may be absolutely binding, the promoter must pursue one of 4 courses of action: (1) provide an independent board of officers and make a full disclosure to the corporation through the board; (2) make a full disclosure of all material facts to each original subscriber of


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
substance of the transaction and their extraordinary profit to the purchasers of its stock for cash at par. (Pau: They sold their property to themselves and assigning themselves as trustee for the corporation while it is being formed. So the fiduciary relationship is between them as promoters and the subsequent investors to the under construction corporation). The court has decided that such a transaction creates a liability on the part of the promoters to account for the secret profits to Old Dominion. The corporation seeks to recover the secret profit made by the promoters in the sale of their own property to the corporation, basing its claim on the general rule that a promoter cannot lawfully take a secret profit and will be held to account for it if he does. Fundamentally the action is to recover profits obtained by a breach of trust, as promoters have duties as fiduciaries to the company. A promoter includes those who undertake to form a corporation and to procure for it the rights, instrumentalities and capital by which it is to carry out the purposes set forth in its charter and to establish it as fully able to do its business. It is now established without exception that a promoter stands in a fiduciary relation to the corporation which he is interested in, and that he is charged with all the duties of good faith which attach to other trusts.

Janz Hanna Ria N. Serrano

shares (3) procure a ratification of the contract by vote of the shareholders of the completely established corporation (4) he may be himself the real subscriber of all the shares of the capital stock contemplated as part of the promotion scheme. In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares. They held all the shares issued at the time of ratification, but not all which it was proposed to issue as part of their promotion scheme. There is a liability of the promoter to the corporation when further original subscribers to capital stock contemplated as an essential part of the scheme of promotion came in after the transaction complained of, even though that transaction is known to all the then SHs at the timewhich are the promoters themselves and their representatives. In the present case, the whole purchase price was paid in stock, issued before any stock was issued to the public although after a substantial public subscription. In other words, it is the order in which the transaction is carried out, and not its substantial nature, which makes the difference between liability and immunity of the promoter. It is of know consequence whether in fact the dummy directors know of the terms of sale and the breach of trust of the promoters. The point is that the directors were selected with the purpose that they should be the mere instruments of the promoter and they carried out the will of their masters. Promoters have in their hands the creation and molding of the company, like clay in the hands of a potter. It is not necessary to inquire how far he may be trustee also for shareholders and associates. In the present case the inquiry relates wholly to his obligation to the corporation. The fiduciary relation must continue until the promoter has completely established according to his plan the being which he has undertaken to create. The principle that one cannot rightfully sell property, belonging to him in his private capacity, to himself in a trust capacity is universal. The theory upon which corporations are founded is that they are entities, separate and distinct from officers and SHs. Looking through the form of the corporation to the SHs and treating them as the corporation is an exception to the rule that the corporation is a separate legal entity for all purposes, even though all its stock be held by a single interest and it be to all practical intents merely the instrument of the SH. The wrong which the promoters did in this case was in selling property worth $1M and in the market at most $2M for $3.25 without revealing that they were making a secret profit. The wrong was done to the corporation. It affected all its SHs, present and future alike. It is done directly to the corporation as an independent entity, and thus indirectly the rights of those who are or will become SHs are affected. In buying the promoter property, the directors of the corpo ration acted for the corporation, as such, without regard to who were the then SHs. The wrong is not done when the innocent public subscribes but when the sale was made to the corporation at a grossly exaggerated price with secret profit. The


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

occasion for complaining of this wrong comes when the promoters issue to the public the balance of stock in order to provide the money necessary to set the corporation on its feet. The breach of trust is in nature of a tort, thus, renders Bigelow and Lewisohn solidarily liable for the whole damage. Remedy is to return the secret profit. Plaintiff even presses that it is entitled to recover the difference between the market value of the shares received by the defendant and Lewisohn and the cost of them of the property conveyed. But the court said that there is no finding here that such fiduciary relation existed at the time (because this is the measure of recovery when there is a fiduciary relationship). No finding that such relationship exised at the time Bigelow purchased the property. Market value is the standard commonly applied where property has such value. It is only in cases where the value of property cannot be fairly ascertained bu the application of this test that resort is had to any other.

Republic of the Philippines v. Acoje Mining Corporate Powers

CHAPTER VI Acoje Mining requested the opening of a post office at its mining camp in Zambales to service employees living in the camp. The Director of Posts agreed to set up the office, provided that in the meantime that funds are not available, the company would provide for all essential equipment and assign a responsible employee to perform the duties of a postmaster. He also added that the company shall assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of the dishonesty or negligence of the employee assigned. A Resolution by the Acoje Board of Directors was passed. The postmaster assigned, Hilario Sanchez, went on leave and never returned. It was soon discovered that a shortage was incurred iao P13,867.24, apparently embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its liability contending that the resolution issued by the board was ultra vires, and its liability if any would only be that of a guarantor.

It should be noted that it was Acoje itself that requested for the setting up of a post office for the convenience of its employees, which the SC held to cover a subject which is a reasonable and proper adjunct to the conduct of the business of Acoje Mining. An ultra vires act is one committed outside the object for which a corporation is created, but there are certain corporate acts that may be performed outside the scope of the powers expressly conferred if they are necessary to promote the interest and welfare of the corporation. Even in the case of ultra vires acts which are not illegal per se, a corporation cannot be heard to complain that it is not liable for the acts of its board, because of estoppel by representation. The term ultra vires should be 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 invalidated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. In this case, it is fair that the resolution be upheld at least on the ground of estoppel. The defense of ultra vires rests on violation of trust or duty towards the stockholders, and should not be entertained where its allowance will do greater wrong to innocent parties dealing with the corporation. The acceptance of benefits arising from the performance of the other party gives rise to an estoppel precluding the repudiation of the contract.

NPC v. Vera Corporate Powers

Sea Lion is a port and arrastre operator with a contract for stevedoring services with NPC which had already expired. Its PPA permit for cargo handling services at the NPC Calaca pier had expired as well. Napocor did not renew Sea Lions contract for Stevedoring Services for Coal-Handling Operations at Calaca plant, and took over its stevedoring services pursuant to a provision in its charter, [t[o exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose. Sea Lion sues, alleging that NPC had acted in bad

In determining whether or not the act of NPC falls within the purview of the charter which creates it, the Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. A pier located at Calaca, Batangas, which is owned by NPC, receives the various shipments of coal which is used exclusively to fuel the


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
faith and with grave abuse of discretion in not renewing its Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant, and in taking over its stevedoring services. Judge Vera, acting on Sea Lions suit, issued a writ of preliminary injunction enjoining NPC from further undertaking stevedoring and arrastre services in its pier located at the Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either to enter into a contract for stevedoring and arrastre services or to conduct a public bidding therefor. Sea Lion was also allowed to continue stevedoring and arrastre services at the pier.

Janz Hanna Ria N. Serrano

Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric power. The stevedoring services which involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant. The Court holds that NPC is empowered under its Charter to undertake such services, it being reasonably necessary to the operation and maintenance of the power plant. This Court is, guided by the case of Republic of the Philippines v. Acoje Mining Company, Inc., where the Court affirmed the rule that a corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. Whether NPC will enter into a contract for stevedoring and arrastre services to handle its coal shipments to its pier, or undertake the services itself, is entirely and exclusively within its corporate discretion. It does not involve a duty the performance of which is enjoined by law. Thus, the courts cannot direct the NPC in the exercise of this prerogative. What clearly emerges from the recorded facts is that the petitioner, awash with profits from its business operations but confronted with the demand of the union for wage increases, decided to evade its responsibility towards the employees by a devised capital reduction. While the reduction in capital stock created an apparent need for retrenchment, it was, by all indications, just a mask for the purge of union members, who, by then, had agitated for wage increases. In the face of the petitioner company's piling profits, the unionists had the right to demand for such salary adjustments. That the petitioner made quite handsome profits is clear from the records. We agree with the National Labor Relations Commission that "[t]he dividends received by the company are corporate earnings arising from corporate investment." 42 Indeed, as found by the Commission, the petitioner had entered such earnings in its financial statements as profits, which it would not have done if they were not in fact profits. 43 Moreover, it is incorrect to say that such profits in the form of dividends are beyond the reach of the petitioner's creditors since the petitioner had received them as compensation for its management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may then be available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to a share in such dividends, by way of salary increases, may not be denied its employees.

Madrigal & Co. v. Zamora Corporate Powers

Madrigal & Co was engaged in the management of Rizal Cement Co., Inc. and is also its sister company, both being owned by the same or practically the same stockholders. The Madrigal Central Office Employees Union sought for the renewal of its collective bargaining agreement and proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits. Madrigal requested for a deferment in the negotiations. Thereafter, Madrigal on two occasions reduced its capital stock from 765,000 shares to 267,366 shares and from 267,366 shares to 110,085 shares by virtue of two alleged resolutions of its stockholders, which was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. The Union filed a case for ULP with the NLRC. Madrigal answered citing operational losses. Madrigal then informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income as the General Manager or Agent" had "ceased operating temporarily. In addition, because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to prevent further losses," it had to reduce its capital stock on two occasions. The labor arbiter, having found that the petitioner "had been making substantial profits in its operation" since 1972 through 1975, granted the wage increase, and was affirmed by NLRC. Meanwhile Madrigal tried to terminate the services of Union members citing retrenchment but its application was declared illegal by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the decision of DOLE.

Government v. El Hogar

Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice. This is a quo warranto proceeding, alleging 17 causes of action, instituted originally in this court by the Government of the Philippine Islands on the relation of the


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Corporate Powers

Janz Hanna Ria N. Serrano

Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said corporation. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success. The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit. From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last above-mentioned the association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the sum of P7,621,565.81. I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in violation of the law that while corporations may loan funds upon real estate security, they shall dispose of the same within 5 years after receiving title H: the corporation has not been shown to have offended against the law in a manner which would entail forfeiture of its charter. The evident purpose behind the law restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail or other similar institution by which land could be fettered and its alienation hampered. In the case, El Hogar had in GF disposed of the property at the expiration of the period fixed by law. Under the circumstances the destruction of the corporation would bring irreparable loss upon thousands of innocent shareholders of the corporation without any corresponding benefit to the public. I: W/N el Hogar is illegally owning and holding a business lot in excess of the reasonable requirements and in contravention of the Corpo law that every corporation has the power to purchase hold lease real property as reasonable and necessary required for the transaction of the lawful business

H: The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner. I: W/N el Hogar has engaged in activities foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends, specifically: (1) the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public; (2) the administration and management of properties belonging to delinquent shareholders of the association; (3) the management of some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful. (2) The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

(3) The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. The administration of property in the manner described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the owner of the property may have been required to subscribe to one or more shares of the association with a view to qualifying him to receive this service is of no significance. It is a general rule of law that corporations possess only such express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort. I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation for his services rendered by him during the early stages of the organization of the corporation, is unconscionable, excessive, and thus necessitates dissolution H: No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing at the time this contract was made, that the compensation therein provided was excessive? If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent years. If the Melian contract had been clearly ultra vires which is not charged and is certainly untrue its continued performance might conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an action is either the corporation itself, or some shareholder who has an interest to protect. I: W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be illegal and inconsistent with the plan and purposes of building and loan associations,and that these are held by well-to-do people purely for investment purposes and not by wage-earners for savings H: The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of security which may be issued by the association. Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where evidently created for the purpose of meeting the condition cause by the prepayment of dues that is there permitted. The language of this provision is as follow "payment of dues or interest may be made in advance, but the corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a longer period than one year." In one sort of special shares the dues are prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the subscribers assume the obligation to pay P10 monthly until P160 shall have been paid. It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a greater rate than six per centum per annum nor for a longer period than one year. The word "interest " as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be confused with the dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no interest is ever paid by the association in any amount for the advance payments made on these shares; and the reason is to be found in the fact that the participation of the special shares in the earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance payments made by him; and no other incentive is necessary to induce inventors to purchase the stock. It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying a portion of the shareholder's participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of the special shares does not involve any violation of the principle that the shares must be sold at par. From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The complaint consequently fails also as


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
regards the stated in the ninth cause of action.

Janz Hanna Ria N. Serrano

I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at the discretion of its Board, the value of real properties acquired by it at its sales, thereby frustrating the right of SHs to participate annually and equally in the earnings. H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The tenth cause of action is therefore not well founded. I: W/n el Hogars charter should be revoked because it illegally maintains excessive reserve funds and because it pursues a p olicy, allegedly unlawful, of paying a straight annual dividend of 10% regardless of losses suffered and profits made by the corporation and in violation of the requirement s of the corpo code. H: It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate the keeping of reserves is inconsistent with section 188 of the Corporation Law. Upon careful consideration of the questions involved we find no reason to doubt the right of the respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence. Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of a fixed dividend which is contrary to the intention of the statute. The government insists upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal. From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met. Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit. I: W/n el Hogar illegally departed from its charter because it has made loans which were intended to be used by the borrowers for other purposes than the building of homes. There is no statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the building of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association from time to time to fix the premium to be charged. In the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the idea is developed that the primary design of building and loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be denied that they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community. I: W/n the el Hogar charter may be revoked because various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans, and that some of these juridical entities became shareholders merely for the purpose of qualifying themselves to take loans from the association.

H: the Corporation Law declares that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is said that five or more "persons", although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common sense of the situation, suggests that natural persons are meant. When it is said, however, in section 173, that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that they were without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan or for some other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief. I: W/n el Hogar, in disposing of real estate purchased in the collection of defaulted loans, on credit at first and then sold and mortgaged to el Hogar to secure payment of the purchase price, had incurred several outstanding loans, and that that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are they made members or shareholders of the defendant. H: This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it a loan in law. The contention of the Government under this head is untenable. Under the leadership and management of Enrico Pirovano, president of Del Rama Under the AOI of Dela Rama Steamship it is provided under (g) that the company Steamship, the company grew and progressed until it became a multi-million may invest and deal with moneys of the company not immediately required, in corporation, the assets of which grew and increased from P240K to around P15M. such a manner as from time to time may be determined, and under (i) to lend He was insured by the company for P1M. Esteban dela Rama, majority money or to aid in any other manner any person association, or corporation of stockholder, distributed his shares among his 5 daughters, including the NDC, to which any obligation or in which any interest is held by the corporation or in the which Dela Rama had an outstanding bonded indebtedness iao P7.5M, through a affairs of prosperity of which the corporation has a lawful interest. The debt-equity swap arrangement which also gave the NDC representation in the corporation was thus given broad and almost unlimited powers to carry out the Board. purposes for which it was organized. The word deal is broad enough to include any manner of disposition, and thus the donation comes within the scope of this Pirovano was killed by the Japanese during the war, and a Boardres was adopted broad power. The company was in fact very much solvent as it was able to declare granting to the Pirovano children the proceeds of the insurance policies taken on and issue dividends to its stockholders, and shows that the excess funds which the life of the late president. However, the policy had lapse because the company were not needed by the company which was donated to the children was justified was not able to pay the premiums regularly. The BoardRes authorizes the under the AOI. allocation of P400K convertible into 4000 shares of stock ifo of the Pirovano children, as well as a waiver of the preemptive rights of the former owners, the Under the second broad power, the corporation knew well its scope such that Dela Rama siblings. This was submitted to the stockholders which duly approved noone lifted a finger to dispute its validity. The company gave the donation not the same. only because it was indebted to him but also because it was fit and proper to make provisions for the children and out of a sense of gratitude. It appears, however, that Don Esteban did not realize that the dole out would actually be giving to the Pirovano children more than what they intended to give. Even assuming that the donation was ultra vires, still it cannot be invalidated or This was because the value then of the shares was 3.6 times the par value thereof, declared legally ineffective for that reason alone, it appearing that the donation thus the donation iao P400K would amount to a total of P1.44M. Thus the voting represents not only the act of the Board but also that of the stockholders strength of the Pirovano children would be twice as much as that of the dela Rama themselves since they expressly ratified the resolution. By this ratification, the sisters. The old Resolution having been nullified, the Board adopted a new BR infirmity of the corporate act, if any, has been obliterated thereby making the act

Pirovano v. Dela Rama Steamship Corporate Powers


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
changing the form of the donation from 4000 shares into a renunciation of the Companys right and title to the life insurance policies of Pirovano. It also provides that the proceeds of the policy be retained by the Company as a loan drawing interest payable to the Pirovano children whenever the company is in a position to meet this financial obligation and after the Company settles its bonded indebtedness ifo NDC. This was ratified by the Dela Rama stockholders. Mrs Pirovano accepted the donation, and buys property in the US. Upon inquiry with the Sec, it was found that the donation was illegal and thus void on the grounds that the corporation acted ultra vires and that it could not dispose of its assets through donation. The stockholders then voted to revoke the donation. Mrs Pirovano sued to demand the credit owed to them by the Company. Balatoc Mining, engaged in the mining of gold, sorely needed the infusion of new capital to resuscitate its stalled operations. The officers approached the Benguet Mining Co, an entity also engaged in gold mining. A contract was executed, which states that Benguet agrees to construct a milling plant for the Balatoc mine and erect a power plant, in exchange for Balatoc Mining shares valued at P600K and the excess in cash to compensate for the cost of the contract. By the time of the complaint, the value of the stock of Balatoc had soared for a nominal valuation to more than P11 per share. It was alleged by Harden of Balatoc that the Benguet Mining Co held shares of stock in another mining corporation, the Balatoc Mining Company, in violation of a prohibition against mining corporations from owning stock of another mining corporation in the old Corpo law. The shareholders of Balatoc sued Benguet Mining to annul stock certificates of Balatoc issued ifo Benguet and to recover money earned from the transaction. TC dismissed complaint. CHAPTER XI12 Ellingwood is a preferred SH of the Wolfs Head Oil Co. At a SH meeting, the corporation was in default in the declaration and payment of dividends for 2 years on the PS. The AOI provides that PS holders are entitled to cumulative dividends, and gives exclusive voting power to holders of CS. PS holders have no voting rights, but is the corporation is in default in the payment of dividends, the majority PS holders shall have an election to exercise the sole right to vote for the election of directors and all other purposes, to the exclusion of the CS holders, until the corporation declares and pays dividends for a full year on the PS. Thereafter the right to vote shall revert to the CS holders. Ellingwood contends that the clause until the corporation pays for a one year period dividends on the PS restricts the above provision in the AOI as to the duration of time when PS holders shall have the right to vote. TC ruled that PS were entitled to vote at the SH meeting. The Big Bend Co. is a real estate business concern. It amended its articles, stipulating that holders of PS are entitled to receive cumulative dividends, such that if in any year dividends shall not have been paid, the deficiency shall be paid before dividends are declared or paid upon the CS. It also provides: that out of any surplus profit remaining after payment of full dividends on PS for all dividend periods and after full dividends have been paid in full, then dividends may be paid

Janz Hanna Ria N. Serrano

perfectly valid and enforceable, especially so if the donation is not merely executory but consummated. The defense of ultra vires cannot be set up against completed or consummated transactions. An ultra vires act may either be an act performed merely outside the scope of the powers granted to the corporation by its AOI or one which is contrary to law or violative of any principle which would void any contract. A distinction has to be made with respect to corporate acts which are illegal and those merely ultra vires. The former are contrary to law, morals, public order or policy, while the latter are not void ab initio, but merely go beyond the scope of the powers in the AOI, and which renders the act merely voidable and thus ratifiable by the stockholders. Although the contract between the two mining companies was illegal for contravening the old Corpo Law, the Legislature, in adopting such a provision had the intention that public policy should be controlling in the granting of mining rights. The violation in this case was of such a nature that it can be proceeded upon only by way of a criminal prosecution, or by action quo warranto, which can be maintained only by the State. Insofar as the parties are concerned, no civil wrong had been committed between them, and if public wrong had been committed, then the directors of Balatoc Mining and Harden were the active inducers of that wrong. The contract has in fact been performed on both sides, and there is no possibility of undoing what had been done. Thus even where corporate contracts are illegal per se, when only public or government policy or interests are at stake and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original contractual expectations. The AOI of the company evidences an intention to make provision for the protection of PS holders. When a dividend for a full year is paid on PS, the sole right to vote reverts to the CS holders, notwithstanding that dividends for 2 years are still due on PS. It clearly appears therefore that when the annual meeting of the corporation was held, dividends were accrued and unpaid on the PS, thus the company was in default, and therefore the PS holders were entitled to vote for the election of directors and all other purposes as stipulated in the AOI.

Harden et al v. Benguet Consolidated Mining Corporate Powers

Ellingwood v. Wolfs Head Oil Refining Preferred stocks: as to voting rights

Hay v. Hay Preferred stocks: preference upon liquidation

The contract stating the rights of the PS has a double aspect. The provision on annual dividends payable out of the surplus profits was founded on the hope and prospect of a profitable business. Such dividends could be paid by a corporation financially successful. There can be no dividends declared by a corporation in financial distress. But if there were provision for the rights of PS holders even in the event of a business disaster resulting in voluntary winding up or dissolution of



Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
to CS; and in the event of any liquidation of the corporation the holders of PS shall be entitled to be paid in the full the par value thereof, and all accrued unpaid dividends thereon before any sum shall be paid to any assets distributed among the holders of CS. No creditors are involved. No dividends on cumulative PS have been declared or paid. No surplus profits are available with which to pay dividends. A plan of liquidation, distribution, and dissolution of the corporation was adopted. It appears that the net assets were sufficient to redeem the PS at par, but if the PS holders received the promised dividends per the amended AOI, assets instead of surplus profits would be used. The result will be that the CS holders will get no part of such assets. The liquidating trustees, being in doubt as to who was entitled to receive the assets upon liquidation after redemption of the PS, sought a declaratory judgment from the court. It is contended that the phrase all accrued unpaid dividends means that before there can be a dividend, there must be surplus profits, and that since none ever existed, the right to the dividends never accrued and therefore none are payable. A counterargument is raised that the provisions of the amended AOI relate to the payment of dividends to PS holders out of surplus profits while the corporation is a going concern, but that it authorizes payment of accumulated and unpaid dividends out of assets upon liquidation of the corporation, even though there is no surplus profits available.

Janz Hanna Ria N. Serrano

the corporation, they would be entitled to receive in full both the amount of their shares and the unpaid dividends accrued. In this case the words of preference were designed to be operative even under conditions of adversity. The advantages of holders of PS are not restricted to conditions of prosperity, but general in scope and intended to be operative in all the hazards of business. In the present case, the holders of PS are entitled to both the par value of their stock and to dividends which have not been declared or paid but which would have been so, had the company experience surplus profits. An investor places his money in cumulative PS because it has a guaranteed dividend and certain preferences, as set forth in the stock agreement. If this agreement gives preferences as to dividends in the liquidation proceedings, the stock would normally be considered as a better business risk. The clause unpaid dividends accrued would thus mean that it gives preference to holders regardless of any consideration of profits or surplus. Dissent: Differences of opinion usually arise when on liquidation, PS holders sought to have a preference in the distribution of assets to reimburse them, because the corporation may not have earned any net profits out of which dividends can be paid. Two schools of thought: (1) a dividend can come into being and exist only by affirmative declaration of the corporation, and only if there is surplus profits. No surplus profits, no right to the dividends accrues, and thus cannot be demanded in liquidation; (2) dividends, if not regularly paid out of available earnings, may be amassed, whether earned or not, at regular dividend rates, and may be paid out of assets when the corporation is liquidated if the AOI so provide. It is within the power of the legislature to prescribe that corporations may issue certificates in the form of certificates of PS, making the holders creditors of the corporation as well as SHs, and giving them a lien upon the corporate property with a priority over other creditors. This is not ordinary PS, nor technically PS at all. It is sui generis, not governed by the ordinary rules. The preferences given the holders of the PS in this case were not authorized by statute when made. The stock was not statutory PS of the kind described. PS may be issued in such a way as to make the certificates thereof merely evidence of indebtedness and the holders creditors and not SHs. Here all facts and circumstances characterize the PS issued by the corporation as PS, and not bonds. SHs voted increases in capital stock by the creation of PS. The certificates delivered to the holders of the bonds exchanged for it designated the stock as PS. The holders had the right to vote. The certificates contain every essential feature of a certificate of PS and none of a contract of indebtedness. By surrendering their bonds, and taking in lieu thereof PS, the bondholders ceased to become creditors and became mere SHs. Those who have no made the exchange are entitled to the security of the mortgages, excluding the illegal conversion agreements. The PS are not entitled to share in the assets of the corporation until all creditors are paid in full. A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness, and is thus not a credit. SHs are not creditors of the corporation. The capital stock of a corporation is a trust funds to be used for the security of the creditors of the corporation, who deal with it on the credit of the

Augusta Trust Co. v. Augusta Hallowell Preferred stocks: preference stockholder is not a creditor

Augusta Railroad had outstanding bonds secured by mortgage. These bonds gave the holders the right to convert into preferred stock of the company. The corporation contends that the certificates of PS issued in exchange for bonds were in fact certificates of indebtedness and not stock.

Garcia v. Lim Chu Sing Nature of Subscription Contract

Lim Cuan Sy is the debtor of the Mercantile Bank of China, by virtue of a trust account with the bank, in the form of trust receipts guaranteed by CMs and by Defendant Lim Chu Sing as the surety of Lim Cuan. Lim Chu is also a SH of the bank iao P10000. When the obligation became due, the bank foreclosed the CMs


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
without the knowledge of the surety Lim Chu. The bank also required Lim Chu as surety to execute a PN, where in the event of Lims default in payment of any installment as they become due, the entire amount or unpaid balance becomes due and demandable. Lim leaves a balance of P9,105.17. The bank is under liquidation at the time of the action. Case involves a contract entered into by Wallace and the promoters of the Eclipse Pocahontas Coal Co. Wallace was to transfer and assign an option for a lease to the promoters and from the promoters to the corporation, in exchange for money to pay for the purchase price for the lease, and once the corporation is up and running, Wallace was to have a 1/5 interest in the property fully-paid up, and a 1/5 interest in the corporation fully paid up. Wallace was also to be entitled to 50 shares of the corporation, but only 5 shares were issued to him. Wallace alleged that the corporation and its promoters failed to perform their part of the contract. TC ruled that Wallace was to recover a little over $1000 from each of the defendants, or a total of $4300, which the court found to be the value of 43 shares which he had been deprived, being 1/5 of the shares issued less 5 shares delivered to him. The corporation was not held liable. Wallace contends that he was erroneously limited to money decrees against the promoters and seeks a judgment against the entire property and plant of the corporation as a trust therein his 1/5 undivided interest or a judgment to order the issuance and delivery of 43 additional shares, or a judgment for the actual, not par value of the shares. Bayla et al are SHs who file an action to recover certain sums of money which they had paid to the corporation on account of shares of stock they individually agreed to take and pay for under certain specified conditions. The action is based on a resolution by the board of Silang Traffic Inc. The resolution revokes the rescission of the agreement. Silang argues that the resolution does not apply to Bayla because on the date thereof the subscribed shares had already automatically reverted to the corporation, and the installments paid had already been forfeited, without need for demand, and that the resolution itself had been revoked. TC ruled ifo Silang Traffic, invoking the ruling in Velasco v Poizat that a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for its shares, and any agreement to this effect is invalid. CA affirms. The parties, TC and CA treated the agreement as a contract of subscription to the capital stock of Silang Traffic. It should be noted that the agreement is entitled, Agreement for Installment Sale of Shares in the Silang Traffic Co. Inc, and that while the purchaser is designated as a subscriber, the corporation is described as seller. The agreement took effect long after incorporation of the company.

Janz Hanna Ria N. Serrano

capital stock. SC ruled that Lim Chu not being a creditor of the Bank, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation. Promoters are indeed solidarily liable to Wallace for the stock to which he is entitled, and so is the corporation. The corporation and the other subscribing SHs accepted and benefited from the contract with Wallace. Thus, not only did the corporation have notice of Wallaces right but all the SHs of the corporation participating in the 1st SH meeting of the corporation had notice that Wallace had at least some interest or claims based on his contract. Wallace is definitely a subscriber to the stock of the corporation. His contract was to sell or convey to the corporation the leasehold and accept payment in fully paid up stock to the value of the property leased when fully equipped for the business purposes of the corporation. Being entitled to this amount of stock easily ascertainable when the equipment was completed, he became entitled to the stock, and a court of equity can compel specific performance to deliver the shares to him. One who has paid for his subscription may sue in court to compel the issuance of proper certificates therefor. The TC was therefore wrong in limiting Wallace to a money decree severally against the promoters and not including the corporation. I: W/N the contract in question is a subscription or a contract of sale. H: Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its terms and intention of the parties. A subscription to a stock in an existing corporation is, as between the subscriber and the corporation, simply a contract of purchase and sale. Thus the terms of the contract indicate that they are contracts of sale and not of subscription. A subscription is the mutual agreement of the subscribers to take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual and the corporation to buy shares at a stipulated price. Likewise, the rule that the corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for his shares, is inapplicable to a contract of purchase of shares. The contract being one of purchase and not subscription there is no legal impediment to its rescission by agreement of the parties. The rescission was made for the good of the corporation and in order to terminate the pending civil case. Since the civil case was eventually dismissed, and that the purchasers of stock would be able to benefit by the resolution. It would be an unjust discrimination to deny the same benefit to Bayla. There is also no intimation that the corporation is insolvent, or that the right of any creditor was prejudiced by the rescission. I: W/N under the contract, the failure of the purchaser to pay any of the installments automatically gave rise to the forfeiture of the paid installments. H: the contract did not expressly provide for automatic forfeiture and cancellation without necessity of demand. Under the CC persons obliged to deliver or do something are not in default until the amount the creditor judicially demands the same, unless the obligation or the law expressly provides that demand shall not be necessary or that by reason of the nature and circumstances of the obligation it shall appear that the designation of the time when the thing is to be delivered or

Wallace v. Eclipse Pocahontas Coal Co. Pre-incorporation Subscription

Bayla et. al. v. Silang Traffic Co. Post-incorporation subscription


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

service rendered was the principal inducement to the creation of the obligation. The nature of a contract covering unissued shares after incorporation was either a subscription contract or a purchase of shares of stock, depending on the terms of the agreement and intent of the parties Subscription agreements are mutual agreements among subscribers to take and pay for the stock of a corporation, and it is not possible for SHs to withdraw from such an agreement without the consent of the other subscribers Purchase agreements are independent agreements between the individual and the corporation to buy shares at a stipulated price GR: preemptive right is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. The theory is that when a corporation at its inception offers it first shares, it is presumed to have offered all of those which it is authorized to issue. The original subscriber is deemed to have taken his shares knowing that they form a definite proportionate part of the whole number of authorized shares. When the shares left unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. A vote to increase the capital stock, if it was not the creation of new and disjointed capital, was in its nature an agreement among the SH to enlarge their shares in the amount or in the number of the extent required to effect that increase. If the right claimed by Stokes was a right of property belonging to him as SH, he could not be deprived of it by the joint action of the other SHs and of all directors and officers of the corporation. He has an inherent right to his proportional share of any dividend declared, or of any surplus arising upon dissolution, and he can prevent waste or misappropriation of the property of the corporation by those in control. Hence the power of the individual SH to vote in proportion to the number of his shares is vital and cannot be cut off or curtailed by the action of all other SHs even with the cooperation of the other directors and officers. The ownership of stock is in the nature of an inherent but indirect power to control the corporation. The stock, when issued ready for delivery, does not belong to the corporation, but is held by it with not power of alienation, and in trust for the SHs, who are the beneficial owners and become the legal owner upon paying therefor. The new stock issued by the corporation did not belong to it, but was held in trust for the SHs. In this case, the new stock came into existence through the exercise of a right belonging wholly to the SHs. As the right to increase belonged to them, the stock when increased belonged to them also, as it was issued for money and not for property or for some other purpose other than the sale for money. By the increase in stock the voting power of Stokes was reduced , and while he consented to the increase he did not consent to the disposition of new stock which belonged to them. In other words, it was a partial division of property of the old SHs. The corporation cannot dispose of the shares to strangers against the protest of any SH who insists that he has a right to his proportion. Otherwise the majority

Datu Benito v. SEC The Preemptive Right to Shares: Waiver of Preemptive Right

Stokes v. Continental Trust Co. The Preemptive Right to Shares

Benito subscribed to 460 shares of the Jamiatul Philippine-Al Islamis Inc. The corporation increase its capital stock, with an additional issuance of worth P110,980.00. Benito files a complaint with the SEC alleging that the issuance was made in violation of his pre-emptive right to the additional issue and that the SHs of record were not notified of the meeting. SEC ruled that the issuance was valid, and that his preemptive rights are inapplicable. H: Issuance is not invalid even without notice to the SHs. The power to issue shares of stocks is lodged in the board and no SH meeting is necessary to consider it because additional issuance of shares does not need SH approval. Stokes is one of the original SHs of Continental Trust Co, owning 221 shares at the time of the controversy. Blair & Co. proposed that if the company decides to increase the capital stock, they would purchase the new shares at a higher price, and acquire the right to nominate their people to the board of trustees. The SH were informed of the Blair offer, and Stokes made his demand to exercise his preemptive right. Stokes at the SH meeting for the purpose of increasing the capital stock, demanded the right to subscribe for 221 shares of the new stock at par, but was refused. As a result, he now has only voting power that he had before, because the number of shares had been doubled while he still owns 221. After the sale to Blair, Stokes renewed his demand but was again refused. At this time the stock rose in value, from 450 to 550 to 750. Stokes sued. TC ruled that Stokes had the right to subscribe, and was entitled to recover the difference between the market value at the time of increase and its par value. CA reversed.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

could deprive the minority of their proportionate power in the election of directors and of their proportionate right to share in the surplus, each of which is an inherent, preemptive, and vested right of property. It is inviolable and can neither be taken away nor lessened without consent or a waiver implying consent. A share of stock is a share in the power to increase stock, and belongs to the SHs the same as the stock itself. When that power is exercise, the new stock belongs to the old SHs in proportion to their holding of old stock, subject to compliance with the lawful terms upon which it is based. A SH has an inherent right to a proportionate share of a new stock issued for money only and not to purchase property for the purposes of the corporation or to effect a consolidation, and while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued at a fixed price not less than par and he is given the right to take at that price in proportion to his holding, or in some other equitable way that will enable him to protect his interest by acting on his own judgment and using his own resources. After the price was fixed it was the duty of the corporation to offer him his proportion at that price, for it had notice that Stokes had not acquiesced in the proposed sale of his share, but wanted it for himself. The directors were under the legal obligation to give him an opportunity to purchase at the price fixed before they could sell his property to a third party, even with the approval of a large majority of the SHs. By selling to strangers without thus offering to sell him, the corporation wrongfully deprived him of his property and is liable for such damages. The preemptive right of SHs are said to be inherent in their stock ownership. The SHs of a corporation have a preferential right to purchase new issues of its shares, to the proportional extent of their respective interests in the capital stock then outstanding. The right adheres in stock ownership as an essential means of enabling a SH to maintain the existing ration of his proprietary interest and voting power in the corporation. In transactions involving the acquisition of property by corporations in exchange for shares of stock, the determining consideration to the owners of the property may be the advantage of sharing as SHs in the profits of the corporation with which they are contracting. In this case, the preemptive rights of Thom et al are recognized and protect by the amendment to its AOI. In declaring the right as to sales of stock for cash, and in restricting it as to issues of stock for accomplishing merger or acquisition of property, the amendment is valid. Existing SHs are the owners of the business, and are entitled to have the ownership continued in the same proportion. Therefore, when additional stock is issued, those already having shares, are held to have the first right to buy the new stock in proportion to their holdings. This is the preemptive right. An exception would be where the stock about the be issued is part of the original issue. This is based on the fact that the original subscribers took their stock on the implied understanding that the incorporators could complete the sale of the remaining stock to obtain the capital necessary to start the business. The exception to the exception would be where conditions have changed since the original issue.

Thom v. Baltimore Trust Co. The Preemptive Right to Shares

Thom, owner of 6416 of 70000 shares, is a SH of the Baltimore Trust Co who wants to exercise his preemptive right to purchase a due proportion of a supplemental issue of its capital stock. The Baltimore Trust Co wanted to merge with the National Union Bank of Maryland, and that the company would issue 150000 shares at $112 to acquire the 10000 shares of National Union Bank at $168/share, and would require delivery of 70% of the stock. A resolution was passed to increase the capital stock of Baltimore, which also stipulated that the SH shall have the pro rata preferential right to subscribe at such price and terms as the board may fix. In any additional issuance, the directors may issue without preferential subscription rights and on such terms as the board may deem proper. Thom protested and voted against the merger, alleging the corporation disregarded the proportional purchase right of SHs. Derivative suit by SH Crothers to set aside the issuance of stock dividends to 4 SHs and ordering them to repay Ross Transport Inc the dividends received on stock declared to be illegally issued. The corporations business is to operate a fleet of buses to service the transport needs of employees of the Triumph Explosives Inc. The company was an immediate financial success. It was engaged in a special business, of which it had a monopoly. The company then issued new stock to the family of the directors and the president, and had the effect of increasing the outstanding stock. There was no meeting, no notice, and no offer to the other SHs. The company declared dividends 3 times, and authorized salary payments to the officers. The benefit of the dividends would not only increase the value of the

Ross Transport v. Crothers The Preemptive Right to Shares


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
stock, but the first two declared dividends would pay back all the subscribers had invested, leaving any future earnings and distributions pure profit. Under these circumstances, they took the opportunity they thought they had to increase their investment. Crothers et al contend that changed conditions make it unnecessary to use the remaining unsold stock to obtain capital.

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Trustees and directors of corporations cannot purchase, directly or indirectly, at their own sale. Such a transaction is entirely voidable at the option of the party interested. The transaction may not be ipso facto void, but it is necessary to establish that there had been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation. In this case, the directors have not shown the company needed the money so badly and was such in a financial condition that the sale of additional stock to themselves was the only way the money could be obtained. On the contrary, the corporation appears to be in a very good financial condition. The sale must be set aside as a constructive fraud upon the other SHs. At the time of the supposed ratification, the principal must have been fully aware of every material aspect of the transaction, the real value of the subject of the contract, and his act of ratification must have been an independent and substantive act founded on complete information and of perfect freedom of volition. The warrants gave the holders the privilege, unlimited in time, to purchase 40,000 authorized but unissued shares. Had the warrant holders exercise their option, they would have acquired a definite percentage of the CS. A stock dividend does not change the proportional interest of each SH in the corporate enterprise; it changes only the evidence which represents that interest. It is a mere watering of outstanding shares. If the corporation were at liberty to declare stock dividends without making provision for warrant holders, the percentage of interest in the CS capital of the corporate enterprise which the warrant holders would acquire could be reduced to practically the point of extinction. The privilege the warrant holders originally had of acquiring a definite proportional interest in the CS would be lost without recourse unless their contract with the corporation contained some provision to protect it. By this covenant the corporation recognized the possibility that a stock dividend might be declared and paid on outstanding shares before the warrants had been exercised, and promised in that event to deposit with the trustee stock certificates representing that proportion of dividend shares which the shares subject to the warrants bore to all the CS, and that the trustee would deliver such dividend shares without additional consideration. I: W/N payments made to the holders of Debenture stock of the Jordan Company were payments of interest on outstanding obligations or dividends paid on invested capital. H: The answer rests on what the payments actually are, and not what the payments are called. Although there is no precise formula, the usual factors considered are the ff: (1) treatment by the parties; (2) maturity date and right to enforce collection; (3) rank/preference during dissolution; (4) uniform rate of interest or income payable; (5) participation in the management and right to vote. (1) voting rights: if security holders had such rights, this would strongly indicate that the securities were stocks; the absence or extremely limited rights is of little probative value, because it is common both to bonds and preferred stock (2) treatment by the parties: in this case the company itself treated the debenture stocks as an obligation and the payments as interest. No evidence as to how the holders treated the same. (3) Preference/rank in dissolution: GR holders of obligations are secured or

Merritt-Chapman & Scott Corp. v. NY Trust Co. Debt Securities: Convertible Securities; stock options

Jordan v. Allen Debt Securities: Hybrid Securities

Stock purchase (option) warrants were issued by Merritt-Chapman (MC) in bearer form. The bearer would be entitled to purchase fully-paid and nonassessable shares of CS, no par value, at $30/share. To insure that the stock to be purchased under the warrants would be available, the trust deed requires that stock certificates for an aggregate amount of 40,000 shares be delivered to the trustee and made the Trust co the agent of the corporation to receive the purchase price and deliver the stock certificates. The board of the corporation issued a resolution declaring a stock dividend iao 40%/shares of no par CS on each legally issued and outstanding share of CS. The resolution fixed the price at $20/share, and directed the warrant holders outstanding and to the trust company the 60day notice required incase the corporation shall pay any stock dividend upon the outstanding CS. The corporation contends that the warrant holder must exercise his warrant before a certain date in order to share in the dividend. The trustee contends that the corporation must first deposit with the trustee, stock certificates in the amount equal to 40% of the certificates now on deposit with the trustee, and that the holder who wishes to exercise the warrant must pay the basic purchase price before he will be entitled to receive 1.4 share. The Jordan Company issues Debenture Stock. The company believes that the pay-outs made on the debentures were actually interest, and thus entitling them to deductions from their taxable income. The IRS claims the pay-outs were dividends to the holders.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

general creditors of the corporation and rank as such on dissolution. Here the holders ranked ahead of the other SHs but inferior to general creditors. One of the most important considerations is whether the right to share in the assets of the corporation in case of dissolution is subject to the rights of creditors. If subject to such rights, there is a strong presumption that the interest in question is that of a SH (4) Payment out of profits: the debentures provide for payment of interest at a prescribed rate to paid out of the profits only. This fact loses significance when considered in conjunction with the provision that holders should rank inferior to general creditors Maturity date and right to enforce payment. Of utmost significance. The existence of a fixed maturity date for the principal sum, together with the right to enforce payment as debt in case of default, is the most essential feature of a debtor and a creditor as opposed to a SH relationship. One of the most fundamental characteristics of a debt is a definite determinable date on which the principal falls due. The obligation in the debenture stock clearly had no maturity date. There was no time when the holders could demand their money; they were at the mercy of the companys fortunes and payment was merely a way of distributing profit. Although the officers considered the debenture stock as matured after 20 years, mere opinion of corporate officers cannot override the provisions of the certificates themselves and the charter and by-laws. It is to be noted that when the issue was retired, after officers considered it matured, they retired it at a premium. Payment of premiums is certainly more consistent with the retirement of stock than with payment of past due obligations. The contention of the officers that the term of the debenture matures upon termination of corporate existence is also untenable. Termination of corporate existence cannot be considered the maturity of the debenture stock as it would not be a fixed or determinable date set in advance, but could be constantly moved forward simply by corporate action. the modifications were made in strict compliance with the provisions of the trust deed, which did not provide for notice to the bondholders. The changes were approved by 2/3 of the bondholders. The rights of the bondholders are to be determined by their contract and courts will not make or remake a contract merely because one of the parties may become dissatisfied with the provisions. There is no question that the provisions in the trust deed and the bonds were legal provisions which violated no principle of public policy or private right. No notice was required so far as the parties to the contract were concerned. Their rights must be determined by their contract and not by any equitable doctrine, and notice to the other bondholders could have served no possible purpose. There is no substantial evidence warranting BF, fraud, or corruption on the part of the Joneses. The changes made in the provisions of the trust deed were made before Bloom acquired her bonds, and were in fact past due when she purchased them. Bloom, with notice of the changes made, and with knowledge that she had no notice of the application for the changes, made no effort to repudiate it until she brought the suit, but accepted interest payable under the provisions of the contract. Issue: WON there was any CS voted for the B Ticket at the 1929 election that was

Aladdin Hotel Co. v. Bloom Debt Securities: The Trust Indenture

Triplex Shoe Co. v. Rice & Hatchins


Bloom is a minority bondholder of bonds issued by the Alladin Hotel Co. The bonds are secured by a deed of trust by which was mortgaged certain real estate, with the Mississippi Valley Trust Co as trustee. The deed of trust contained provisions empowering bondholders of not less than 2/3 to modify and extend the date of payment of the bonds. The Joneses are majority bondholders as well as the majority SHs of the company who entered into an agreement with the company to extend the maturity date of the bonds. The changes were certified by the trust company and has the consent of holders of 2/3 the principal amount of the bonds. Bloom objects to the change, contending that these were invalid for not being made in GF and that it was not for the benefit of the minority bondholders and deprived them of their rights and property. She added that the Joneses acted in a dual capacity as trustees for the other bondholders, being the majority, and therefore must not act detrimental to the rights of the other holders. She also added that the modifications are void for not giving notice to the other bondholders. TC held that the changes did not benefit the minority bondholders and that the bondholders were entitled to notice. But it held that the decree should be limited to a money judgment only. The hotel appeals. CHAPTER XII13 Triplex authorized capital stock totaled $150K, broken down into $75000 PS (par


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Liability on Watered Stocks value $100), and $75000 no par CS. Directors meeting: Albert Dillman Pres; Solly VP and Sec, and Louis Dillman Treasurer .. agreed to receive lower compensation and in consideration of other services to be rendered and for managing the co., additional stocks were to be given as follows: A Dillman 376 CS, L Dillman 114 CS, Solly 50 CS. (Solly transferred stock to 2 Dillmans). An amendment was proposed, 2375 PS and 175 no-par CS. Rice and Hutchins purchased 249 shares of PS and 83 shares CS (as bonus). The Dillmans own 540 CS shares. During election of directors, the B ticket of the Dillmans were elected. Rice questions the election, saying the there was no consideration for the CS at the incorporation of Triplex. legally issued and outstanding at that time?

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H: No, there was none. (Chancellors decision: No outstanding Cs and PS stocks were voted). The no par value CS issued before and after the amendment was invalid because consideration was never fixed. The certificate must state the total number of shares authorized that are without nominal or par value. The provision in the articles that a certain part of capital is in shares of CS no par and without stating the number of shares is not authorized and is meaningless in the eyes of the law. Thus the CS in the original AOI was invalid stock. The consideration of the shares issued to Dillman were alleged to have been for services rendered in organizing the company, and in agreeing to serve at a smaller compensation that they would get otherwise. Clearly the consideration mentioned, consisting of services, was not of such as the law contemplates. The services do not appear to be essentially different or greater than the services ordinarily rendered in the promotion and organization of the corporation. (also, services still to be rendered are not lawful consideration) -- Hence, no proper and lawful consideration was for the CS at the 1st Board Meeting. the contract is enforceable No declaration in the consti prohibition that a transaction in w/c something other than money, labor or property shall be received in payment of the stock is utterly void. If a security is to be accepted in payment for the stock, e.g. a subscribers note, w/c is not property for such purpose, the Consti doesnt say that it, or the stock issued for it, shall be void. The word void is used only once and has reference to the distinct clause w/c says that all fictitious increase of stock or indebtedness shall be void. --the affairs of the corporation in this case are in the hands of a receiver who represents not only the SHs, but also the creditors, and the rights of creditors have now intervened. The constitution of Texas prohibits such a transaction and makes it unlawful . It was aimed against his acquiring stock except upon lawful payment. It was designed for the protection of the corporation and its creditors. In such a case as this where the SH has paid nothing for his stock and deceived the public, he cannot be permitted to take shelter under the constitutional prohibition, which protects the corporation and its creditors. --Purpose is to give integrity to the corps capital. It is to prevent false pretense at its hands, and avoid imposition upon the public. None of these objects would be promoted by declaring a note given by a subscriber for stock subscription in the hands of a bonafide stockholder. Court found that only 5/12 of the par value had been paid. At the lower court, it ruled for the plaintiff on the theory that it made no difference WON the

McCarty v. Langdeau Liability on Watered Stocks

Langdeau is the receiver of Estate Life Insurance Co, and McCarty is the President of the company. Langdeau sues McCarty for the unpaid balance of his stock subscription, iao $387,380 (he paid only $20) representing 19, 370 shares of no par stock. The contract between the corporation and McCarty was that he would: -- pay a minimum of $20/month for the balance not exceeding 30 months, evidenced by a note, payable w/o interest. --that the company will have a lien on his shares until the note is paid. -- He was to receive as much stock as his actual payments , but the company would be able to vote the stock while the contract is in force (to be voted by McCarty) -Yet despite his default (only made a total payment of $8,120), the company did not elect to terminate the contract. He claims that the contract is void for it violates the constitution of Texas (no corp. shall issue stock or bond except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.)

Rhode v. Dock-hop Co. Liability on Watered Stocks

Judgment creditors of a corporation sues the original SHs or incorporators of the Dock-Hop Co, seeking to collect on the unpaid balances on the par value of their


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
shares. Complaint alleged that only 25c on the dollar had been paid in on the par value of their shares (watered stocks). Defendants deny however, that they are subscribers, or that the full value of their stock had not been paid

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defendants were subscribers: the mere fact that that they were SHs and the shares they held , although issued as fully paid were in fact issued for property w/c the directors didnt believe was equal in value, were enough to warrant judgment against them. Where a person accepts the ownership of stock which purports to be fully paid, it cannot be said of him that he accepts the stock and enters upon the relation of SH for the corporation. On the contrary, he accepts the ownership of the stock and enters upon the relationship of SH with the contrary understanding. What then is the principle upon which the holder of watered stock is under any circumstances held obligated to supply substance and make good what it pretended the corporation received by did not? The SH is held upon the principle that one giving credit to the corporation is entitled to rely upon its ostensible capitalization as the basis for the credit given, and that, when the corporation issues watered stock, and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves the misleading of subsequent creditors, and whether done with that purpose actually in mind or not, is at least constructive fraud upon such creditors. In other words, the essence of the right of the creditor to brush aside the issuance of stock as fully paid, and to show that it was not such and to compel payment, is that its issuance as fully paid was as to him a fraud. --the transferee of watered stock who takes it in ignorance of its real character is not required, even at the suit of the of a creditor of the company, to pay anything more upon it. Campos: The innocent purchaser of watered stocks is thus treated like the holder in GF of nego instrument, based on the policy of encouraging the free transferability of shares as a means of enhancing the growth of commerce and industry. Apparently the remedy of the defrauded creditor would be against the original owner of the watered stocks. Poizat is still liable on his subscription. A stock subscription is a contract between the corporation on one side, and the subscriber on the other. It is a rule that a subscription for shares of stock does not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the part of the subscriber. A stock subscription is a subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws. There are two (2) remedies for the enforcement of stock subscriptions: (1) the first is a special remedy which consists in permitting the corporation to put up the unpaid stock for sale, and is merely a remedy in addition to that which proceeds by action in court; (2) the other is an action in court, which exists even though no mention thereof is made in statute. Under the Insolvency Law, the assignee of the insolvent corporation succeeds to all the corporate rights of action vested in the corporation prior to its insolvency, and the assignee therefore has the same freedom with respect to suing upon a

Velasco v. Poizat How Payment of Shares Enforced

Velasco is the assignee in the insolvency of Philippine Chemical Product Company and is seeking to recover from Jean Poizat the unpaid subscription made by him to the stock of the corporation. Poizat, one of the incorporators and once the treasurer and manager of the corporation, subscribed for 20 shares and paid in the par value of 5 shares (P500). While in this capacity he called in and collected all subscriptions except 15 shares subscribed by him and another 15 by Jose Infante. 2 resolutions were adopted by the board: (1) proposal that the directors or SHs make good by new subscription the 15 shares w/h had been surrendered by Infante, and that the latter would be released from his obligation to the corporation; (2) as to Poizat, who was absent, he should be required to pay the amount of his subscription upon the 15 shares he owes to the corporation. Poizat, in a letter states that he was also to be relieved from his subscription, and that he prefers to lose the whole of the 25% rather than continue investing more money


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
in a ruinous proposition. Soon the company became insolvent, and Velasco as assignee sues Poizat for his unpaid subscription.

Janz Hanna Ria N. Serrano

stock subscription as directors themselves would have had under Sec 49 above cited. Another reason: When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the assignee in court. It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of the failure of officers to perform their duty in making the call; and when the original mode of making the call becomes impracticable, the obligation must be treated as due upon demand. As to the Infante release, it is not prejudicial to the right of the corporation or its assignee to recover from Poizat, although in releasing Infante, the board overstepped its bounds and should still be liable on shares that were not taken up and paid for by the corporation. Poizat continued to be liable on his subscription When insolvency supervenes and court assumes jurisdction to wind up, unpaid stock subscriptions become payable on demand and are at once recoverable in an action by the assignee in insolvency TC was correct that the law requires that notice of any call for the payment of unpaid subscription should be made not only personally but also by publication. The publication requirement is mandatory, and the reason is because it is not only to assure notice to all subscribers, but also to assure equality and uniformity in the assessment on SHs. Not only must personal notice be given in one of these matters, but the notice must also be published once a week, for 4 consecutive weeks in some newspapers. The court reiterated the ruling in Velasco v Poizat, where the corporation involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are immediately recoverable in an action instituted by the assignee. But when the corporation is a solvent concern, the rule is that the suit demanding for payment of unpaid subscriptions must be preceded by a call or assessment against the subscribers, and only then will there be a right of action. As to claim of Baltazar that Resolution 17 released him from obligation to pay, in order to effect the release, there must be unanimous consent of the SHs (here, 7 SHs were absent when said Res was made) . The GR is that a valid and binding subscription cannot be cancelled so as to release the subscriber from liability thereon without the consent of all the SHs. Furthermore, a subscription cannot be cancelled by the company, even under a secret or collateral agreement for cancellation made with the subscriber at the time of the subscription, as against persons who subsequently suebscribed or purchased without notice of such agreement. Exceptions: pursuant to a bona fide compromise, or to set off a debt due from the corporation, a release, supported by consideration, will be effectual as against

Lingayen Gulf Elec. Power Co. v. Baltazar How Payment of Shares Enforced

Baltazar subscribed for 600 shares (P100 par value) of Lingayen Gulf and paid P15000, plus another payment leaving a balance of P18500 unpaid. In a SH meeting it was agreed to call the balance of all unpaid subscribed capital stock, the first 50% payable within 60 days, remaining 50% payable within 60 days hence. All unpaid subscription after due dates of both calls would be subject to 12% interest. All remaining unpaid shares would revert to the corporation. Baltazar offered to withdraw completely from the corporation by selling out all his shares of stock. Another resolution (No. 17) was adopted rescinding the previous resolution because the corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. Yet another resolution (No. 4) was adopted to revalue the stock and assets of the corporation to attract outside investors. Although Baltazar was informed of the demand for payment the call however was not published in a newspaper of general circulation. Another demand was made upon Baltazar, who ignores the same upon the grounds that 1. action is premature because there was no valid call, and 2. granting there was a valid call, he was released from liability thru SH Res. Nos. 17 and 4. . The corporation sues. TC rules ifo Baltazar, holding that the resolution was null and void for lack of publication.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

dissenting SHs and subsequent and existing creditors. A release which might originally have been held invalid may be sustained after a considerable lapse of time. In the present case, the release claimed by the Baltazar does not fall under the exceptions referred to, because it was not given pursuant to a bona fide compromise or to set off a debt due from the corporation and there was no consideration for it. I: W/N under the by-laws the corporation may declare the unpaid shares delinquent or collect their value through another method. H: YES> The by-law also authorizes and empowers the board to collect the value of the shares subscribed and unpaid by deducting from the 70%, distributable in equal parts among the SHs, to be applied on the payment of the shares. It also authorizes the creation of a special emergency fund, applying the 70% of the profit on the payment of shares not fully paid. Thus it is discretionary on the corporation to do whatever is provided in the said article relative to the application of a part of the 70% of the profit distributable. It also shows that it is the board and not he delinquent subscriber that may and must judge and decide whether or not such value must be paid out of the 70% of the profit. It lies therefore, within the discretion of the board to make use of such authority. If the board opts not the make use of such authority, it has two other remedies to accomplish the same purpose, as declared by the Court in Velasco v Poizat: (1) put up the unpaid stock for sale; or (2) direct action in court. In this case the board elected to avail of the first remedy, and complying strictly with the requirements of law, the directors made use of the discretionary power granted by the law and declared that the payment of the subscription to 450 unpaid shares was due and demandable, and that said shares were delinquent. The Board has absolute discretion to choose which remedy it deems proper in order to collect the unpaid subscriptions Two other remedies: delinquency sale and action in court I: w/n the subscription is payable from the first dividends declared has the effect of relieving the subscriber from personal liability in an action to recover the balance H: Of course not. A corporation has the power to accept subscriptions upon any special terms not prohibited or contrary to law or public policy, provided it does not require the performance of corporate acts beyond the powers conferred, and do not constitute a fraud upon other subscribers, SHs, or creditors. If it is unlawful to issue stock otherwise than as stated it is self-evident that a stipulation in a stock subscription that obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock is illegal. This is discriminatory ifo the subscriber, to the detriment of the others. Nor has a corporation the power to receive a subscription such terms as will operate as a fraud upon the other subscribers or SHs by subjecting them to lighter burdens, or by giving greater rights and privileges, or as a fraud upon creditors. As a general rule, an agreement between a corporation and a subscriber, by which the subscription is not he be payable, or is to be payable in part only is illegal and void as in fraud of creditors or other SHs.

Da Silva v. Aboitiz & Co. How Payment of Shares Enforced

Da Silva subscribes for 650 shares (par value of P500) of Aboitiz. He pays only for 200 shares, as there are remaining 450 shares unpaid (P225,000). Thru a Res., the board declared and informed all subscribers and SHs that all shares unpaid by 31 May shall be declared delinquent and to be sold at a delinquency sale on the following June 16. Ad was published as announced in the notice. Da Silva sued Aboitiz Co., contending that in prescribing another method for payment of subscription different from that in the by-laws, the corporation had exceeded its authority. He claims that in Art 46 of the by-laws, all shares subscribed shall be paid out of the 70% of the profit obtained, to be distributed among the subscribers and said Res., violates the said by-law

National Exchange co v. Dexter How Payment of Shares Enforced

IB Dexter subscribed to 300 shares of CS Salmon & Co., which shall be payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until full amount of subscription has been paid. The subscription was initially paid P15,000, from a dividend declared by the company, supplemented by Dexters own money. Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on his subscription. The assignee of Salmon, National Exchange Co, sues Dexter to recover the balance. TC ruled ifo National Exchange.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

Campos: Besides assuring equality among SH, the law seeks to protect corporate creditors. Making payment of subscription dependent on the existience of profits or dividends would be contrary to the policy behind the law. As it is evident that there are other creditors of the corporation, the corporation has a right to collect all unpaid stock subscriptions and any other amounts due it. Subscriptions to the capital of the corporation constitute a fund to which creditors have a right to look for the satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription. A stock subscription is an existing liability from the time subscription is made. Thus the TC ruling is modified and that the corporation is ordered to credit Lumanlan P13840 against the judgment previous (P15109), and to issue to Lumanlan 300 shares of its capital stock upon payment of the difference of the amount (P1269).

Lumanlan v. Cura How Payment of Shares Enforced

Lumanlan subscribed for 300 shares (par value P50) of Dizon & Co., paying only P1500 of the P15000 par value of the shares. Creditors sued the company, and prayed for a receiver as it appears that the corporation had no assets except credits against those who had subscribed for shares of stock. Tayag was appointed receiver for the purpose of collecting the unpaid subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders Lumanlan to pay the corporation (plus interest). Pending Lumanlans appeal, he agreed to assume the obligation of the corporation to Valenzuela (P8,000), and that if he withdraws his appeal, the corporation would collect only 50% of the amount subscribed by him. Lumanlan then paid Valenzuela and was subrogated in place of Valenzuela (P11,840 incl. interest). Disregarding the agreement and notwithstanding payment made to Valenzuela, the corporation asked for the execution of the judgment in the previous suit and his properties in Tarlac were levied upon. BPI as creditor of the corporation intervenes as the assignee in the insolvency case of the corporation. Chua Soco subscribed for 500 shares (P100 par) of China Banking Corporation, paying and leaving a balance of P25,000. He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the shares of stock, and endorsing the receipt of the stock purchase). Chua Soco was also indebted to China Bank (P37,731.68), and upon default his interest in the 500 shareas was attached and the receipt seized by the sheriff. The attachment was levied after the bank knew of the fact that the receipt had been endorsed to Fua Cun. Fua Cun then sued, contending that by virtue of payment of the subscription price of the shares, Chua Soco in effect became the owner of 250 shares and sought to have his lien on the shares be declared to hold priority over the claim of the bank. China Bank argued that the interest of Chua Soco was merely an equity which cannot be made the subject of a CM. TC ruled ifo Fua Cun. Baltazar and Rose were incorporators of the Lingayen Gulf Electric Power Co. and subscribed to: Baltazar = 600 shares (paid 535 shares after transfers, owned 341 shares w/ cert. plus 65 shares w/o certificate) Rose = 400 shares (paid 375 shares w/ certs) leaving unpaid a certain portion thereof. It is the company practice to issue certificates of stock to its individual subscribers for unpaid shares of stock. Defendants Ungson et al are small SHs ( <100 shares) of the corporation, and are the majority of the board. Co-defendant Acena is the largest single SH with 600 shares and was responsible for election to the board of two of the 4 majority board members (Ungson Group). Baltazar was responsible for the election of the other 2 (Baltazar Group). Ungson Group which controlled the corporation passed 3 resolutions which threatened to expel the plaintiffs and prevent them from exercising their voting

Fua Cun v. Summers Rights and Obligations of Holders of Unpaid but Non-delinquent Stock

TC erred in holding that Chua Soco became owner of 250 shares. Fua Cuns rights consist in an equity of 500 shares and upon payment of the unpaid portion, he becomes entitled to the issuance of the certificate for 500 shares in his favor. As to the CM, the CM would not prevail over liens of third persons without notice; an equity in shares is of such an intangible character that is somewhat difficult to see how it can be treated as chattel and mortgaged in the same manner that the recording of the same will furnish constructive notice to third parties. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to person to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. As against the rights of fua cun, the bank had no lien unless by virtue of the attachment, but the attachment was levied after the bank had received notice of the assignment of Chua Socos interest to fua Cun and was therefore subject to the rights of the latter. I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the latter H: YES> The present case does not come under the principle in Fua Cun because it was the practice of the company since its inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. The present law requires as a condition before a SH can vote that his full subscription be paid in the case of no par value shares, and with respect to par value shares, the SH can vote the shares full paid, irrespective of the unpaid delinquent shares. A corporation may now, in the absence of provisions in their by-laws to the contrary, apply payments made by subscribers either as full payment for the corresponding number of stock or as payment pro-rata to each and all the entire number of shares subscribed. In this case, corporation chose to apply payments by the SHs to definite shares of stock and had full paid-up shares certificates for

Baltazar v. Lingayen Gulf Elec. Power Co. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
rights: (1) declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville of no value and cancelled the same; (2) all unpaid subscriptions to bear interest, and all payments to be credited to interest first, capital debt second, and ; (3) all stock declared delinquent on the accrued interest are incapacitated to avail of voting power. Baltazar and Rose sought to allow them to vote their fully paid-up shares and to declare the resolutions invalid. A compromise deal was executed, but enforcement by the TC was enjoined by the Ungon Group and asked for amendment. TC amended but was opposed by Baltazar. The Court then reversed the amending decision, ruling that all shares of the capital stock of the corporation covered by fully paid shares are entitled to vote in all meetings. Baltazar claims that once a SH has subscribed to a certain number of shares, although he has made partial payments, but is issued a certificate for the paid-up shares, he is entitled to vote the whole number of shares subscribed, whether paid or not. The corporation counters that under the doctrine in the Fua Cun case, a partial payment of a subscription does not entitle the SH to a certificate for the total number of shares subscribed by him, and his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. Po was an incorporator of Peers Marketing and subscribed to 80 shares (P100 p.v.) paying 25% of the amount of subscription. No certificate of stock was issued. --Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was the absolute and registered owner of the 20 shares sold. -- Nava requested the corporation to register the sale, but was denied because Po had not fully paid the amount of subscription. (was informed that Po was delinquent in payment of his subscription and that corp had the claim to his entire subscription of 80 shares). Nava filed a mandamus action to compel the corporation to register the shares in the books. TC dismissed petition. --Nava contends the ruling in Fua Cun is not applicable in affirming corporations refusal to register in the books the sale to him of 20 shares. Nava relies on the ruling in Baltazar v Lingayen Gulf Electric, which held that the corpo law requires as a condition before a SH can vote his shares that his full subscription be paid in the case of no par stock; but in par value stocks, the SH can vote his shares fully paid by him, only, irrespective of the unpaid delinquent shares.

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the payments. Its call for payments of unpaid subscription and its declaration of delinquency only affecting the remaining number of shares. Here the corporation applied the payments made to the full par value of shares subscribed, instead of the accrued interest. This being the case, the application of payments must be deemed to have been agreed upon by the corporation and the SHs and cannot now be changed without the consent of the SHs concerned. It would therefore result that a corporation may, upon the request of an interested SH, apply payments by them to the full par value of subscribed capital stock. Since it was the practice of the corporation to issue stock certificates to not fully paid subscribers, it may not take away the right to vote granted by the certificate Stock certificates may be issued for less than the number of shares subscribed for o Provided the par value of each represented by the certificate has been paid And it is not prohibited by the by-laws I: W/N the corporation can be compelled to enter in its books the sale made by Po to Nava of 20 shares H: NO>> The Nava transfer is not the alienation sale or transfer of stock contemplated in the old Law. As a rule, shares which may be alienated are those which are covered by certificates of stock. As prescribed in the corpo law, shares of stock may be transferred by delivery to the transferee of the certificate properly indorsed. However, that cannot be followed in the instant case because the 20 shares are not covered by any stock certificate in Pos name. Moreover, a corporation has a claim on the said shares for the unpaid balance of the subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less contestable. A corporation cannot release an original subscriber from paying for his shares without valuable consideration, without the unanimous consent of the SHs. There is no clear duty here on the part of the officers of Peers to register the 20 shares in Navas name. The court also ruled that there is no parallelism between Nava and the Baltazar case. In the latter, the SH-incorporator was the holder of a stock certificate, and the issue was whether the said shares had voting rights although the incorporator had not fully paid the subscription, which is not the issue in this case. There is no stock certificate issued to Po, and without itwhich is the evidence of ownership of the stockthe assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock certificate is essential for the protection of both the corporation and its SHs.

Nava v. Peers Mktg. Corp. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock

Nielson & Co. v. Lepanto Consolidated Mining Form of Dividends

CHAPTER XIII MR filed by Lepanto Corp which involves an agreement subsequently extended, as to the compensation of Nielson (a promoter?) which provides that he is entitled to

Under the Code stock dividends cannot be issued to a person who is not a SH in payment of services rendered. Nielson cannot be paid in shares of stock which


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
receive 10% of any dividends declared and paid by Lepanto. Nielson is not a SH of the corporation. During the extension period the corporation declared dividends worth P3M. SC ruled that Nielson was entitled to the 10% of the dividends paid and declared and Lepanto was ordered to issue and deliver to Nielson shares of stocks as well as fruits or dividends accruing to the same. Lepanto contends that payment to Nielson of stock dividends as compensation violates the Corporation Law.

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form part of the stock dividends of Lepanto. The understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends as the basis for determining the amount of compensation that should be paid to Nielson. R: Consideration for shares of stock: (1) cash; (2) property; (3) undistributed profits. A corporation may legally issue shares of stock in consideration of services rendered by a person not a SH, or in payment of indebtedness, which is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation, or part of the stocks issued when the increase in capitalization was properly authorized. In other words, it is the shares that are originally issued by the corporation and forming the part of capital that can be exchanged for cash or services rendered, or property if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalizationthese may be issued to a person already a SH. But a share of stock coming from stock dividends cannot be issued to one who is not a SH of a corporation. A stock dividend is any dividend payable in shares of stock of the corporation declaring or authorizing ita distribution of shares among SHs, as dividends. It is actually 2 things: (1) a dividend; (2) the enforced use of dividend money to purchase additional shares at par. When a corporation issues stock dividends, it shows that the corporations accumulated profits have been capitalized instead of distributed to the SHS or retained as surplus. Far from being a realization of profits, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from the surplus to the assets and are thus no longer available for actual distribution. It really adds nothing to the interest of each SH; the proportional interest remains the same. It is the civil fruits of the original investment, and to the owners of the shares go the fruits. Although Lepanto says that the value of the dividends declared should be the basis for determining the amount of compensation due to Nielson, it does not mean that the compensation should be taken from the amount actually declared as cash dividends to be distributed to the SHs. Otherwise there would be a dilution of the dividend that corresponds to each share of stock held by the SHs. GR: Capital of a corporation must not be impaired in any manner Exception: impairments involuntarily made through losses resulting from business operations. It is illegal to declare and pay dividends from other than a surplus consisting of an excess in the value of the assets over the aggregate of the liabilities and the capital stock. The object of this prohibition is to afford a margin of protection for creditors in view of the limited liability of the SHs, and to protect the interest of the SHs themselves by preserving the capital so that the purposes of the corporation will be carried out. The surplus must be a bona fide and not an artificial or fictitious one; it must be founded upon actual earnings or profits and not be dependent for its existence upon a theoretical estimate of an appreciation in the value of the companys assets. Such appraisals and conjectural valuations cannot be considered for the purpose of dividends because are subject to market fluctuations, and are merely

Berks Broadcasting v. Crammer Source of Dividends

Craumer et al together with one Landis (4 people), are the incorporators and directors of the Berks Broadcasting Company. The books indicate that the stock is fully paid (auth. Capital stock = $100K) , through cash ($5K each) and the fixing of a value of $80K upon an asset denominated Franchise and Promotion Expense. A year later, this was written off and in its place were substituted 1) $50K as an amount Due on Unpaid Stock Subscriptions -- (each SH paid $4.2K reducing the item to $23,300. Then it was cancelled altogether and was replaced w/ the entry Goodwill and Promo Expense) and 2) write-ups or increases in the valuation of fixed assets over and above depreciation costs, totaling $30K. Balance sheet showed assets in excess (surplus) of liabilities iao $2,545.94. However, the existence of that alleged surplus depended on the inclusion of the assets of the write-ups of $26K; otherwise, there would be a deficiency to the


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
extent of almost $24K. Directors sold their stock, and declared a series of dividends totaling $13K based on the earnings of the company of 12K+ plus the surplus. The corporation, now under the control of new SHs, sued the directors to recover the $13K which was allegedly unlawfully declared and paid out as dividends.

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anticipatory of future profits, and may never be actually realized as an asset of the company. It is thus clear that since the write-ups of $26,000 represented an unrealized appreciation in the value of the fixed assets, their inclusion in determining the existence of a surplus from which dividends might be declared was unlawful, and since when eliminated there would be not a surplus, but a deficiency in capital. ---Sir: so long as the assets (even if they appreciate in value) are not yet disposed, dividends cannot be declared based on the appreciated value (because it is still an expectancy). CAMPOS: Since our Corpo Code allows dividends only out of unrestricted retained earnings, an increase in the value of existing assets cannot be a source of even a stock dividend. the doctrine of the Cast Iron Pipe Cases, based on sound equitable principles, is a departure from the GR that holders of non-cumulative preferred stock lose with the close of the fiscal year all rights in the undistributed net profits of that year. It preserves to the holders of the non-cumulative PS their right in the undivided net profits withheld from them and retained in the business, but otherwise available for the payment of dividends. The right to earned dividends is not extinguished upon the mere passing of the fiscal year. The doctrine, however, cannot be extended by implication beyond its clear intendment. It may be generally stated that as to the payment of dividends the holders of PS are in no better position than the holders of CS except as to priority of payment. Dividends on PS are not payable absolutely and unconditionally, but only out of the sources designated by law. The payment of dividends on non-cumulative PS is further circumscribed by the certificate of incorporation and stock certificate; dividends on such stock are payable only out of net profits and for the years in which the same were earned. Thus the right of non-cumulative PS is conditional upon: (1) accrual of net profits (2) retention of the same in the business. If there are no net profits, the deficiency is not chargeable against the net profits of succeeding years. The test of applicability is W/N there were in the years in which dividends were not declared, net profits available for the lawful declaration and payment of dividends, but withheld from non-cumulative PS and retained in the business. Net profits connotes clear pecuniary gain remaining after deducting from gross earnings the expenses incurred. It is not synonymous with annual net earnings, which may be productive of net profits, or reductive of the deficit. In this case there were in 1935-37 no net profits to which the inchoate right to dividends could have attached. There was a substantial deficit in each of the three years which greatly exceeded the annual net earnings of the corresponding year. It is manifest therefore that the annual net earnings of each year resulted, not in a profit, but in a reduction of the deficit. There was no source from which dividends could be paid out lawfully; the payment of dividends under such circumstance would have been unlawful. The corporation is charged with the duty of maintaining the integrity of the capital, on the faith of which credit was extended, as a trust fund for the security of creditors.

Lich v. US Rubber Source of Dividends

Lich is a holder of 300 non-cumulative PS of United States Rubber Company. She seeks to enjoin payment of a dividend on common stock declared. During 3 fiscal years (1935-37), the corporation experienced a deficit of close to $24M, $17M and $10M for each of the 3 years, and a corresponding impairment of capital. In each of these years, the annual net earnings were applied to the deficit, and no dividends were declared. The company underwent a reconstruction of its capital structure. It issued, in lieu of no-par value CS, CS of par value $10. In the next 3 years the deficit was reduced and cancelled and net profts were made available for dividends for noncumulative PS, but not common shares. The company then declared a dividend, from the net profits for the current year and from no other fund, on both PS and CS. In the deficit years, the company maintained adequate reserves, which remain intact even when dividends were declared. Lich contends that the preference of PS holders as to dividends extends not only to the current year, but to the prior deficit years, and dividends cannot be paid out to CS holders until dividends are paid to PS on the years in question and the arrearages must be paid in full.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

When a man buys stock instead of bonds, he takes a greater risk in the business. No one suggests that he has a right to the dividends if there are no net earnings. But the investment presupposes that the business is to go on, and therefore even if there are net earnings, the holder of stock is entitled to have a dividend declared only out of such part of them as can be applied to the dividends consistently with a wise administration of a going concern. If the annual net earnings of a corporation are justifiable applied to legitimate corporate purposes, such as payment of debts, reduction of deficits, and restoration of impaired capital, the right of non-cumulative preferred SHs to the payments of dividends is lost. The payment of dividends from annual net earnings, when the liabilities of a corporation exceed the assets, would be in derogation of the rights of creditors. The payment of dividends under such circumstances, while debts accrue, would be contrary to sound business practice. WON corp can be compelled to declare dividends. H: In this case, YES> The determination of w/n to declare a dividend is essentially a matter of internal management. It is primarily for the corporate directors in their sound discretion to decide, and judicial review may be secured when abuses contravening the SHs rights manifest themselves. A court will not compel a dividend unless the directors act fraudulently, unjustly, or unreasonably so as to impair the rights of the complaining SHs to their just proportion of the corporate profit. Generally the mere fact that a large corporate surplus exists is not enough to warrant equitable intervention. Ultimately the test is an examination of the GF and reasonableness of the policy of retaining that which is otherwise available for dividends. The corporation did not have a reasonable need for the large surplus accumulated and held as bonds or other easily liquidated assets. Inventory was small, cash turnover was liquid, no substantial obligations, no expansion program, accounts for depreciation were set upin short, the surplus was easily available for dividends, if the directors so elected to do so. The large surplus existed at the time the Ryans were receiving salaries in excess of their worth and draining from the corporation money otherwise available for dividends. The capitalization of the surplus did not serve a corporate need; it was referable only to the desires and purposes of those in control to keep it under their control and subject to their machinations. Furthermore, fraudulent expense items and other anomalies point to the intent of the directors. Generally directors are proper parties to determine whether a divided shall be in cash of stock, and a court will not interfere with the exercise of their discretion; but where it appears that the object was to primarily benefit those in whom the discretion rests, equitable powers can be called into operation. Directors and officers of the corporation owe SHs the active duty of honesty and GF in the transaction of the business and in their dealings. While it is true that the court cannot ordinarily compel a corporation to declare a dividend at the suit of a minority SH, yet where dividends are withheld for an unlawful purpose to deprive a SH of his rightshe may have the aid of equity for adequate protection. A stock dividend really takes nothing from the property of the corporation, and

Keough v. St. Paul Milk Co. Dividend Declaration Discretionary with Board

Action to compel corporation to declare a cash dividend, on the ground that those in charge of the corporate affairs (the Ryans) are wrongfully and needlessly withholding profits available for cash dividends and conspiring to retain them for their benefit and to the prejudice of the majority. The business, assets, liabilities of the partnership were exchanged for 597 shares of the St Paul Milk Co. The 597 shares represent the only stock issued until the stock dividend. By amendment, the authorized capital was increased to $300K. A 6-to-1 stock dividend was declared and the amount necessary to cover the issued shares was transferred from the surplus account to the capital account. When the corporation paid out its first dividend, a total of $169,470 was distributed to SHs or about a 335% return. There were no mortgages or liens or any other substantial indebtedness. Sales are predominantly cash basis. Fixed assets were in good condition. Wages were paid. The corporation had investments in bonds, CS in a wholly-owned subsidiary, but the merchandise inventory was small. TC held that a liberal and reasonable capitalization and surplus was the sum equal to the original outstanding stock plus 2/3 of the accumulated surplus, and that all sums in excess were unreasonable and constituted a violation of the fiduciary relation. Keough et al claims that the capitalization in 1936 by the Ryans of a large percentage of the accumulated surplus without reason or necessity other than to keep it within the corporation under the dominating control of the Ryans. The Ryans contend that the capitalization was for avoiding possible federal taxes upon undistributed surplus. TC found that the capitalization was to strengthen control of the Ryans over the corporation and surplus to prevent a distribution of earnings.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012

Janz Hanna Ria N. Serrano

adds nothing to the interest of the SHs. Its property is not diminished, and their interests are not increased. Where profits clearly warrant payment would be proper, the SHs cannot be cut off by a stock dividend when it purpose is wrongfully to keep the profits of the business with the control of those dominating the affairs so as to be available to them. Such action is oppressive and evinces BF sufficient to justify equitable intervention. the plan does not call for and is not intended to produce immediately a more profitable business but a less profitable one, with the apparent immediate effect to diminish the value of shares and return to SHs. There is no doubt that certain sentiments, philantrophic and altruistic, creditable to Ford, had largely influenced the policy to be pursued by the company. There is an obvious difference between an incidental humanitarian expenditure of corporate funds for the employees, and a general purpose and plan to benefit all mankind at the expense of others. There should be no confusion of the duties Mr Ford conceives as owed to the general public and the duties which in law he and his directors owe to the protesting minority SHs. A business corporation is organized for the benefit and profit of the SHs. The powers of directors are to be exercise to that end. Discretion of directors is to be exercised in the means to attain that end, and does not include the end itself, through the reduction of profits or nondistribution thereof. It is not within the lawful powers of the board to shape and conduct the affairs of a corporation for the incidental benefit of SHs and for the primary purpose of benefiting others. The Court however did not interfere in the proposed expansion of the business of Ford Motor. It is recognized that plans must often be made for a long future, for expected competition, for continuing as well as an immediately profitable venture. The experience of FMC is evidence of capable management of its affairs. But it noted that the company took from the public money required for its plan but that the considerable salaries of Mr Ford were not diminished. --It is true that a considerable cash balance must be at all times carried by such a concern. But, cash is coming in and output immediately converted into cash So, it would appear that, accepting and approving the plan of the directors, it was their duty to distribute a very large sum of money to stockholders. Reversed and remanded to TC. Under the certificate of PS, the conditions which the holder may demand a dividend depend on the precise terms of the contract upon which it is issued. The fair interpretation of the contract between the corporation and the PS holder is that if in any year net profits are earned, a dividend is to be declared. To hold that the board has a discretion to declare or not a dividend when it has funds it can use is to hold that one of the parties to a contract has the option to pay something to the other or not, at its own election since, if the dividend is not declare, the benefits of accumulated profits are practically lost to these SHs. Such a construction should be avoided. The directors owe a positive duty to pay a dividend to the PS whenever in any year there were net profits available. Inasmuch as the only possible source of profit to the preferred SH from his investment is the distribution of earnings in the year in which they accrue, he has the right to insist that an accounting be taken annually, and that the surplus of one year, available for a dividend, shall not

Dodge v. Ford Motor Co. Dividend Declaration Discretionary with Board

Action by John Dodge, a minority SH, against the Ford Motor Company to compel the declarations of dividends. --TC granted motion and ordered the payment of dividends. -- At this time, Ford Motor Co had just concluded its most prosperous year of operations. Demand for Ford cars continued. It could make and market 500,000 cars. Sales of parts and repairs increase. It had assets of more than $132M, COH $54M, surplus of $112M. -- Liabilities continue the corporation as a semi-eleemosynary institution, and not as a business concern. Henry Ford himself testified that the company he built had made too much money, had too large profits, and that a sharing of profits with the public, by reducing the prices. It expected a profit upwards of $60M. Fords defense was that its policy was to reduce the selling price of Ford cars while improving their quality, with the goal of producing 1M cars per year. There was a general plan for expansion of the productive capacity of the business. Management decided not to reduce in the meantime the price, but to maintain the same and accumulate a large enough surplus to pay for the proposed expansion of plant and equipment. There was a large daily, weekly, monthly, receipt of cash. The output was practically continuous and within a few days, turned into cash. -- Dodge et al contend that the plan was to the selling price of cars should be attained. Ford argues that although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on with humanitarian motives such as charity as are incidental to the main business of the corporation.

Burk v. Ottawa Gas & Elec. Co Preference as to Dividends

Suit by preferred SHs of Ottawa Gas, demanding an accounting of all property and assets and declare and payment of dividends. Burk claims that earnings of the business were such that the directors owed them an imperative duty to declare a dividend. --Ottawa Gas maintain that the corporate has been unable to declare a dividend because its funds were exhausted by expenditures which it was obliged to make, which was for the extensions of the companys plant. TC ruled the extensions necessary and for the betterment of the plant and its patrons.


Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
be carried over to meet a possible deficiency of the next.

Janz Hanna Ria N. Serrano

The holder of PS, is however not generally a creditor until a dividend is declared, but if a dividend ought to have been declared in a certain year to such SHs, they should be regarded as creditors to such extent from such time or times. The companys contract with the PS is not to pay him at all events the amount of 6% of the net profits, but to declare a dividend on that basis. The obligation of the corporation to pay dividends on the PS out of the yearly net profits is subordinate to whatever obligation it owes to the public. Therefore if it was necessary for the corporation to use the surplus in any year to make extension to which patrons were entitled, a dividend for that year would have been excused. Case concerns the declaration of a cash dividend by a solvent corporation possessed of ample undivided profits and surplus. The corporation contends that a resolution declaring a dividend is not sufficient to create a dividend or create a debt from the corporation in the absence of further action in setting apart a fund for the purpose. The court held that if the declaration of the dividend is fairly and properly made, out of profits existing at the time it was declared, the relation of debtor and creditor is thereby established between the corporation and the SHs for the payment of the dividend to the SH. The declaration of dividends operates as a severance thereof from the stock in the general mass of the corporate property, and raises an implied promise on the part of the corporation to pay the SH the amount of the dividend. Action on the part of the corporation in setting aside the fund for the specific purpose constitutes such moneys as a trust fund in the hands of the corporation for the use of the SHs and in the event of bankruptcy of the corporation, the SHs are not required to go in pro rata with the general creditors for such unpaid dividends, but may proceed as against a trustee on account of such trust fund. Mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation ifo the SHs the same way as any other general creditor of the concern. The setting apart of a fund thereafter, passes one step further toward securing the payment of the debt to the SH. Thus the mere declaration of the dividend itself, without the setting aside of the fund, creates a debt, and the act of declaring a dividend from the stock and corpus of the corporate property is ipso facto, in and of itself, the setting apart, setting aside and segregating such dividends and it creates an immediate right of the SH to demand and recover the same when due.

McClaran v. Crescent Planning Mill Co. When Right to Dividends Vests; Rights of Transferee

McLaran is the administrator of the estate of Humber, owner of 57 paid-up shares of stock of the Crescent Planning Mill Co. and director of the company as well as President. The company declared a dividend of 6%, divided into 4 payments of 1/1/2% each. No other action taken to set apart a fund out of which to pay the dividend although the company was solvent and had adequate surplus. Nonetheless the officers proceeded to pay Humber and other SHs the 1st installment of the dividend. The next installment was not paid, the board having discovered an error in the financial statements of the company such that its assets were overstated by $6000. The board then voted to rescind and recall the order paying out the dividends and defer the payment indefinitely. The company was still perfectly solvent and had amply funds to pay the dividend. Humber demanded payment of his dividend but was refused on account of the recent action by the board. The corporation contends that there was no declaration because the board failed to set aside funds for the purpose, and that by virtue of the resolution its former action was rescinded and the payouts were recalled and put on hold.