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Piercing the Corporate Veil: The Alter Ego Doctrine

The corporate veil may be lifted where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. (PNB vs Hydro Resources Contractors Corporation)
One of the instances when the Alter Ego Doctrine is invoked is when there is parent
company-subsidiary company relationship. However, the general rule is still to the effect that
if used for legitimate functions, a subsidiarys separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary will be contained to those arising in
their respective business (AQUINO)
While confirming that there exists no definite test of general application in determining when
a subsidiary may be treated as a mere instrumentality of the parent corporation, it identified
factors that will justify the application of the treatment of the doctrine of the piercing of the
corporate veil:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
(PNB vs RITRATTO GR 142616)
The conditions under which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast rule can be accurately
laid down, but certainly, there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1.
Stock ownership by one or common ownership of both corporations.
2.
Identity of directors and officers.
3.
The manner of keeping corporate books and records.
4.
Methods of conducting the business
(Concept Builders Inc. vs. NLRC)
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Alter-Ego Cases:
(a) Where the stock of a corporation is owned by one person whereby the corporation
functions only for the benefit of such individual owner, the corporation and the individual
should be deemed the same. Arnold v. Willits and Patterson, Ltd., 44 Phil. 634 (1923).
(b) When the corporation is merely an adjunct, business conduit or alter ego of another
corporation, the fiction of separate and distinct corporation entities should be disregarded. -Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
The corporation veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum-shopping. Shareholders, whether suing as the majority in direct
actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes,
particularly where, as in this case, the corporation itself has not been remiss in vigorously
prosecuting or defending corporate causes and in using and applying remedies available to
it. -First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
(c) Employment of same workers; single place of business, etc. La Campana Coffee Factory
v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
The 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 subserve the ends
of justice. This fiction cannot be extended to a point beyond its reason and policy. Where, as
in this case, the corporation fiction was used as a means to perpetrate a social injustice or as
a vehicle to evade obligations or confuse the legitimate issues, it would be discarded and
the two (2) corporations would be merged as one, the first being merely considered as the
instrumentality, agency conduit or adjunct of the other. In this case, because of the actions
of management of the two corporations, there was much confusion as to the proper
employment of the claimant. -Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
(d) Use of nominees. -Marvel Building v. David, 9 Phil. 376 (1951).
(e) Avoidance of tax. -Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961);
Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).
(f) Mixing of bank deposit accounts. -Ramirez Telephone Corp. v. Bank of America, 29 SCRA
191 (1969).
(g) Where it appears that two business enterprises are owned, conducted, and controlled by
the same parties, both law and equity will, when necessary to protect the rights of third
persons, disregard the legal fiction that two corporations are distinct entities and treat them
as identical. -Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
(h) Thinly-capitalized corporations. -McConnel v. Court of Appeals, 1 SCRA 722 (1961).
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(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);-Philippine

Veterans Investment Development Corporation v. CA, 181 SCRA 669 (1990).
(j) Affiliated companies. -Guatson International Travel and Tours, Inc. v. NLRC, 230 SCRA 815
(1990).
Whether the existence of the corporation should be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual
stockholders is insufficient. The presumption is that the stockholders or officers and the
corporation are distinct entities. The burden of proving otherwise is on the party seeking to
have the court pierce the veil of corporate entity. -Ramos v. Court of Appeals, G.R. No.
117416, 8 December 2000.
Guiding Principles in Alter-Ego Cases:
(i) The doctrine applies in this case even in the absence of evil intent; it applies because of
the direct violation of a central corporate law principle of separating ownership from
management.
(ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the
separate entity, others cannot also be expected to be bound by the separate juridical
entity.
(iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to be
enforced against the stockholders or officers of the corporation.
----------------------------------------------------------------------------------------------------------Arnold vs. Willets and Patterson Ltd, 44Phil 634
FACTS: Arnold and Willits and Patterson, Ltd. entered into a contract by which plaintiff was
appointed agent for a period of 5 years. A dispute arose as to the amount which plaintiff
should receive for his services. Patterson retired and Willits became the sole owner of the
assets of the firm. Willits then organized a corporation. He became exclusive owner except
for a few stocks (nominal shares to qualify the directors) for organizational purposes. Another
instrument was executed between Arnold and Willits. Such defined and specified the
compensation of Arnold. Nothing shows that such was formally ratified or approved by the
corporation. A statement of the corporation's account showed that there was due and
owing the plaintiff a sum of money. The corporation's creditor's committee protested against
such amount. Arnold filed suit to collect. Willits argued that the document was signed
without the authority of the defendant corporation and also filed a counterclaim.

1916. The Firm Willits & Patterson in San Francisco entered into a contract with Arnold
whereby Arnold was to be employed for a period of five years as the agent of the firm
here in the PI to operate an oil mill for which he was to receive a minimum salary of
$200/mth, a 1% brokerage fee from all purchases and sales of merchandise, and half
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of the profits of the oil business and other businesses. provided if the business was at a
loss, Arnold would receive $400/mth.
Later, Patterson retired and Willits acquired all interests of the business.
Willits organized a new Corp in San Francisco which took over and acquired all assets
of the Firm Willits & Patterson. Willits was the owner of all the capital stock. New corp
had the same name.
After, Willits, organized a new Corporation here in the PI to take over all the business
and assets of the firm here in the PI. Willits was the owner of all the capital stock.
Later, there was dispute with regard to the construction of the contract as a result, a
new contract in the form of a letter was entered into. Willits signed this.
The statements of account showed that 106K was due and owing to Arnold.
W&P Corp was in financial trouble and all assets were turned over to a creditors
committee.
1922. Arnold filed this complaint to recover 106K from W&P.
W&P argues that the 2nd contract was signed without authority. And as counterclaim
alleged that Arnold took 30K from the Corp but only 19.1K was due to him thus he
owed 10.1K to W&P.
CFI ordered Arnold to return the 10.1K.
ISSUE:
Whether plaintiff may collect from defendant corporation.
HELD: Yes.
The proposition that a corporation has an existence separate and distinct from its
membership has its limitations. It must be noted that this separate existence is for particular
purposes. It must also be remembered that there can be no corporate existence without
persons to compose it; there can be no association without associates.
This separate existence is to a certain extent a legal fiction. Whenever necessary for the
interests of the public or for the protection or enforcement of the rights of the membership,
courts will disregard this legal fiction and operate upon both the corporation and the
persons composing it.
He continued his employment and rendered his services after the corporation was organized
and the second document was signed just the same as he did before, and both
corporations recognized and accepted his services.
It was a one man corporation, and Willits, as the owner of all of the stock, was the force and
dominant power which controlled them. After the document was signed it was recognized
by Willits that the plaintiff's services were to be performed and measured by its term and
provisions, and there never was any dispute between plaintiff and Willits upon that question.
Statements of account were made and prepared by the accountant on the assumption
that the document was in full force and effect as between the plaintiff and the defendant.
Previous financial statements show upon their face that the account of plaintiff was credited
with several small items on the same basis, and it was not until the 23d of March, 1921, that
any objection was ever made by anyone.

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The first Philippine case to apply the piercing doctrine was actually Arnold v. Willets
and Patterson, Ltd., and it was clearly an alter ego case. It expressed the language of
piercing doctrine when applied to alter ego cases, as follows: "Where the stock of a
corporation is owned by one person whereby the corporation functions only for the benefit
of such individual owner, the corporation and the individual should be deemed the same."
In Arnold the creditors' committee of the corporation opposed the payment of
compensation due to the plaintiff Arnold under a contract-letter signed by Willits, the
controlling stockholder, without board approval. The signing president was the controlling
stockholder of the corporation. The Court held the validity of contract and "[a]lthough the
plaintiff was the president of the local corporation, the testimony is conclusive that both of
them were what is known as a one man corporation, and Willits, as the owner of all the
stocks, was the force and dominant power which controlled them."

----------------------------------------------------------------------------------------------------------La Campana Coffee Factory vs Kaisahan Manggagawa 93 Phil 160

Facts: Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the
trade name La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family
organized the family corporation. La Campana Coffee Factory with its principal office
located in Gawgaw Packing. Prior to said information, Tan Tong entered into a CBA with the
labor union of La Campana Gawgaw. Later on, his employees formed Kaisahan ng mga
Manggagawa ng La Campana with an authorization from the DOLE to become an affiliate
of the larger union.
Kaisahan with 66 members presented a demand for higher wages and more privileges to La
Campana Starch and Coffee Factory. The demand was not granted and the DOLE certified
the issue to the CIR. La Campana filed a motion to dismiss alleging that the action was
directed against two different entities with distinct personalities. This was denied, hence this
petition.
Issue: W/N the CIR has jurisdiction over the case.
Held: YES. La Compana Gawgaw and La Campana Factory are operating under one single
management or as one business though with two trade names. The coffee factory is a
corporation and by legal fiction, an entity separate and apart from the persons composing it
namely, Tan Tong and his family.
However, the concept of separate corporate personality cannot be extended to a point
beyond reason and policy when invoked in support of an end subversive of this policy and
will be disregarded by the courts.
A subsidiary company which is created merely as an agent for the latter may sometimes
be regarded as identical with the parent corporation especially if the stockholders or officers
of the two corporations are substantially the same or their systems of operation unified. The
facts showed that they had one management, one payroll prepared by the same person,
laborers were interchangeable, there is only one entity as shown by the signboard ad in
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trucks, packages and delivery forms and the same place of business.
The attempt to make the two factories appear as two separate businesses when in reality
they are but one, is but a device to defeat the ends of the law and should not be permitted
to prevail.
WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Campana
Gawgaw has only 14 employees and only 5 are members of Kaisahan.
----------------------------------------------------------------------------------------------------------Mariano vs. Petron Corp, 610 SCRA 487
FACTS: In 1968, Aure Group, owners of a parcel of land in Tagaytay City leased the Property
to ESSO with lease period is 90 years and the rent is payable monthly for the first 10 years,
and annually for the remaining period. The lease contract (Contract) contained an
assignment veto clause barring the parties from assigning the lease without prior consent of
the other. ESSO sold ESSO Philippines to the Philippine National Oil Corporation (PNOC). ESSO
Philippines became Petron Corporation taking possession of the property.
On 18 November 1993, petitioner Romeo D. Mariano (petitioner) bought the Property from
the Aure Group and obtained title to the Property issued in his name bearing an annotation
of ESSO Easterns lease.
Petitioner sent to Petron a notice to vacate the Property. Petitioner informed Petron that
Presidential Decree No. 471 (PD 471), dated 24 May 1974, reduced the Contracts duration
from 90 to 25 years, ending on 13 November 1993. Despite receiving the notice to vacate on
21 December 1998, Petron remained on the Property.
On March 1999, petitioner sued Petron in the Regional Trial Court to rescind the Contract
and recover possession of the Property. Aside from invoking PD 471, petitioner alternatively
theorized that the Contract was terminated on 23 December 1977 when ESSO Eastern sold
ESSO Philippines to PNOC, thus assigning to PNOC its lease on the Property, without seeking
the Aure Groups prior consent.
In its Answer, Petron countered that the Contract was not breached because PNOC merely
acquired ESSO Easterns shares in ESSO Philippines, a separate corporate entity. Alternatively,
Petron argued that petitioners suit, filed on 18 March 1999, was barred by prescription under
Article 1389 and Article 1146(1) of the Civil Code as petitioner should have sought rescission
within four years from PNOCs purchase of ESSO Philippines on 23 December 1977 or before
23 December 1981.
To dispense with the presentation of evidence, the parties submitted a Joint Motion for
Judgment (Joint Motion).
Trial court ruled for petitioner, rescinded the Contract, ordered Petron to vacate the
Property, and cancelled the annotation on petitioners title of Petrons lease.It ruled that ESSO
Easterns sale to PNOC of its interest in ESSO Philippines included the assignment to PNOC of
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ESSO Easterns lease over the Property, which, for lack of the Aure Groups consent, breached
the Contract, resulting in its termination.
Court of Appeals found merit in Petrons appeal, set aside the trial courts ruling, declared the
Contract subsisting until 13 November 2058. The Court of Appeals found no reason to pierce
ESSO Philippines corporate veil, treating PNOCs buy-out of ESSO Philippines as mere change
in ESSO Philippines stockholding.
Petitioner sought reconsideration but the Court of Appeals denied his motion in its Resolution
of 26 August 2005.
Hence, this petition.
ISSUE: whether the Contract subsists between petitioner and Petron.
RULING : We hold in the affirmative and thus sustain the ruling of the Court of Appeals.
ESSO Eastern Assigned to PNOC its Leasehold Right over the Property, Breaching the
Contract
PNOCs buy-out of ESSO Philippines was total and unconditional, leaving no residual rights to
ESSO Eastern. Logically, this change of ownership carried with it the transfer to PNOC of any
proprietary interest ESSO Eastern may hold through ESSO Philippines, including ESSO Easterns
lease over the Property. This is the import of Petrons admission in the Joint Motion that by
PNOCs buy-out of ESSO Philippines [PNOC], x x x acquired ownership of ESSO Standard
Philippines, Inc., including its leasehold right over the land in question, through the acquisition
of its shares of stocks. As the Aure Group gave no prior consent to the transaction between
ESSO Eastern and PNOC, ESSO Eastern violated the Contracts assignment veto clause.
Petrons objection to this conclusion, sustained by the Court of Appeals, is rooted on its
reliance on its separate corporate personality and on the unstated assumption that ESSO
Philippines (not ESSO Eastern) initially held the leasehold right over the Property. Petron is
wrong on both counts.
Courts are loathe to pierce the fictive veil of corporate personality, cognizant of the core
doctrine in corporation law vesting on corporations legal personality distinct from their
shareholders (individual or corporate) thus facilitating the conduct of corporate business.
However, fiction gives way to reality when the corporate personality is foisted to justify
wrong, protect fraud, or defend crime, thwarting the ends of justice. The fiction even holds
lesser sway for subsidiary corporations whose shares are wholly if not almost wholly owned by
its parent company. The structural and systems overlap inherent in parent and subsidiary
relations often render the subsidiary as mere local branch, agency or adjunct of the foreign
parent corporation.
Here, the facts compel the conclusion that ESSO Philippines was a mere branch of ESSO
Eastern in the execution and breach of the Contract. First, by ESSO Easterns admission in the
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Contract, it is a foreign corporation organized under the laws of the State of Delaware,
U.S.A., duly licensed to transact business in the Philippines, and doing business therein under
the business name and style of Esso Standard Philippines x x x. In effect, ESSO Eastern was
ESSO Philippines for all of ESSO Easterns Philippine business.
Second, the Contract was executed by ESSO Eastern, not ESSO Philippines, as lessee, with
the Aure Group as lessor. ESSO Eastern leased the Property for the use of ESSO Philippines,
acting as ESSO Easterns Philippine branch. Consistent with such status, ESSO Philippines took
possession of the Property after the execution of the Contract. Thus, for purposes of the
Contract, ESSO Philippines was a mere alter ego of ESSO Eastern.
The Lessors Continued Acceptance of Lease Payments
Despite Breach of Contract Amounted to Waiver
The breach of contract notwithstanding, we hold that the Contract subsists. Contrary to the
trial courts conclusion that ESSO Easterns violation of the assignment veto clause
extinguished the Contract, replaced by a new implied lease with a monthly term, we hold
that the breach merely gave rise to a cause of action for the Aure Group to seek the lessees
ejectment as provided under Article 1673, paragraph 3 of the Civil Code. Although the
records do not show that the Aure Group was formally notified of ESSO Philippines sale to
PNOC, the successive changes in the lessees name (from ESSO Philippines to Petrophil
Corporation then to Petron) suffice to alert the Aure Group of a likely change in the
personality of the lessee, which, for lack of the Aure Groups prior consent, was in obvious
breach of the Contract. Thus, the continued receipt of lease payments by the Aure Group
(and later by petitioner) despite the contractual breach amounted to a waiver of their
option to eject the lessee.
Petitioners Suit Barred by Prescription
Petitioners waiver of Petrons contractual breach was compounded by his long inaction to
seek judicial redress. Petitioner filed his complaint nearly 22 years after PNOC acquired the
leasehold rights to the Property and almost six years after petitioner bought the Property from
the Aure Group. The more than two decades lapse puts this case well within the territory of
the 10 year prescriptive bar to suits based upon a written contract under Article 1144 (1) of
the Civil Code.
----------------------------------------------------------------------------------------------------------Read Commentaries/ References on the following:
I.
Pre- Incorporation and Incorporation Matters
A.
Promoter- person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor
B.
Liability under Promoters Contracts
Art. 1897. The agent who acts as such is not personally liable to the party with whom he
contracts, UNLESS he expressly binds himself or exceeds the limits of his authority without
giving such party sufficient notice of his powers. (1725)

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Art. 1898. If the agent contracts in the name of the principal, exceeding the scope of his
authority, and the principal does not ratify the contract, it shall be void if the party with
whom the agent contracted is aware of the limits of the powers granted by the principal. In
this case, however, the agent is liable if he undertook to secure the principal's ratification. (n)
Art. 1901. A third person cannot set up the fact that the agent has exceeded his powers, if
the principal has ratified, or has signified his willingness to ratify the agent's acts. (n)
----------------------------------------------------------------------------------------------------------Cagayan Fishing Development vs Teodoro Sandiko 65 Phil 223
FACTS: Manuel Tabora is the registered owner of four parcels of land. To guarantee the
payment of a loan in the sum of P8,000, Manuel Tabora executed in favor of the Philippine
National Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was executed by Tabora over the same lands to
guarantee the payment of another loan amounting to P7,000. A third mortgage on the
same lands was executed in favor of Severina Buzon to whom Tabora was indebted in the
sum of P2,9000. These mortgages were registered and annotations thereof appear at the
back of transfer certificate of title No. 217.
The board of directors of plaintiff adopted a resolution authorizing its president, Jose
Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. The
defendant having failed to pay the sum stated in the promissory note, plaintiff, brought this
action in the Court of First Instance of Manila praying that judgment be rendered against the
defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the
complaint, and the costs of the suits.
ISSUE: Whether or not the transfers were valid.
RULING: NO.
The contract here was entered into not between Manuel Tabora and a non-existent
corporation but between the Manuel Tabora as owner of the four parcels of lands on the
one hand and the same Manuel Tabora, his wife and others, as mere promoters of a
corporations on the other hand. For reasons that are self-evident, these promoters could not
have acted as agent for a projected corporation since that which no legal existence could
have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it
were, a child in ventre sa mere. This is not saying that under no circumstances may the acts
of promoters of a corporation be ratified by the corporation if and when subsequently
organized. There are, of course, but under the peculiar facts and circumstances of the
present case we decline to extend the doctrine of ratification which would result in the
commission of injustice or fraud to the candid and unwary.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by sale to the
defendant, Teodoro Sandiko.
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Some of the members of this court are also of the opinion that the transfer from
Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is
evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva),
namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank,
and that this condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. However, having arrived at the
conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development
Company, Inc. was null because at the time it was affected the corporation was nonexistent, we deem it unnecessary to discuss this point.
----------------------------------------------------------------------------------------------------------Rizal Light & Ice Co v. Municipal of Rizal 25 SCRA 1968
FACTS: The bulk of petitioner's arguments assailing the personality of Morong Electric dwells
on the proposition that since a franchise is a contract, 23 at least two competent parties are
necessary to the execution thereof, and parties are not competent except when they are in
being. Hence, it is contended that until a corporation has come into being, in this jurisdiction,
by the issuance of a certificate of incorporation by the Securities and Exchange Commission
(SEC) it cannot enter into any contract as a corporation.
The certificate of incorporation of the Morong Electric was issued by the SEC on
October 17, 1962, so only from that date, not before, did it acquire juridical personality and
legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6,
1962 when it was not yet in esse is null and void and cannot be the subject of the
Commission's consideration. On the other hand, Morong Electric argues, and to which
argument the Commission agrees, that it was a de facto corporation at the time the
franchise was granted and, as such, it was not incapacitated to enter into any contract or to
apply for and accept a franchise. Not having been incapacitated, Morong Electric
maintains that the franchise granted to it is valid and the approval or disapproval thereof
can be properly determined by the Commission.
ISSUE: Whether the lack or corporate existence on the part of Morong rendered the
franchise valid.
RULING: YES.
The incorporation of (Morong) and its acceptance of the franchise as shown by this
action in prosecuting the application filed with the Commission for approval of said
franchise, not only perfected a contract between the municipality and Morong but also
cured the deficiency pointed out by the petition. The fact that Morong did not have a
corporate existence on the day the franchise was granted does not render the franchise
invalid, as Morong later obtained its certificate of incorporation and accepted the franchise.
The two decisions of the Public Service Commission, appealed from, should be, as they
are hereby affirmed, with costs in the two cases against petitioner Rizal Light & Ice Co., Inc.

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----------------------------------------------------------------------------------------------------------Caram Jr. vs Court of Appeals 151 SCRA 372

FACTS: The petitioners claim that this order has no support in fact and law because they had
no contract whatsoever with the private respondent regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation that was later
created, they should not be held solidarily liable with the Filipinas Orient Airways, a separate
juridical entity, and with Barretto and Garcia, their co-defendants in the lower court, ** who
were the ones who requested the said services from the private respondent.
ISSUE:

Whether or not the petitioners should be held liable.

RULING: NO.
The petitioners were not involved in the initial stages of the organization of the airline.
They were merely among the financiers whose interest was to be invited and who were in
fact persuaded, on the strength of the project study, to invest in the proposed airline.
There was no showing that the Airline was a fictitious corporation and did not have a
separate juridical personality to justify making the petitioners, as principal stockholders
thereof, responsible for its obligations. As a bona fide corporation, the Airline should alone
be liable for its corporate acts as duly authorized by its officers and directors. Granting that
the petitioners benefited from the services rendered, such is no justification to hold them
personally liable therefor. Otherwise, all the other stockholders of the corporation, including
those who came in late, and regardless of the amount of their shareholdings, would be
equally and personally liable also with the petitioner for the claims of the private respondent.
Petitioners cannot be held personally liable for the compensation claimed by the
private respondent for the services performed by him in the organization of the corporation.
To repeat, the petitioners did not contract such services. It was only the results of such
services that Barretto and Garcia presented to them and which persuaded them to invest in
the proposed airline. The most that can be said is that they benefited from such services, but
that surely is no justification to hold them personally liable therefor.
A promoter could not have acted as agent for a corporation that had no legal
existence. A corporation, until organized, has no life therefore no faculties. The corporation
had no juridical personality to enter into a contract.
----------------------------------------------------------------------------------------------------------II.

Incorporation Matters
TITLE II
INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Section 10. Number and qualifications of incorporators. Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation. (6a)
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Section 11. Corporate term. A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single instance by an amendment
of the articles of incorporation, in accordance with this Code; Provided, That no extension
can be made earlier than five (5) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission. (6)
Section 12. Minimum capital stock required of stock corporations. Stock corporations
incorporated under this Code shall not be required to have any minimum authorized capital
stock except as otherwise specifically provided for by special law, and subject to the
provisions of the following section.
Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. At least twenty-five percent (25%) of the authorized capital stock as stated
in the articles of incorporation must be subscribed at the time of incorporation, and at least
twenty-five (25%) per cent of the total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the contract of subscription without need
of call, or in the absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less than five
Thousand (P5,000.00) pesos. (n)
Section 14. Contents of the articles of incorporation. All corporations organized under this
code shall file with the Securities and Exchange Commission articles of incorporation in any
of the official languages duly signed and acknowledged by all of the incorporators,
containing substantially the following matters, except as otherwise prescribed by this Code
or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. Where a
corporation has more than one stated purpose, the articles of incorporation shall state which
is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a
non-stock corporation may not include a purpose which would change or contradict its
nature as such;
3. The place where the principal office of the corporation is to be located, which must be
within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;

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6. The number of directors or trustees, which shall not be less than five (5) nor more than
fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors or trustees
until the first regular directors or trustees are duly elected and qualified in accordance with
this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of
the Philippines, the number of shares into which it is divided, and in case the share are par
value shares, the par value of each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his subscription, and if some or
all of the shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of incorporation of
any stock corporation unless accompanied by a sworn statement of the Treasurer elected
by the subscribers showing that at least twenty-five (25%) percent of the authorized capital
stock of the corporation has been subscribed, and at least twenty-five (25%) of the total
subscription has been fully paid to him in actual cash and/or in property the fair valuation of
which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up
capital being not less than five thousand (P5,000.00) pesos.
Section 15. Forms of Articles of Incorporation. Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply substantially with the
following form:
ARTICLES OF INCORPORATION
OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of whom are residents of the
Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under
the laws of the Republic of the Philippines;
AND WE HEREBY CERTIFY:

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FIRST: That the name of said corporation shall be "_____________________, INC. or

CORPORATION";
SECOND: That the purpose or purposes for which such corporation is incorporated are: (If
there is more than one purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located in the City/Municipality of
________________________, Province of _______________________, Philippines;
FOURTH: That the term for which said corporation is to exist is _____________ years from and
after the date of issuance of the certificate of incorporation;
FIFTH: That the names, nationalities and residences of the incorporators of the corporation
are as follows:
NAME NATIONALITY
RESIDENCE
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
SIXTH: That the number of directors or trustees of the corporation shall be _______; and the
names, nationalities and residences of the first directors or trustees of the corporation are as
follows:
NAME NATIONALITY
RESIDENCE
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
SEVENTH: That the authorized capital stock of the corporation is ______________________
(P___________) PESOS in lawful money of the Philippines, divided into __________ shares with
the par value of ____________________ (P_____________) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ______________ shares without par value. (In case
some shares have par value and some are without par value): That the capital stock of said
corporation consists of _____________ shares of which ______________ shares are of the par
value of _________________ (P____________) PESOS each, and of which _________________
shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated
has been subscribed as follows:
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Name of Subscriber/ Nationality/ No. of Shares/ Subscribed

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Amount/Subscribed

NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of
the total subscription as follows:
Name of Subscriber
Amount Subscribed
Total Paid-In
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock,
Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the
articles state the amount of capital or money contributed or donated by specified persons,
stating the names, nationalities and residences of the contributors or donors and the
respective amount given by each.)
TENTH: That _____________________ has been elected by the subscribers as Treasurer of the
Corporation to act as such until his successor is duly elected and qualified in accordance
with the by-laws, and that as such Treasurer, he has been authorized to receive for and in
the name and for the benefit of the corporation, all subscription (or fees) or contributions or
donations paid or given by the subscribers or members.
ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino
citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less
than the required percentage of the capital stock as provided by existing laws shall be
allowed or permitted to be recorded in the proper books of the corporation and this
restriction shall be indicated in all stock certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this
__________ day of ________________, 19 ______ in the City/Municipality of ____________________,
Province of ________________________, Republic of the Philippines.
(Names and signatures of the incorporators)
SIGNED IN THE PRESENCE OF:
___________________
___________________
(Notarial Acknowledgment)
TREASURERS AFFIDAVIT
REPUBLIC OF THE PHILIPPINES)
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CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, ____________________, being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as
such until my successor has been duly elected and qualified in accordance with the by-laws
of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25%
of the authorized capital stock of the corporation has been subscribed and at least 25% of
the total subscription has been paid, and received by me, in cash or property, in the amount
of not less than P5,000.00, in accordance with the Corporation Code.
____________________
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality
of___________________Province of _____________________, this _______ day of ___________, 19
_____; by __________________ with Res. Cert. No. ___________ issued at _______________________
on ____________, 19 ______
NOTARY PUBLIC
My commission expires on _________, 19 _____
Doc. No. _________;
Page No. _________;
Book No. ________;
Series of 19____ (7a)
Section 18. Corporate name. No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a change in the corporate
name is approved, the Commission shall issue an amended certificate of incorporation
under the amended name. (n)
Section 19. COMMENCEMENT OF CORPORATE EXISTENCE. A private corporation formed or
organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation is sooner dissolved in
accordance with law. (n)
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Trust Fund Doctrine

(a) Commercial/Common Law Premise: Equity versus Debts; Preference of Creditors over
Equity Holders (Art. 2236, Civil Code)
The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is null and void. Boman Environmental
Dev. Corp. v. CA, 167 SCRA 540 (1988).
Under the trust fund doctrine, the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate creditors.
Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
(b) Nature and Coverage of the Trust Fund Doctrine:
The subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts. Phil. Trust Co. v. Rivera, 44 Phil. 469 (1923).
Even when foreclosure on corporate assets was wrongful done, stockholders have no
standing to recover for themselves moral damages; otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of part of the corporations
assets before the dissolution and the liquidation of its debts and liabilities. APT v. Court of
Appeals, 300 SCRA 579 (1998).
The trust fund doctrine considers the subscribed capital stock as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for
satisfaction. Until the liquidation of the corporation, no part of the subscribed capital
stock may be turned over or released to the stockholder (except in the redemption of
the redeemable shares) without violating this principle. Thus dividends must never impair
the subscribed capital stock; subscription commitments cannot be condoned or
remitted; nor can the corporation buy its own shares using the subscribed capital as the
consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
We clarify that the trust fund doctrine is not limited to reaching the stockholders
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts. All assets and
property belonging to the corporation held in trust for the benefit of creditors that were
distributed or in the possession of the stockholders, regardless of full payment of their
subscriptions may be reached by the creditors in satisfaction of its claim. Halley v.
Printwell, Inc. 649 SCRA 116 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2001), p.
558.
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(c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph)
Under common law, there were originally conflicting views on whether a corporation
had the power to purchase its own stocks. Only a few American jurisdictions adopted
the strict English rule forbidding a corporation from purchasing its own shares. In some
American states where the English rule used to be adopted, statutes granting authority
to purchase out of surplus funds were enacted, while in others, shares might be
purchased even out of capital provided the rights of creditors were not prejudiced. The
reason underlying the limitation of share purchases sprang from the necessity of
imposing safeguards against the depletion by a corporation of its assets and against
the impairment of its capital needed for the protection of creditors. Turner v. Lorenzo
Shipping Corp., 636 SCRA 13 (2010).
(d) Rescission of Subscription Agreement
Violation of terms embodied in a Subscription Agreement, with are personal
commitments, do not constitute legal ground to rescind the such agreement:. In the
instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since the rescission of a
subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed. Distribution of corporate assets among the
stockholders cannot even be resorted to achieve corporate peace. Ong Yong v.
Tiu, 401 SCRA 1 (2003).
CAPITAL STOCK
1. Power of the Corporation to Issue Shares of Stock
The power to issue shares of stock in a corporation is lodged in the board of directors
and no stockholders meting is required to consider it because additional issuances of
shares of stock does not need approval of the stockholderswhat is only required is the
board resolution approving the additional issuance of shares. Majority Stockholders of
Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
2. Concept of Capital Stock (Sec. 137)
By express provision of Sec. 137, paid-up capital is that portion of the authorized capital
stock which has been both subscribed and paid. . . Not all funds or assets received by the
corporation can be considered paid-up capital, for this term has a technical signification
in Corporation Law. Such must form part of the authorized capital stock of the
corporation, subscribed and then actually paid up. MSCI-NACUSIP v. National Wages and
Productivity Comm., 269 SCRA 173 (1997).
The term capital and other terms used to describe the capital structure of a
corporation are of universal acceptance, and their usages have long been established in
jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation.
The capital subscribed is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and can
be more than, the par value of the shares. In fine, it is the amount that the corporation
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receives, inclusive of the premium if any, in consideration of the original issuance of the
shares. NTC v. Court of Appeals, 311 SCRA 508 (1999).
The outstanding capital stock is defined under Sec. 137 as the total shares of stock
issued to subscribers or stockholders whether or not fully or partially paid (as long as there is
binding subscription agreement) except treasury shares. Thus, quorum is based on the
totality of the shares which have been subscribed and issued, whether it be founders
shares or common shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
An investment, being in the nature of equity, is an expenditure to acquire property or
other assets in order to produce revenue. It is the placing of capital or laying out of money
in a way intended to secure income or profit from its employment. Unlike a deposit of
money or a loan that earns interest, cannot be assured of a dividend or an interest on the
amount invested, for dividends on investments are granted only after profits or gains are
generated. President of PDIC v. Reyes, 460 SCRA 473 (2005).
Advances for Future Subscription is a receivable account and does not form part of
the capital stock of the corporation since it does not correspond to any particular
issuance of shares of stock. Central Textile Mills v. National Wage and Productivity Comm.,
260 SCRA 368 (1996). Consequently there is no liability for the payment of the
documentary stamp tax on such deposit for future subscription for the reason that there is
yet no subscription that creates rights and obligations between the subscriber and the
corporation. Commissioner of Internal Revenue v. First Express Pawnshop Co., Inc., 589
SCRA 253 (2009).
Capital Stock is an amount fixed in the AOI (where shares are with par value) and is
unaffected by profits and losses. It limits the maximum amount or number of shares that may
be issued without formal amendment of the articles of incorporation (See Sec. 38).
Subscribed Capital Stock - It is the amount of the capital stock subscribed whether fully paid
or not. It connotes an original subscription contract for the acquisition by a subscriber of
unissued shares in a corporation (Secs. 60 and 61)
Outstanding Capital Stock - it is the total shares of stock issued under the binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares (Sec. 137). It is broader than subscribed capital stock.
Paid-up Capital - Portion of the authorized capital stock which has been subscribed and
paid (See Sec. 13).
Unissued Capital Stock - It is that portion of the capital stock that is not issued or subscribed.
It does not vote and draws no dividends.
Legal Capital - It is the amount equal to the aggregate par value and/or issued value of the
outstanding capital stock (DE LEON). Requirement (Sec 13, Corporation Code) At least
twenty-five (25%) percent of the authorized capital stock of the corporation must be
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subscribed; and At least twenty-five (25%) of the total subscription has been fully paid to him
in actual cash and/or in property the fair valuation of which is equal to at least twenty-five
(25%) percent of the said subscription, such paid-up capital being not less than five
thousand (P5,000.00) pesos.
SUBSCRIPTION
Section 60. Subscription contract. Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription
contract within the meaning of this Title, notwithstanding the fact that the parties refer to it as
a purchase or some other contract.
a. Characteristics There can be a subscription only with reference to unissued shares of
the Authorized Capital Stock (ACS), in the following cases:
1. The original issuance of the ACS at the time of incorporation.
2. The opening, during the life of the corporation, of the portion of the original ACS previously
unissued; or
3. The increase in ACS achieved through a formal amendment of the Articles and
registration thereof with the SEC. (VILLANUEVA)
b. Status as Shareholder A person becomes a shareholder the moment he:
Enters into a SUBSCRIPTION CONTRACT with an existing corporation (he is a stockholder
upon acceptance of the corporation of his offer to subscribe whether the consideration is
fully paid or not).
Purchases TREASURY SHARES from the corporation
Acquires shares from existing shareholders by SALE OR ANY OTHER CONTRACT (SUNDIANG
AND AQUINO)
c. Types of subscription contracts i. Pre-incorporation subscription (Sec. 61) It is a subscription
for shares of stock of a corporation still to be formed. ii. Post-incorporation subscription It is
entered into after incorporation.
d. Interest on unpaid subscription GENERAL RULE Stockholder is NOT liable to pay interest on
his unpaid subscription. EXCEPTION If so required by the by-laws RATE: that fixed in the bylaws, otherwise, the legal rate (Sec. 66) NOTES Transfer of unissued shares = subscription.
Transfer for consideration of treasury shares = sale by the corporation (not subscription).
Transfer of previously issued shares by a stockholder to a third person = sale. Shareholders are
NOT creditors of the corporation with respect to their shareholdings thereto and the principle
of compensation or set-off has no application. Subscription contract is NOT required to be in
writing.
PRE- INCORPORATION SUBSCRIPTION
It is a subscription for shares of stock of a corporation still to be formed. When subscription is
IRREVOCABLE:
1. For a period of at least 6 months from the date of subscription, UNLESS (1) all of the other
subscribers consent to the revocation, or (2) the incorporation fails to materialize within six (6)
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months or within a longer period as may be stipulated in the contract of subscription; or

2. After the submission of the AOI to the SEC.
PAR VALUE SHARE
These are shares with a stated value set out in the AOI. This remains the same regardless of
the profitability of the corporation. This gives rise to financial stability and is the reason why
banks, trust corporations, insurance companies and building and loan associations must
always be organized with par value shares. Par value is minimum issue price of such share in
the AOI which must be stated in the certificate
AUTHORIZED CAPITAL STOCK - is synonymous with capital stock where the shares of the
corporation have par value. If the shares of stock have no par value, the corporation has no
ACS, but it has capital stock the amount of which is not specified in the AOI as it cannot be
determined until all the shares have been issued. In this case, the two terms are not
synonymous (DE LEON).
ARTICLES OF INCORPORATION
E. Articles of Incorporation
constitutes the charter of the corporation
defines the contractual relationships between the State and the corporation, the
stockholders and the State, and the corporation and the stockholders
The Articles must be filed with the SEC for the issuance of the Certificate of Incorporation.
1. Contents (Sec. 14)
i. Corporate name (Sec. 18)
1. Must not be identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law
2. Not patently deceptive, confusing or contrary to existing laws Required by law to include
the word Corporation or Inc. (Campos, 1990) Change of corporate name requires the
amendment of the AOI: majority vote of the board and the vote or written assent of
stockholders holding 2/3 of the outstanding capital stock (Sec. 16).
Republic Planters Bank v. CA (1992): Amendment of a corporations AOI changing its
corporate name does not extinguish the personality of the original corporation. It is the same
corporation with a different name, and its character is not changed. Consequently, the
new corporation is still liable for the debts and obligations of the old corporation.
ii. Purpose clause
Must indicate the PRIMARY and SECONDARY purposes if there is more than one purpose,
which should not contradict or change the nature of the corporation (Sec. 14(2))
Must not be patently unconstitutional, illegal, immoral, and contrary to government rules
and regulations (Sec. 17 (2)).
Must not be for the purpose of practicing a profession (People v. United Medical Service,
200 N.E. 157, cited in Campos
iii. Principal office
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Must be within the Philippines (Sec. 14 (3))

AOI must specify both province or city or town where it is located
Important for (1) determining venue in an action by or against the corporation, and (2)
determining the province where a chattel mortgage of shares should be registered (Chua
Gan vs. Samahang Magsasaka, 1935).
iv. Corporate Term
Maximum life of 50 years.
Extendible for a period not exceeding 50 years at any one instance. No extension,
however, can be made earlier than 5 years before the end of the term. (Sec. 11)
Extension requires an amendment of the subject to the exercise of appraisal right by the
dissenting stockholder (Sec. 37).
v. Names, citizenship and residences of incorporators
vi. Number, names, citizenship and residences of directors/trustees. (Asked in 05 and 08)
Stock corporations: DIRECTORS
Non-stock corporations: TRUSTEES
GENERAL RULE
Not less than 5 but not more than 15 directors/trustees EXCEPTION Non-stock corporations
whose articles or by-laws may provide for more than 15 trustees (Sec. 92) Educational nonstock corporations:
trustees may NOT be less than 5 NOR exceed 15
number of trustees shall be in multiples of 5 (Sec. 108)
Nationalized industries: Aliens may be directors but only in such number as may be
proportional to their allowable ownership of shares vii. If STOCK corporation:
authorized capital stock in lawful money of the Philippines
the number of shares into which the ACS is divided
If with par value shares, the par value of each share (Sec. 14(8), Sec. 15(7)).
names, citizenship and residences of original subscribers
amount subscribed and paid on each subscription
fact that some or all shares are without par value
viii. If NON-STOCK:
amount of capital
names, nationalities & residences of contributors
amount contributed by each
ix. Amount paid by each subscriber on their subscription, which shall not be less than 25% of
subscribed capital and shall not be less than P5,000 (Sec. 15 (8 & 9)) x. Name of treasurer
elected by the subscribers (Sec. 15 (10) xi. Other matters
Classes of shares, as well as preferences or restrictions on any such class (Sec. 6).
Denial or restriction of pre-emptive right (Sec.39).
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Prohibition against transfer of stock which would reduce stock ownership to less than the
required minimum in the case of a nationalized business or activity (Sec. 15(11)).
2. Non-amendable items
The following items state accomplished facts, therefore, cannot be amended:
The names, nationalities and residences of the incorporators
(Otherwise, an amendment would go against the definition of incorporators in Sec. 5)
First set of directors or trustees
Original stock subscriptions and paid-in capital
-in-trust

NOTES: AOI must be accompanied by Treasurers sworn statement of compliance with Sec.
13 on amount of capital to be subscribed and paid for the purposes of incorporation;
otherwise, SEC shall not accept the AOI. (Sec. 14)
BY-LAWS- Product of agreement of the stockholders/members and establish the rules for
internal government of the corporation (Campos, 1990)
prejudice 3rd persons who
deal with the corporation unless they have knowledge of the same (China Banking Corp v
CA, 1997)
a. ADOPTION OF BY-LAWS (Sec. 46)
- within 1 month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC.
- approved and signed by all the incorporators & submitted to SEC
together with AOI
b. EFFECT OF FAILURE TO FILE THE BY-LAWS WITHIN THE PERIOD:
-laws may be required by law for an
orderly governance and management of corporations but they are not essential to
corporate birth. Therefore, failure to file them within the period required by law by no means
tolls the automatic dissolution of a corporation (Loyola Grand Villas Homeowners Assn v. CA
(1997)
NOTESection 22 on the effect of failure to formally organize within 2 years from
incorporation, the corporations corporate powers cease and the corporation is deemed
dissolved. Organization includes: the filing & approval of by-laws with the SEC and the
election of directors and officers (Campos, 1990). c. REQUISITES OF VALID BY-LAWS (Sec. 46)
ders representing MAJORITY of
the outstanding capital stock or majority of members (If filed pre-incorporation: must be
approved and signed by all incorporators)
stockholders or members during office hours (Sec. 74)
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d. BINDING EFFECT (Sec. 46) ONLY from date of issuance of SEC of certification that by-laws
are not inconsistent with the Code Pending approval, they CANNOT bind stockholders or
corporation
e. Amendments or Repeal (Sec. 48) Effected by: MAJORITY vote of the members of the
BOARD and MAJORITY VOTE OF THE OWNERS of the OCS or members, in a meeting duly
called for the purpose DELEGATION TO THE BOD OF POWER TO AMEND OR REPEAL BY-LAWS:
by vote of stockholders representing 2/3 of the OCS or 2/3 of the members HOW
DELEGATION REVOKED: by MAJORITY VOTE only of stockholders representing 2/3 of the OCS
or 2/3 of the members
Section 20. DE FACTO CORPORATIONS. The due incorporation of any corporation claiming
in good faith to be a corporation under this Code, and its right to exercise corporate powers,
shall not be inquired into collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding.
(n)A
Seventh Day Adventist Conference Church of the Philippines et al vs. Northeasthern
Mindanao Mission of Seventh Day Adventists GR 150416
Section 21. CORPORATION BY ESTOPPEL. All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation. (n)
----------------------------------------------------------------------------------------------------------People vs. Garcia 271 SCRA 621
FACTS: In 1993, Carlos Garcia, Patricio Botero, and Luisa Miraples were accused of
illegal recruitment. It was alleged that they represented themselves as the
incorporators and officers of Ricorn Philippine International Shipping Lines, Inc.; that
Ricorn is a recruitment agency for seamen; that Garcia is the president, Botero is the
vice-president, and Miraples (now at large) is the treasurer. It was later discovered that
Ricorn was never registered with the Securities and Exchange Commission (SEC) and
that it was never authorized to recruit by the Philippine Overseas Employment Agency
(POEA). Botero and Garcia were convicted. Botero appealed.
In his defense, Botero averred that he was not an incorporator; that he was merely an
employee of Ricorn in charge of following up on their documents.
ISSUE: Whether or not Botero is a mere employee of Ricorn.
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HELD: No. It was proven by evidence that he was introduced to the applicants as the
vice president of Ricorn. When he was receiving applicants, he was receiving them
behind a desk which has a nameplate representing his name and his position as VP of
Ricorn.
But Ricorn was never incorporated? How will this affect his liability in the crime illegal
recruitment?
Under the law, if the offender is a corporation, partnership, association or entity, the
penalty shall be imposed upon the officer or officers of the corporation, partnership,
association or entity responsible for violation. In this case, even if Ricorn was not
incorporated, Botero and his cohorts are estopped from denying liability as corporate
officers of Ricorn. Section 25 of the Corporation Code provides that All persons who
assume to act as a corporation knowing it to be without authority to do so shall be
liable as general partners for all the debts, liabilities and damages incurred or arising as
a result thereof: Provided, however, That when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of corporate personality
----------------------------------------------------------------------------------------------------------Lim Tong Lim v. Phil. Fishing Gear Industries Inc. 317 SCRA 728
Under the law on estoppel including that under Sec. 21, those acting on behalf of an
ostensible corporation and those benefited by it, knowing it to be without valid existence,
are held liable as general partners.
FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to the agreement. They, however,
failed to pay; hence, private respondent filed a collection suit against Chua, Yao and
Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the allegation that
"Ocean Quest Fishing Corporation" was a nonexistent corporation
Yao and Chua admitted liability while Lim filed his answer. Trial court rendered decision
ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that
Chua, Yao and Lim, as general partners, were jointly liable to pay respondent.
ISSUE: Whether or not Lim should be made jointly liable with Yao and Chua.
RULING: YES.
Lim asserts that he should not be made liable because there was no partnership
existing between them.
The court ruled that there exist a partnership between them. It is clear that Chua, Yao
and Lim had decided to engage in a fishing business, which they started by buying boats
worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother.
In their Compromise Agreement, they subsequently revealed their intention to pay the loan
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AYAME NOTES :WEEK 2

with the proceeds of the sale of the boats, and to divide equally among them the excess or
loss. These boats, the purchase and the repair of which were financed with borrowed
money, fell under the term "common fund" under Article 1767. The contribution to such fund
need not be cash or fixed assets; it could be an intangible like credit or industry. That the
parties agreed that any loss or profit from the sale and operation of the boats would be
divided equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the
boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential
to fishing, were obviously acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition
of the aforesaid equipment, without which the business could not have proceeded.
----------------------------------------------------------------------------------------------------------Pioneer Insurance vs. CA 175 SCRA 668
FACTS: In 1965, Jacob S. Lim, owner-operator of Southern Airlines (SAL), a single proprietorship
entered into a sales contract with regarding Japan Domestic Airlines (JDA) regarding 2 DC#A type aircrafts, 1 set of necessary spare parts where a Total of $ 190,000 in instalments are
to be paid. Pioneer Insurance and Surety Corp. as surety executed its surety bond in favor of
JDA on behalf of its principal Lim. Border Machinery and Heavy Equipment Co, Inc. of
Francisco and Modesto Cervantes and Constancio Maglana contributed funds for the
transaction based on the misrepresentation of Lim that they will form a new corporation to
expand his business.
Lim as owner operator for SAL executed in favor of Pioneer a deed of chattel
mortgage as security. A restructuring of obligation to change the maturity was done twice
without the knowledge of other defendants made the surety of JDA prescribed so not
entitled to reimbursement. Upon default on the 2/8 payments, Pioneer paid for him and filed
a petition for the foreclosure of chattel mortgage as security. CA affirmed Trial of Merits:
Only Lim is liable to pay
ISSUE: Whether or not there is failure of respondents to incorporate leading to a de facto
partnership.
RULING: NO.
Partnership inter se does not necessarily exist, for ordinarily CANNOT be made to
assume the relation of partners as between themselves, when their purpose is that no
partnership shall exists. It should be implied only when necessary to do justice between the
parties (i.e. only pretend to make others liable). Lim never intended to form a corporation.
----------------------------------------------------------------------------------------------------------Section 17. GROUNDS WHEN ARTICLES OF INCORPORATION OR AMENDMENT MAY BE
REJECTED OR DISAPPROVED. The Securities and Exchange Commission may reject the
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articles of incorporation or disapprove any amendment thereto if the same is not in

compliance with the requirements of this Code: Provided, That the Commission shall give the
incorporators a reasonable time within which to correct or modify the objectionable portions
of the articles or amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurers Affidavit concerning the amount of capital stock subscribed
and/or paid is false;
4. That the percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking and
quasi-banking institutions, building and loan associations, trust companies and other financial
intermediaries, insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate government
agency to the effect that such articles or amendment is in accordance with law. (n)
Section 22. EFFECTS ON NON-USE OF CORPORATE CHARTER AND CONTINUOUS INOPERATION
OF A CORPORATION. If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from the date of
its incorporation, its corporate powers cease and the corporation shall be deemed
dissolved. However, if a corporation has commenced the transaction of its business but
subsequently becomes continuously inoperative for a period of at least five (5) years, the
same shall be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation. (19a)
This provision shall not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes
beyond the control of the corporation as may be determined by the Securities and
Exchange Commission.

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