OUTLINE ON PHILIPPINE

CORPORATE LAW
1

I. HISTORICAL BACKGROUND
1. The Philippine Corporate La!
2
Sort o" Co#i"i$ation o" A%eri$an Corporate La
When the Philippines came under American sovereignty, attention was drawn to the fact that there was
no entity in Spanish law exactly corresponding to the notion "corporation" in English and American law the
Philippine !ommission enacted the !orporation "aw #Act $o% 1&'(), to introduce the American corporation into
the Philippines as the standard commercial entity and to hasten the day when the sociedad annima of the
Spanish law would *e o*solete% +he statute is a sort of codification of American !orporate "aw% xHarden v.
Benguet Consolidated Mining Co.,

', Phil% 1&1 #1(--)%
&. The Corporation La
+he first corporate statute, the !orporation "aw, or Act $o% 1&'(, *ecame effective on 1 April 1(./% 0t
had various piece1meal amendments during its 2& year history% 0t rapidly *ecame anti3uated and not adapted
to the changing times%
'. The Corporation Co#e
+he present !orporation !ode, or Batas Pambansa Blg% /,, *ecame effective on 1 4ay 1(,.% 0t adopted
various corporate doctrines enunciated *y the Supreme !ourt under the old !orporation "aw% 0t clarified the
o*ligations of corporate directors and officers, expressed in statutory language esta*lished principles and
doctrines, and provided for a chapter on close corporations%
(. Proper Treat%ent o" Philippine Corporate La
Philippine !orporate "aw comes from the common law system of the 5nited States% +herefore, although
we have a !orporation !ode that provides for statutory principles, !orporate "aw is essentially, and continues
to *e, the product of commercial developments% 4uch of this development can *e expected to happen in the
world of commerce, and some expressed 6urisprudential rules that try to apply and adopt corporate principles
into the changing concepts and mechanism of the commercial world%
II. CONCEPTS
See opening paragraphs of 70""A$5E7A, Corporate Contract Law -, A+E$E8 "%9% 1
#$o% 2, 9une 1((&)%
1. De"inition #Section 2 Articles &&#-), &', &/, and 122', !ivil !ode)%
&. Tri)Le*el E+i,ten$e o" Corporation
#a) Aggregation of Assets and :esources
#*) ;usiness Enterprise or Economic 5nit
#c) 9uridical Entity
'. Relation,hip, In*ol*e# in Corporate Settin-
.a/ 01ri#i$al Entit2 Le*el, which views the State1corporations relationship
.3/ Contra$t1al Relation,hip Le*el, which considers that the corporate setting is at once a contractual
relationship on four #&) levels<
1 ;etween the corporation and its agents or representatives to act in the real world, such
as its directors and its officers, which is governed also *y the "aw on Agency
1 ;etween the corporation and its shareholders or mem*ers
1 ;etween and among the shareholders in a common venture and
1 ;etween the corporation and third1parties or "outsiders", which is essentially governed
*y !ontract "aw%
(. Theorie, on 4or%ation o" Corporation!
.a/ Theor2 o" Con$e,,ion #!a"ag v. Benguet Consolidated #nc., 2/ S!:A 2&2 =1(/,>)
+o organi?e a corporation that could claim a 6uridical personality of its own and transact *usiness as
such, is not a matter of a*solute right *ut a privilege which may *e en6oyed only under such terms as the
State may deem necessary to impose #x1cf. $ng Pue % Co. v. Sec. of Commerce and #ndustr", ' S!:A
/&' =1(/2>)%
;efore a corporation may ac3uire 6uridical personality, the State must give its consent either in the
form of a special law or a general ena*ling act, and the procedure and conditions provided under the law
1
5nless otherwise indicated, all references to sections pertain to +he !orporation !ode of the Philippines%
2
+he whole *ody of statutory and 6urisprudential rules pertaining to corporations is referred to as "!orporate "aw" to differentiate
it from the old statute @nown as "+he !orporation "aw," or Act $o% 1&'(%
for the ac3uisition of such 6uridical personality must *e complied with% +he failure to comply with the
statutory procedure and conditions does not warrant a finding that such association achieved the
ac3uisition of a separate 6uridical personality, even when it adopts sets of constitution and *y1laws%
x#nternational &xpress !ravel % !our Services #nc. v. Court of $ppeals -&- S!:A /2& #2...)%
Since all corporations, *ig or small, must a*ide *y the provisions of the !orporation !ode, then even
a simple family corporation cannot claim an exemption nor can it have rules and practices other than those
esta*lished *y law% x!orres v. Court of $ppeals, 22, S!:A 2(- #1((2)%
.3/ Theor2 o" Enterpri,e Entit2 #;E:"E, !heor" of &nterprise &ntit", &2 !8"% "% :E7% -&- =1(&2>)
!orporations are composed of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of in6ustice and ine3uity, such as the use of separate
personality to avoid the execution of the property of a sister company% x!an Boon Bee % Co. #nc. v.
'arencio, 1/- S!:A 2.' #1(,,)%
A corporation is *ut an association of individuals, allowed to transact under an assumed corporate
name, and with a distinct legal personality% 0n organi?ing itself as a collective *ody, it waives no
constitutional immunities and per3uisites appropriate to such a *ody% xPhilippine Stoc( &xchange #nc. v.
Court of $ppeals 2,1 S!:A 2-2 #1((2)%
5. 4o1r Attri31te, o" Corporation "ro% Stat1tor2 De"inition!
#a) A corporation is an artificial *eing
#*) !reated *y operation of law
#c) With right of succession
#d) 8nly has powers, attri*utes and properties expressly authori?ed *y law or incident to its existence
6. A#*anta-e, an# Di,a#*anta-e, o" Corporate 4or%!
.a/ 4o1r Ba,i$ A#*anta-eo1, Chara$teri,ti$, o" Corporate Or-ani7ation!
#i) Strong "egal Personality
1 Entity attri*uta*le powers
1 !ontinuity of existence
1 Purpose
+he corporation was evolved to ma@e possi*le the aggregation and assem*ling of huge
amounts of capital upon which *ig *usiness depends and has the advantage of non1dependence
on the lives of those who compose it even as it en6oys certain rights and conducts activities of
natural persons% )e"noso #* v. Court of $ppeals A%:% $o% 11/12&12', 22 $ovem*er 2...%
#ii) !entrali?ed 4anagement%
#iii) "imited "ia*ility to 0nvestors
8ne advantage of a corporate *usiness organi?ation is the limitation of an investorBs lia*ility
to the amount of the investment, which flows from the legal theory that a corporate entity is
separate and distinct from its stoc@holders% xSan 'uan Structural and Steel +abricators #nc. v.
Court of $ppeals, 2(/ S!:A /-1, /&' #1((,)%
#iv) Cree +ransfera*ility of 5nits of 8wnership for 0nvestors
.3/ Di,a#*anta-e,!
#i) A*use of corporate management
#ii) A*use of limited lia*ility feature
#iii) !ost of maintenance
#iv) Dou*le taxation
Dividends received *y individuals from domestic corporations are su*6ect to final 1.E tax
#Sec% 2&#;)#2), $0:! of 1((2) for income earned on or after 1 9anuary 1((,% 0nter1corporate
dividends *etween domestic corporations, however, are not su*6ect to any income tax #Sec% 22#D)
#&), $0:! of 1((2)%
0n addition, there has *een a re1imposition of the Fimproperly accumulated earnings tax,G
under Section 2( of the $0:! of 1((2 for corporations at the rate of 1.E annually%
8. Co%pare# With Other 9e#ia o" B1,ine,, En#ea*or,
, -istribution of )is( Profit and Control
#a) Sole Proprietorships
#*) ;usiness +rusts #Article 1&&2, !ivil !ode)
#c) Partnerships and 8ther Associations #Arts% 12/, and 122', !ivil !ode)
1 !an a defective attempt o form a corporation result at least in the formation of a partnershipH
Pioneer #nsurance v. Court of $ppeals 12' S!:A //, #1(,()%
#d) 9oint 7entures
2
'oint venture is defined as an association of persons or companies 6ointly underta@ing some
commercial enterprise generally all contri*ute assets and share ris@s% 0t re3uires a community of interest in
the performance of the su*6ect matter, a right to direct and govern the policy in connection therewith, and
duty, which may *e altered *y agreement to share *oth in profit and losses% the acts of wor@ing together in
a 6oint pro6ect% x.ilosba"an #nc. v. /uingona 'r., 2-2 S!:A 11., 1&- #1((&), citing ;"A!IBS "AW
D0!+08$A:J, Sixth ed%, ,-(%
#e) !ooperatives #Art% -, :%A% $o% /(-,)
#f) Sociedades $nnimas
A sociedad annima was considered a commercial partnership, a sort of a corporation, Fwhere upon
the execution of the pu*lic instrument in which its articles of agreement appear, and the contri*ution of
funds and personal property, *ecomes a 6uridical personKan artificial *eing, invisi*le, intangi*le, and
existing only in contemplation of lawKwith power to hold, *uy, and sell property, and to sue and *e suedK
a corporationKnot a general copartnership nor a limited copartnership % % % +he inscri*ing of its articles of
agreement in the commercial register was not necessary to ma@e it a 6uridical personKa corporation% Such
inscription only operated to show that it partoo@ of the form of a commercial corporation%G xMead v.
McCullough, 21 Phil% (',1./ #1(11)%
+he sociedades annimas were introduced in Philippine 6urisdiction on 1 Decem*er 1,,, with the
extension to Philippine territorial application of Articles 1'1 to 1'( of the Spanish !ode of !ommerce%
+hose articles contained the features of limited lia*ility and centrali?ed management granted to a 6uridical
entity% ;ut they were more similar to the English 6oint stoc@ companies than the modern commercial
corporations% xBenguet Consolidated Mining Co. v. Pineda, (, Phil% 211 #1('/)
8ur !orporation "aw recogni?es the difference *etween sociedades annimas and corporations and
will not apply legal provisions pertaining to the latter to the former xPhil. Product Co. v. Primateria Societe
$non"me, 1' S!:A -.1 #1(/')%
#g) Cuentas &n Participacion
A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its
existence was only @nown to those who had an interest in the same, there *eing no mutual agreement
*etween the partners, and without a corporate name indicating to the pu*lic in some way that there were
other people *esides the one who ostensi*ly managed and conducted the *usiness, governed under article
2-( of the !ode of !ommerce%
+hose who contract with the person under whose name the *usiness of such partnership of cuentas
en participacion is conducted, shall have only a right of action against such person and not against the
other persons interested, and the latter, on the other hand, shall have no right of action against third person
who contracted with the manager unless such manager formally transfers his right to them% xBourns v.
Carman, 2 Phil% 112 #1(./)%
III. NATURE AND ATTRIBUTES O4 A CORPORATION
1. Nat1re o" Poer to Create a Corporation #Sec% 1/, Article L00, 1(,2 !onstitution)
&. Corporation a, a Per,on<
.a/ Entitle# to #1e pro$e,,
+he due process clause is universal in its application to all persons without regard to any differences
of race, color, or nationality% Private corporations, li@ewise, are "persons" within the scope of the guaranty
insofar as their property is concerned%" xSmith Bell % Co. v. 0atividad, &. Phil% 1-/, 1&& #1(2.)%
.3/ E:1al prote$tion $la1,e #xSmith Bell % Co. v. 0atividad, &. Phil% 1-/ =1(2.>)%
.$/ Unrea,ona3le Sear$he, an# Sei71re
!orporations are protected *y the constitutional guarantee against unreasona*le searches and
sei?ures, *ut that the officers of a corporation from which documents, papers and things were sei?ed have
no cause of action to assail the legality of the sei?ures, regardless of the amount of shares of stoc@ or of
the interest of each of them in said corporation, and whatever the offices they hold therein may *e,
*ecause the corporation has a personality distinct and separate from those of said officers% +he legality of a
sei?ure can *e contested only *y the party whose rights have *een impaired there*y and the o*6ection to
an unlawful search is purely personal and cannot *e availed of *y such officers of the corporation who
interpose it for their personal interests% xStonehill v. -io(no, 2. S!:A -,- #1(/2)%
A corporation is *ut an association of individuals under an assumed name and with a distinct legal
entity% 0n organi?ing itself as a collective *ody it waives no constitutional immunities appropriate for such
*ody% 0ts property cannot *e ta@en without compensation can only *e proceeded against *y due process of
law and is protected against unlawful discrimination%

xBache % Co. 1Phil.2 #nc. v. )ui3, -2 S!:A ,2-, ,-2
#1(21), 4uoting from xHale v. Hen(el 2.1 5%S% &-, '. "%Ed% /'2%
.#/ B1t a $orporation i, not entitle# to pri*ile-e a-ain,t ,el" in$ri%ination
F0t is elementary that the right against self1incrimination has no application to 6uridical persons%G
Bataan Ship"ard % &ngineering Co v. PC//, 1'. S!:A 1,1, 2-&12-' #1(,2)%
While an individual may lawfully refuse to answer incriminating 3uestions unless protected *y an
immunity statute, it does not follow that a corporation, vested with special privileges and franchises may
-
refuse to show its hand when charged with an a*use of such privilege% xHale v. Hen(el, 2.1 5%S% &-
#1(./) x5ilson v. 6nited States 221 5%S% -/1 #1(11) x6nited States v. 5hite -22 5%S% /(& #1(&&)%
'. Lia3ilit2 "or Tort,
A corporation is civilly lia*le in the same manner as natural persons for torts, *ecause generally
spea@ing, the rules governing the lia*ility of a principal or master for a tort committed *y an agent or servant
are the same whether the principal or master *e a natural person or a corporation, and whether the servant or
agent *e a natural or artificial person% +hat a principal or master is lia*le for every tort which he expressly
directs or authori?es, is 6ust as true of a corporation as a natural person% P0B v. C$, ,- S!:A 2-2 #1(2,)%
8ur 6urisprudence is wanting as to the definite scope of Fcorporate tort%G Essentially, FtortG consists in the
violation of a right given or the omission of a duty imposed *y law% Simply stated, tort is a *reach of a legal
duty% When it was found that !lar@ Cield +axi failed to comply with the o*ligation imposed under Article 2,- of
the "a*or !ode which mandates that the employer to grant separation pay to employees in case of closure or
cessation of operations of esta*lishments or underta@ing not due to serious *usiness losses or financial
reverses conse3uently, its stoc@holder who was actively engaged in the management or operation of the
*usiness should *e held personally lia*le% xSergio +. 0aguiat v. 0L)C, 2/( S!:A '/& #1((2)%
As a general rule, a *an@ing corporation is lia*le for the wrongful or tortuous acts and declarations of its
officers or agents within the course and scope of their employment% A *an@ will *e held lia*le for the negligence
of its officers or agents when acting within the course and scope of their employment, even as regards that
species of tort of which malice is an essential element% 0n this case, we find a situation where the P!0;an@
appears also to *e the victim of the scheme hatched *y a syndicate in which its own management employees
had participated% Philippine Commercial #nternational Ban( vs. Court of $ppeals, A%:% $o% 121&1-, 2( 9anuary
2..1%
(. Cri%inal Lia3ilit2 o" a Corporation #5est Coast Life #ns. Co. v. Hurd, 22 Phil% &.1 #1(1&) People v. !an Boon
.ong, '& Phil% /.2 =1(-.> Sia v. C$, 121 S!:A /'' =1(,-> Articles 1.2 and 1.-, :evised Penal !ode)%
$o criminal suit can lie against an accused who is a corporation% x!imes #nc. v. )e"es, -( S!:A -.-
#1(21)%
When a criminal statute for*ids the corporation itself from doing an act, the prohi*ition extends to the
*oard of directors, and to each director separately and individually% xPeople v. Concepcion && Phil% 12( #1(22)%
5. Re$o*er2 o" 9oral Da%a-e, an# Other Da%a-e,
A corporation, *eing an artificial person, cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shoc@ or social humiliation which are *asis for moral damages under
Art% 2212 of the !ivil !ode% However a corporation ma" have a good reputation which if besmirched ma" be
a ground for the award of moral damages% xMambulao Lumber Co. v. Philippine 0ational Ban( 22 S!:A -'(
#1(/,).
Even when the corporationMs reputation and goodwill have *een pre6udiced, "there can *e no award for
moral damages under Article 2212 and succeeding articles of Section 1 of !hapter - of +itle L7000 of the !ivil
!ode in favor of a corporation%" xPrime 5hite Cement Corp. vo #ntermediate $ppellate Court, 22. S!:A 1.-,
11-111& #1((-)%
4oral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,
*esmirched reputation, wounded feelings, moral shoc@, social humiliation, and similar in6ury% A corporation,
*eing 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% 4ental suffering can *e
experienced only *y one having a nervous system and it flows from real ills, sorrows, and griefs of lifeKall of
which cannot *e suffered *y respondent *an@ as an artificial person% xLBC &xpress #nc. v. Court of $ppeals
2-/ S!:A /.2 #1((&) x$cme Shoe )ubber % Plastic Corp. v. Court of $ppeals, 2/. S!:A 21& #1((/)
xSolid Homes #nc. v. Court of $ppeals, 22' S!:A 2/2 #1((2)%
0n $sset Privati3ation !rust v. Court of $ppeals -.. S!:A '2( #1((,), the Supreme !ourt seemed to
have gone *ac@ to the original doctrine that F=u>nder Article 2212 of the !ivil !ode, moral damages include
*esmirched reputation which a corporation may possi*ly suffer%G
+he award of moral damages cannot *e granted in favor of a corporation *ecause, *eing an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses% 0t cannot,
therefore, experience physical suffering and mental anguish, which can *e experienced only *y one having a
nervous system% +he statement in People v% 4anero =21, S!:A ,' #1((-)> and 4am*ulao "um*er !o% v% P$;
=1-. Phil% -// #1(/,)>, that a corporation may recover moral damages if it Fhas a good reputation that is
de*ased, resulting in social humiliationG is an o*iter dictum% % %G !he possible basis of recover" of a corporation
would be under $rticles 78 9: and 97 of the Civil Code but which re4uires a clear proof of malice or bad faith.
x$BS,CB0 Broadcasting Corp. v. Court of $ppeals, -.1 S!:A ',( #1((()%
While it is true that a criminal case can only *e filed against the officers of a corporation and not against
the corporation itself, it does not follow from this, however, that the corporation cannot *e a real1party1in1
interest for the purpose of *ringing a civil action for malicious prosecution for the damages incurred *y the
corporation for the criminal proceedings *rought against its officer% xCometa v. Court of $ppeals, -.1 S!:A
&'( #1((()%
6. Nationalit2 o" Corporation! COUNTRY UNDER WHOSE LAWS INCORPORATED #Sec% 12-)%
E+$eption,! The TEST OF CONTROLLING OWNERSHIP Applie, In!
&
.a/ E+ploitation o" Nat1ral Re,o1r$e, #Sec% 1&. Sec% 2, Article L00, 1(,2 !onstitution )oman Catholic
$postolic $dministrator of -avao #nc. v. !he L)C and the )egister of -eeds of -avao, 1.2 Phil% '(/
=1('2>)%
+he donation of land to an unincorporated religious organi?ation, whose trustees are foreigners,
cannot *e allowed registration for *eing violation of the constitutional prohi*ition and it would not *e
violation of the freedom of religion clause% +he fact that the religious association Fhas no capital stoc@ does
not suffice to escape the constitutional inhi*ition, since it is admitted that its mem*ers are of foreign
nationality% +he purpose of the sixty per centum re3uirement is o*viously to ensure that corporations or
associations allowed to ac3uire agricultural land or to exploit natural resources shall *e controlled *y
Cilipinos and the spirit of the !onstitution demands that in the a*sence of capital stoc@, the controlling
mem*ership should *e composed of Cilipino citi?ens%G x)egister of -eeds of )i3al v. 6ng Sui Si !emple, (2
Phil% ', #1('')
.3/ P13li$ Utilitie, #Sec% 11, Article L00, 1(,2 !onstitution People v. ;uasha, (- Phil% --- =1('->)%
+he primary franchise of a corporation, that is, the right to exist as such, is vested in the individuals
who compose the corporation and not in the corporation itself and cannot *e conveyed in the a*sence of a
legislative authority so to do% ;ut the special or secondary franchises of a corporation are vested in the
corporation and may ordinarily *e conveyed or mortgaged under a general power granted to a corporation
to dispose of its property, except such special or secondary franchises as are charged with a pu*lic use%
x'.).S. Business Corp. v. #mperial #nsurance, 11 S!:A /-& #1(/&)%
+he !onstitution, in no uncertain terms, re3uires a franchise for the operation of a pu*lic utility
however, it does not re3uires a franchise *efore one can own the facilities needed to operate a pu*lic utility
so long as it does not operate them to serve the pu*lic% 0n law there is a clear distinction *etween the
"operation" of a pu*lic utility and the ownership of the facilities and e3uipment used to serve the pu*lic%
!atad v. /arcia 'r., 2&- S!:A &-/ #1((')
FA distinction should *e made *etween shares of stoc@, which are owned *y stoc@holders, the sale of
which re3uires only $+! approval, and the franchise itself which is owned *y the corporation as the
grantee thereof, the sale or transfer of which re3uires !ongressional sanction% Since stoc@holders own the
shares of stoc@, they may dispose of the same as they see fit% +hey may not, however, transfer or assign
the property of a corporation, li@e its franchise% 0n other words, even if the original stoc@holders had
transferred their shares to another group of shareholders, the franchise granted to the corporation su*sists
as long as the corporation, as an entity, continues to exist% +he franchise is not there*y invalidated *y the
transfer of the shares% A corporation has a personality separate and distinct from that of each stoc@holder%
0t has the right of continuity or perpetual succession !orporation !ode, Sec% 2)%G Philippine Long -istance
!elephone Co. v. 0ational !elecommunications Commission, 1(. S!:A 212, 2-2 #1((.)%
.$/ 9a,, 9e#ia #Sec% 11#1), Art% L70, 1(,2 !onstitution)
So1r$e,< P%D% -/, as amended *y PDs 1(1 and 1(2 D89 8pinion $o% 12., s% of 1(,2 Section 2, P%D%
'2/ SE! 8pinion dated 2& 4arch 1(,- D89 8pinion 1/-, s% 1(2- SE! 8pinion dated 1' 9uly 1((1,
LL7 SE! N5A:+E:"J ;5""E+0$, #$o% &KDecem*er, 1((1), at p% -1%
Ca3le In#1,tr2
+he $ational +elecommunications !ommission #$+!), which regulates and supervises the ca*le
television industry in the Philippines under Section 2 of Executive 8rder $o% &-/, s% 1((2, has provided
under $+! 4emorandum !ircular $o% ,1(1(', under item (2.#a) thereof provides that F!a*le +7
operations shall *e governed *y E%"% $o% 2.', s% 1(,2% 0f !A+7 operators offer pu*lic telecommunications
services, they shall *e treated 6ust li@e a pu*lic telecommunications entity%G
5nder D89 8pinon $o% (', series of 1(((, the Secretary of 9ustice, ta@ing its cue from $llied
Broadcasting #nc. v. +ederal Communications Commission &-' C% 2d 2., considered !A+7 as Fa form of
mass media which must, theefore, *e owned and managed *y Cilipino citi?ens, or corporations,
cooperatives or associations, wholly1owned and managed *y Cilipino citi?ens pursuant to the mandate of
the !onstitution%G
.#/ A#*erti,in- B1,ine,, #Sec% 11#2), Art% L70, 1(,2 !onstitution)
.e/ War)Ti%e Te,t #+ilipinas Compania de Seguros v. Christern Huenefeld % Co. #nc., ,( Phil% '& =1('1>
x-avis 5inship v. Philippine !rust Co., (. Phil% 2&& =1('2> xHaw Pia v. China Ban(ing Corp%, ,. Phil% /.&
=1(&,>)%
."/ In*e,t%ent Te,t as to "Philippine $ationals" #Sec% -#a),#*), :%A% 2.&2, Coreign 0nvestment Act of 1((2)
.-/ The Gran#"ather R1le #8pinion of D89 $o% 1,, s% 1(,(, dated 1( 9anuary 1(,( SE! 8pinion, dated /
$ovem*er 1(,(, LL07 SE! N5A:+E:"J ;5""E+0$ #$o% 11 4arch 1((.) SE! 8pinion, dated 1& Decem*er
1(,(, LL07 SE! N5A:+E:"J ;5""E+0$ #$o% 2 19une 1((.)
5p to what level do you apply the grandfather ruleH #Palting v. San 'ose Petroleum #nc., 1, S!:A
(2& =1(//>)%
.h/ Spe$ial Cla,,i"i$ation, #Sec% 1&.)
I;. SEPARATE 0URIDICAL PERSONALIT< AND DOCTRINE O4 PIERCING ;EIL
O4 CORPORATE 4ICTION
'
See relevant portions of 70""A$5E7A, )estatement of the -octrine of Piercing !he
*eil of Corporate +iction, -2 A+E$E8 "%9% 1( #$o% 2, 9une 1((-)%
A. 9ain Do$trine! A CORPORATION HAS A PERSONALIT< SEPARATE AND DISTINCT 4RO9 ITS
STOCKHOLDERS OR 9E9BERS.
:udimentary is the rule that a corporation is invested *y law with a personality distinct and separate
from its stoc@holders or mem*ersK*y legal fiction and convenience it is shielded *y a protective mantel and
im*ued *y law with a character alien to the persons comprising it% xLim v. Court of $ppeals -2- S!:A 1.2
#2...)%
1. So1r$e,! Sec% 2 Article &&, !ivil !ode
&. I%portan$e o" Prote$tin- 9ain Do$trine!
+he Fseparate 6uridical personalityG includes< right of succession limited lia*ility centrali?ed
management and generally free transfera*ility of shares of stoc@% +herefore, an undermining of the separate
6uridical personality of the corporation, such as the application of the piercing doctrine, necessarily dilutes
any or all of those attri*utes%
8ne of the advantages of a corporate form of *usiness organi?ation is the limitation of an investorBs
lia*ility to the amount of the investment% +his feature flows from the legal theory that a corporate entity is
separate and distinct from its stoc@holders% Oowever, the statutorily granted privilege of a corporate veil may
*e used only for legitimate purposes% 8n e3uita*le considerations, the veil can *e disregarded when it is
utili?ed as a shield to commit fraud, illegality or ine3uity defeat pu*lic convenience confuse legitimate
issues or serve as a mere alter ego or *usiness conduit of a person or an instrumentality, agency or ad6unct
of another corporation% xSan 'uan Structural and Steel +abricators #nc. v. Court of $ppeals, 2(/ S!:A /-1,
/&' #1((,)%
'. Appli$ation,!
.a/ Majority Ownersi! o" or Dea#in$s in Sareo#%in$s< 8wnership of a ma6ority of capital stoc@ and
the fact that ma6ority of directors of a corporation are the directors of another corporation creates no
employer1employee relationship with the latterMs employees% -BP v. 0L)C, 1,/ S!:A ,&1 #1((.)
+rancisco et al. v. Me=ia A% :% $o% 1&1/12, 1& August 2..1%
+he mere fact that a stoc@holder sells his shares of stoc@ in the corporation during the pendency
of a collection case against the corporation, does not ma@e such stoc@holder personally lia*le for the
corporate de*t, since the disposing stoc@holder has no personal o*ligation to the creditor, and it is the
inherent right of the stoc@holder to dispose of his shares of stoc@ anytime he so desires% x)emo 'r. v.
#ntermediate $ppellate Court, 122 S!:A &.', &1-1&1& #1(,()%
4ere ownership *y a single stoc@holder or *y another corporation of all or nearly all of the capital
stoc@ of a corporation is not of itself sufficient ground for disregarding the separate corporate personality%
xSunio v. 0L)C , 122 S!:A -(. #1(,&) x$sionics Philippines #nc. v. 0ational Labor )elations
Commission 2(. S!:A 1/& #1((,) xLim v. Court of $ppeals -2- S!:A 1.2 #2...) xManila Hotel
Corp. v. 0L)C -&- S!:A 1 #2...) x+rancisco v. Me=ia A% :% $o% 1&1/12, 1& August 2..1%
4ere su*stantial identity of the incorporators of the two corporations does not necessarily imply
fraud, nor warrant the piercing of the veil of corporate fiction% 0n the a*sence of clear and convincing
evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law,
the corporations are to *e rightly treated as distinct and separate from each other% xLaguio v. 0L)C
2/2 S!:A 21' #1((/)%
.3/ Dea#in$s &etween te Cor!oration an% Sto'(o#%ers) +he transfer of the corporate assets to the
stoc@holder is not in the nature of a partition *ut is a conveyance from one party to another%
Stoc(holders of +. /uan3on and Sons #nc. v. )egister of -eeds of Manila, / S!:A -2- #1(/2)%
As a general rule, a corporation may not *e made to answer for acts or lia*ilities of its stoc@holders
or those of the legal entities which it may *e connected and vice1versa% x$)B Constructions Co. #nc. v.
Court of $ppeals --2 S!:A &22 #2..)
.$/ On Iss*es o" Pri+i#e$es Enjoye%) +he tax privileges en6oyed *y a corporation do not extend to its
stoc@holders% "A corporation has a personality distinct from that of its stoc@holders, ena*ling the taxing
power to reach the latter when they receive dividends from the corporation% 0t must *e considered as
settled in this 6urisdiction that dividends of a domestic corporation which are paid and delivered in cash
to foreign corporations as stoc@holders are su*6ect to the payment of the income tax, the exemption
clause to the charter =of the domestic corporation> notwithstanding%" xManila /as Corp. v. Collector of
#nternal )evenue, /2 Phil% ,(', ,(, #1(-/)%
.#/ &ein$ a Cor!orate O""i'er) ;eing an officer or stoc@holder of a corporation does not *y itself ma@e
oneMs property also of the corporation, and vice,versa, for they are separate entities, and that
shareholders are in no legal sense the owners of corporate property which is owned *y the corporation
as a distinct legal person% /ood &arth &mporium #nc. v. C$, 1(& S!:A '&& #1((1)
+he mere fact that one is president of the corporation does not render the property he owns or
possesses the property of the corporation, since that president, as an individual, and the corporation
are separate entities% xCru3 v. -alisa", 1'2 S!:A &,2 #1(,2)%
/
.e/ Pro!erites, O-#i$ations an% De-ts) "i@ewise, a corporation has no legal standing to file a suit for
recovery of certain parcels of land owned *y its mem*ers in their individual capacity, even when the
corporation is organi?ed for the *enefit of the mem*ers% Sulo ng Ba"an v. $raneta #nc%, 22 S!:A -&2
=1(2/>)%
+he corporate de*t or credit is not the de*t or credit of the stoc@holder nor is the stoc@holderMs
de*t or credit that of the corporation% x!raders )o"al Ban( v. C$, 122 S!:A 2,( #1(,()%
Stoc@holders have no personality to intervene in a collection case covering the loans of the
corporation on the ground that the interest of shareholders in corporate property is purely inchoate%
xSaw v. C$, 1(' S!:A 2&. =1((1>)
+he interests of payees in promissory notes cannot *e off1set against the o*ligations *etween the
corporations to which they are stoc@holders a*sent any allegation, much less, even a scintilla of
su*stantiation, that the parties interest in the corporation are so considera*le as to merit a declaration
of unity of their civil personalities% x#ndustrial and -evelopment Corp. v. Court of $ppeals, 222 S!:A
--- #1((2)%
0t is a *asic postulate that a corporation has a personality separate and distinct from its
stoc@holders% +herefore, even when the foreclosure on the assets of the corporation was wrongful and
done in *ad faith, the stoc@holders of the corporation have no standing to recover for themselves
moral damages% 8therwise, it would amount to the appropriation *y, and the distri*ution to, such
stoc@holders of part of the corporationBs assets *efore the dissolution of the corporation and the
li3uidation of its de*ts and lia*ilities% x$sset Privati3ation !rust v. Court of $ppeals -.. S!:A '2(, /12
#1((,)%
Where real properties included in the inventory of the estate of a decedent are in the possession
of and are registered in the name of the corporations, in the a*sence of any cogency to shred the veil
of corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations
should stand undistur*ed% xLim v. Court of $ppeals -2- S!:A 1.2 #2...)%
."/ Tir%.Parties! +he fact that respondents are not stoc@holders of the disputed corporations does not
ma@e them non1parties to the case, since the 6urisdiction of a court or tri*unal over the su*6ect matter
is determined *y the allegations in the !omplaint% 0n this case, it is alleged that the aforementioned
corporations are mere alter egos of the directors1petitioners, and that the former ac3uired the
properties sought to *e reconveyed to CAS:! in violation of directors1petitionersB fiduciary duty to
CAS:!% +he notion of corporate entity will *e pierced or disregarded and the individuals composing it
will *e treated as identical if, as alleged in the present case, the corporate entity is *eing used as a
cloa@ or cover for fraud or illegality as a 6ustification for a wrong or as an alter ego, an ad6unct, or a
*usiness conduit for the sole *enefit of the stoc@holders% /ochan v. >oung A%:% $o% 1-1,,(, 21
4arch 2..1%

B. Pier$in- the ;eil o" Corporate 4i$tion!
1. So1r$e o" In$antation! x6nited States v. Milwau(ee )efrigerator !ransit Co., 1&2 Ced% 2&2 =1(.'>)% xSee
also +rancisco v. Me=ia A% :% $o% 1&1/12, 1& August 2..1%
&. Nat1re o" the Pier$in- Do$trine #!raders )o"al Ban( v. Court of $ppeals, 2/( S!:A 1' =1((2>)
Piercing the veil of corporate entity re3uires the court to see through the protective shroud which
exempts its stoc@holders from lia*ilities that ordinarily, they could *e su*6ect to, or distinguishes one
corporation from a seemingly separate one, were it not for the existing corporate fiction% xLim v. Court of
$ppeals -2- S!:A 1.2 #2...)%
+his !ourt has pierced the veil of corporate fiction in numerous cases where it was used, among
others, to avoid a 6udgment credit, to avoid inclusion of corporate assets as part of the estate of a
decedent, to avoid lia*ility arising from de*t when made use of as a shield to perpetrate fraud andPor
confuse legitimate issues, or to promote unfair o*6ectives or otherwise to shield them% x )e"noso #* v.
Court of $ppeals A%:% $o% 11/12&12', 22 $ovem*er 2... also x)amoso v. Court of $ppeals A%:% $o%
112&1/, , Decem*er 2...%
'. When Pier$in- Do$trine Not Appli$a3le!
.a/ Piercing the veil of corporate fiction is remedy of last resort and is not availa*le when other remedies
are still availa*le% 6mali v. C$, 1,( S!:A '2( #1((.)%
.3/ Piercing is not allowed unless the remedy sought is to ma@e the officer or another corporation
pecuniarily lia*le for corporate de*ts% 6mali v. C$, 1,( S!:A '2( #1((.)? #ndophil !extile Mill 5or(ers
6nion,P!/5@ v. Calica, 2.' S!:A /(2 #1((2)%
.$/ Piercing is not availa*le when the personal o*ligations of an individual are sought to *e enforced
against the corporation% x)obledo v. 0L)C 2-, S!:A '2 #1((&)
F+he rationale *ehind piercing a corporationBs identity in a given case is to remove the *arrier
*etween 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 underta@ing certain proscri*ed activities%
Oowever, in the case at *ar, instead of holding certain individuals or person responsi*le for an alleged
corporate act, the situation has *een reversed% 0t is the petitioner as a corporation which is *eing
ordered to answer for the personal lia*ility of certain individual directors, officers and incorporators
concerned% Oence, it appears to us that the doctrine has *een turned upside down *ecause of its
erroneous invocation%G +rancisco Motors Corp. v Court of $ppeals, -.( S!:A 22, ,- #1((()%
2
.#/ +o disregard the separate 6uridical personality of a corporation, the wrongdoing must *e clearly and
convincingly esta*lished% 0t cannot *e presumed% +his is elementary% +he organi?ation of the
corporation at the time when the relationship *etween the landowner and the developer were still
cordial cannot *e used as a *asis to hold the corporation lia*le later on for the o*ligations of the
landowner to the developer under the mere allegation that the corporation is *eing used to evade the
performance of o*ligation *y one of its ma6or stoc@holders% xLuxuria Homes #nc. v. Court of $ppeals
-.2 S!:A -1' #1((() x-evelopment Ban( of the Philippines vs. Court of $ppeals A%:% $o% 12/2..,
1/ August 2..1%
.e/ Not A!!#i'a-#e to Teori/in$) Piercing of the veil of corporate fiction is not allowed when it is resorted
to 6ustify under a theory of co1ownership the continued use and possession *y stoc@holders of
corporate properties% Bo"er,)oxas v. Court of $ppeals, 211 S!:A &2. =1((2>)%
+he piercing doctrine cannot *e availed of in order to dislodge from the 6urisdiction of the SE! a
the petition for suspension of payments filed under Section '#e) of Pres% Decree $o% (.21A, on the
ground that the petitioning individuals should *e treated as the real petitioners to the exclusion of the
petitioning corporate de*tor% F+he doctrine of piercing the veil of corporate fiction heavily relied upon
*y the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used
to defeat pu*lic convenience, 6ustify wrong, protect fraud or defend crime%G x6nion Ban( of the
Philippines v. Court of $ppeals 2(. S!:A 1(, #1((,)%
!hanging of the petitionersBs su*sidiary lia*ilities *y converting them to guarantors of *ad de*ts
cannot *e done *y piercing the veil of corporate identity% x)amoso v. Court of $ppeals A%:% $o%
112&1/, , Decem*er 2...%
#f) Piercing doctrine is meant to prevent fraud, and cannot *e employed to perpetrate fraud or a wrong%
/regorio $raneta #nc. v. !uason de Paterno and *idal, (1 Phil% 2,/ #1('2)%
+he theory of corporate entity was not meant to promote unfair o*6ectives or otherwise, nor to
shield them% x*illanueva v. $dre, 122 S!:A ,2/ #1(,()%
#g) Piercing is a power *elonging to the court and cannot *e assumed improvidently *y a sheriff% Cru3 v.
-alisa", 1'2 S!:A &,2 #1(,2)%
'. Con,e:1en$e, an# T2pe, o" Pier$in- Ca,e,< 6mali v. C$, 1,( S!:A '2( =1((.>)
.a/ +he application of the doctrine to a particular case does not deny the corporation of legal personality for
any and all purposes, *ut only for the particular transaction or instance for which the doctrine was
applied% .oppel 1Phil.2 #nc. v. >atco, 22 Phil% &(/ #1(&/) x!antoco v. .aisahan ng Mga Manggagawa sa
La Campana, 1./ Phil% 1(, #1('()%
.3/ Cla,,i"i$ation o" the Pier$in- Ca,e,!
.i/ When the corporate entity is used to commit fraud or to do a wrong #"fraud cases")
.ii/ When the corporate entity is merely a farce since the corporation is merely the alter ego,
*usiness conduit or instrumentality of a person or another entity #"alter ego cases") and
.iii/ When the piercing the corporate fiction is necessary to achieve 6ustice or e3uity #"e3uity
cases")%
+he three cases may appear together in one application% See ).+. Suga" % Co. v. )e"es, 12
S!:A 2.. #1(/&)%
(. 4ra1# Ca,e,!
.a/ A$t, 32 the Controllin- Sharehol#er< Where a stoc@holder, who has a*solute control over the
*usiness and affairs of the corporation, entered into a contract with another corporation through fraud
and false representations, such stoc@holder shall *e lia*le 6ointly and severally with his co1defendant
corporation even when the contract sued upon was entered into on *ehalf of the corporation% 0amarco
v. $ssociated +inance Co., 1( S!:A (/2 #1(/2)%
+he tests in determining whether the corporate veil may *e pierced are< #1) the defendant must
have control or complete domination of the other corporationBs finances, policy and *usiness practices
with regard to the transaction attached #2) control must *e used *y the defendant to commit fraud or
wrong and #-) the aforesaid control or *reach of duty must *e the proximate cause of the in6ury or loss
complained of% Manila Hotel Corporation v. 0L)C -&- S!:A 1 #2...) xAlso Lim v. Court of $ppeals
-2- S!:A 1.2 #2...)%
.3/ 8ne cannot evade civil lia*ility *y incorporating properties or the *usiness% Palacio v. +el"
!ransportation Co., ' S!:A 1.11 #1(/2)%
.$/ +he veil of corporation fiction may *e pierced when used to avoid a contractual commitment against
non1competition% *illa )e" !ransit #nc. v. +errer, 2' S!:A ,&' #1(/,)%
.#/ +he Supreme !ourt found the following facts to *e legal *asis to pierce< 8ne company was merely an
ad6unct of the other, *y virtue of a contract for security services, the former provided with security
guards to safeguard the latterBs premises *oth companies have the same owners and *usiness
address the purported sale of the shares of the former stoc@holders to a new set of stoc@holders who
changed the name of the corporation appears to *e part of a scheme to terminate the services of the
security guards, and *ust their newly1organi?ed union which was then *eginning to *ecome active in
,
demanding the companyBs compliance with "a*or Standards laws% -e Leon v. 0L)C, A%:% $o%
112//1, -. 4ay 2..1%
.e/ Parent)S13,i#iar2 Relation,= A""iliate, #)e"noso #* v. Court of $ppeals A%:% $o% 11/12&12', 22
$ovem*er 2... Commissioner of #nternal )evenue v. 0orton and Harrison, 11 S!:A 2.&, =1('&>
!omas Lao Construction v. 0L)C, 22, S!:A 21/ =1((2>)%
1 Why is there inordinate showing of alter1ego elementsH
.e/ G1i#in- Prin$iple, in 4ra1# Ca,e,<
#i) +here must have *een fraud or an evil motive in the affected transaction, and the mere proof
of control of the corporation *y itself would not authori?e piercing and
#ii) +he main action should see@ for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or stoc@holders%
5. Alter)E-o Ca,e,!
.a/ Where the stoc@ of a corporation is owned *y one person where*y the corporation functions only for the
*enefit of such individual owner, the corporation and the individual should *e deemed the same%
$rnold v. 5illets and Patterson Ltd., && Phil% /-& #1(2-)%
.3/ When the corporation is merely an ad6unct, *usiness conduit or alter ego of another corporation, the
fiction of separate and distinct corporation entities should *e disregarded% x!an Boon Bee % Co. v.
'arencio 1/- S!:A 2.' #1(,,)%
+he corporation veil cannot *e used to shield an otherwise *latant violation of the prohi*ition
against forum1shopping% Shareholders, whether suing as the ma6ority in direct actions or as the
minority in a derivative suit, cannot *e allowed to trifle with court processes, particularly where, as in
this case, the corporation itself has not *een remiss in vigorously prosecuting or defending corporate
causes and in using and applying remedies availa*le to it% x+irst Philippine #nternational Ban( v. Court
of $ppeals, 2'2 S!:A 2'( #1((/)%
.$/ Employment of same wor@ers single place of *usiness, etc% La Campana Coffee +actor" v. .aisahan
ng Manggagawa, (- Phil% 1/. #1('-)%
+he doctrine that a corporation is a legal entity or a person in law distinct from the persons
composing it is merely a legal fiction for purposes of convenience and to su*serve the ends of 6ustice%
+his fiction cannot *e extended to a point *eyond its reason and policy% Where, as in this case, the
corporation fiction was used as a means to perpetrate a social in6ustice or as a vehicle to evade
o*ligations or confuse the legitimate issues, it would *e discarded and the two #2) corporations would
*e merged as one, the first *eing merely considered as the instrumentality, agency conduit or ad6unct
of the other% 0n this case, *ecause of the actions of management of the two corporations, there was
much confusion as to the proper employment of the claimant% x$3cor Manufacturing #nc. v. 0L)C -.-
S!:A 2/ #1((()%
.#/ 5se of nominees% xMarvel Building v. -avid, ( Phil% -2/ #1('1)
%
.e/ Avoidance of tax% >utivo Sons Hardware v. Court of !ax $ppeals 1 S!:A 1/. #1(/1) xLiddell % Co. v.
Collector of #nternal )evenue,

2 S!:A /-2 #1(/1)%
."/ 4ixing of *an@ deposit accounts% x)amire3 !elephone Corp. v. Ban( of $merica, 2( S!:A 1(1 #1(/()%
.-/ Where it appears that two *usiness enterprises are owned, conducted, and controlled *y the same
parties, *oth law and e3uity will, when necessary to protect the rights of third persons, disregard the
legal fiction that two corporations are distinct entities and treat them as identical% xSibagat !imber
Corp. v. /arcia, 21/ S!:A 2. #1((2)%
.h/ +hinly1capitali?ed corporations% McConnel v. Court of $ppeals, 1 S!:A 222 #1(/1)%
.i/ Parent1su*sidiary relationship% .oppel 1Phil.2 #nc. v. >atco, 22 Phil% (2 #1(&/) xPhilippine *eterans
#nvestment -evelopment Corporation v. C$, 1,1 S!:A //( #1((.)%
.>/ Affiliated companies% x/uatson #nternational !ravel and !ours #nc. v. 0L)C 2-. S!:A ,1' #1((.)%
.?/ S1%%ar2 o" Pro3ati*e 4a$tor,! Philippine 0ational Ban( vs. )itratto /roup #nc. et al. A%:% $o%
1&2/1/, -1 9uly 2..1 xConcept Builders #nc. v. 0L)C, 2'2 S!:A 1&( #1((/)%
Whether the existence of the corporation should *e pierced depends on 3uestions of facts,
appropriately pleaded% 4ere allegation that a corporation is the alter ego of the individual stoc@holders
is insufficient% +he presumption is that the stoc@holders or officers and the corporation are distinct
entities% +he *urden of proving otherwise is on the party see@ing to have the court pierce the veil of
corporate entity% x)amoso v. Court of $ppeals A%:% $o% 112&1/, , Decem*er 2...%
.l/ G1i#in- Prin$iple, in Alter)E-o Ca,e,!
#i) +he doctrine applies in this case even in the a*sence of evil intent it applies *ecause of the
direct violation of a central corporate law principle of separating ownership from
management%
#ii) +he doctrine in such cased is *ased on estoppel< if stoc@holders do not respect the separate
entity, others cannot also *e expected to *e *ound *y the separate 6uridical entity%
(
#iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to *e
enforced against the stoc@holders or officers of the corporation%
6. E:1it2 Ca,e,!
.a/ When used to confuse legitimate issues% !elephone &ngineering and Service Co. #nc. *. 5CC, 1.&
S!:A -'& #1(,1)%
.3/ When used to raise technicalities% x&milio Cano &nt. v. C#), 1- S!:A 2(1 #1(/')%
8. Pier$in- Do$trine an# D1e Pro$e,, Cla1,e
.a/ +he need to *ring a new case against the officer% McConnel v. Court of $ppeals, 1 S!:A 22- #1(/1)%
#*) When corporate officers are sued in their official capacity when the corporation was not made a party,
the corporation is not denied due process% &milio Cano &nterprises v. Court of #ndustrial )elations, 1-
S!:A 2(1 #1(/')%
#c) Provided that evidential *asis has *een adduced during trial to apply the piercing doctrine% 'acinto v.
Court of $ppeals, 1(, S!:A 211 #1((1) x$rcilla v. Court of $ppeals, 21' S!:A 12. #1((2)%
;. CLASSI4ICATIONS O4 CORPORATIONS
1. In Relation to the State!
#a) Pu*lic corporations #Sec% -, Act $o% 1&'()
8rgani?ed for the government of the portion of the state #e%g%, *arangay, municipality, city and
province)
4a6ority shares *y the Aovernment does not ma@e an entity a pu*lic corporation% x0ational Coal Co.
v. Collector of #nternal )evenue, &/ Phil% ',- #1(2&)%
#*) ;uasi1pu*lic corporations xMarilao 5ater Consumers $ssociates v. #$C, 2.1 S!:A &-2 #1((1)
Although ;oy Scouts of the Philippines does not receive any monetary or financial su*sidy from the
Aovernment, and that its funds and assets are not considered government in nature and not su*6ect to
audit *y the !8A, the fact that it received a special charter from the government, that its governing *oard
are appointed *y the Aovernment, and that its purpose are of pu*lic character, for they pertain to the
educational, civic and social development of the youth which constitute a very su*stantial and important
part of the nation, it is not a pu*lic corporation in the same sense that municipal corporation or local
governments are pu*lic corporation since its does not govern a portion of the state, *ut it also does not
have proprietary functions in the same sense that the functions or activities of government1owned or
controlled corporations such as the $ational Development !ompany or the $ational Steel !orporation, is
may still *e considered as such, or under the 1(,2 Administrative !ode as an instrumentality of the
Aovernment% +herefore, the employees are su*6ect to the !ivil Service "aw% xBo" Scouts of the
Philippines v. 0L)C, 1(/ S!:A 12/ #1((1)%
.$/ Pri*ate Corporation #Sec% -, Act 1&'()
A government1owned or 1controlled corporation when organi?ed under the !orporation !ode is still a
private corporation% ;ut *eing a government1owned or 1controlled corporation ma@es it lia*le for laws and
provisions applica*le to the Aovernment or its entities and su*6ect to the control of the Aovernment%
xCervantes v. $uditor /eneral, (1 Phil% -'( #1('2)%
A private corporation is created *y operation of law under the !orporation while a government
corporation is normally created *y special law referred to often as a charter% xBliss -ev. Corp. &mplo"ees
6nion v. Calle=a 2-2 S!:A 221 #1((&)%
+he doctrine that employees of government1owned and 1controlled corporations, whether created *y
special law or formed as su*sidiaries under the general corporation law are governed *y the !ivil Service
"aw and not *y the "a*or !ode, has *een supplanted *y the 1(,2 !onstitution% +he present doctrine in
determining whether a government1owned or 1controlled corporation is su*6ect to the !ivil Service "aw is
the manner of its creation, such that government corporations created *y special charter are su*6ect to the
!ivil Service "aw, while those incorporated under the general corporation law are governed *y the "a*or
!ode% xP0@C,&nerg" -evelopment Corp. v. 0L)C, 2.1 S!:A &,2 #1((1) x-avao Cit" 5ater -istrict v.
Civil Service Commission, 2.1 S!:A '(- #1((1)%
+he test to determine whether a corporation is government owned or controlled, or private in nature
is simple% 0s it created *y its own charter for the exercise of a pu*lic function, or *y incorporation under the
general corporation lawH +hose with special charters are government corporations su*6ect to its provisions,
and its employees are under the 6urisdiction of the !ivil Service !ommission, and are compulsory
mem*ers of the Aovernment Service 0nsurance System% xCamparedondo v. 0L)C, -12 S!:A &2 #1((()%
Section -1 of the !orporation !ode #"ia*ility of Directors and 8fficers) is applica*le to corporations
which have *een organi?ed *y special charters since Sec% & of the !orporation !ode renders the
provisions of thereof applica*le in a supplementary manner to all corporations, including those with special
or individual charters, such as cooperatives organi?ed under Pres% Decree $o% 2/(, so long as those
provisions are not inconsistent with such charters% xBenguet &lectric Cooperative #nc. v. 0L)C, 2.( S!:A
'' #1((2)%
1.
&. A, to Pla$e o" In$orporation!
#a) Domestic !orporation
#*) Coreign !orporation #Sec% 12-)
'. A, to P1rpo,e o" In$orporation!
#a) 4unicipal or Pu*lic corporation
#*) :eligious corporation #Secs% 1.( and 11/)
#c) Educational corporations #Secs% 1./, 1.2 and 1., Sec% 2', ;%P% ;lg% 2-2)
#d) !harita*le, Scientific or 7ocational corporations
#e) ;usiness corporation
(. A, to N1%3er o" 9e%3er,!
#a) Aggregate !orporation
.3/ Corporation Sole #Secs% 11. to 11' x)oman Catholic $postolic $dministrator of -avao #nc. v. L)C and
the )egister of -eeds of -avao Cit", 1.2 Phil% '(/ #1('2)%
x-irector of Land v. #$C, 1&/ S!:A '.( #1(,/), which held that a corporation sole has no nationality,
overturned the previous doctrine #x)epublic v. *illanueva, 11& S!:A ,2' =1(,2> and )epublic v. #glesia 0i
Cristo, 122 S!:A /,2 =1(,&>) that a corporation sole is dis3ualified to ac3uire or hold aliena*le lands of the
pu*lic domain, *ecause of the constitutional prohi*ition 3ualifying only individuals to ac3uire land of the
pu*lic domain and the provision under the Pu*lic "and Act which applied only to Cilipino citi?ens or natural
persons% x)epublic v. #glesia ni Cristo, 122 S!:A /,2 #1(,&) x)epublic v. #$C, 1/, S!:A 1/' #1(,,)%
5. A, to Le-al Stat1,!
.a/ De 0*re Corporation
.3/ De Fa'to Corporation #Sec% 2.)
.$/ Corporation 32 E,toppel #Sec% 21)
6. A, to E+i,ten$e o" Share, #Secs% - and ')
#a) Stoc@ !orporation
#*) $on1Stoc@ !orporation
;I. CORPORATE CONTRACT LAW
See relevant portion of 70""A$5E7A, Corporate Contract Law -, A+E$E8 "%9% 1 #$o%
2, 9une 1((&)
1% Pre)In$orporation Contra$t,
.a/ Who Are Pro%oter,@
FPromoterG is a person who, acting alone or with others, ta@es initiative in founding and organi?ing
the *usiness or enterprise of the issuer and receives consideration therefor% #Sec% -%1., Securities
:egulation !ode =:%A% ,2((>)
.3/ Nat1re o" Pre)in$orporation A-ree%ent, #Secs% /. and /1 Ba"la v. Silang !raffic Co. #nc., 2- Phil% ''2
=1(&2>)
.$/ Theorie, on Lia3ilitie, "or Pro%oterA, Contra$t, #Caga"an +ishing -evelopment Co. #nc. v. !eodoro
Sandi(o, /' Phil% 22- =1(-2> )i3al Light % #ce Co. #nc. v. Public Service Commission, 2' S!:A 2,'
=1(/,> Caram 'r. v. C$, 1'1 S!:A -22 =1(,2>)%
&. De Fa'to Corporation #Sec% 2.)
.a/ Ele%ent, "or E+i,ten$e o" De 4a$to Corporation<
#1) 7alid law under which incorporated
#2) Attempt in good faith to incorporate Fcolora*le complianceG
#-) Assumption of corporate powers and
#&) 0ssuance of certificate of incorporation% $rnold Hall v. Piccio, ,/ Phil% /-&
#1('.)%
'. Corporation 32 E,toppel Do$trine #Sec% 21 Salvatierra v. /arlitos, 1.- Phil% 2'2 =1(',>? $lbert v. 6niversit"
Publishing Co., 1- S!:A ,& =1(/'> #nternational &xpress !ravel % !our Services #nc. v. Court of $ppeals -&-
S!:A /2& #2...) x$sia Ban(ing Corporation v. Standard Products, &/ Phil% 1&' =1(2&> xMadrigal Shipping
Co. #nc. v. @gilvie, Supreme !ourt Advanced Decision, '' 8%A% $o% -', p% 2--1)%
An individual should *e held personally lia*le for the unpaid o*ligations of the unincorporated association
in whose *ehalf he entered into such transactions, under the principle that Fany person acting or purporting to
act on *ehalf of a corporation which has no valid existence assumes such privileges and *ecomes personally
lia*le for contract entered into or for other acts performed as such agent%G #nternational &xpress !ravel % !our
Services #nc. v. Court of $ppeals -&- S!:A /2& #2...)%
11
.a/ Nat1re o" Do$trine
!orporation *y estoppel doctrine is founded on principles of e3uity and is designed to prevent
in6ustice and unfairness% 0t applies when persons assume to form a corporation and exercise corporate
functions and enter into *usiness 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 @now that it has not
*een registered, there is no corporation *y estoppel% Lo3ano v. -e Los Santos, 22& S!:A &'2 #1((2)
A party cannot challenge the personality of the plaintiff as a duly organi?ed corporation after having
ac@nowledged same when entering into the contract with the plaintiff as such corporation for the
transportation of its merchandise% #x@hta -ev. Co. v. Steamship Pompe" &( Phil% 112 =1(2/>) the same
principle applied in xCompania $gricole de 6ltramar v. )e"es, & Phil% 1 =1(11> *ut that case pertained to a
commercial partnership which re3uired registration in the registry under the terms of the !ode of
!ommerce%
.3/ To Le*el,< #i) With "fraud" and #ii) Without "fraud"
When incorporating individuals represent themselves to *e officers of the corporation never duly
registered with SE!, and engages in the name of purported corporation in illegal recruitment, they are
estopped from claiming that they are not lia*le as corporate officers, since Section 2' of !orporation !ode
provides that all persons who assume to act as a corporation @nowing it to *e without authority to do so
shall *e lia*le as general partners for all the de*ts, lia*ilities and damages incurred or arising as a result
thereof% xPeople v. /arcia, 221 S!:A /21 #1((2)%
An individual cannot avoid his lia*ilities to the pu*lic as an incorporator of a corporation whose
incorporation was not consummated, when he held himself out as officer of the corporation and received
money from applicants who availed of their services% Such individual is estopped from claiming that they
are not lia*le as corporate officers for illegal recruitment under the corporation *y estoppel doctrine under
Sec% 2' of the !orporation !ode which provides that all persons who assume to act as a corporation
@nowing it to *e without authority to do so shall *e lia*le as general partners for all the de*ts, lia*ilities and
damages incurred or arising as a result thereof% xPeople v. Pineda, A%:% $o% 112.1., 1, April 1((2
#5npu*lished)%
(. Tr1,t 41n# Do$trine
See 70""A$5E7A, "!he !rust +und -octrine 6nder Philippine Corporate Setting,"
-1 A+E$E8 "%9% #$o% 1, Ce*% 1(,2)%
.a/ Co%%er$ialBCo%%on La Pre%i,e on E:1it2 *i,)a)*i, De3t,
.3/ Nat1re o" Do$trine
5nder the trust fund doctrine, the capital stoc@, property and other assets of the corporation are
regarded as e3uity in trust for the payment of the corporate creditors% xCommissioner of #nternal )evenue
v. Court of $ppeals -.1 S!:A 1'2 #1((()%
+he re3uirement of unrestricted retained earnings to cover the shares is *ased on the trust fund
doctrine which means that the capital stoc@, property and other assets of a corporation are regarded as
e3utiy in trust for the payment of corporate creditors% +he reason is that creditors of a corporation are
preferred over the stoc@holders in the distri*ution of corporate assets% +here can *e no distri*ution of
assets among the stoc@holders without first paying corporate creditors% Oence, any disposition of corporate
funds to the pre6udice of creditors is null and void% xBoman &nvironmental -ev. Corp. v. C$, 1/2 S!:A
'&. #1(,,)%
+he F+rust CundG doctrine considers the su*scri*ed capital as a trust fund for the payment of the
de*ts of the corporation, to which the creditors may loo@ for satisfaction% 5ntil the li3uidation of the
corporation, no part of the su*scri*ed capital stoc@ may *e turned over or released to the stoc@holder
#except in the redemption of the redeema*le shares) without violating this principle% +hus dividends must
never impair the su*scri*ed capital stoc@ su*scription commitments cannot *e condoned or remitted nor
can the corporation *uy its own shares using the su*scri*ed capital as the consideration therefore% 0!C v.
Court of $ppeals -11 S!:A '.,, '1&1'1' #1((()%
.$/ Corporation P1r$ha,in- On Share, #Secs% ,, &1, &- and 122, last paragraph Phil. !rust Co. v. )ivera,
&& Phil% &/( =1(2-> Steinberg v. *elasco, '2 Phil% ('- =1(2(>)
;II. ARTICLES O4 INCORPORATION
See relevant portions of 70""A$5E7A, Corporate Contract Law -, A+E$E8 "%9% 1
#$o% 2, 9une 1((&)%
1. Nat1re o" Charter ) +he charter is in the nature of a contract *etween the corporation and the Aovernment%
/overnment of P.#. v. Manila )ailroad Co%, '2 Phil% /(( #1(2()%
&. Pro$e#1re an# Do$1%entar2 Re:1ire%ent, #Sec% 1& and 1')
.a/ A, to N1%3er an# Re,i#en$2 o" In$orporator, #Sec% 1.)
.3/ Corporate Na%e #Secs% 1,, 1&#1) and &2 )ed Line !rans. v. )ural !ransit, /. Phil% '&( =1(-&>)%
A corporation may change its name *y the amendment of its articles of incorporation, *ut the same is
not effective until approved *y the SE!% xPhilippine +irst #nsurance Co. v. Hartigan, -& S!:A 2'2 #1(2.)
12
A change in the corporate name does not ma@e a new corporation, and whether affected *y special
act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or
lia*ilities% x)epublic Planters Ban( v. C$, 21/ S!:A 2-, #1((2)%
Similarity in corporate names *etween two corporations would cause confusion to the pu*lic
especially when the purposes stated in their charter are also the same type of *usiness% x6niversal Mills
Corp. v. 6niversal !extile Mills #nc., 2, S!:A /2 =1(22>)%
A corporation has not right to intervene in a suit using a name other than its registered name if a
corporation legally and truly wants to intervene, it should have used its corporate name as the law re3uires
and not another name which it had not registered% xLaureano #nvestment and -evelopment Corporation v.
Court of $ppeals, 222 S!:A 2'- #1((2)%
+here would *e no denial of due process when a corporation is sued and 6udgment is rendered
against it under its unregistered trade name, holding that a corporation may *e sued under the name *y
which it ma@es itself @nown to its wor@ers% xPison,$rceo $gricultural -evelopment Corp. v. 0L)C 22(
S!:A -12 #1((2)
.$/ P1rpo,e Cla1,e #Secs% 1&#2) and &2 6" Siuliong v. -irector of Commerce and #ndustr", &. Phil% '&1
=1(1(>)
.#/ Corporate Ter% #Sec% 11)%
$o extension can *e effected once dissolution stage has *een reached% x$lhambra Cigar v. S&C, 2&
S!:A 2/( #1(/,)%
.e/ Prin$ipal Pla$e o" B1,ine,,
Place of residence of the corporation is the place of its principal office% xClavecilla )adio S"stem v.
$ntillon, 1( S!:A -2( #1(/2)
+he residence of its president is not the residence of the corporation *ecause a corporation has a
personality separate and distinct from that of its officers and stoc@holders% xS" v. !"son &nterprises #nc.,
11( S!:A -/2 #1(,2)%
."/ 9ini%1% Capitali7ation #Sec% 12)
1 Why is maximum capitali?ation re3uired to *e indicatedH
.-/ S13,$ription an# Pai#)1p Re:1ire%ent, #Sec% 1-)
.h/ Step, an# Do$1%ent, Re:1ire# in SEC
'. Gro1n#, "or Di,appro*al #Sec% 12)
When the proposed articles presented show that the o*6ect of incorporation is to organi?e a *arrio of a
given municipality into a separate corporation for the purpose of ta@ing possession and having control of all
municipal property within the *arrio so incorporated and administer it exclusively for the *enefit of the
residents, the o*6ect is unlawful and the articles can *e denied registration% x$suncion v. -e >riarte, 2, Phil% /2
=1(1&>)%
(. A%en#%ent, to Arti$le, o" In$orporation #Sec% 1/)
5. Co%%en$e%ent o" Corporate E+i,ten$e #Sec% 1()
;III. B<)LAWS
See relevant portions of 70""A$5E7A, "Corporate Contract Law" -, A+E$E8 "%9% 1
#$o% 2, 9une 1((&)%
1. Nat1re an# 41n$tion, #/o(ongwei v. S&C, ,( S!:A --2 =1(2(> PeAa v. C$, 1(- S!:A 212 =1((1>)
As the Frules and regulations or private laws enacted *y the corporation to regulate, govern and control
its own actions, affairs and concerns and its stoc@holders or mem*ers and directors and officers with relation
thereto and among themselves in their relation to it,G *y1laws are indispensa*le to corporations in this
6urisdiction% +hese may not *e essential to corporate *irth *ut certainly, these are re3uired *y law for an orderly
governance and management of corporations% $onetheless, failure to file them within the period re3uired *y
law *y no means tolls the automatic dissolution of a corporation% Lo"ola /rand *illas Homeowners 1South2
$ssociation #nc. v. Court of $ppeals 22/ S!:A /,1 #1((2)%
.a/ Co%%on La Li%itation, on B2)La,
.i/ B2)La, Cannot Be Contrar2 to La an# Arti$le, o" In$orporation
A *y1law provision granting to a stoc@holder a permanent representation in the ;oard of
Directors is contrary to the !orporation !ode re3uiring all mem*ers of the ;oard to *e elected *y the
stoc@holders or mem*ers% Even when the mem*ers of the association may have formally adopted the
provision, their action would *e of no avail *ecause no provision of the *y1laws can *e adopted if it is
contrary to law% x/race Christian High School v. Court of $ppeals 2,1 S!:A 1-- #1((2)%
1-
Although the right to amend *y1laws lies solely in the discretion of the employer, this *eing in the
exercise of management prerogative or *usiness 6udgment, such right cannot impair the o*ligation of
existing contracts or rights or undermine the right to security of tenure of a regular employee%
8therwise, it would ena*le an employer to remove any employee from employment *y the simple
expediency of amending its *y1laws and providing the position shall cease to exist upon occurrence of
a specified event% xSalafranca v. Philamlife 1Pamplona2 *illage Homeowners $ssociation #nc., -..
S!:A &/(, &2( #1((,)%
.ii/ B2)La, Cannot Be Unrea,ona3le or Be Contrar2 to Nat1re o" B2)la,% x/overnment of the
Philippine #slands v. &l Hogar +ilipino, '. Phil% -(( #1(22)%
Authority granted to a corporation to regulate the transfer of its stoc@ does not empower
corporation to restrict the right of a stoc@holder to transfer his shares, *ut merely authori?es the
adoption of regulations as to the formalities and procedure to *e followed in effecting transfer%
x!homson v. Court of $ppeals 2(, S!:A 2,. #1((,)%
;y1laws are intended merely for the protection of the corporation, and prescri*e regulation, not
restrictions they are always su*6ect to the charter of the corporation% x)ural Ban( of Salinas #nc. v.
C$, 21. S!:A '1. #1((2), 4uoting from +hompson on !orporation Sec% &1-2, cited in x+leischer v.
0olasco, &2 Phil% ',-.
.iii/ B2)La, Cannot Di,$ri%inate
.3/ Bin#in- E""e$t, o" B2)la, #China Ban(ing Corp. v. Court of $ppeals, 22. S!:A '.- =1((2>)%
F$either can we concede that such contract would *e invalid 6ust *ecause the signatory thereon was
not the !hairman of the ;oard which allegedly violated the corporationBs *y1laws% Since *y1laws operate
merely as internal rules among the stoc@holders, they cannot affect or pre6udice third persons who deal
with the corporation, unless they have @nowledge of the same%G PM# Colleges v. 0L)C, 222 S!:A &/2
#1((2)%
&. A#option Pro$e#1re #Sec% &/)
Section &/ of the !orporation, which re3uires the filing of *y1laws, does not expressly provide for the
conse3uence of their non1filing within the period provided therein however, Pres% Decree (.21A allows the
SE! to suspend or revo@e, after proper notice and hearing, the franchise or certificate of registration of
corporations which fail to file their *y1laws% !learly, there can *e no automatic corporate dissolution simply
*ecause the incorporators failed to a*ide *y the re3uired filing of *y1laws, and there is no outright FdemiseG of
corporate existence% Proper notice and hearing are cardinal components of due process in any democratic
institution, agency or society, which would re3uire that the incorporators must *e given the chance to explain
their neglect or omission and remedy the same% xLo"ola /rand *illas Homeowners 1South2 $ssociation #nc. v.
Court of $ppeals 22/ S!:A /,1 #1((2)%
'. Content, #Sec% &2)
(. A%en#%ent, #Sec% &,)
Power to amend may *e delegated to the *oard of directors
IC. CORPORATE POWERSD AUTHORIT< AND ACTI;ITIES
1. Corporate Poer an# Capa$it2 #Art% &/, !ivil !ode Secs% -/ and &' Land Ban( of the Philippines v. C@$,
1(. S!:A 1'& =1((.>)
A corporation has no power except those expressly conferred on it *y the !orporation !ode and those that
are implied or incidental to its existence% 0n turn, a corporation exercises said powers through its *oard of directors
andPor its duly authori?ed officers and agents, since the physical acts of the corporation, li@e the signing of
documents, can *e performed only *y natural persons duly authori?ed for the purpose of *y corporate *y1laws or
*y a specific act of the *oard of directors% x)e"noso #* v. Court of $ppeals A%:% $o% 11/12&12', 22 $ovem*er
2...%
Precisely *ecause the corporation is such a prevalent and dominating factor in the *usiness life of the
country, the law has to loo@ carefully into the exercise of powers *y these artificial persons it has created%
)e"noso #* v. Court of $ppeals A%:% $o% 11/12&12', 22 $ovem*er 2...%
.a/ Cla,,i"i$ation o" Corporate Poer,! E1!ress2 I3!#ie%2 an% In'i%enta#
+here is *asis to rule that the act of issuing the chec@s on *ehalf of the corporation was well within
the am*it of a valid corporate act, for it was for securing a loan to finance the activities of the corporation,
hence, not an ultra vires act% $trium Management Corporation vs. Court of $ppeals, A%:% $o% 1.(&(1, 2,
Ce*ruary 2..1%
.3/ Where Corporate Poer i, Lo#-e# #Sec% 2-)
5nless otherwise provided *y the !orporation !ode, corporate powers, such as the power to enter
into contracts, are exercised *y the ;oard of Directors% Oowever, the ;oard may delegate such powers to
either an executive committee or officials or contracted managers, which delegation, except for the
executive committee, must *e for specific purposes% +he delegated officers ma@es the latter agents of the
corporation, and rules of agency as to the *inding effects of their acts would apply% Cor such officers to *e
1&
deemed fully clothed *y the corporation to exercise a power of the ;oard, the latter must specially
authori?e them to do so% x$BS,CB0 Broadcasting Corporation v. Court of $ppeals, -.1 S!:A '22 #1((()%
&. U#tra 4ires A$t,
See relevant portions of 70""A$5E7A, Corporate Contract Law -, A+E$E8 "%9% 1
#$o% 2, 9une 1((&)%
.a/ Con$ept an# T2pe, #Sec% &')
An ultra vires act is one committed outside the o*6ect for which a corporation is created as define *y
the law of its organi?ation and therefore *eyond the power conferred upon it *y law%G +he term F ultra vireG is
Fdistinguished from an illegal act from the former is merely voida*le which may *e enforced *y
performance, ratification, or estoppel, while the latter is void and cannot *e validated% $trium Management
Corporation vs. Court of $ppeals, A%:% $o% 1.(&(1, 2, Ce*ruary 2..1%
.3/ Rati"i$ation o" U#tra 4ires A$t,! #Pirovano v. -e la )ama Steamship Co. #nc., (/ Phil% --' =1('&> Carlos
v. Mindoro Sugar Co., '2 Phil% -&- =1(-2> )epublic v. $co=e Mining Co., - S!:A -/1 =1(/-> Crisologo
'ose v. C$, 122 S!:A '(& =1(,(>
.i/ Teory o" Esto!!e# or Rati"i'ation
0n order to ratify the unauthori?ed act of an agent and ma@e it *inding on the corporation, it must
*e shown that the governing *ody or officer authori?ed to ratify had full and complete @nowledge of all
the material facts connected with the transaction to which it relates% :atification can never *e made on
the part of the corporation *y the same person who wrongfully assume the power to ma@e the contract,
*ut the ratification must *e *y the officer or governing *ody having authority to ma@e such contract%
+he act or conduct for which the corporation may *e lia*le under the doctrine of estoppel must *e *y
those of the corporation, its governing *ody or authori?ed officers, and not those of the purported agent
who is himself responsi*le for the misrepresentation% x*icente v. /eralde3, '2 S!:A 21. #1(2-)%
When the counsel representing the corporation in a collection suit admits on *ehalf of the
corporation that the latter admitted culpa*ility for personal loans o*tained *y its corporate officers, such
admission cannot *e given legal effect to the detriment of the corporation% +he admission made in the
answer *y the counsel for the corporation was Fwithout any ena*ling act or attendant ratification of
corporate act,G as would authori?e or even ratify such admission% 0n the a*sence of such ratification or
authority, such admission does not *ind the corporation% Also, the letter issued *y the corporate officers
who o*tained the loan Fas indicating the corporate lia*ility of the corporation,G cannot also serve to
ma@e the corporation lia*le% +he documents and admissions cannot have the effect of a ratification of
an unauthori?ed act% :atification can never *e made on the part of the corporation *y the same
persons who wrongfully assume the power to ma@e the contract, *ut the ratification must *e *y the
officers as governing *ody having authority to ma@e such contract% x$guen3a v. Metropolitan Ban( and
!rust Co. 221 S!:A 1 #1((2)%
.ii/ Do'trine o" A!!arent A*tority #Prime 5hite Cement Corp. v. #ntermediate $ppellate Court, 22.
S!:A 1.-, 11-111& =1((-> +rancisco v. /S#S, 2 S!:A '22 =1(/->)
A contract signed *y the PresidentP!hairman without authority from the ;oard of Directors is
void% Although the *y1laws grant authority to the President "to execute and sign for and in *ehalf of the
corporation all contracts and agreements which the corporation may enter into," the same presupposes
a prior act of the corporation exercised through its ;oard of Directors% >ao .a Sin !rading v. C$, 2.(
S!:A 2/- #1((2)%
Although an officer or agent acts without, or in excess of, his actual authority if he acts within the
scope of an apparent authority with which the corporation has clothed him *y holding him out or
permitting him to appear as having such authority, the corporation is *ound there*y in favor of a person
who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed
to exercise a particular authority with respect to the *usiness, or a particular *ranch of it, continuously
and pu*licly, for a considera*le time% >ao .a Sin !rading v. C$, 2.( S!:A 2/- #1((2)%
Persons who deal with corporate agents within circumstances showing that the agents are acting
in excess of corporate authority, may not hold the corporation lia*le% x!raders )o"al Ban( v. Court of
$ppeals, 2/( S!:A /.1 #1((2) also Art% 1,,-, !ivil !ode%
+he authority of a corporate officer in dealing with third persons may *e actual or apparent% % %
the principal is lia*le for the o*ligations contracted *y the agent% +he agentMs apparent representation
yields to the principalMs true representation and the contract is considered as entered into *etween the
principal and the third person% x+irst Philipine #nternational Ban( v. Court of $ppeals, 2'2 S!:A 2'(
#1((/)%
0f a corporation @nowingly permits one of its officers, or any other agent, to act within the scope of
an apparent authority, it holds him out to the pu*lic as possessing the power to do those acts and thus,
the corporation will, as against anyone who has in good faith dealt with it through such agent, *e
estopped from denying the agentBs authority% xSoler v. Court of $ppeals A%:% $o% 12-,(2, 21 4ay 2..1%
5nder Article 1,(, of the !ivil !ode, the acts of an agent *eyond the scope of his authority do no
*ind the principal unless the latter ratifies the same expressly or implied% 0t also *ears emphasi?ing that
when the third person @nows that the agent was acting *eyond his power or authority, the principal can
not *e held lia*le for the acts of the agent% 0f the said third person is aware of such limits of authority, he
is to *lame, and is not entitled to recover damages from the agent, unless the latter undertoo@ to secure
the principalBs ratification% 0n the case of the corporation as the principal, there was no such ratification%
1'
+herefore, when the officer entered into the speculative contracts without securing the ;oardBs approval,
nor did he su*mit the contracts to the ;oard after their consummation nor were they recorded in the
*oo@s of the corporation, there was, in fact, no occasion at all for ratification% xSafic $lcan % Cie. *.
#mperial *egetable Co. A%:% $o% 12/2'1, 2, 4arch 2..1%
.iii/ Theor2 o" No State Da%a-e .Harden v. Benguet Consolidated Mining Co., ', Phil% 1&. =1(-->)%
'. Spe$i"i$ .E+pre,,/ Poer,
.a/ En1%erate# Poer, .Se$,. '6/
&xample of Poor -raftsmanship<
When the article of incorporation expressly provides that the purpose of the corporation was to
Fengage in the transportation of person b" water,G such corporation cannot engage in the *usiness of land
transportation, which is an entirely different line of *usiness, and, for which reason, may not ac3uire any
certificate of pu*lic convenience to operate a taxica* service% xLuneta Motor Co. v. $.-. Santos #nc%, '
S!:A ,.( =1(/2>)%
Power to Sue
5nder section -/ of the !orporation !ode, in relation to Section 2-, it is clear that where a
corporation is an in6ured party, its power to sue is lodged with its *oard of directors or trustees% A minority
stoc@holder and mem*er of the ;oard, who fails to show any proof that he was authori?ed *y the ;oard of
Directors, has no such power or authority to sue on the corporationBs *ehalf% $or can we uphold this as a
derivative suit% Cor a derivative suit to prosper, it is re3uired that the minority stoc@holder suing for and on
*ehalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on
*ehalf of the corporation and all other stoc@holders similarly situated who may wish to 6oin him in the suit%
+here is now showing that petitioner has complied with the foregoing re3uisites% x!am 5ing !a( v.
Ma(asiar A%:% 122&'2, 2( 9anuary 2..1%
.3/ Poer to E+ten# or Shorten Corporate Ter% #Secs% -2 and ,1 =1>)
.$/ Poer to In$rea,e or De$rea,e Capital Sto$? #Sec% -,)
Prior to SE! approval of the increase in the authori?ed capital stoc@, and despite the ;oard
resolution approving the increase in capital stoc@, and the receipt of payment on the future issues of the
shares from the increased capital stoc@, such funds do not constitute part of the capital stoc@ of the
corporation until approval of the increase *y SE!% xCentral !extile Mills #nc. v. 0ational 5ages and
Productivit" Commission, 2/. S!:A-/, #1((/)%
A reduction of capital to 6ustify the mass layoff of employees, especially of union mem*ers, amounts
to nothing *ut a premature and plain distri*ution of corporate assets to o*viate a 6ust hearing to la*or of the
vast profits o*tained *y its 6oint efforts with capital through the years, and would constitute unfair la*or
practice% xMadrigal % Co. v. Bamora, 1'1 S!:A -'' =1(,2>)
.#/ In$1rD Create or In$rea,e Bon#e# In#e3te#ne,, #Sec% -,)
.e/ Sell or Di,po,e o" A,,et, #Sec% &.)%
Sale *y the ;oard of the only property of the corporation without compliance with the provisions of
Sec% &. of the !orporation !ode re3uiring the ratification of mem*ers representing at least two1thirds of
the mem*ership, would ma@e the sale null and void% x#slamic -irectorate of the Philippines v. Court of
$ppeals, 222 S!:A &'& #1((2) also xPeAa v. C$, 1(- S!:A 212 #1((1)%
."/ In*e,t Corporate 41n#, in Another Corporation or B1,ine,, or 4or An2 Other P1rpo,e #Sec% &2 -e
la )ama v. Ma,ao Sugar Central Co%, 22 S!:A 2&2 =1(/(>)%
.-/ De$lare Di*i#en#, #Sec% &- 0ielson % Co. v. Lepanto Consolidated Mining Co., 2/ S!:A '&. =1(/,>)%
Stoc@ dividend is the amount that the corporation transfers from its surplus profit account to its
capital account% 0t is the same amount that can loosely *e terms as the Ftrust fundG of the corporation%
x0ational !elecommunications Commission v. Court of $ppeals -11 S!:A '.,, '1&1'1' #1((()%
Although the certificates of stoc@ granted the stoc@holder the right to receive 3uarterly dividends of
1E, cumulative and participating, the stoc@holders do not *ecome entitled to the payment thereof as a
matter of right without necessity of a prior declaration of dividends% % % ;oth Sec% 1/ of the !orporation "aw
and Sec% &- of the present !orporation !ode prohi*it the issuance of any stoc@ dividend without the
approval of stoc@holders, representing not less than two1thirds #2P-) of the outstanding capital stoc@ at a
regular or special meeting duly called for the purpose% +hese provisions underscore the fact that payment
of dividends to a stoc@holder is not a matter of right *ut a matter of consensus% Curthermore, Finterest
*earing stoc@sG, on which the corporation agrees a*solutely to pay interest *efore dividends are paid to the
common stoc@holders, is legal only when construed as re3uiring payment of interest as dividends from net
earnings or surplus only% x)epublic Planters Ban( v. $gana, 2/( S!:A 1 #1((2)%
.i/ Enter into 9ana-e%ent Contra$t, #Sec% && 0ielson % Co. #nc. v. Lepanto Consolidated Mining, 2/ S!:A
'&. =1(/,> )icafort v. Mo"a, 1(' S!:A 2&2, at pp% 2//12/2 =1((1>)% Why the difference in rule *etween
entity and individualH
.>/ Other Poer,
1/
. To Se## Lan% an% Oter Pro!erties
A corporation whose primary purpose is to mar@et, distri*ute, export and import merchandise, the
sale of land is not within the actual or apparent authority of the corporation acting through its officers,
much less when acting through the treasurer% "i@ewise Article 1,2& and 1,2, of the !ivil !ode re3uires
that when land is sold through an agent, the agentBs authority must *e in writing, otherwise the sale is
void% xSan 'uan Structural and Steel +abricators #nc. v. Court of $ppeals, 2(/ S!:A /-1, /&' #1((,)%
. To &orrow F*n%s
+he power to *orrow money is one of those cases where even a special power of attorney is
re3uired under Art% 1,2, of the $ew !ivil !ode% +here is invaria*ly a need of an ena*ling act of the
corporation to *e approved *y its ;oard of Directors% +he argument that the o*taining of loan was in
accordance with the ordinary course of *usiness usages and practices of the corporation is devoid of
merit *ecause the prevailing practice in the corporation was to explicitly authori?e an officer to contract
loans in *ehalf of the corporation% xChina Ban(ing Corp. v. Court of $ppeals, 22. S!:A '.- #1((2)%
. To Pro+i%e Grat*ity Pay "or E3!#oyees
Providing gratuity pay for its employees is one of the express powers of a corporation under the
!orporation !ode, and cannot *e considered to *e ultra vires to avoid any lia*ility arising from the
resolution granting such gratuity pay% xLope3 )ealt" v. +ontecha, 2&2 S!:A 1,-, 1(2 #1((')%
. To Donate
. To Enter Into Partnersi!, 0oint 4ent*re% !uason % Co. v. Bolanos, (' Phil% 1./ #1('&)%
C. DIRECTORSD TRUSTEES AND O44ICERS
1. Poer, o" Boar# o" Dire$tor, or Tr1,tee, #Sec% 2- /amboa v. *ictoriano, (. S!:A &. =1(2(>)%
.a/ To Theorie, on So1r$e o" Poer o" Boar# o" Dire$tor, #$ngeles v. Santos, /& Phil% /(2 =1(-2>)%
.3/ Boar# 91,t A$t A, Bo#2 #Sec% 2' !he Board of Li4uidators v. Heirs of Maximo M. .alaw, 2. S!:A (,2
=1(/2> )amire3 v. @rientalist Co. and +ernande3, -, Phil% /-& =1(1,> $cuAa v. Batac Producers
Cooperative Mar(eting $ssociation, 2. S!:A '2/ =1(/2>)%
+he general rule is that a corporation, through its *road of directors, should act in the manner and
within the formalities, if any, prescri*ed *y its charter or *y the general law% +hus, directors must act as a
*ody in a meeting called pursuant to the law or the corporationMs *y1laws, otherwise, any action ta@en
therein may *e 3uestioned *y any o*6ecting director or shareholder% ;e that as it may, 6urisprudence tells
us that an action of the *oard of directors during a meeting, which was illegal for lac@ of notice, may *e
ratified either expressly, *y the action of the directors in su*se3uent legal meeting, or impliedly, *y the
corporationMs su*se3eunt course of conduct% xLope3 )ealt" v. +ontecha, 2&2 S!:A 1,-, 1(2 #1((')%
.$/ E""e$t, o" a EBo-1,F Boar#
+he acts or contracts effected *y a *ogus *oard would *e void pursuant to Art% 1-1, of the !ivil
!ode *ecause of the lac@ of FconsentG% #slamic -irectorate of the Philippines v. Court of $ppeals, 222 S!:A
&'& #1((2)%
.#/ E+e$1ti*e Co%%ittee #Sec% -')
&. BUSINESS 0UDG9ENT RULE #Montelibano v. Bacolod,Murcia Miling Co. #nc., ' S!:A -/ =1(/2> Philippine
Stoc( &xchange #nc. v. Court of $ppeals 2,1 S!:A 2-2 =1((2>)
;oard mem*ers and officers who purport to act for and in *ehalf of the corporation, @eep within the
lawful scope of their authority in so acting and act in good faith, do not *ecome lia*le, whether civilly or
otherwise, for the conse3uences of their acts% +hose acts, when they are such a nature and are done under
such circumstances, are properly attri*uted to the corporation alone and no personal lia*ility is incurred *y
such officers and ;oard mem*ers% xBenguet &lectric Cooperative #nc. v. 0L)C, 2.( S!:A '' #1((2)
'. G1ali"i$ation, o" Dire$tor, an# Tr1,tee, #Secs% 2- and 22 /o(ongwei 'r. v. S&C, ,( S!:A --/ =1(2(>)%
.a/ A director must own at least one share of stoc@ #xPeAa v. C$, 1(- S!:A 212 =1((1> x-etective %
Protective Bureau #nc. v. Cloribel, 2/ S!:A 2'' =1(/(>)
.3/ 4ere *eneficial ownership in a voting trust arrangement no longer 3ualifies #Lee v. C$, 2.' S!:A 2'2
=1((2>)%
(. Ele$tion o" Dire$tor, an# Tr1,tee,
.a/ Directors #Secs% 2& and 2/ Premium Marble )esources v. Court of $ppeals 2/& S!:A 11 =1((/>)%
.3/ +rustee #Secs% (2 and 1-,)
12
.$/ C1%1lati*e ;otin- #Sec% 2& Cumulative *oting in Corporate &lections< #ntroducing Strateg" in the
&4uation -' S85+O !A:8"0$A "% :E7% 2(')
5. ;a$an$2 in Boar# #Sec% 2()
;y1law provision or the practice giving a stoc@holder a permanent seat in the ;oard of Directors would
*e against the provision of Sections 2, and 2( of the !orporation !ode which re3uires mem*er of the *oard of
corporations to *e elected% 0n addition, Section 2- of the !orporation !ode which provides for the powers of
the ;oard of Directors or +rustees expressly re3uires them Fto *e elected from among the holders of stoc@, or
where there is no stoc@, from among the mem*ers of the corporation% x/race Christian High School v. Court of
$ppeals 2,1 S!:A 1-- #1((2)%
6. Ter% o" O""i$eD Hol#)o*er Prin$iple
Directors may lawfully fill vacancies occurring in the *oard, and such officials, as well as the original
directors, hold until 3ualification of their successors% x/overnment v. &l Hogar +ilipino, '. Phil% -(( #1(22)%
+he remedy is 4uo warranto to 3uestion the legality and proper 3ualification of persons elected to the
*oard% xPonce v. &ncarnacion, (& Phil% ,1 #1('-)%
8. Re%o*al o" Dire$tor, or Tr1,tee, #Sec% 2, )oxas v. -e la )osa, &( Phil% /.( =1(2/>)%
H. Dire$tor,A or Tr1,tee,A 9eetin-, #Secs% &(, '-, '& and (2)
0n a *oard meeting, an a*stention is presumed to *e counted as an affirmative vote insofar as it ma" be
construed as an ac4uiescence in the action of those who voted affirmativel"? *ut such presumption, *eing
merely prima facie would not hold in the face of clear evidence to the contrary% xLope3 v. &ricta, &' S!:A '-(
=1(22>)%
I. Co%pen,ation o" Dire$tor, #Sec% -.)
Directors and trustees are not entitled to salary or other compensation when they perform nothing more
than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render
service gratuitously, and that the return upon their shares ade3uately furnishes the motives for service, without
compensation% 5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/, 22- #1((2)%
5nder Section -. of the !orporation !ode, there are two #2) ways *y which mem*ers of the *oard can
*e granted compensation apart from reasona*le per diems< #a) when there is a provision in the *y1laws fixing
their compensation and #*) when the stoc@holders representing a ma6ority of the outstanding capital stoc@ at a
regular or special meeting agree to give them compensation% Crom the language of Section -., it may also *e
deduced that mem*ers of the *oard may also receive compensation, when they render services to the
corporation in a capacity other than as directors or trustees of the corporation% 5estern #nstitute of !echnolog"
#nc. v. Salas 22, S!:A 21/ #1((2)%
+he position of *eing !hairman and 7ice1!hairman, li@e that of +reasurer and Secretary, were
considered *y the officers as not mere directorship position, *ut officership position that would entitle the
occupants to compensation% "i@ewise, the limitation placed under Section -. of the !orporation that directors
cannot receive compensation exceeding 1.E of the net income of the corporation, would not apply to the
compensation given to such positions since it is *eing given in their capacity as officers of the corporation and
not as *oard mem*ers% 5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/ #1((2)%
1J. Role o" Dire$tor,
.a/ Dire$tor, a, 4i#1$iarie,.
1 Pre1!orporation !ode% Palting v. San 'ose Petroleum #nc., 1, S!:A (2& #1(//)%
1 $ature of Duties of Directors and 8fficers% Prime 5hite Cement Corp. v. #$C, 22. S!:A 1.- #1((-)%
.3/ D1t2 o" O3e#ien$e
A corporation, through its *oard of directors, should act in the manner and within the formalities, if
any, prescri*ed *y its charter or *y the general law% xLope3 )ealt" #nc. v. +ontecha, 2&2 S!:A 1,- #1((')
.$/ D1t2 o" Dili-en$e #Sec% -1 Steinberg v. *elasco, '2 Phil% ('- =1(2(> Bates v. -resser, 2'1 5%S% '2&, /&
"% Ed% -,,, &. S% !t% 2&2 =1(1(> Smith v. *an /or(am, &,, A%2d ,',, Supreme !ourt of Delaware, 1(,')%%
.#/ D1t2 o" Lo2alt2 #Secs% -1 to -& Mead v. McCullough, 21 Phil% (' =1(11>)%
1 Do$trine o" Corporate Opport1nit2 #/o(ongwei v. S&C, ,( S!:A --/ =1(2(> See Annotations<
Doctrine of !orporate 8pportunity, ,( S!:A &12)%
1 Sel")#ealin-, #Secs% -2 and --)
1 U,in- In,i#e In"or%ation #/o(ongwei v. S&C, ,( S!:A --/ =1(2(>)%
When a director, who also owns Q of the e3uity of the corporation, who has also *een designated as
the administrator of corporate affairs, and who was directly negotiating the sale of the corporations large
landholdings to the Aovernment at great prices, purchases the shares of stoc@ of a shareholder without
informing the latter of the on1going negotiations, such director is deemed to have fraudulently ac3uired the
shareholdings *y way of deceit practiced *y means of concealing his @nowledge of the state of the
negotiations and their pro*a*le successful result% xStrong v. )epide, &1 Phil% (&2 =1(.(>
1,
1 Applies to confidential employees #cf. xSing 'uco v. Llorente, &- Phil% ',( =1(22>)
.e/ D1t2 to Cre#itor, an# O1t,i#er,
=x70""A$5E7A, !he +iduciar" -uties of -irectors and @fficers )epresenting the
Creditor Pursuant to a Loan 5or(out $rrangement< Parameters 6nder Philippine
Corporate Setting, -' A+E$E8 "%9% #$o% 1, Ce*% 1((1)>
."/ Corporate Dealin-, ith Dire$tor, an# O""i$er, #Sec% -2 /o(ongwei v. S&C, ,( S!:A --/ =1(2(>
Prime 5hite Cement Corp. v. #$C, 22. S!:A 1.- =1((->)%
.-/ Contra$t, Beteen Corporation, ith Interlo$?in- Dire$tor, #Sec% --)
11. Who I, an KO""i$erK o" the Corporation #Sec% 2' /urrea v. Le3ama, 1.- Phil% ''- =1(',> Mita Pardo de
!avera v. !uberculosis Societ", 112 S!:A 2&- =1(,2> PSB$ v. LeaAo, 122 S!:A 22, =1(,&> -" v. 0L)C,
1&' S!:A 211 =1(,/> x*isa"an v. 0L)C, 1(/ S!:A &1. =1((1>)%
!orporations act only through their officers and duly authori?ed agents% All acts within the powers of a
corporation may *e performed *y agents of its selection except so far as limitations or restrictions imposed *y
special charter, *uy1laws, or statutory provisions% xB$ Savings Bani v. Sia --/ S!:A &,& #2...)%
An FofficeG is created *y the charter of the corporation and the officer is elected *y the directors or
stoc@holders% % % $ote that a corporate officerBs removal from his office is a corporate act% 0f such removal
occasions an intra1corporate controversy, its nature is not altered *y the reason or wisdom, or lac@ thereof, with
which the ;oard of Directors might have in ta@ing such action% When petitioner, as Executive 7ice1President
allegedly diverted company funds for his personal use resulting in heavy financial losses in the company, this
matter would amount to fraud% Such fraud would *e detrimental to the interest not only of the corporation *ut
also of its mem*ers% +his type of fraud encompasses controversies in a relationship within the corporation
covered *y the SE! 6urisdiction =now with the regular courts>% Perforce, the matter would come within the area
of corporate affairs and management, and such a corporate controversy would call for the ad6udicative
expertise of the SE!, not the "a*or Ar*iter or the $":!%G -e )ossi v. 0L)C, -1& S!:A 2&' #1((()%
When the *y1laws of the condominium corporation specifically includes the position of
FSuperintendentPAdministratorG in is roster of corporate officers, then such position is clearly a corporate officer
position and issues of reinstatement would *e within the 6urisdiction of the SE! and not the $":!%
x@ng(ingco v. 0L)C, 22. S!:A /1- #1((2)%
When the *y1laws provide that one of the powers of the ;oard of +rustees is F=t>o appoint a 4edical
Director, !omptrollerPAdministrator, !hiefs of Services and such other officers as it may deem necessary and
prescri*e their powers and duties,G then such specifically designated positions should *e considered Fcorporate
officersG position% +he determination of the rights and the concomitant lia*ility arising from any ouster from
such positions, would *e intra1corporate controversy su*6ect to the 6urisdiction of the SE! #now :+!)% x!abang
v. 0L)C 2// S!:A &/2 #1((2)%
An FofficeG is created *y the charter of the corporation and the officer is elected *y the directors or
stoc@holders #2 Cletcher !yc% !orp% !h% 00, Sec% 2//)% 8n the other hand, an FemployeeG usually occupies no
office and generally is employed not *y action of the directors or stoc@holders *ut *y the managing officer of
the corporation who also determines the compensation to *e paid to such employee% ##bid2 . % % A corporate
officerBs dismissal is always a corporate act, or an intra1corporate controversy, and the nature is not altered *y
the reason or wisdom with which the ;oard of Directors may have in ta@ing such action% x!abang v. 0L)C 2//
S!:A &/2 #1((2)%
+he president, vice1president, secretary and treasurer are commonly regarded as the principal or
executive officers of a corporation, and modern corporation statutes usually designate them as the officers of
the corporation% Oowever, other offices are sometimes created *y the charter or *y1laws of a corporation, or
the board of directors ma" be empowered under the b",laws of a corporation to create additional offices as
ma" be necessar"% x!abang v. 0L)C 2// S!:A &/2 #1((2)%
1&. Poer, o" Corporate O""i$er,!
.a/ The R1le on Corporate O""i$erL, Poer to Bin# Corporation
An officerMs power as an agent of the corporation must *e sought from the statute, charter, the *y1
laws or in a delegation of authority to such officer, from the acts of the *oard of directors formally
expressed or implied from a ha*it or custom of doing *usiness% x*icente v. /eralde3, '2 S!:A 21. =1(2->
reiterated in xBo"er,)oxas v. C$, 211 S!:A &2. #1((2)%
.3/ When Corporation Bo1n# 32 A$t o" It, Pre,i#ent% PeopleCs $ircargo v. Court of $ppeals, 2(2 S!:A 12.
#1((,)
.$/ Corporate Se$retar2
0n the a*sence of provisions to the contrary, the corporate secretary is the custodian of corporate
recordsKhe @eeps the stoc@ and transfer *oo@ and ma@es proper and necessary entries therein% 0t is the
duty and o*ligation of the corporate secretary to register valid transfers of stoc@ in the *oo@s of the
corporation and in the event he refuses to comply with such duty, the transferor1stoc@holder may rightfully
*ring suit to compel performance% x!orres 'r. v. Court of $ppeals 22, S!:A 2(- #1((2)%
When a SecretaryBs !ertificate is regular on its face, it can *e relied upon *y a third party who does
not have to investigate the truths of the facts contained in such certification otherwise *usiness
transactions of corporations would *ecome tortuously slow and unnecessarily hampered% x&sguerra v.
Court of $ppeals 2/2 S!:A -,. #1((2)%
1(
.#/ Corporate Trea,1rer
A corporate treasurerBs function have generally *een descri*ed as Fto receive and @eeps funds of the
corporation, and to dis*urse them in accordance with the authority given him *y the *oard or the properly
authori?ed officers%G 5nless duly authori?ed, a treasurer, whose power are limited, cannot *ind the
corporation in a sale of its assets% Selling is o*viously foreign to a corporate treasurerBs function% When the
corporation categorically denies ever having authori?ed its treasurer to sell the su*6ect parcel of land, the
*uyer had the *urden of proving that the treasurer was in fact authori?ed to represent and *ind the
allegedly selling corporation in the transaction% And failing to discharge such *urden, and failing to show
any provision of the articles of incorporation, *y1laws or *oard resolution to prove that the treasurer
possessed such power, the sale is void and not *inding on the alleged selling corporation% xSan 'uan
Structural and Steel +abricators #nc. v. Court of $ppeals, 2(/ S!:A /-1, /&' #1((,)%
.e/ Other EO""i$er,F "or Ser*i$e o" S1%%on, on Corporation
Cor purposes of determining proper service of summons to a corporation in a 3uasi16udicial
proceeding *efore the $":!, a *oo@@eeper can *e considered as an agent of the corporation within the
purview of the :ules of !ourt% +he rationale of all rules with respect to service of process on a corporation
is that such service must *e made to an agent or a representative so integrated with the corporation sued
as to ma@e it a priori supposa*le that he will reali?e his responsi*ilities and (now what he should do with
an" legal papers served on him. !he boo((eeperCs tas( is one under consideration that his regular
recording of the corporationCs Dbusiness accountsE and Dessential facts about the transactions of a business
or enterpriseE safeguards the corporation from possible fraud being committed adverse to its own corporate
interest% xPabon v. 0L)C 2(/ S!:A 2 #1((,)%
0n spite of provisions of the :ules of !ourt on service of process to *ind corporate entities, service
made to a representative so integrated with the corporation sued as to ma@e it a priori supposa*le that he
will reali?e his responsi*ilities and @now what he should do with any legal papers served on him, has *een
considered proper service to *ind the corporation% #x*illa )e" !ransit #nc. v. +ar &ast Motor Corp%, ,1
S!:A 2(, =1.2,>, overturning x-elta Motor Sales Corp. v. Mangosing, 2. Phil% '(, =1(2/> reiterated in
x). !ransport Corp. v. C$ 2&a S!:A 22 =1(('>)%
Section 11, :ule 1& of the 1((2 :ules of !ivil Procedure uses the term Fgeneral managerG and unli@e
the old provision in the :ules of !ourt, it does not include the term FagentG% !onse3uently, the enumeration
of persons to whom summons may *e served is Frestricted, limited and exclusiveG following the rule on
statutory construction expressio unios est exclusion alterius. +herefore, the earlier cases that uphold
service of summons upon a construction pro6ect manager
1
a corporationBs assistant manager
2
ordinary
cler@ of a corporation
-
private secretary of corporate executives
&
retained counsel
'
officials who had
charge or control of the operations of the corporation, li@e the assistant general manager
/
or the
corporationBs !hief Cinance and Administrative 8fficer
2
no longer apply since they were decided under the
old rule that allows service of summons upon an agent
,
of the corporation% x&.B. *illarosa % Partners Co.
Ltd. v. Benito, -12 S!:A /' #1((()%
."/ Co*era-e o" Corporate EA-ent,F
;lac@Bs "aw Dictionary defines an FagentG as Fa *usiness representative, whose function is to *ring
a*out, modify, affect, accept performance of, or terminate contractual o*ligations *etween principal and
third persons%G +o this extent, an FagentG may also *e shown to represent his principal in some one or more
of his relations to others, even though he may not have the power to enter into contracts% +he rules on
service of process ma@e service on FagentG sufficient% 0t does not in any way distinguish whether the
FagentG *e general or special, *ut is complied with even *y a service upon an agent having limited
authority to represent his principal% As such, it does not necessarily connote an officer of the corporation%
Oowever, though this may include employees other than officers of a corporation, this does not include
employees whose duties are not so integrated to the *usiness that their a*sence or presence will not toll
the entire operation of the *usiness% xPabon v. 0L)C 2(/ S!:A 2 #1((,)%
1'. LIABILITIES O4 CORPORATE O44ICERS! #Sec% -1 *a34ue3 v. Bor=a, 2& Phil% '/. #1(&&) Pala" #nc. v.
Clave, 12& S!:A /-, =1.(-> !ramat Mercantile #nc. v. C$, 2-, S!:A 1& =1((&> Pabalan v. 0L)C 1,&
S!:A &(' =1((.> xSulo ng Ba"an #nc. v. $raneta #nc. #nc., 22 S!:A -&2 =1(2/> xMindanao Motors Lines
#nc. v. Court of #ndustrial )elations, / S!:A 21. #1(/2)
+he general rule is that corporate officers are not personally lia*le for their official acts unless it is shown
that they have exceeded their authority% x$)B Constructions Co. #nc. v. Court of $ppeals --2 S!:A &22 #2..)
01ri,pr1#ential En1%eration o" O""i$er Lia3ilitie, ) M$M )ealt" v. 0L)C 2&& S!:A 2(2, #1((')
reiterated in x0ational +ood $uthorit" v. Court of $ppeals -11 S!:A 2.. #1((() x6ichico v. 0L)C 22- S!:A
-' #1((2)%
1
.anlaon Construction &nterprises Co. #nc. v. 0L)C 22( S!:A --2 #1((2)%
2
/esulgon v. 0L)C 21( S!:A '/1 #1((-)%
-
/olden Countr" +arms #nc. v. Sanvar -evelopment Corp., 21& S!:A 2(' #1((2) / % / !rading Corp. v. Court of $ppeals, 1', S!:A &// #1(,,)%
&
Summit !rading and -ev. Corp. v. $vendaAo 1-' S!:A -(2 #1(,') also *lason &nterprises Corp. v. Court of $ppeals -1. S!:A 2/ #1((()%
'
)epublic v. .er % Co. Ltd. 1, S!:A 2.2 #1(//)%
/
*illa )e" !ransit #nc. v. +ar &ast Motor Corp., ,1 S!:A 2(, #1(2,)%
2
+ar Corporation v. +rancisco 1&/ S!:A 1(2 #1(,/)%
,
+iloil Mar(eting Corp. v. Marine -ev. Corp. of the Philippines, 122 S!:A ,/ #1(,2)%
2.
+he horn*oo@ law is that corporate personality is a shield against personal lia*ility of its officers% +hus,
when the trust receipt sued upon was clearly entered into in *ehalf of the corporation *y its Executive 7ice1
President, then such officer and his spouse cannot *e made personally lia*le the personality of the corporation is
separate and distinct from the persons composing it% x!he Consolidated Ban( and !rust Corp. v. Court of
$ppeals A%:% $o% 11&2,/, 1( April 2..1%
Personal lia*ility of a corporate director, trustee or officer along #although not necessarily) with the
corporation may so validly attach, as a rule, only when<
#a) Oe assents to a patently unlawful act of the corporation
#*) Auilty of *ad faith or gross negligence in directing its affairs
#c) for conflict on interest resulting in damages to the corporation, its stoc@holders or other persons
#d) Oe consents to the issuance of watered down stoc@s or who, having @nowledge thereof, does not
forthwith file with the corporate secretary his written o*6ection thereto
#e) Oe agrees to hold himself personally and solidarily lia*le with the corporation or
#f) Oe is made, *y a specific provisions of law, to personally answer for his corporate action% x$trium
Management Corporation vs. Court of $ppeals, A%:% $o% 1.(&(1, 2, Ce*ruary 2..1
+he finding of solidary lia*ility among the corporation and its officers and directors would patently *e
*aseless when the decision contains no allegation, finding or conclusion regarding particular acts committed *y
said officers and mem*ers of the ;oard of Directors that show them to have *een individually guilty of
unmista@a*le malice, *ad faith, or ill1motive in their personal dealings with third parties% When corporate
officers and directors are sued merely as nominal parties in their official capacities as such, they cannot *e
held lia*le personal for the 6udgment rendered against the corporation% x0ational Power Corp. v. Court of
$ppeals, 22- S!:A &1( #1((2)%
When corporate officers are sued in their official capacity, the suit is e3uivalent to a suit against the
corporation, and 6udgment may *e enforced against corporate assets% x&milio Cano &nterprises #nc. v. C#), 1-
S!:A 2(1 #1(/')%
An attempt *y the corporation to avoid lia*ility *y distancing itself from the acts of the its President was
struc@ down with the !ourt holding that a corporation may not distance itself from the acts of a senior officer<
"the dual roles of :omulo C% Sugay should not *e allowed to confuse the facts%" x).+. Suga" v. )e"es, 12
S!:A 2.. #1(/1)%
Aenerally, officers or directors under the old corporate name *ear no personal lia*ility for acts done or
contracts entered into *y officers of the corporation, if duly authori?ed% x)epublic Planters Ban( v. C$, 21/
S!:A 2-, #1((2)%
An officer1stoc@holder who is a party signing in *ehalf of the corporation to a fraudulent contract cannot
claim the *enefit of separate 6uridical entity< "+hus, *eing a party to a simulated contract of management,
petitioner 5y cannot *e permitted to escape lia*ility under the said contract *y using the corporate entity
theory% +his is one instance when the veil of corporate entity has to *e pierced to avoid in6ustice and ine3uity%"
xParadise Sauna Massage Corporation v. 0g, 1,1 S!:A 21( #1((.)%
.a/ S!e'ia# Pro+isions in La-or Laws. , 0n the "a*or !ode since a corporate employer is an artificial person,
it must have an officer who can *e presumed to *e the emplo"er, *eing the "person acting in the interest
of #the) employer" as provided in the "a*or !ode% $.C. )ansom Labor 6nion,CCL6 v. 0L)C, 1&2 S!:A
2/( #1(,/)%
5nder the "a*or !ode, in the case of corporations, it is the president who responds personally for
violation of the la*or pay laws% x*illanueva v. $dre, 122 S!:A ,2/ #1(,()%
Cor the separate 6uridical personality of a corporation to *e disregarded, the wrongdoing must *e
clearly and convincingly esta*lished% -el )osario v. 0L)C, 1,2 S!:A 222 #1((.)%
A corporate officer cannot *e held personally lia*le for a corporate de*t simply *ecause he had
executed the contract for and in *ehalf of the corporation% 0t held that when a corporate officer acts in
*ehalf of a corporation pursuant to his authority, is "a corporate act for which only the corporation should *e
made lia*le for any o*ligations arising from them%" x5estern $gro #ndustrial Corporation v. Court of
$ppeals, 1,, S!:A 2.( #1((.)%
8nly the responsi*le officer of a corporation who had a hand in illegally dismissing an employee
should *e held personally lia*le for the corporate o*ligations arising from such act% Maglutac v. 0L)C,1,(
S!:A 2/2 #1((.) reiterated in x/ude3 v. 0L)C, 1,- S!:A /&& #1((.) and xChua v. 0L)C, 1,2 S!:A
-'- #1((.)%
+he case of )ansom v. 0L)C is not in point *ecause there the de*tor corporation actually ceased
operations after the decision of the !ourt of 0ndustrial :elations was promulgated against it, ma@ing it
necessary to enforce it against its former president% When the corporation is still existing and a*le to satisfy
the 6udgment in favor of the private respondent, the corporate officers cannot *e held personally lia*le%
Lim v. 0L)C, 121 S!:A -2, #1(,()%
+he aforecited cases will not apply to the instant case, however, *ecause the persons who were there
made personally lia*le for the employeesM claims were stoc@holders1officers of the respondent corporation%
0n the case at *ar, the petitioner while admittedly the highest ran@ing local representative of the
corporation, is nevertheless not a stoc@holder and much less a mem*er of the *oard of directors or an
officer thereof% x-e /u3man v. 0L)C, 211 S!:A 22- #1((2)
21
A mere general manager cannot *e held solidarily lia*le with the corporation for unpaid la*or claims,
especially when he is neither a stoc@holder or a mem*er of the *oard of the corporation% x-e /u3man v.
0L)C, 211 S!:A 22- #1((2)
A president cannot *e held solidarily lia*le personally with the corporation a*sent evidence of
showing that he acted maliciously or in *ad faith% x&P/ Constructions Co. v. C$, 21. S!:A 2-. #1((2)%
A 6udgment rendered against a person "in his capacity as President" of the corporation was
enforcea*le against the assets of such officer when the decision itself found that he merely used the
corporation as his alter1ego or as his *usiness conduit% x$rcilla v. Court of $ppeals, 21' S!:A 12. #1((2)%
+he President and Aeneral 4anager of a corporation who entered into and signed a contract in his
official capacity cannot *e made lia*le thereunder in his individual capacity in the a*sence of stipulation to
that effect due to the personality of the corporation *eing separate and distinct from the persons composing
it% x)ustan Pulp % Paper Mills #nc. v. #$C, 21& S!:A //' #1((2), citing xBan4ue /enerale Belge v. 5alter
Bull and Co., ,& Phil% 1/& #1(&().
)eahs Corporation v. 0L)C 221 S!:A 2&2 #1((2), reviewed the $.C. )ansom doctrine of imposing
solidarily lia*ility on the highest officers of the corporation for 6udgment on la*or claims rendered against
the corporation pursuant to Art% 2,- of the "a*or !ode, and reviewed its application in su*se3uent cases of
Maglutac Chua /ude3 and Pabalan. 0t reiterated the main doctrine of separate personality of a
corporation which should remain as the guiding rule in determining corporate lia*ility to its employees, and
that at the very least, to 6ustify solidary lia*ility, Fthere must *e an allegation or showing that the officers of
the corporation deli*erately or maliciously designed to evade the financial o*ligation of the corporation to
its employees,G or a showing that the officers indiscriminately stopped its *usiness to perpetuate an illegal
act, as a vehicle for the evasion of existing o*ligations, in circumvention of statutes, and to confuse
legitimate issues%
!orporate officers are not personally lia*le for money claims of discharged employees unless they
acted with evident malice and *ad faith in terminating their employment% x$HSFPhilippines v. Court of
$ppeals 2'2 S!:A -1( #1((/)%
+he finding of solidary lia*ility among the corporation and its officers and directors would patently *e
*aseless when the decision contains no allegation, finding or conclusion regarding particular acts
committed *y said officers and mem*ers of the ;oard of Directors that show them to have *een
individually guilty of unmista@a*le malice, *ad faith, or ill1motive in their personal dealings with third
parties% When corporate officers and directors are sued merely as nominal parties in their official capacities
as such, they cannot *e held lia*le personal for the 6udgment rendered against the corporation% x0ational
Power Corp. v. Court of $ppeals, 22- S!:A &1( #1((2)%
0n la*or cases, particularly, corporate directors and officers are solidarily lia*le with the corporation
for the termination of employment of corporate employees done with malice or in *ad faith% 0n this case, it
is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees% +hey
were the one, who as high1ran@ing officers and directors of the corporation, signed the ;oard :esolution
retrenching the employees on the feigned ground of serious *usiness losses that had no *asis apart from
an unsigned and unaudited Profit and "oss Statement which, to repeat, had no evidentiary value
whatsoever% +his is indicating of *ad faith on the part of the corporate officers for which they can *e held
6ointly and severally lia*le with the !orporation for all the money claims of the illegally terminated
employees% x6ichico v. 0L)C, 22- S!:A -' #1((2)%
A corporation, *eing a 6uridical entity, may act only through its directors, officers and employees and
o*ligations incurred *y them, acting as corporate agents, are not theirs *ut the direct accounta*ilities of the
corporation they represent% xBrent Hospital #nc. v. 0L)C 2(2 S!:A -.& #1((,)%
+he manager of a corporation are not personally lia*le for their official acts unless it is shown that
they have exceeded their authority% +here is nothing on record to show that the manager deli*erately and
maliciously evaded the corporationBs financial o*ligation to the employee hence, there appearing to *e no
evidence on record that the manager acted maliciously or deli*erately in the non1payment of *enefits to
the employee, the manager cannot *e held 6ointly and severally lia*le with the corporate employers% =!"7 R
$othing was shown to determine whether the corporate employer had no assets with which to pay the
claims of the employee>% x0icario v. 0L)C 2(' S!:A /1( #1((,)%
0n x)estuarante Las Conchas v. Llego, -1& S!:A 2& #1(((), the Supreme !ourt had apparently
returned to the $.C. )ansom principle that F=a>lthough as a rule, the officers and mem*ers of a corporation
are not personally lia*le for acts done in the performance of their duties, this rule admits of exceptions, one
of which is when the employer corporation is no longer existing and is una*le to satisfy the 6udgment in
favor of the employee, the officers should *e held lia*le for acting on *ehalf of the corporation%G 0n that
case, the restaurant *usiness had to *e closed down *ecause possession of the premises had *een lost
through an adverse decision in an e6ectment case% +he !ourt held< F0n the present case, the employees
can no longer claim their separation *enefits and 1-
th
month pay from the corporation *ecause it had
already ceased operation% +o re3uire them to do so would render illusory the separation and 1-t6 month pay
awarded to them *y the $":!% +heir only recourse is to satisfy their claim from the officers of the
corporation who were, in effect, acting in *ehalf of the corporation%G
+he $.C. )ansom doctrine has *een reiterated in xCarmelcraft Corp. v. 0L)C 1,/ S!:A -(-
#1((.), x*alderrama v. 0L)C, 2'/ S!:A &// #1((/)%
CI. STOCKHOLDERS AND 9E9BERS
22
1. Sharehol#er, Not Cre#itor, o" Corporation #/arcia v. Lim Chu Sing, '( Phil% '/2 =1(-&>)%
&. S13,$ription Contra$t, #Sec% /. and 22 !rillana v. ;ue3on Colegialla, (- Phil% -,- =1('->)%
.a/ Purchase Agreement #Ba"la v. Silang !raffic Co. #nc., 2- Phil% ''2 =1(&2>)%
.3/ Pre10ncorporation Su*scription #Sec% /1)
.$/ :elease from Su*scription 8*ligation #*elasco v. Poi3at, -2 Phil% ,.2 =1(1,> P0B v. Bitulo( Sawmill #nc.,
2- S!:A 1(/, =1(/,> 0ational &xchange Co. v. -exter, '1 Phil% /.1 =1(2,>)
.#/ When condition of payment provided for in the *y1laws #-e Silva v. $boiti3 % Co., && Phil% 2'' =1(2->)%
'. Con,i#eration #Sec% /2)%
#a) !ash
#*) Property
#c) Service
#d) :etained Earnings
#e) Share
Stoc@ dividends are in the nature of shares of stoc@, the consideration for which is the amount of
unrestricted retained earnings converted into e3uity in the corporationBs *oo@s% xLincoln Philippine Life v.
Court of $ppeals A%: $o% 11,.&-, 2- 9uly 1((,%
(. Watere# Sto$?, #Sec% /')
5. Pa2%ent o" Balan$e o" S13,$ription #Secs% // and /2 Linga"en /ulf &lectric Power Co. v. Balta3ar, (- Phil%
&.& =1('->)%
6. Delin:1en$2 on S13,$ription #Secs% /,, /(, 2. and 21 xPhilippine !rust Co. v. )ivera, && Phil% &/( =1(2->
xMiranda v. !arlac )ice Mill Co., '2 Phil% /1( =1(-2>)
+he prescriptive period to recover on unpaid su*scription does not commence from the time of
su*scription *ut from the time of demand *y the corporation through it *oard of directors for the stoc@holder to
pay the *alance of his su*scription #x/arcia v. Suare3, /2 Phil% &&1=1(-(>)%
.a/ Who 4ay Nuestion a Delin3uency Sale #Sec% /, and /()%
8. Certi"i$ate o" Sto$? #Sec% /-)
.a/ Nat1re o" Certi"i$ate #!an v. S&C, 2./ S!:A 2&. =1((2> -e los Santos v. )epublic (/ Phil% '22 =1(''>
xC.0. Hodges v. Le3ama, 1& S!:A 1.-. =1(/'>)%
A stoc@ certificate is merely evidence of a share of stoc@ and not the share itself% xLincoln Philippine
Life v. Court of $ppeals, 2(- S!:A (2 #1((,)%
A formal certificate of stoc@ could not *e considered issued in contemplation of law unless signed *y
the president or vice1president and countersigned *y the secretary or assistance secretary% Bitong v. Court
of $ppeals 2(2 S!:A '.- #1((,)%
.3/ 5*asi)ne-otia3le Chara$ter o" the Certi"i$ate o" Sto$? #Bachrach Motor Co. v. Lacson Ledesma, /&
Phil% /,1 =1(-2>)%
0n order for a transfer of stoc@ certificate to *e effective, the certificate must *e properly indorsed
and that title to such certificate of stoc@ is vested in the transferee *y the delivery of the duly indorsed
certificate of stoc@% 0ndorsement of the certificate of stoc@ is a mandatory re3uirement of law for an
effective transfer of a certificate of stoc@% )a3on v. #$C, 2.2 S!:A 2-& #1((2)%
+he rule is that the endorsement of the certificate of stoc@ *y the owner or his attorney1in1fact or any
other person legally authori?ed to ma@e the transfer shall *e sufficient to effect the transfer of shares only if
the same is couple with delivery% +he delivery of the stoc@ certificate duly endorsed *y the owner is the
operative act of transfer of shares from the lawful owner to the new transferee% +hus, for a valid transfer of
stoc@s, the re3uirements are as follows< #a) +here must *e delivery of the stoc@ certificate #*) +he
certificate must *e endorsed *y the owner or his attorney1in1fact or other persons legally authori?ed to
ma@e the transfer and #c) to *e valid against third parties, the transfer must *e recorded in the *oo@s of
the corporation% Bitong v. Court of $ppeals 2(2 S!:A '.- #1((,)%
.$/ Ri-ht to I,,1an$e #Sec% /& Balta3ar v. Linga"en /ulf &lect. Power Co. #nc., 1& S!:A '22 =1(/'>)%
.#/ Lo,t or De,tro2e# Certi"i$ate, #Sec% /- and 2-)
While Section 2- of the !orporation !ode appears to *e mandatory, the same admits exceptions,
such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stoc@
which has *een lost without complying with the re3uirements under Section 2- of the !orporation !ode,
provided that the corporation is certain as to the real owner of the shares to whom the new certificate shall
*e issued% % % % 0t would *e an internal matter for the corporation to find measures in ascertaining who are
the real owners of stoc@ for purposes of li3uidation% 0t is well1settled that unless proven otherwise, the
Fstoc( and transfer boo(E of the corporation is the *est evidence to esta*lish stoc@ ownership% #SE!
8pinion, dated 2, 9anuary 1(((, addressed to 4s% 4a% !ecilia Sala?ar1Santos)%
2-
.e/ 4or-e# an# Una1thori7e# Tran,"er, #'. Santamaria v. Hong.ong and Shanghai Ban(ing Corp., ,( Phil%
2,. =1('1> 0eugene Mar(eting #nc. v. Court of $ppeals, -.- S!:A 2(' =1(((>)%
H. Sto$? an# Tran,"er Boo? #Secs% /-, 22 and 2& +ua Cun v. Summers, && Phil% 2.& =1(2-> Monserrat v.
Ceran, ', Phil% &/( =1(--> Chua /uan v. Samahang Magsasa(a #nc%, /2 Phil% &22 =1(-'> 6son v.
-iosomito, /1 Phil% '-' =1(-'> &scaAo v. +ilipinas Mining Corporation, 2& Phil% 21 =1(&&> Bachrach Motors v.
Lacson,Ledesma, /& Phil% /,1 =1(-2> 0ava v. Peers Mar(eting Corp., 2& S!:A /' =1(2/>)%
0n /arcia v. 'omouad -2- S!:A &2& #2...), the Supreme !ourt directly resolved the issue FWhether a
bona fide transfer of the shares of a corporation, not registered or noted in the *oo@s of the corporation, is valid
as against a su*se3uent lawful attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not%G +he !ourt 3uoted from 6son v. -iosomito which held that all transfers of
shares not entered in the stoc@ and transfer *oo@ of the corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the corporation and to su*se3uent purchasers in good faith and to all
persons interested, except the parties to such transfers< FAll transfers not so entered on the *oo@s of the
corporation are a*solutely void *ot *ecause they are without notice or fraudulent in law or fact, *ut *ecause
they are made so void *y statute% +he Supreme !ourt held that Fthe transfer of the su*6ect certificate made *y
Dico to petitioner was not valid as to the spouses Atinon, the 6udgment creditors, as the same still stood in the
name of Dico, the 6udgment de*tor, at the time of the levy on execution% 0n addition, as correctly ruled *y the
!A, the entry in the minutes of the meeting of the !lu*Bs *oard of directors noting the resignation of Dico as
proprietary mem*er does not constitute compliance with Section /- of the !orporation !ode% Said provision of
law strictly re3uires the recording of the transfer in the *oo@s of the corporation, and not elsewhere, to *e valid
as against third parties%G
Attachments of shares of stoc@ are not included in the term "transfer" as provided in Section /- of the
!orporation !ode% ;oth the :evised :ules of !ourt and the !orporation !ode do not re3uire annotation in the
corporationMs stoc@ and transfer *oo@s for the attachment of shares to *e valid and *inding on the corporation
and third parties% Chemphil &xport % #mport Corporation v Court of $ppeals, 2'1 S!:A 2'2 #1((')%
5ntil registration is accomplished, the transfer, though valid *etween the parties, cannot *e effective as
against the corporation% +hus, the unrecorded transferee cannot vote nor *e voted for% +he purpose of
registration, therefore, is two1fold< to ena*le the transferee to exercise all the rights of a stoc@holder, including
the right to vote and to *e voted for, and to inform the corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and su*6ect to the lia*ilities of a stoc@holder% 5ntil challenged in
a proper proceeding, a stoc@holder of record has a right to participate in any meeting his vote can *e properly
counted to determine whether a stoc@holdersB resolution was approved, despite the claim of the alleged
transferee% 8n the other hand, a person who has purchased stoc@, and who desires to *e recogni?ed as a
stoc@holder for the purpose of voting, must secure such a standing *y having the transfer recorded on the
corporate *oo@s% 5ntil the transfer is registered, the transferee is not a stoc@holder *ut an outsider% Batangas
Laguna !a"abas Bus Compan" #nc. v. Bitanga, A%:% $o% 1-2(-&, 1. August 2..1%
Section /- of the !orporation !ode which provides that Fno share of stoc@ against which the corporation
holds any unpaid claim shall *e transfera*le in the *oo@s of the corporationG cannot *e utili?ed *y the
corporation to refuse to recogni?e ownership over pledged shares purchased at pu*lic auction% +he term
Funpaid claimsG refers to Fany unpaid claims arising from unpaid su*scription, and not to any inde*tedness
which a su*scri*er or stoc@holder may owe the corporation arising from any other transactions% 8*ligations
arising from unpaid monthly dues do not fall within the coverage of Section /-% China Ban(ing Corp. v. Court of
$ppeals, 22. S!:A '.- #1((2)%
Entries made on the stoc@ and transfer *oo@ *y any person other than the corporate secretary, such as
those made *y the President and !hairman, cannot *e given any valid effect% x!orres 'r. v. Court of $ppeals
22, S!:A 2(- #1((2)%
A person cannot claim a right to intervene as a stoc@holder in corporate issue on the strength of the
transfer of shares allegedly executed *y a registered stoc@holder% +he transfer must *e registered in the *oo@s
of the corporation to affect third persons% +he law on corporation is explicit on this under Sec% /- of the
!orporation !ode% xMagsa"sa",Labrador v. C$, 1,. S!:A 2// #1(,()
Section /- of the !orporation !ode envisions a formal certificate of stoc@ which can *e issued only upon
compliance with certain re3uisites% +irst the certificate must *e signed *y the president or vice1president,
countersigned *y the secretary or assistant secretary, and sealed with the seal of the corporation% A mere
typewritten statement advising a stoc@holder of the extent of his ownership is a corporation without 3ualification
andPor authentication cannot *e considered as a formal certificate of stoc@% Second delivery of the certificate
is an essential element of its issuance% Oence, there is no issuance of a stoc@ certificate where it is never
detached from the stoc@ *oo@s although *lan@s therein are properly filled up if the person whose name is
inserted therein has no control over the *oo@s of the company% !hird the par value, as to par value shares, or
the full su*scription as to no par value shares, must first *e fully paid% +ourth the original certificate must *e
surrendered where the person re3uesting the issuance of a certificate is a transferee from a stoc@holder% Bitong
v. Court of $ppeals 2(2 S!:A '.- #1((,)%
I. Sit1, o" Share, o" Sto$?, #Sec% '')
+he situs of shares of stoc@ would *e the place of domicile of the corporation to which they pertain to%
x5ells +argo Ban( and 6nion v. Collector, 2. Phil% -2' #1(&.) x!a"ag v. Benguet Consolidated #nc., 2/ S!:A
2&2 #1(/,) cf. xPer(ins v. -i3on, /( Phil% 1,/ #1(-()%
CII. RIGHTS O4 STOCKHOLDERS AND 9E9BERS
2&
1. What #oe, EShareF repre,ent@
While shares of stoc@ constitute personal property, they do not represent property of the corporation = i.e.
they are properties of the stoc@holders who own them>% Share of stoc@ only typifies an ali3uot part of the
corporationBs property, or the right to share in its proceeds to that extent when distributed according to law and
e4uit" *ut the holder is not the owner of any part of the capital =properties> of the corporation, nor is he entitled
to the possession of any definite portion of its property or assets% +he stoc@holder is not a co1owner or tenant in
common of the corporate property% xStoc(holders of +. /uanson and Sons #nc. v. )egister of -eeds of Manila,
/ S!:A -2- #1(/2)%
&. Ri-ht to Certi"i$ate o" Sto$? "or 41ll2 Pai# Share, #Sec% /& !an v. S&C, 2./ S!:A 2&. =1((2>)
'. Pree%pti*e Ri-ht, #Sec% -( -atu !agoranao Benito v. S&C, 12- S!:A 222 =1(,-> -ee v. S&C, 1(( S!:A
2-, =1((1>)%
(. Ri-ht to Tran,"er o" Sharehol#in-, #Sec% /-)
Authority of a corporation to regulate the transfer of its stoc@ does not empower the corporation to restrict
the right of a stoc@holder to transfer his shares, *ut merely authori?es the adoption of regulations as to the
formalities and procedure to *e followed in effecting transfer% x!homson v. Court of $ppeals, 2(, S!:A 2,.
#1((,)%
.a/ Non)tran,"era3ilit2 o" 9e%3er,hip in Non)Sto$? Corporation #Secs% (. and (1)%
.3/ Re,tri$tion on Tran,"er, #Lambert v. +ox, 2/ Phil% ',, =1(1&>)
) Ri-ht o" Re"1,al #Padgett v. Babcoc( % !empleton #nc., '( Phil% 2-2 =1(-->)%
Section /- of the !orporation !ode contemplates no restriction as to whom the stoc@s may *e
transferred% 0t does not suggest that any discrimination may *e created *y the corporation in favor of, or
against a certain purchaser% +he owner of shares, as owner of personal property, is at li*erty, under said
section to dispose them in favor of whomever he pleases, without limitation in this respect, than the
general provisions of law% +leishcher v. Botica 0olasco, &2 Phil% ',- #1(2')%
+he only limitation imposed *y Section /- of the !orporation !ode is when the corporation holds
any unpaid claim against the shares intended to *e transferred% A corporation, either *y its *oard, its *y1
laws, or the act of its officers, cannot create restrictions in stoc@ transfers, *ecause ":estrictions in the
traffic of stoc@ must have their source in legislative enactment, as the corporation itself cannot create
such impediment% ;y1laws are intended merely for the protection of the corporation, and prescri*e
relation, not restriction they are always su*6ect to the charter of the corporation% )ural Ban( of Salinas v.
C$, 21. S!:A '1. #1((2)%
Restraint o" Tra%e K An agreement *y which a person o*liges himself not to engage in
competitive trade for five years is valid and reasona*le and not an undue or unreasona*le restraint of
trade and is o*ligatory on the parties who voluntarily enter into such agreement% x @llendorf v.
$brahamson -, Phil% ',' #1(1,).
.$/ Re%e#2 I" Re-i,tration I, Re"1,e# #Hager v. Br"an, 1( Phil% 1-, =1(11>)
A stipulation on stoc@ certificate that assignment thereof would not *e *inding on the corporation
unless such assignment is registered in the *oo@s of the clu* as re3uired under the *y1laws, which does
not provide when the registration should *e made, would mean that the cause of action and the
determination of the prescription period would *egin only upon demand for registration is made and not at
the time of the assignment of the certificate% x5on v. 5ac( 5ac( /olf % Countr" Club, 1.& Phil% &//
#1(',)%
+he claim for damages of what the shares could have sold had the demand *een complied with is
deemed to *e speculative damage and non1recovera*le xBatong Buha" /old Mines v. C$, 1&2 S!:A &
#1(,2)%
5. Ri-ht, to Di*i#en#, #Sec% &-)
Although the certificates of stoc@ granted the stoc@holder the right to receive 1E 3uarterly dividends,
cumulative and participating, the stoc@holders do not *ecome entitled to the payment thereof as a matter of
right without necessity of a prior declaration of dividends% % % ;oth Sec% 1/ of the !orporation "aw and Sec% &-
of the present !orporation !ode prohi*it the issuance of any stoc@ dividend without the approval of
stoc@holders, representing not less than two1thirds #2P-) of the outstanding capital stoc@ at a regular or special
meeting duly called for the purpose% +hese provisions underscore the fact that payment of dividends to a
stoc@holder is not a matter of right *ut a matter of consensus% Curthermore, Finterest *earing stoc@sG on which
the corporation agrees a*solutely to pay interest *efore dividends are paid to the common stoc@holders, is
legal only when construed as re3uiring payment of interest as dividends from net earnings or surplus only%
x)epublic Planters Ban( v. $gana, 2/( S!:A 1 #1((2)%
6. Ri-ht, to Atten# 9eetin-, an# ;ote #Sec% /, Sec% ,()
5ntil challenged successfully in the proper proceedings, a stoc@holder according to the *oo@s of the
corporation has a right to participate in any meeting, and in the a*sence of fraud the action of the stoc@holdersB
meeting cannot *e collaterally attac@ed on account of such participation, even if it *e shown later on that the
shares had *een previously sold #*ut not recorded)% xPrice and Sulu -ev. Co. v. Martin, ', Phil% 2.2 #1(--)
2'
Se3uestration of shares does not entitle the government to exercise acts of ownership over the shares
conse3uently, even se3uestered shares may *e voted upon *y the registered stoc@holder of record%
xCo=uangco 'r. v. )oxas, 1(' S!:A 2(2 #1((1)%
.a/ In,tan$e, When Sto$?hol#er, Entitle# to ;ote!
1 Election of directors and trustees #Sec% 2&)
1 Amendment of articles of incorporation #Sec% 1/)
1 0nvestment in another *usiness or corporation #Secs% -/ and &2)
1 4erger and consolidation #Sec% 22)
1 0ncrease and Decrease of capital stoc@ #Sec% -,)
1 Adoption, amendment and repeal of *y1laws #Sec% &,)
1 Declaration of stoc@ dividends #Sec% &-)
1 4anagement contracts #Sec% &&)
1 Cixing of consideration of no par value shares #Sec% /2)
.3/ 0oint Oner,hip #Sec% '/)
.$/ Trea,1r2 Share No ;otin- Ri-ht, #Sec% '2)
.#/ Ple#-orD 9ort-a-or, an# A#%ini,trator, #Sec% '')
When shares of stoc@s are pledged *y means of endorsement in *lan@ and delivery of the covering
certificates to secure a mortgage loan, the pledgee does not *ecome the owner of the shares simply *y the
failure of the registered stoc@holder to pay his loan% !onse3uently, without proper foreclosure, the lender
cannot demand that the shares *e registered in his name% A contract of pledge of shares does not ma@e
the pledgee the owners of the shares pledged% xLim !a" v. Court of $ppeals 2(- S!:A /-& #1((,)%
.e/ Con#1$t o" Sto$?hol#er,A or 9e%3er,A 9eetin-,!
Iinds and :e3uirements of 4eetings #Secs% &( and '.)
Place and +ime of 4eeting #Secs% '1 and (-)
Nuorum #Sec% '2)
8. Ri-ht, to In,pe$t an# Cop2 Corporate Re$or#,
.a/ Ba,i, o" Ri-ht #/o(ongwei 'r. v. S&C, ,( S!:A --/ =1(2(>)%
:ight to inspect covers controlled su*sidiaries% x/o(ongwei v. S&C, ,( S!:A --/ #1(2()%
.3/ Li%itation, on Ri-ht
+he only express limitations on the right of inspection under Sec% 2& of the !orporation !ode are< #a)
the right of inspections should *e exercised at reasona*le hours on *usiness days #*) the person
demanding the right to examine and copy excerpts from the corporate records and minutes has not
improperly used any information secured through any previous examination of records of the corporation
and #c) the demand is made in good faith or for a legitimate purpose% x$frica v. PC//, 2.' S!:A -(
#1((2)%
+he right is exercisa*le through agents and representatives, otherwise it would often *e useless to
the stoc@holder who does not @now corporate intricacies% x5./. Philpotts v. Philippine Manufacturing Co.,
&. Phil% &21 #1(1()%
A director has the un3ualified right to inspect the *oo@s and records of the corporation at all
reasona*le times, and cannot *e denied on the ground that the director or shareholder is on unfriendly
terms with the officers of the corporation whose records are sought to *e inspected% x*eraguth v. #sabela
Sugar Co., '2 Phil% 2// #1(-2)
+he right to inspect, although it includes the right to ma@e copies, does not authori?e *ringing the
*oo@s or records outside of the corporate premises% x*eraguth v. #sabela Sugar Co., '2 Phil% 2// #1(-2)
+he right to inspect does not include the right of access to minutes until such minutes have *een
written up and approved *y the directors% x*eraguth v. #sabela Sugar Co., '2 Phil% 2// #1(-2)
A *oard resolution limiting the right to inspect to a period of ten days shortly prior to the annual
stoc@holdersB meeting is an unreasona*le restriction and violates the legal provision granting the exercise
of such right Fat reasona*le hours%G xPardo v. Hercules Lumber Co., &2 Phil% (/& #1(2&)
.$/ Spe$i"ie# Re$or#, #Secs% 2&, 2' and 1&1)
.#/ Re%e#ie, I" In,pe$tion Denie#! Man%a3*s #/on3ales v. P0B, 122 S!:A, &,( =1(,-> )epublic v.
Sandiganba"an, 1(( S!:A -( =1((1>)%
.e/ Con"i#ential Nat1re o" SEC E+a%ination, #Sec% 1&2)
H. Apprai,al Ri-ht #Secs% ,1 to ,/ and 1.')
I. Deri*ati*e S1it, #San Miguel Corp. v. .ahn, 12/ S!:A &&2 =1(,(>)%
.a/ Who 9a2 Brin- S1it ##Pascual v. @ro3co, 1( Phil% ,- =1(11>)%
2/
.3/ E+ha1,tion o" Intra)Corporate Re%e#ie, #&verett v. $sia Ban(ing Corp. &( Phil% '12 =1(22> $ngeles v.
Sanmtos /& Phil% /(2 =1(-2>).
.$/ Nat1re o" Relie" #&vangelista v. Santos, ,/ Phil% -,2 =1('.> )epublic Ban( v. Cuaderno, 1( S!:A /21
=1(/2> )e"es v. !an, - S!:A 1(, =1(/1> Commart 1Phils.2 #nc. v. S&C, 1(, S!:A 2- =1((1>)%
Appointment of receiver can *e an ancillary remedy in a derivative suit xChase v. C+# of Manila, 1,
S!:A /.2 #1(//)%
A derivative suit is an action *rought *y minority shareholders in the name of the corporation to
redress wrongs committed against the corporation, for which the directors refuse to sue% 0t is a remedy
designed *y e3uity and has *een the principal defense of the minority shareholders against a*uses *y the
ma6ority% x5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/ #1((2)%
Cor a derivative suit to prosper, it is re3uired that the minority shareholder who is suing for and on
*ehalf of the corporation must allege in his complaint *efore the proper forum that he is suing on a
derivative cause of action on *ehalf of the corporation and all other shareholders similarly situated who
wish to 6oin% x5estern #nstitute of !echnolog" #nc. v. Salas 22, S!:A 21/ #1((2)%
0n the a*sence of a special authority from the *oard of directors to institute a derivative suit for and
in *ehalf of the corporation, the president or managing director is dis3ualified *y law to sue in her own
name% +he power to sue and *e sued in any court *y a corporation even as a stoc@holder is lodged in the
*oard of directors that exercises its corporate powers and not in the president or officer thereof% x Bitong v.
Court of $ppeals 2(2 S!:A '.- #1((,)%
Cor a derivative suit to prosper, it is re3uired that the minority stoc@holder suing for and on *ehalf of
the corporation must allege in his complaint that he is suing on a derivative cause of action on *ehalf of
the corporation and all other stoc@holders similarly situated who may wish to 6oin him in the suit% +here is
now showing that petitioner has complied with the foregoing re3uisites% !am 5ing !a( v. Ma(asiar A%:%
122&'2, 2( 9anuary 2..1%
+he allegations of in6ury to the spouses1relators can co1exist with those pertaining to the corporation%
+he personal in6ury suffered *y the spouses cannot dis3ualify them from filing a derivative suit on *ehalf of
the corporation% 0t merely gives rise to an additional cause of action for damages against the erring directors%
+his cause of action is also included in the !omplaint filed *efore the SE!% /ochan v. >oung A%:% $o%
1-1,,(, 12 4arch 2..1%
1J. Ri-ht to Proportionate Share o" Re%ainin- A,,et, Upon Di,,ol1tion
#a) Different rules apply to non1stoc@ corporations and foundations #Secs% (& and (' Section -&#O)#2)#c), $0:!
of 1((2)%
11. Contra$t, an# A-ree%ent A""e$tin- Sharehol#in-,
.a/ Pro+2 #Sec% ',)
.3/ ;otin- Tr1,t A-ree%ent, #Sec% '( Lee v. C$, 2.' S!:A 2'2 =1((2>)%
+he trustor has a right to terminate the 7+A for *reach thereof% x&verett v. $sia Ban(ing Corporation,
&( Phil% '12 #1(2/)%
7oting trust agreement as part of a loan arrangement% 0#-C v. $4uino, 1/- S!:A 1'- #1(,,)%
.$/ Poolin- A-ree%ent, or Sharehol#er,L A-ree%ent, #Sec% 1..)
CIII. CAPITAL STRUCTURE! SHARES O4 STOCK
&. Con$ept o" KCapital Sto$?K #Central !extile Mills v. 0ational 5age and Productivit" Commission 2/. S!:A
-/, =1((/>)%
;y express provision of Section 1- =of the !orporation !ode>, paid1up capital is that portion of the
authori?ed capital stoc@ which has *een *oth su*scri*ed and paid% $ot all funds or assets received *y the
corporation can *e considered paid1up capital, for this term has a technical signification in !orporation "aw%
Such must form part of the authori?ed capital stoc@ of the corporation, su*scri*ed and then actually paid up%
xMSC#,0$C6S#P Local Chapter v. 0ational 5ages and Productivit" Commission 2/( S!:A 12- #1((2)%
+he term FcapitalG and other terms used to descri*e the capital structure of a corporation are of universal
acceptance, and their usages have long *een esta*lished in 6urisprudence% ;riefly, capital refers to the value of
the property or assets of a corporation% +he capital su*scri*ed is the total amount of the capital that persons
#su*scri*ers or shareholders) have agreed to ta@e and pay for, which need not necessarily *e, and can *e
more than, the par value of the shares% 0n fine, it is the amount that the corporation receives, inclusive of the
premium if any, in consideration of the original issuance of the shares% x0ational !elecommunications
Commission v. Court of $ppeals -11 S!:A '.,, '1&1'1' #1((()%
&. Cla,,i"i$ation o" Share, #Sec% /)
.a/ Co%%on Share,
FA common stoc@ represents the residual ownership interest in the corporation% 0t is a *asic class of
stoc@ ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to
22
a pro rata division of profits%G xCommissioner of #nternal )evenue v. Court of $ppeals, -.1 S!:A 1'2
#1((()%
.3/ Pre"erre# Share, #)epublic Planters Ban( v. $gana, 2/( S!:A 1 =1((2>)%
Parti$ipatin- an# Non)parti$ipatin-
C1%1lati*e an# Non)$1%1lati*e
Preferred stoc@s are those which entitle the shareholder to some priority on dividends and asset
distri*ution% xCommissioner of #nternal )evenue v. Court of $ppeals -.1 S!:A 1'2 #1((()%
FA preferred share of stoc@, on one hand, is one which entitles the holder thereof to certain
preferences over the holders of common stoc@% +he preferences are designed to induce persons to
su*scri*e for shares of a corporation% Preferred shares ta@e a multiplicity of forms% +he most common
forms may *e classified into two< #1) preferred shares as to assets and #2) preferred shares as to dividends%
+he former is a share which gives the holder thereof preference in the distri*ution of the assets of the
corporation in case of li3uidation the latter is a share the holder of which entitled to receive dividends on
said shares to the extent agreed upon *efore any dividends at all are paid to the holders of common stoc@%
+here is no guaranty, however, that the share will receive any dividends% % % Similarly, the present
!orporation !ode provides that the *oard of directors of a stoc@ corporation may declare dividends only out
of unrestricted retained earnings% +he !ode, in Section &-, adopting the change made in accounting
terminology, su*stituted the phrase Funrestricted retained earnings,G which may *e a more precise term, in
place of Fsurplus profits arising from its *usinessG in the former law% +hus, the declaration of dividends is
dependent upon the availa*ility of surplus profit or unrestricted retained earnings, as the case may *e%
Preferences granted to preferred stoc@holders, moreover, do not give them a lien upon the property of the
corporation nor ma@e them creditors of the corporation, the right of the former *eing always su*ordinate to
the latter% Dividends are thus paya*le only when there are profits earned *y the corporation and as a
general rule, even if there are existing profits, the *oard of directors has the discretion to determine whether
or not dividends are to *e declared% Shareholders, *oth common and preferred, are considered ris@ ta@ers
who invest capital in the *usiness and who can loo@ only to what is left after corporate de*ts and lia*ilities
are fully paid% )epublic Planters Ban( v. $gana, 2/( S!:A 1 #1((2)%
.3/ Re#ee%a3le ,hare, #Sec% ,)
:edeema*le shares are shares usually preferred, which *y their terms are redeema*le at a fixed
date, or at the option of either issuing corporation, or the stoc@holder, or *oth at a certain redemption price%
A redemption *y the corporation of its stoc@ is, in a sense, a repurchase of it for cancellation% +he present
!ode allows redemption of shares even if there are no unrestricted retained earnings on the *oo@s of the
corporation% +his is a new provision which in effect 3ualifies the general rule that the corporation cannot
purchase its own shares except out of current retained earnings% Oowever, while redeema*le shares may
*e redeemed regardless of the existence of unrestricted retained earnings, this is su*6ect to the condition
that the corporation has, after such redemption, assets in its *oo@s to cover de*ts and lia*ilities inclusive of
capital stoc@% :edemption, therefore, may not *e made where the corporation is insolvent or if such
redemption will cause insolvency or ina*ility of the corporation to meet its de*ts as they mature% )epublic
Planters Ban( v. $gana, 2/( S!:A 1 #1((2)%
F:edemption is repurchase, a reac3uisition of stoc@ *y a corporation which issued the stoc@ in
exchange for property, whether or not the ac3uired stoc@ is cancelled, retired or held in the treasury%
Essentially, the corporation gets *ac@ some of its stoc@, distri*utes cash or property to the shareholder in
payment for the stoc@, and continues in *usiness as *efore% +he redemption of stoc@ dividends previously
issued is used as a veil for the constructive distri*ution of cash dividends% xCommissioner of #nternal
)evenue v. Court of $ppeals -.1 S!:A 1'2 #1((()%
.$/ 4o1n#er Share, #Sec% 2)
.#/ Trea,1r2 Share, #Sec% ( Commissioner v. Manning, // S!:A 1& =1(2'>)%
When a treasury share which has not *een retired *y the corporation may *e sold again *ut so
long as it remains a treasury share, it does not participate in dividends #since a corporation cannot pay
dividends to itself) and cannot vote in stoc@holdersB meeting% San Miguel Corp. v. Sandiganba"an, -&.
S!:A 2,( #2...)%
.e/ Sto$? Warrant,
."/ Sto$? Option,
.-/ Re)Cla,,i"i$ation o" Share,
F:eclassification of shares does not always *ring any su*stantial alteration in the su*scri*erBs
proportional interest% ;ut the exchange is differentKthere would *e a shifting of the *alance of stoc@
features li@e priority in dividend declarations or a*sence of voting rights% Jet neither the reclassification nor
exchange per se yields income for tax purposes% % % 0n this case, the exchange of shares, without more,
produces no reali?ed income to the su*scri*er% +here is only a modification of the su*scri*erBs rights and
privilegesKwhich is not a flow of wealth for tax purposes% +he issue of taxa*le dividend may arise only
once a su*scri*er disposes of his entire interests and not when there is still maintenance of proprietary
interest%G xCommissioner of #nternal )evenue v. Court of $ppeals -.1 S!:A 1'2 #1((()%
'. H23ri# Se$1ritie, #/overnment v. Phil. Sugar &states, -, Phil% 1' =1(1,> 'ohn .ele" Co. v. Comm. of #nternal
)evenue, -2/ 5%S% '21, // S% !t% 2((, (. "% Ed%, 22, =1(&'>)
2,
(. G1a,i)Reor-ani7ation
.a/ :eduction of !apital Stoc@ #Sec% -, xMadrigal % Co. v. Bamora, 1'1 S!:A -'' =1(,2>)
.3/ Stoc@ Splits
.$/ Stoc@ !onsolidations
CI;. ACGUISITIONSD 9ERGERS AND CONSOLIDATIONS
A. A$:1i,ition, an# Tran,"er,
See relevant portion of 70""A$5E7A, )estatement of the -octrine of Piercing the
*eil of Corporate +iction, -2 A+E$E8 "%9% 1( #$o% 2, 9une 1((-)
1. Con$ept o" KEnterpri,eK or KE$ono%i$ 1nitK or KGoin- $on$ernK #*illa )e" !ransit #nc. v. +errer, 2'
S!:A ,&' =1(/,>)%
&. T2pe, o" A$:1i,ition,MTran,"er, #&dward '. 0ell Co. v. Pacific, 1' S!:A &1' =1(/'>)!
.a/ 0n a pure KA,,et, onl2K Tran,"er, the transferee is not lia*le for the de*ts and lia*ilities of
the transferor, except where the transferee expressly or impliedly agrees to assume such
de*ts
.3/ 0n a EB1,ine,, Enterpri,eF Tran,"er, the transferee is lia*le for the de*ts and lia*ilities of
the transferor and
.$/ 0n an E:1it2 Tran,"er, the transferee is not lia*le for the de*ts and lia*ilities of the transferor,
except where the transferee expressly or impliedly agrees to assume such de*ts%
'. B1,ine,, Enterpri,e Tran,"er, #$.-. Santos v. *as4ue3, 22 S!:A 11'/ =1(/,> Laguna !ransportation
Co. #nc. v. SSS, 1.2 Phil% ,-- =1(/.>)%
Although the *usiness enterprise was held under a partnership scheme and latter the *usiness was
transferred to a corporation, the *usiness enterprise is deemed to have *een in operation for the re3uired
two1year period as to come under the coverage of the SSS "aw% xSan !eodoro -ev. &nt. #nc. v. SSS, ,
S!:A (/ #1(/-)%
Although a corporation may have ceased *usiness operations and an entirely new company has
*een organi?ed to ta@e over the same type of operations, it does not necessarily follow that no one may
now *e held lia*le for illegal acts committed *y the earlier firm% Pepsi,Cola Bottling Co. v. 0L)C, 21.
S!:A 222 #1((2)%
(. E:1it2 Tran,"er, #Philippine *eterans #nvestment -evelopment Corp. v. C$, 1,1 S!:A //( =1((.>)%
+he fact that instead on foreclosing on the mortgaged assets, D;P converted its loans to e3uity,
ma@ing it the controlling stoc@holder of a *an@, and although the ma6ority of the mem*ers of the *oard of
directors of the *an@ are from D;P, the same does not ma@e D;P an employer of the *an@ employees, nor
does it ma@e D;P lia*le for the wage claims of the *an@Ms employees% x-BP v. 0L)C, 1,/ S!:A ,&1
#1((.)%
B. 9er-er an# Con,oli#ation
1. Con$ept,
&. Pro$e#1re!
.a/ Plan of 4erger or !onsolidation #Sec% 2/)
.3/ Stoc@holdersM or 4em*ersM Approval #Sec% 22)
.$/ Articles of 4erger or !onsolidation #Sec% 2,)
.#/ Approval *y SE! #Sec% 2()%
'. E""e$t, o" 9er-er or Con,oli#ation #Sec% ,.)
0t is settled that in the merger of two existing corporations, one of the corporations survives and
continues the *usiness, while the other is dissolved and all its rights, properties and lia*ilities are ac3uired *y
the surviving corporation% xBabst v. Court of $ppeals, A%:% $o% ((-(,, 2/ 9anuary 2..1%
8rdinarily, in the merger of two or more existing corporations, one of the com*ining corporations
survives and continues the com*ined *usiness, while the rest are dissolved and all their rights, properties
and lia*ilities are ac3uired *y the surviving corporation% Although there is dissolution of the a*sor*ed
corporations, there is no winding up of their affairs or li3uidation of their assets, *ecause the surviving
corporation automatically ac3uires all their rights, privileges and powers, as well as their lia*ilities%
x$ssociated Ban( v. Court of $ppeals 2(1 S!:A '11 #1((,)
+he merger, however, does not *ecome effective upon the mere agreement of the constituent
corporations% +he procedure to *e followed is prescri*ed under the !orporation !ode% Section 2( of said
!ode re3uires the approval *y the Securities and Exchange !ommission #SE!) of the articles of merger
which, in turn, must have *een duly approved *y a ma6ority of the respective stoc@holders of the constituent
corporations% +he same provision further states that the merger shall *e effective only upon the issuance *y
the SE! of a certificate of merger% +he effectivity date of the merger is crucial for determining when the
2(
merged or a*sor*ed corporation ceases to exist< and when its rights, privileges, properties as well as
lia*ilities pass on to the surviving corporation% x$ssociated Ban( v. Court of $ppeals 2(1 S!:A '11 #1((,)%
C. E""e$t, on E%plo2ee, o" Corporation .Complex &lectronics &mplo"ees $ssociation v. 0L)C -1. S!:A &.-
=1(((>)%
1. A,,et, Onl2 Tran,"er, #Sundowner -ev. Corp. v. -rilon 1,. S!:A 1& =1(,(>)
+here is no law re3uiring that the purchaser of 4D00Bs assets should a*sor* its employees% As there is
no such law, the most that the $":! could do, for reasons of pu*lic policy and social 6ustice, was to direct
=the *uyer> to give preference to the 3ualified separated employees of 4D00 in the filling up of vacancies in
the facilities% xM-## Supervisors % Confidential &mplo"ees $sso. *. Pres. $ssistance on Legal $ffairs G8
SC)$ H: 178GG2.
&. B1,ine,,)Enterpri,e Tran,"er, #>u v. 0L)C 2&' S!:A 1-& =1(('> Sunio v. 0L)C, 122 S!:A -(.
=1(,&> Central $3ucarera del -anao v. Court of $ppeals, 1-2 S!:A 2(' =1(,'> xSan +elipe 0eri School
of Mandalu"ong #nc. v. 0L)C, 2.1 S!:A &2, #1((1)%
'. E:1it2 Tran,"er, #Manlimos v. 0L)C, 2&2 S!:A 1&' =1(('> )obledo v. 0L)C, 2-, S!:A '2 =1((&>
Pepsi,Cola Bottling Co. v. 0L)C, 21. S!:A 222 #1((2) x-evelopment Ban( of the Philippines v. 0L)C,
1,/ S!:A ,&1=1((.> Pepsi Cola -istributors of the Philippines #nc. v. 0L)C, 2&2 S!:A -,/ #1((')
xCoral v. 0L)C, 2', S!:A 2.& =1((/> x$von -ale /arments #nc. v. 0L)C, 2&/ S!:A 2-- =1(('>
&lectronics &mplo"ees $ssociation v. 0L)C -1. S!:A &.- =1(((>)%
(. 9er-er, an# Con,oli#ation, #+ilipinas Port Services #nc. v. 0L)C 122 S!:A 2.- =1(,(> +ilipinas Port
Services #nc. v. 0L)C 2.. S!:A 22- =1((1> 0ational 6nion Ban( &mplo"ees v. "a?aro, 1'/ S!:A 12-
=1(,,>) x+irst /eneral Mar(eting Corp. v. 0L)C, 22- S!:A --2 #1((-)%
5. Spin)O"", #San Miguel Corp. &mplo"ees 6nion,P!/5@ v. Confessor, 2/2 S!:A ,1 =1((/>)
C;. REHABILITATION AND INSOL;ENC<
See 70""A$5E7A, )evisiting the Philippine DLawsE on Corporate )ehabilitation, L"000
A+E$E8 "AW 985:$A" $o% 2 #4ay, 1((()%
1. Corporate Ban?r1pt$2 La, in General
.a/ Aoverning "aws #+he 0nsolvency Act, PD (.21A, and Securities :egulation !ode =:A ,2((> 0nterim :ules
of Procedure for !orporate :eha*ilitation of 2...)
.3/ +ypes of *an@ruptcy proceedings in the Philippines
.$/ :esolution on 6urisdiction issues on *an@ruptcy proceedings #Ching v. Land Ban( of the Philippines 2.1
S!:A 1(. =1((1>)%
&. S1,pen,ion o" Pa2%ent,
.a/ 0nsolvency "aw #Secs% 2 to 1-)
1 Situation of the corporate de*tor
1 $ature of petition
1 :e3uired vote of creditors
1 !onse3uences of approvalPnon1approval
.3/ Pres% Decree (.21A #Sec% '=d>), and Section '%1. of Securities :egulation !ode%
.$/ Supreme !ourt 0nterim :ules of Procedure on !orporation :eha*ilitation #2...)%
'. Corporate Reha3ilitation
.a/ Nat1re o" EReha3ilitationF #)ub" #ndustrial Corp. v. Court of $ppeals 2,& S!:A &&' #1((,)%
"i3uidation, in !orporation "aw, connotes a winding up or setting with creditors and de*tors% 0t is the
winding up of a corporation so that assets are distri*uted to those entitled to receive them% 0t is the process of
reducing assets to cash, discharging lia*ilities and dividing surplus or loss% 8n the opposite end of the
spectrum is reha*ilitation which connotes a reopening or reorgani?ation% :eha*ilitation contemplates a
continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and solvency% 0t is crystal clear that the concept of li3uidation is diametrically
opposed or contrary to the concept of reha*ilitation, such that *oth cannot *e underta@en at the same time%
+o allow the li3uidation proceedings to continue would seriously hinder the reha*ilitation of the su*6ect *an@%
Philippine *eterans Ban( &mplo"ees 6nion I 0.6.B.&., A%:% $o% 1.'-/&, 2, 9une 2..1%
.3/ Ba,i, o" RTC Poer to Un#erta?e Corporate Reha3ilitation #Secs% '=d> and /, Pres% Decree (.21A, in
relation to Sec% '%1., Securities :egulation !ode)
.$/ Appointment of 4anagement !ommittee or a :eha*ilitation :eceiver
.#/ Automatic Stay and its "egal Effects When it *ecomes effective
+he appointment of a management committee or reha*ilitation receiver may only ta@e place after
the filing with the SE! of an appropriate petition for suspension of payments% +he conclusion is inevita*le
that pursuant to Section /#c), ta@en together with Sections '#d) and #d), a court action is ipso =ure
-.
suspended only upon the appointment of a management committee or a reha*ilitation receiver% #Barotac
Sugar Mills v. Court of $ppeals 22' S!:A &(2 =1((2> reiterated in 6nion Ban( v. Court of $ppeals 2(.
S!:A 1(, =1((,>)
) D1ration #B.+. Homes #nc. v. Court of $ppeals 1(. S!:A 2/2 =1((.>)
) E""e$t on In#i*i#1al Petitioner, 0oinin- the Petition #6nion Ban( of the Philippines v. Court of
$ppeals, 2(. S!:A 1(, #1((,) xModern Paper Products #nc. v. Court of $ppeals, 2,/ S!:A 2&( #1((,)
x!raders )o"al Ban( v. Court of $ppeals 122 S!:A 2,, =1(,(> xChung .a Bio v. #ntermediate $ppellate
Court 1/- S!:A '-& #1(,,))
) Clai%, Co*ere# 32 the A1to%ati$ Sta2 #xPC#B v. Court of $ppeals 122 S!:A &-/ =1(,(> $lemarCs
Sibal % Sons #nc. v. &lbinias, 1,/ S!:A (& =1((.> x)i3al Commercial Ban(ing Corp. v. #$C, 21-
S!:A ,-. =1((2> xBan( of P# v. Court of $ppeals, 22( S!:A 22- =1((&>)%
) T2pe, o" E$lai%,F Co*ere# #+inasia #nvestments v. Court of $ppeals 2-2 S!:A &&/ =1((&>)
"a*or claims are not exempted from the automatic stay under Pres% Decree $o% (.21A% +he
6ustification for the automatic stay of all pending actions for claims is to ena*le the management
committee or the reha*ilitation receiver to effectively exercise itsPhis powers free from any 6udicial or
extra16udicial interference that migh unduly hinder or prevent the FrescueG of the de*tor company% +o
allow such other actions for la*or claims to continue would only add to the *urden of the management
committee or reha*ilitation receiver, whose time, effort and resources would *e wasted defending
claims against the corporation instead of *eing directed toward its restructuring and reha*ilitation%
x)ubberworld JPhils.K #nc. v. 0L)C -.' S!:A 221 #1((() A%:% $o% 12,..-, 2/ 9uly 2...%
.e/ Rationale "or S1,pen,i*e E""e$t o" Appoint%ent on E+i,tin- S1it, an# Ca1,e, o" A$tion
."/ Poer, o" 9ana-e%ent Co%%ittee or the Reha3ilitation Re$ei*er #Sec% /, PD (.21A)
.-/ SEC Poer to Li:1i#ate Corporation
.h/ Ba,i$ Di""eren$e, Beteen S1,pen,ion o" Pa2%ent, Pro$ee#in-, 1n#er the In,ol*en$2 La an#
Un#er Pre,. De$ree No. IJ&)A
(. In,ol*en$2 Pro$ee#in-,
A li3uidation proceeding is a proceeding in rem so that all other interested persons whether @nown to the
parties or not may *e *ound *y such proceedings% xChua v. 0L)C, 1(. S!:A '', #1((.)%
.a/ Aoverning "aw and 9urisdiction
.3/ Aeneral Effect of !orporate 0nsolvency Proceedings
.$/ ;OLUNTAR< INSOL;ENC<
.#/ Ciling of Petition #Sec% 1&, +0")
.e/ Effect of 8rder of 0nsolvency #Sec% 1, -e $mu3ategui v. Macleod -- Phil% ,. =1(1'>)%
Section 1, on the automatic stay is no self1executory applications for suspension of proceedings
must *e made in the various courts where actions in pending #x6nson v. $beto &2 Phil% &2 =1(2&>)%
."/ IN;OLUNTAR< INSOL;ENC< #Sec% 2. to --)
.-/ Nualifications of Petitioning !reditors
A foreign corporation whichs shows that it is a resident of the Philippines has legal standing to
petition for involuntary insolvency of a corporate de*tor xState #nvestment House #nc. v. Citiban( 0.$.
2.- S!:A ( #1((1)%
.h/ 8rder to Show !ause #Sec% 21) Oearing of petition #Sec% 2&)
.i/ Acts of 0nsolvency and 8rder of Ad6udication #Sec% 2.)
.>/ 4eeting of !reditors to Elect Assignee #Secs% 2( and -.)
.?/ Effects of 8rder of 0nsolvency and Appointment of :eceiver #Secs% -2, -& and -' x)adiola,!oshiba Phil. v.
#$C, 1(( S!:A -2- =1((1>)
.l/ "i3uidation of assets and payment of de*ts #Sec% --)
.%/ :emedies of Secured !reditors #Sec% 2(, &- and '()
.n/ !omposition #Sec% /-)
.o/ Discharge #Secs% '2, /&, and //)
.p/ Appeal in certain cases #Sec% ,2)
C;I. DISSOLUTION
1. No ;e,te# Ri-ht, to Corporation 4i$tion #/on3ales v. Sugar )egulator" $dministration 12& S!:A -22
=1(,(>)%
&. ;ol1ntar2 Di,,ol1tion #Sec% 112)
.a/ No Cre#itor, A""e$te# #Sec% 11,)
.3/ There Are Cre#itor, A""e$te# #Secs% 11( and 122)%
'. In*ol1ntar2 Di,,ol1tion #Sec% 121 Sec% /#l), P%D% (.21A Sec% 2, :ule // :ules of !ourt)
-1
.a/ 5*o Warranto #)epublic v. Bisa"a Land !ransportation Co., ,1 S!:A ( =1(2,> )epublic v. Securit"
Credit % $cceptance Corp., 1( S!:A ', =1(/2> x/overnment v. &l Hogar +ilipino, '. Phil% -(( =1(22>)%
.3/ E+piration o" Ter%
.$/ Shortenin- o" Corporate Ter% #Sec% 12.)
.#/ Non)1,er o" Corporate Charter an# Contin1o1, Inoperation o" a Corporation #Sec% 22)
"8rgani?e" when used in reference of a corporation involves the election of officers, providing for the
su*scription and payment of the capital stoc@, the adoption of *y1laws, and such other steps as are
necessary to endow the legal entity with the capacity to transact the legitimate *usiness for which it was
created% +he term "organi?ation" relates merely to the systemati?ation and orderly arrangement of the
internal and managerial affairs and organs of the corporation% xBenguet Consolidated Mining Co. v. Pineda
(, Phil% 211 #1('/)%
+he failure to file the *y1laws does not automatically operate to dissolve a corporation *ut is now
considered only a ground for such dissolution% xChung .a Bio v. #ntermediate $ppellate Court, 1/- S!:A
'-& #1(,,)%
."/ De%an# o" 9inorit2 Sto$?hol#er, "or Di,,ol1tion #+inancing Corp. of the Phil. v. !eodoro, (- Phil% &.&
=1('->)%
(. Le-al E""e$t, o" Di,,ol1tion
A corporation cannot extend its life *y amendment of its articles of incorporation effected during the
three1year statutory period for li3uidation when its original term of existence had already expired, as the same
would constitute new *usiness% x$lhambra Cigar % Cigarette Manufacturing Compan" #nc. v. S&C, 2& S!:A
2/( #1(/,)%
When the period of corporate life expires, the corporation ceases to *e a *ody corporate for the purpose
of continuing the *usiness for which it was organi?ed xPhilippine 0ational Ban( v. Court of +irst #nstance of
)i3al Pasig Br. LL#, 2.( S!:A 2(& #1((2)%
5. 9etho#, o" Li:1i#ation #Sec% 122 Board of Li4uidators v. .alaw, 2. S!:A (,2 =1(/2> Sumera v. *alencia, /2
Phil% 221 =1(-(> Buenaflor v. Camarines #ndustr", 1., Phil% &22 =1(/.>)%
F"i3uidationG is Fthe settlement of the affairs of a corporation =which> consists of ad6usting the de*ts and
claims, that is, of collecting all that is due the corporation, the settlement and ad6ustment of claims against it
and the payment of its 6ust de*ts%G xChina Ban(ing Ciorp. *. M. Michelin % Cie, ', Phil% 2/1 #1(--)%
+here can *e no dou*t that under Sections 22 and 2, of the !orporation "aw, the "egislature intended to
let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs%
+he normal method of procedure is for the directors and executive officers to have charge of the winding up
operations, though there is the alternative method of assigning the property of the corporation to the trustees
for the *enefit of its creditors and shareholders% FWhile the appointment of a receiver rests within the sound
6udicial discretion of the court, such discretion must, however, always *e exercised with caution and governed
*y legal and e3uita*le principles, the violation of which will amount to its a*use, and in ma@ing such
appointment the court should ta@e into consideration all the facts and weigh the relative advantages and
disadvantages of appointing a receiver to wind up the corporate *usiness%G xChina Ban(ing Ciorp. *. M.
Michelin % Cie, ', Phil% 2/1 #1(--)%
F+he appointment of a receiver *y the court to wind up the affairs of the corporation upon petition for
voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the
corporation at first hand% % % all claims must *e presented for allowance to the receiver or trustee or other proper
persons during the winding up proceedings which in this 6urisdiction would *e within the three years provided *y
sections 22 and 2, of the !orporation "aw as the term for the corporate existence of the corporation, and if a
claim is disputed or unli3uidated so that the receiver cannot safely allow the same, it should *e transferred to
the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for
payment% +he rulings of the receiver on the validity of claims su*mitted are su*6ect to review *y the court
appointing such receiver though no appeal is ta@en to the latterBs ruling%G xChina Ban(ing Corp. *. M. Michelin
% Cie, ', Phil% 2/1 #1(--)%
While Section 22 of the !orporation "aw =now section 122 of the !orporation !ode> provides for a three
year period for the continuation of the corporate existence of the corporation for purposes of li3uidation, there
is nothing in said provision which *ars an action for the recovery of the de*ts of the corporation against the
li3uidator thereof, after the lapse of the said three1year period% F0t immaterial that the present action was filed
after the expiration of the three years % % % for at the very least, and assuming that 6udicial enforcement of taxes
may not *e initiated after said three years despite the fact that actual li3uidation has not terminated and the
one in charge thereof is still holding the assets of the corporation, o*viously for the *enefit of all the creditors
thereof, the assessment aforementioned, made within the three years, definitely esta*lished the Aovernment
as a creditor of the corporation for whom the li3uidator is supposed to hold assets of the corporation%G
x)epublic v. Marsman -evelopment Compan" && S!:A &1, #1(22)%
6. Who Are Lia3le A"ter Di,,ol1tion an# Win#in-)Up@ #0ational $baca Corp. v. Pore, 2 S!:A (,( =1(/1> !an
!iong Bio v. Commissioner, 1.. Phil% ,/ =1('/> /elano v. C$, 1.- S!:A (. =1(,1>)%
Although a corporate officer, such as a general manager is not lia*le for corporate o*ligations, such as
claims for wages, however, when such corporate officer ceases corporate property to apply to his own claims
against the corporation, he shall *e lia*le to the extent thereof to corporate lia*ilities, since @nowing fully well
that certain creditors had similarly valid claims, he too@ advantage of his position as general manager and
-2
applied the corporationMs assets in payment exclusively to his own claims% x-e /u3man v. 0L)C, 211 S!:A
22- #1((2)%
+he corporation continues to *e a *ody corporate for three #-) years after its dissolution for purposes of
prosecuting and defending suits *y and against it and for ena*ling it to settle and close its affairs, culminating
in the disposition and distri*ution of its remaining assets% 0t may, during the three1year term, appointing a
trustee or a receiver who may act *eyond that period% +he termination of the life of a 6uridical entity does not *y
itself cause the extinction or diminution of the rights and lia*ilities of such entity nor those of its owners and
creditor% 0f the three1year extended life has expired without a trustee or receiver having *een expressly
designated *y the corporation within that period, the *oard of directors #or trustee) itself, following the rationale
of the Supreme !ourtMs decision in /elano v. court of $ppeals #1.- S!:A (.) may *e permitted to so continue
as "trustees" *y legal implication to complete the corporate li3uidation% Still in the a*sence of a *oard of
directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders *ut
li@ewise the creditors of the corporation, acting for and in its *ehalf, might ma@e proper representations with the
Securities and Exchange !ommission, which has primary and sufficient *road 6urisdiction in matters of this
nature, for wor@ing out a final settlement of the corporate concerns% Clemente v. Court of $ppeals, 2&2 S!:A
212, 22- #1((')%
Since the law specifically allows a trustee to manage the affairs of the corporation in li3uidation, any
supervening fact, such as the dissolution of the corporation, repeal of the law, or any other fact of similar
nature, would not serve as an effective *ar to the enforcement of such right% x)eburiano v. Court of $ppeals
-.1 S!:A -&2 #1((()%
0n /elano case, the counsel of the dissolved corporation was considered a trustee% 0n the later case of
Clemente v. Court of $ppeals =2&2 S!:A 212 #1((')>, we held that the *oard of directors may *e permitted to
complete the corporate li3uidation *y continuing as FtrusteesG *y legal implication% 5nder Section 1&' of the
!orporation !ode, F$o right of remedy in favor or against any corporation % % % shall *e removed or impaired
either *y the su*se3uent dissolution of said corporation or *y any su*se3uent amendment or repeal of this
!ode or of any part thereof%G +his provision safeguards the rights of a corporation which is dissolved pending
litigation% x)eburiano v. Court of $ppeals -.1 S!:A -&2 #1((()
8. Rein$orporation #Chung .a Bio v. #ntermediate $ppellate Court, 1/- S!:A '-& =1(,,>)%
C;II. CLOSE CORPORATION
See 70""A$5E7A, !he Philippine Close Corporation, -2 A+E$E8 "%9% #$o% 2, 4arch,
1(,,)%
1. De"inition #Sec% (/ Manuel ). -ula" &nterprises v. Court of $ppeals, 22' S!:A /2, =1((-> San 'uan
Structural and Steel +abricators #nc. v. Court of $ppeals, 2(/ S!:A /-1, /&' #1((,)%
&. Arti$le, o" In$orporation Re:1ire%ent, #Sec% (2)
#a) Pre1Emptive :ights #Sec% 1.2)
#*) Amendment #Sec% 1.-)
'. Re,tri$tion on Tran,"er o" Share, #Secs% (, and (()
(. A-ree%ent, 32 Sto$?hol#er #Sec% 1..)
5. No Ne$e,,it2 o" Boar# #Sec% 1.1 Sergio +. 0aguiat v. 0L)C 2/( S!:A '/& =1((2>)%
6. Dea#lo$?, #Sec% 1.&)
8. With#raal an# Di,,ol1tion #Sec% 1.')
Even prior to the passage of the !orporation !ode which recogni?ed close corporation, the Supreme
!ourt had on limited instances recogni?ed the common law rights of minority stoc@holders to see@ dissolution
of the corporation% +inancing Corp. of the Phil. v. !eodoro, (- Phil% &.& #1('-)%
C;III. NON)STOCK CORPORATIONS AND 4OUNDATIONS
See 70""A$5E7A, -istinguishing +oundations from @ther 0on,Stoc( Corporations%
#5npu*lished)
1. Theor2 on Non)Sto$? Corporation #Secs% 1&#2), &-, ,2, ,, and (&#') Collector of #nternal )evenue v. Club
+ilipino #nc. de Cebu, ' S!:A -21 =1(/2> Collector of #nternal )evenue v. 6niversit" of *isa"as, 1 S!:A //(
=1(/1>)%
A non1stoc@ corporation may only *e formed or organi?ed for charita*le, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes% 0t may not engage in
underta@ings such as the investment *usiness where profit is the main or underlying purpose% Although the
non1stoc@ corporation may o*tain profits as an incident to its operation such profits are not to *e distri*uted
among its mem*ers *ut must *e used for the furtherance of its purposes% People v. Menil, A%:% 11'.'&1//, 12
Septem*er 1(((%
+he incurring of profit or losses does not determine whether an activity is for profit or non1profit, and the
courts will consider whether dividends have *een declared or its mem*ers or that is property, effects or profit
--
was ever used for personal or individual gain, and not for the purpose of carrying out the o*6ectives of the
enterprise% xManila Sanitarium and Hospital v. /abuco, 2 S!:A 1& #1(/-)%
&. What i, a 4o1n#ation@ #Secs% -. and -&#O), $0:! of 1((2 Sec% 2&, :evenue :egulations $o% 2 ;0:1$EDA
:egulations $o% 11,1, as amended)
+he formal re3uirements of :evenue :egulations $o% 2 are not mandatory and that an entity may, in the
a*sence of compliance with such re3uirements, still show that it falls under the provisions of Section 2/ of the
$0:!% xCollector v. *./. Sinco &ducational Corp., 1.. Phil% 122 #1('/)%
'. Di,,ol1tion #Secs% (& and (')
CIC. 4OREIGN CORPORATION
See 70""A$5E7A, Philippine -octrine of "-oing Business," +OE "AWJE:S :E70EW, 1 Part 0 1 7ol%
700, $o% &, #April, 1((-) Part 00 1 7ol% 700, $o% / #9une, 1((-)%
1. De"inition #Sec% 12-)%
A foreign corporation owes its existence to the laws of another state, and generally, has no legal
existence within the state in which it is foreign% x$von #nsurance PLC v. Court of $ppeals 22, S!:A -12
#1((2)%
A fundamental rule of international 6urisdiction is that no state can *y its laws, and no court which is only
a creature of the state, can *y its 6udgments and decrees, directly *ind or affect property or persons *eyond the
limits of that state% x!imes #nc. v. )e"es, -( S!:A -.- #1(21)%
&. Stat1tor2 Con$ept o" KDoin$ &*sinessK #Art% &&, Executive 8rder $o% 22/, 8mni*us 0nvestment !ode Sec%
-#d), :%A% $o% 2.&2, Coreign 0nvestment Act of 1((1)%
.a/ Application for "icense #Secs% 12& and 12' also Art% &,, 8mni*us 0nvestment !ode)
.3/ 0ssuance of "icense #Sec% 12/ Art% &(, 8mni*us 0nvestment !ode)
.$/ Amendment of "icense #Sec% 1-1)
.#/ :ationale for :e3uiring "icense to Do ;usiness
+he purpose of the law in re3uiring that foreign corporations doing *usiness in the country *e
licensed to do so, it to su*6ect the foreign corporations doing *usiness in the Philippines to the 6urisdiction
of the courts, otherwise, a foreign corporation illegally doing *usiness here *ecause of its refusal or neglect
to o*tain the re3uired license and authority to do *usiness may successfully though unfairly plead such
neglect or illegal act so as to avoid service and there*y impugn the 6urisdiction of the local courts% $von
#nsurance PLC v. Court of $ppeals 22, S!:A -12 #1((2)%
+he same danger does not exist among foreign corporations that are indu*ita*ly not doing *usiness
in the Philippines% 0ndeed, if a foreign corporation does not do *usiness here, there would *e no reason for
it to *e su*6ect to the StateBs regulation% As we o*served, in so far as the State is concerned, such foreign
corporation has no legal existence% +herefore, to su*6ect such foreign corporation to the courtsB 6urisdiction
would violate the essence of sovereignty% x$von #nsurance PLC v. Court of $ppeals 22, S!:A -12 #1((2)%
A foreign corporation licensed to do *usiness in the Philippines should *e su*6ected to no harsher
rules that is re3uired of domestic corporation and should not generally *e su*6ect to attachment on the
pretense that such foreign corporation is not residing in the Philippines% xClaude 0eon Lights v. Phil.
$dvertising Corp., '2 Phil% /.2 #1(-2)%
'. 01ri,pr1#ential Con$ept, o" KDoin- B1,ine,,K!
.a/ KDoin- 31,ine,,K implies a continuity of commercial dealings and arrangements and the performance of
acts or wor@s or the exercise of some of the functions normally incident to the purpose or o*6ect of its
organi?ation% Mentholatum v. Mangaliman, 22 Phil% '2' #1(&1)%
Where a single act or transaction, however, is not merely incidental or casual *ut indicates the
foreign corporationMs intention to do other *usiness in the Philippines, said single act or transaction
constitutes doing *usiness% x+ar &ast #ntMl. v. 0an(ai .og"o, / S!:A 22' #1(/2)%
A foreign corporation with a settling agent in the Philippines which issues twelve marine policies
covering different shipments to the Philippines is doing *usiness in the Philippines% x/eneral Corp. of the
Phil. v. 6nion #nsurance Societ" of Canton Ltd. ,2 Phil% -1- #1('.)%
A foreign corporation which had *een collecting premiums on outstanding policies was regarded as
doing *usiness in the Philippines% xManufacturing Life #ns. v. Meer, ,( Phil% -'1 #1('1)
Solicitation of *usiness contracts constitutes doing *usiness in the Philippines% xMarubeni 0ederland
B.*. v. !ensuan, 1(. S!:A 1.' #1((.)%
0t is not really the fact that there is only a single act done that is material for determining whether a
corporation is engaged in *usiness in the Philippines, since other circumstances must *e considered%
Where a single act or transaction of a foreign corporation is not merely incidental or casual *ut is of such
character as distinctly to indicate a purpose on the part of the foreign corporation to do other *usiness in
the state, such act will *e considered as constituting *usiness% xLitton Mills #nc. v. Court of $ppeals, 2'/
S!:A /(/ #1((/)%
-&
Participating in *idding process shows an intention to engage in *usiness in the Philippines%
xHutchison Philippines Ltd. v. Subic Ba" Metropolitan $uthorit", --( S!:A &-& #2...)%
.3/ Unrelate# or I,olate# Tran,a$tion, #&astboard 0avigation Ltd. v. 'uan >smael and Co. #nc., 1.2 Phil% 1
=1('2> $ntam Consolidated v. C$, 1&- S!:A 2,, =1(,/>).
Te "o##owin$ were a## e#% not to -e en$a$e% in -*siness in te Pi#i!!ines)
+he collision of two vessels at the 4anila Oar*or #x-ampfschieffs )hederei 6nion v. La
CampaAia !ransatlantica, , Phil% 2// =1(.2>)
"oss of goods *ound for Oong@ong *ut erroneously discharged in 4anila #x!he Swedish &ast
$sia Co. Ltd. v. Manila Port Service, 2' S!:A /-- =1(/,>)
0nfringement of trade name #x/eneral /arments Corp. v. -irector of Patens, &1 S!:A '.
=1(21> x6niversal )ubber Products #nc. v. Court of $ppeals, 1-. S!:A 1.& =1(,,>)
:ecovery of damages sustained *y cargo shipped to the Philippines #xBula(hidas v. 0avarro,
1&2 S!:A 1 =1(,/>)
Sale to the Aovernment of road construction e3uipment and spare parts with no intent of
continuity of transaction #x/on3ales v. )a4ui3a, 1,. S!:A 2'& =1(,(>) and
:ecovery on a Oong@ong 6udgment against a 4anila resident #xHang Lung Ba( v. Saulog, 2.1
S!:A 1-2 =1((1>)%
0n the case of foreign movie companies who have registered intellectual property rights over their
movies in the Philippines, it was held that the appointment of local lawyer to protect such rights for piracy
is not deemed to *e doing *usiness< "We fail to see how exercising oneMs legal and property rights and
ta@ing steps for the vigilant protection of said rights, particularly the appointment of an attorney1in1fact, can
*e deemed *y and of themselves to *e doing *usiness here%" xColumbia Pictures #nc. v. Court of $ppeals
2/1 S!:A 1&& #1((/)%
.$/ The KContra$t Te,tK o" Doin- B1,ine,, #Pacific *egetable @il Corp. v. Singson, Advanced Decision
Supreme !ourt, April 1('' 7ol%, p% 1..1A $etna Casualt" % Suret" Co. v. Pacific Star Line, ,. S!:A /-'
=1(22> 6niversal Shipping Lines #nc. v. #$C, 1,, S!:A 12. =1((.>)%
.#/ Tran,a$tion, ith A-ent, an# Bro?er, #/ranger $ssociates v. Microwave S"stems #nc., 1,( S!:A /-1
=1(( > La Chemise Lacoste S.$. v. +ernande3, 12( S!:A -2- =1(,&> xSchmid % @berl" v. )'L, 1//
S!:A &(- =1(,,> x5ang Laboratories #nc. v. Mendo3a, 1'/ S!:A && =1(2&>
(. Di""erent R1le, on Tra#e%ar? an# Tra#ena%e, #5estern &4uipment % Suppl" Co. v. )e"es, '1 Phil% 11'
=1(22> xLeviton #ndustries v. Salvador, 11& S!:A &2. =1(,2> xConverse )ubber v. 6niversal )ubber, 1&2
S!:A 1'& =1(,2> xConverse )ubber Corp. v. 'acinto )ubber % Plastic Co., (2 S!:A 1', =1(,.> x6niversal
)ubber Products #nc. v. C$, 1-. S!:A 1.& =1(,&> xPuma Sportschunhfabri(en )udolf -assler ../. v. #$C,
1', S!:A 2-- =1(,,> xPhilips &xport B.*. v. C$, 2./ S!:A &'2 =1((2>)%
5. E""e$t, o" 4ail1re to O3tain Li$en,e!
.a/ 8n the contract entered into *y such foreign corporation #Home #nsurance Compan" v. &astern Shipping
Lines, 12- S!:A &2& =1(,->)%
Section /( of the then !orporation "aw was intended to su*6ect the foreign corporation doing
*usiness in the Philippines to the 6urisdiction of our courts and not to prevent the foreign corporation from
performing single acts, *ut to prevent it from ac3uiring domicile for the purpose of *usiness without ta@ing
the necessary steps to render it amena*le to suit in the local courts% Marshall,5ells Co. v. &lser, &/ Phil%
2. #1(2&)%
.3/ Standing of such foreign corporation to sue in Philippine courts #Sec% 1-- Marshall,5ells v. &lser, &/ Phil%
21 =1(2&>)
.$/ !riminal lia*ility under Sect% 1&& of the !orporation !ode% Home #nsurance Compan" v. &astern Shipping
Lines, 12- S!:A &2& #1(,-)%
.#/ Pari De#i'to Do$trine! +he local party to a contract with a foreign corporation that does *usiness in the
Philippines without license cannot maintain suit against the foreign corporation 6ust as the foreign
corporation cannot maintain suit, under the principle of pari delicto% #!op,5eld Mfg. v. &C&-, 11( S!:A
11, =1(,'>)
&*t Now See Communication Materials and -esign #nc. v. Court of $ppeals 2/. S!:A /2- #1((/)%
.e/ E,toppel Do$trine! A foreign corporation doing *usiness in the Philippines may sue in Philippine courts
although it is without license to do *usiness here against a Philippine citi?en who had contracted with and
*een *enefitted *y said corporation and @new it to *e without the necessary license to do *usiness, under
the principle of estoppel% Merrill L"nch +utures #nc. v. C$, 211 S!:A ,2& #1((2) x/eorg /rot=ahn /MBH
% C. v. #snani, 2-' S!:A 21/ #1((&)%
."/ Proper Do$trine! &ric(s Ltd. v. Court of $ppeals 2/2 S!:A '/2 #1((2)%
-'
B1t ,ee latel2! Subic Ba" Metropolitan $uthorit" v. 6niversal #nternational /roup of !aiwan -&. S!:A -'(
#2...)%
6. S1it, A-ain,t 4orei-n Corporation,!
.a/ 01ri,#i$tion O*er the KPer,onK o" 4orei-n Corporation, #Sec% 1&, :ule 1&, :ules of !ourt /eneral
Corp. of the Phil. v. 6nion #nsurance Societ" of Canton Ltd., ,2 Phil% -1- =1('.> 'ohnlo !rading Co. v
+lores ,, Phil% 2&1 =1('1> x'ohnlo !rading Co. v. Bulueta, ,, Phil% 2'. =1('1> xPacific Micronisian Line
#nc. v. -el rosario, (/ Phil% 2- =1('&> x+ar &ast #nternational #mport and &xport Corp. v. 0an(ai .og"o Co.
Ltd., / S!:A 22' =1(/2>)%
0t the appearance of a foreign corporation to a suit is precisely to 3uestion the 6urisdiction of the said
tri*unal over the person of the defendant, then this appearance is not e3uivalent to service of summons,
nor does it constitute an ac3uiescence to the courtBs 6urisdiction% x$von #nsurance PLC v. Court of $ppeals
22, S!:A -12, -22 #1((2)%
Cor the purpose of having summons served on a foreign corporation in accordance with :ule 1&,
Section 1&, it is sufficient that it *e alleged in the complaint that the foreign corporation is doing *usiness in
the Philippines% xHahn v. Court of $ppeals 2// S!:A '-2 #1((2)%
When it is shown that a foreign corporation is doing *usiness in the Philippines, summons may *e
served on #a) its resident agent designated in accordance with law #*) if there is no resident agent, the
government official designated *y law to that effect or #c) any of its officers or agent within the Philippines%
+he mere allegation in the complaint that a local company is the agent of the foreign corporation is not
sufficient to allow proper service to such alleged agent% Although there is no re3uirement to first
su*stantiate the allegation of agency, yet it is necessary that there must *e specific allegations in the
complaint that esta*lishes the connection *etween the principal foreign corporation and its alleged agent
with respect to the transaction in 3uestion% $owhere in the case of Signetics Corporation v. Court of
$ppeals did the !ourt state that if the Fcomplaint alleges that defendant has an agent in the Philippines,
summons can validly *e served thereto even without prior evidence of the truth of such factual allegation
it is only in the headnote of the reporter which is not part of the decision% x+rench @il Mills Machiner" Co.
#nc. v. Court of $ppeals 2(' S!:A &/2 #1((,)%
.3/ The O## Do$trine #+acilities Management Corp. v. -e la @sa, ,( S!:A 1-1 =1(2(> x+B$ $ircraft v. Bosa,
11. S!:A 1 =1(,1> x)o"al Crown #nternational v. 0L)C, 12, S!:A '/( =1(,(> x5ang Laboratories #nc.
v. Mendo3a, 1'/ S!:A && =1(,2>)%
Contra! +he sine 4ua non re3uirement for service of summons and other legal processes or any such
agent or representative is that the foreign corporation is doing *usiness in the Philippines%
xH"opsung Maritime Co. Ltd. v. C$, 1/' S!:A 2', 1(,,) Signetics Corp. v. C$, 22' S!:A
2-2 #1((-2.
&*t Now See $von #nsurance PLC v. Court of $ppeals 22, S!:A -12 #1((2)
.$/ Stip1lation on ;en1e
When the contract sued upon has a venue clause within the Philippines, it is deemed a confirmation
*y the foreign corporation, even though not doing *usiness in the Philippines, to *e sued in local courts%
xLinger % +isher /MBH v. #$C, 12' S!:A '22 #1(,-)%
8. Plea#in- KDoin-K an# KNot Doin-K o" B1,ine,,
+he fact that a foreign corporation is not doing *usiness in the Philippines must *e alleged if a foreign
corporation desires to sue in Philippines courts under the "isolated transactions rule%" $tlantic Mutual #nc. Co. v.
Cebu Stevedoring Co., 12 S!:A 1.-2 #1(//) xCommissioner of Customs v. ..M... /ani, 1,2 S!:A '(1
#1((.)%
+his overturned the previous doctrine in xMarshall,5ells #as well as in x#n re Li4uidation of the
Mercantile Ban( of China etc., /' Phil% -,' #1(-,), that the lac@ of authority of foreign corporation to sue in
Philippine courts for failure to o*tain the license is a matter of affirmative defense%
A complaint filed *y a foreign corporation is fatally defective for failing to allege its duly authori?ed
representative or resident agent in Philippine 6urisdiction% x0ew >or( Marine Managers #nv. c. Court of
$ppeals 2&( S!:A &1/ #1((')%
Cor the purpose of having summons served on a foreign corporation in accordance with :ule 1&,
Section 1&, it is sufficient that it *e alleged in the complaint that the foreign corporation is doing *usiness in the
Philippines% xHahn v. Court of $ppeals 2// S!:A '-2 #1((2)%
H. Re,i#ent A-ent #Sec% 122 and 12,)
.a/ !oncept of "residence" #State #nvestment House v. Citiban(, 2.- S!:A ( =1((1>)%
.3/ When a corporation has designated a person to receive service of summon pursuant to the !orporation
!ode, the designation is exclusive and service of summons on any other person is inefficacious% xH.B.
Bachr" Compan" #nternational v. C$, 2-2 S!:A -2( #1((&)%
I. Appli$a3le La, to 4orei-n Corporation, #Sec% 12( /re" v. #nsular Lumber Co., /2 Phil% 1-( =1(-,>)
1J. A%en#%ent o" Arti$le, o" In$orporation #Sec% 1-.)
-/
11. 9er-er an# Con,oli#ation #Sec% 1-2 Art% '1, 8mni*us !ode)
1&. Re*o$ation o" Li$en,e #Secs% 1-& and 1-' Art% '., 8mni*us 0nvestment !ode)
1(. With#raal o" 4orei-n Corporation #Sec% 1-/)
CC. PENALT< PRO;ISIONS O4 THE CODE
See 70""A$5E7A, !he Penal Provision 6nder Sec. 7HH of the Corporation Code,
+OE "AWJE:S :E70EW, 7ol% L, $o% 2 #2( Ce*ruary 1((/)%
1. Penalty !lause for 7iolations of the Provisions of the !ode #Sec% 1&&)%
&. !ross1reference #Sec% 22)%
'. Specific application #Sec% 2&)%
(. Strict Principles in !riminal "aw the issue of malice%
5. Hi,tori$al Ba$?-ro1n# o" Se$. 1(( .Se$. 1IJ 1B8 o" the Corporation La/
Sec% 1(. was not intended to ma@e every casual violation of one of the !orporation "aw provisions
ground for involuntary dissolution of the corporation and that the court was entitled to exercise discretion in
such matters% x/overnment of the Philippine #slands v. &l Hogar +ilipino,

'. Phil% -(( #1(22)%
+he penalties imposed in Sec% 1(.#A) of the !orporation "aw for the violation of the prohi*ition in
3uestion are of such nature that they can *e enforced only *y a criminal prosecution or *y an action of 4uo
warranto% But these proceedings can be maintained onl" b" the $ttorne",/eneral in representation of the
/overnment." xHarden v. Benguet Consolidated Mining Co. ', Phil% 1&1 #1(--)%
6. ;iolation o" Se$tion 1'' 32 4orei-n Corporation,
Section 1-- of the present !orporation !ode, which unli@e its counterpart Section /( of the
!orporation "aw provided specifically for penal sanctions for foreign corporations engaging in *usiness in the
Philippines without o*taining the re3uisite license, should *e deemed to have a penal sanction *y virtue of
Section 1&& of the !orporation !ode% Home #nsurance Compan" v. &astern Shipping Lines, 12- S!:A &2&
#1(,-)%
Home may therefore provides the second instance of violation of the !ode #under Section 1--), when
the criminal penalties of Sec% 1&& are applica*le%
CCI. 9ISCELLANEOUS
1. SE! power and supervision #Secs% 1., and 1&- PD (.21A)%
&. Special corporations #Sec% &)%
'. $ew re3uirements on existing corporations #Sec% 1&,)%
(. Applica*ility of other provision of the old !orporation "aw, #Sec% 1&' and 1&/)%
NoOoN
CORPLAW.DIRMCORPLAW.OTLM'('SCRAM11)1()&JJ1
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