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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

CORPORATION
LAW
Finals Reviewer
BECAUSE SHARING IS LOVING
A new command I give you: Love one another.
As I have loved you, so you must love one another
By this everyone will know that you are my disciples,
if you love one another.
John 13: 34-35


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

HISTORICAL*BACKGROUND*

The!corporate!form!has!been!around!for!around!100!years!and!
has!established!a!manner!in!which!business!has!been!conducted!
that!makes!it!an!attractive!medium.!

!
I.* Philippine* Corporate* Law 1 *A?sort?of* codification* of* American*

!
III.*The*Corporation*Code*(Batas*Pambansa*Bilang*68)*

Why* Drawn:* When!attention!was!drawn!to!the!fact!that!there!


was!no!entity!in!Spanish!law!corresponding!to!the!notion!of!the!
American!corporation,!the!Philippine!Commission!enacted!the!
Purpose:! To" introduce" the" American" corporation" in" the"
Philippines)as)the)standard)commercial)entity)and)to)hasten)the)
day$ when$ the$ sociedad$ annima$ of$ the$ Spanish$ law$ would$ be$
obsolete.! The! statute! is! a! sort! of! codification! of! American!
Corporate( Law.( Harden( v.( Benguet( Consolidated( Mining,( 58(
Phil.(141((1933).(

When!the!Americans!came!over,!they!noted!that!whatever!was!
in! place! at! that! time! were! unfamiliar! with! them.! As! such,! they!
caused!the!adoption!of!the!first!corporation!law.(

effective!on!1!April!1906.!!
1

!The! whole! body! of! statutory! and! jurisprudential! rules! pertaining! to!
corporations!is!referred!to!as!"Corporate!Law"!to!differentiate!it!from!the!old!
statute!known!as!"The!Corporation!Law,"!or!Act!No.!1459.!

As! of! date,! the! Securities! and! Exchange! Commission! (SEC)! has!
proposed!that!a!new!Corporation!Code!be!adopted!since!it!has!
been!30!years!since!B.P.!Blg.!68!has!been!implemented.!

Although! we! have! a! Corporation! Code! that! provides! for!


statutory!principles,!since!Philippine!Corporate!Law!comes!from!
the! U.S.! common! law! system,! Philippine! Corporate! Law! is!
essentially,! and! continues! to! be,! a! common! law! system! and!
subject!to!developments!in!commercial!developments,!much!of!
which! can! be! expected! to! happen! in! the! world! of! commerce,!
and! some! expressed! jurisprudential! rules! that! try! to! apply! and!

The! first! corporate! statute,! the! 1906! Corporation! Law! became!

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Provided!for!a!chapter!on!close!corporations.2!

!
IV.*Proper*Treatment*of*Philippine*Corporate*Law*

*
II.*The*Corporation*Law*(Act*No.*1459)*

The!current!Corporation!Code!of!the!Philippines!took!effect!on!1!
May!1980,!!
o Adopting!various!corporate!doctrines!enunciated!by!the!
Supreme!Court!under!the!old!Corporation!Law;!!
o Clarified! the! obligations! of! corporate! directors! and!
officers;!!
o Expressed! in! statutory! language! established! principles!
and!doctrines;!and!!

Corporation!Law!(Act!No.!1459).!

It! had! pieceQmeal! amendments! during! its! 74Qyear! history,! but!


became!antiquated!and!not!adapted!to!the!changing!times.!

Corporate*Law*

A! little! more! detailed! in! certain! aspect.! This! is! very!


similar!to!the!later!law!B.P.!Blg.!68!

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2

!Corporation!Code!applies!even!to!corporations!organized!under!the!old!
Corporation!Law.!Castillo!v.!Balinghasay,!440!SCRA!442!(2004).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!
adopt! corporate! principles! into! the! changing! concepts! and!
mechanism!of!the!commercial!world.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CONCEPTS(
(
I.(Definition((Section(2;(Articles(44(3),(45,(46,(and(1775,(Civil(Code)(
(
Section(2.(Corporation(defined.(
A(corporation(is(an(artificial(being(created(by(operation(of(law,(having(
the( right( of( succession( and( the( powers,( attributes( and( properties(
expressly(authorized(by(law(or(incident(to(its(existence.((2)(
(
CIVIL(CODE(
Article(44.(The(following(are(juridical(persons:((
1.(The(State(and(its(political(subdivisions;((
(
2.( Other( corporations,( institutions( and( entities( for( public( interest( or(
purpose,(created(by(law;(their(personality(begins(as(soon(as(they(have(

Partnerships( and( associations( for( private( interest( or( purpose( are(


governed( by( the( provisions( of( this( Code( concerning( partnerships.( (36(
and(37a)((
(
Article(46.((
Juridical(persons(may(acquire(and(possess(property(of(all(kinds,(as(well(
as( incur( obligations( and( bring( civil( or( criminal( actions,( in( conformity(
with(the(laws(and(regulations(of(their(organization.((38a)((
(
Article(1775.((
Associations(and(societies,(whose(articles(are(kept(secret(among(the(
members,(and(wherein(any(one(of(the(members(may(contract(in(his(
own(name(with(third(persons,(shall(have(no(juridical(personality,(and(
shall(be(governed(by(the(provisions(relating(to(coWownership.((1669)(
(

been(constituted(according(to(law;((
(
3.( Corporations,( partnerships( and( associations( for( private( interest( or(
purpose( to( which( the( law( grants( a( juridical( personality,( separate( and(
distinct(from(that(of(each(shareholder,(partner(or(member.((35a)((
(
Article(45.((
Juridical(persons(mentioned(in(Nos.(1(and(2(of(the(preceding(article(are(
governed(by(the(laws(creating(or(recognizing(them.((
(
Private( corporations( are( regulated( by( laws( of( general( application( on(
the(subject.((
(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Juridical)persons)are)those)who)have)an)identity)granted)to)it)by)
law)with)powers)granted)and)subject)to)the)law.))
o As)such,)they)can)own)property)and)conduct)business)as)
well)as)sue)and)be)sued.)
o Juridical) capacity) !) the) capacity/ability) to) enter) into)
legal)relations)and)be)bound)by)them.)

A)corporation)is)an:)
o
o
o

Artificial) being) !) essentially) means) that) it) has) a)


fictional)existence.)
Created) by) operation) of) law) !) absence) of) the) law)
would)mean)that)a)corporation)cannot)exist.)
Invested) by) law) upon) coming) into) existence) with) a)
personality) separate) and) distinct) from) the) persons)
composing)it,)and)from)any)other)legal)entity)to)which)it)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
may)be)related.)PNB$v.$Andrada$Electric$&$Engineering$
Co.,$381$SCRA$244$(2002).1)

strong) legal) personality) of) the) corporation) is) an)


attribute) that) has) made) it) most) attractive) to)
businessmen)when)compared)to)other)media.4)
(d) Creature( of( Limited( Powers:) It) has) only) such) powers,)
attributes)and)properties)as)are)expressly)authorized)by)law)or)
incident)to)its)existence.)

)
II.(FOUR((4)(CORPORATE(ATTRIBUTES(BASED(ON(SECTION(2:(
(a) An( Artificial( Being:) It) has) juridical) capacity) to) contract) and)
enter)into)legal)relationships.)
It) is) a) basic) postulate) that) before) a) corporation) may)
acquire) juridical) personality,) the) State) must) give) its)
consent) either)in)the)form)of)a)special)aw)or)a)general)
enabling)act.2)
(b) Creature(of(the(Law:)It)is)created)by)operation)of)law)and)not)
by)mere)agreement.)
o There) must) first) be) an) underlying) contract) among) the)
o

The) corporation) has) the) capacity) for) continuous)


existence) despite) the) death) or) replacement) of) its)
shareholders) or) members,) for) it) has) a) personality)
separate) and) distinct) from) those) who) compose) it.) The)

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1

)Construction)&)Dev.)Corp.)of)the)Phils.)v.)Cuenca,)466)SCRA)714)(2005);)EDSA)
ShangriGLa)Hotel)and)Resorts,)Inc.)v.)BF)Corp.,)556)SCRA)25)(2008).)
2
)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
3
)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

A)corporation)has)no)powers)except)for)those)which)are:))
o
o
o

individuals) forming) the) corporation) upon) which) the)


state) grant) may) be) conferred.) Therefore,) you) have) an)
interGplay) of) State) grant) and) contractual) relations)
between)the)parties.)Which)principle)has)precedence)in)
resolving) conflict) would) depend) upon) the) public)
interest)or)issue)to)be)resolved.3)
(c) Strong(Juridical(Personality:)It)has)a)right)of)succession.)

As) opposed) to) a) natural) person,) who) has) the) ability) to)
exercise)any)power)and)enter)into)any)business)activity)
and)the)only)limitation)would)be)that)an)individual)has)
no) right) to) enter) into) an) act) or) transaction) that) is)
contrary)to)law,)morals)and)public)policy.5)
Expressly)conferred)on)it)by)the)Corporation)Code))
Found)in)its)charter,)and))
Those) that) are) implied) by) or) are) incidental) to) its)
existence.))

It)exercises)its)powers)through)its)Board)of)Directors)and/or)its)
duly)authorized)officers)and)agents.)Pascual$and$Santos,$Inc.$v.$
The$ Members$ of$ the$ Tramo$ Wakas$ Neighborhood$ Assn.$ Inc.,$
442$SCRA$438$(2004).6)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
5
)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
6
)De) Liano) v.) Court) of) Appeals,) 370) SCRA) 349) (2001);) Monfort) Hermanos)
Agricultural) Dev.) Corp.) v.) Monfort) III,) 434) SCRA) 27) (2004);) United) Paragon)
Mining) Corp.) v.) Court) of) Appeals,) 497) SCRA) 638) (2006);) Cebu) Bionic) Builders)
Supply,)Inc.)v.)DBP,)635)SCRA)13)(2010).)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
NOTE:( Corporations) are) products) of) relationships.) They) cannot) come)
into)force)unless)persons)agree)to)form)one,)and)unless)the)State)agrees)
and)allows)them)to)form)a)corporation.)Since)a)corporation)is)formed)by)
relationship,)it)does)not)have)a)body)of)its)own)and)as)such)requires)that)
its)actions)be)made)through)its)agents.)The)officers)of)a)corporation)are)
the)ones)who)smell,)touch)and)see)for)the)corporation)and)it)is)through)
them)that)the)corporation)reaches)out)to)the)real)world.)
)
III.(TRIWLEVEL(EXISTENCE(OF(THE(CORPORATION:(
(a) AssetsWOnly( Level:) The) corporation) is) an) aggregation) of)
Assets)and)Resources)
(b) Business( Enterprise( Level:) The) corporations) primary)
purpose)is)to)pursue)business.))
(c) Juridical( Entity( Level:) The) corporation) is) a) medium) of)
pursuing)a)business)enterprise.)
(
IV.(TRIWLEVEL(RELATIONSHIPS(IN(THE(CORPORATE(SETTING:(
(a) JURIDICAL( ENTITY( LEVEL,) which) treats) of) the) aspects) of) the)
StateGcorporation)relationship.)
(b) INTRAWCORPORATE( LEVEL,) which) considers) that) the) corporate)
setting)is)at)once)a)contractual)relationship)on)four)(4))levels:)
)
Relationship(

Governing(
Law(

Between)the)corporation)and)its)agents/representatives)to) Law)on)
act)in)the)real)world,)i.e.,)directors)and)officers)
Agency)
Between)the)corporation)and)its)shareholders)or)members) )
Between)the)shareholders)and)the)corporate)directors,)
trustees)and)officers)

Between)and)among)the)shareholders)in)a)common)
venture)

)
(c) EXTRAWCORPORATE( LEVEL,) which) views) the) relationship)
between) the) corporation) and) thirdGparties) or) outsiders,)
essentially)governed)by)Contract)Law)and)Labor)Law.)
)
Relationship(

Governing(Law(

Between)the)corporation)and)its)employees)

Labor)Law)

Between)the)corporation)and)those)it)contracts)

Contract)Laws)

and)transacts)with)
Between)the)corporation)and)the)publics)it)
affects)with)its)enterprise)

Torts)or)QuasiGDelict)
Laws)

)
V.(THEORIES(ON(THE(FORMATION(OF(CORPORATION(
(
A.(Theory(of(Concession:(Tayag$v.$Benguet$Consolidated,$26$SCRA$242$
(1968).$
)
Tayag$v.$Benguet$Consolidated$
(
Facts:( Idonah) Slade) Perkins) owned) two) stocks) certificates) under)
Benguet) Consolidated) Inc.) (a) Philippine) corporation).) Perkins) died) in)
New) York) in) 1960,) and) the) stock) certificates) were) held) in) trust) by)
County) Trust) Company) [CTC]) of) New) York,) who) was) the) domiciliary)
administrator) of) her) estate.) On) the) other) hand,) Renato) D.) Tayag) was)
appointed) ancillary) administrator) of) Perkins) properties) in) the)
Philippines.) A) dispute) arose) between) the) domiciliary) administrator) in)
New)York)and)the)ancillary)administrator)in)the)Philippines)as)to)which)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
of)them)was)entitled)to)the)possession)of)the)stock)certificates.)
)
The) Court) of) First) Instance) of) Manila) ordered) CTC) to) produce) and)
deposit) the) certificates) with) Tayag,) but) the) former) refused.) Tayag) was)
able)to)have)a)court)order)issued)declaring)the)certificates)lost)and)new)

creature) without) any) existence) until) it) has) received) the) imprimatur) of)
the)State)acting)according)to)law.)It)is)logically)inconceivable)therefore)
that)it)will)have)rights)and)privileges)of)a)higher)priority)than)that)of)its)
creator.)More)than)that,)it)cannot)legitimately)refuse)to)yield)obedience)
to) acts) of) its) state) organs,) specifically) the) judiciary.) It) is) not) immune)

ones)should)be)issued)by)Benguet)Consolidated)Inc.)However,)the)latter)
refused)because)as)far)as)it)was)concerned,)the)certificates)were)not)lost)
being)in)the)possession)of)CTC.)
(
Issue:(Whether)or)not)the)lower)court)erred)in)declaring)the)certificates)
as)lost.))
(

from)judicial)control.)
)

then)its)existence)and)actions)concedes)to)the)law.$
o The) theory) of) concession,) therefore,) looks) at) a)
corporation) simply) as) a) creature) of) the) State) and) of)
limited) powers) and) capabilities,) completely) within) the)
control)of)the)State.1$

Held:( NO.)Since)there)was)a)refusal)by)the)domiciliary)administrator)in)
New) York) to) deliver) the) shares) of) stocks) of) Benguet) to) the) ancillary)
administrator) in) the) Philippines,) there) was) nothing) unreasonable) or)
arbitrary)in)considering)them)as)lost)and)requiring)the)appellant)to)issue)
new)certificates)in)lieu)thereof.)Moreover,)the)view)adopted)by)Benguet)
Consolidated) that) it) cannot) issue) new) certificates) because) doing) so)
under) the) circumstances) would) be) a) violation) of) its) byGlaws) is) fraught)

To)organize)a)corporation)that)could)claim)a)juridical)personality)
of) its) own) and) transact) business) as) such,) is) not) a) matter) of)
absolute)right,)but)a)privilege)which)may)be)enjoyed)only)under)
such)terms)as)the)State)may)deem)necessary)to)impose.)cf.$Ang$
Pue$ &$ Co.$ v.$ Section$ of$ Commerce$ and$ Industry,$ 5$ SCRA$ 645$
(1962).$

with)implications)at)war)with)the)basic)postulates)of)corporate)theory.)A)
corporation)is)an)artificial)being)created)by)operation)of)law.)To)assert)
that)it)can)choose)which)court)order)to)follow)and)which)to)disregard)is)
to) confer) upon) it) not) autonomy) which) may) be) conceded) but) license)
which)cannot)be)tolerated.)It)is)to)argue)that)it)may,)when)so)minded,)
overrule)the)state,)the)source)of)its)very)existence;)it)is)to)contend)that)
what) any) of) its) governmental) organs) may) lawfully) require) could) be)
ignored)at)will.)So)extravagant)a)claim)cannot)possibly)merit)approval.)
(
Doctrine:( A) corporation) as) known) to) Philippine) jurisprudence) is) a)

Theory$ of$ Concession( ! ( Since)a)corporation)is)created)by)law,)

It) is) a) basic) postulate) that) before) a) corporation) may) acquire)


juridical)personality,)the)State)must)give)its)consent)either)in)the)
form) of) a) special) law) or) a) general) enabling) act,) and) the)
procedure) and) conditions) provided) under) the) law) for) the)
acquisition)of)such)juridical)personality)must)be)complied)with.)
Although)the)statutory)grant)to)an)association)of)the)powers)to)
purchase,) sell,) lease) and) encumber) property) can) only) be)
construed) the) grant) of) a) juridical) personality) to) such) an)

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1

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
associationnevertheless,) the) failure) to) comply) with) the)
statutory) procedure) and) conditions) does) not) warrant) a) finding)
that)such)association)acquired)a)juridical)personality,)even)when)
it) adopts) constitution) and) byGlaws.) Intl$ Express$ Travel$ &$ Tour$
Services,$Inc.$v.$CA,$343$SCRA$674$(2000).$

enterprise,)which)by)these)very)qualities)and)operations)
acquires)an)entity)of)its)own,)recognized)by)law.2$$

fiction) alone) that) creates) a) corporate) entity.) Any) State) grant)


must)presuppose)the)existence)of)consent) or)common)venture)
among)those)who)will)form)the)corporation.))
o Although)it)is)within)the)power)of)the)State)to)give)such)
grant) or) to) deny) it,) the) corporate) fiction) cannot) be)
created) unless) there) is) an) enterprise) or) group) upon)
whom)it)would)be)conferred.))

All) corporations,) big) or) small,) must) abide) by) the) provisions) of)
the)Corporation)Code;)even)a)simple)family)corporation)cannot)
claim) an) exemption) nor) can) it) have) rules) and) practices) other)
than)those)established)by)law.)Torres$ v.$ Court$ of$ Appeals,$ 278$
SCRA$793$(1997).$

(
B.( Theory( of( Enterprise( Entity:) BERLE,$ 47$ COLUMBIA$ LAW$ REV.$ 343$
(1947)$

Theory$ of$ Enterprise$ Entity( ! ( The) enterprise) theory) hinges)


itself) on) the) fact) that) there) can) be) no) corporate) existence)
without) persons) to) compose) it;) there) can) be) no) association)
without)associates.1$
o The)entity)commonly)known)as)"corporate)entity")takes)
its) being) from) the) reality) of) the) underlying) enterprise,)
formed)or)in)formation;)that)the)state's)approval)of)the)
corporate) form) sets) up) a) prima& facie) case) that) the)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
&Arnold&v.&Willets&&&Patterson,&Ltd.&45)Phil.)634)(1923).)

But) once) granted,) and) the) entity) acquires) juridical)


personality,) it) does) not) mean) that) the) group,) as)
distinguished) from) the) juridical) entity,) becomes) a)
creature) of) the) State,) but) actually) becomes) a) creature)
of) its) own) volition) and) maintains) either) singly) or)
collectively) their) inherent) rights) under) the) law,) which)
may) tend) to) project) to) their) business) dealings) done)
through)the)corporation.)

assets,) liabilities) and) operations) of) the) corporation) are)


those) of) the) enterprise.) But) that) where) the) corporate)
entity) is) defective,) or) otherwise) challenged,) its)
existence,)extent)and)consequences)may)be)determined)
by)the)actual)existence)and)operations)of)the)underlying)

The) theory) draws) its) vitality) from) the) fact) that) it) is) not) legal)

A) corporation) is) a) creation) of) law) and) a) creation) of) a) set) of)
relationships)between)individuals.$
o It)takes)5)people)to)form)a)corporation)and)it)is)formed)

by) the) agreement) of) the) individuals) to) establish) the)


corporation.$
Even)as)a)corporation)has)an)identity)separate)from)the)
individuals,) you) cannot) do) away) completely) with) the)
notion) that) there) are) individuals) behind) the)
corporation.$

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2

)Berle,)The&Theory&of&Enterprise,)47)COL.)L.)REV.)No.)3)(April,)1947).))

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

As)such,)in)cases)where)there)is)defect)in)the)corporate)
identity,)your)recourse)is)to)the)individuals.)This)is)why)
the) Supreme) Court) has) ruled) that) the) corporation) is)
entitled) to) rights) ) because) individuals) form) the)
corporation)and)these)individuals)have)rights.$

corporate) assets) and) properties.) Stockholders$ of$ F.$ Guanzon$


and$ Sons,$ Inc.$ v.$ Register$ of$ Deeds$ of$ Manila,$ 6$ SCRA$ 373$
(1962).$

party) is) already) of) advanced) age) and) in) danger) of) extinction,)
but) not) in) this) case) where) the) winning) party) is) a) corporation.)
[A]) juridical) entitys) existence) cannot) be) likened) to) a) natural)
personits) precarious) financial) condition) is) not) by) itself) a)
compelling) circumstance) warranting) immediate) execution) and)
does)not)outweigh)the)long)standing)general)policy)of)enforcing)

A) corporation) is) but) an) association) of) individuals,) allowed) to)


transact)under)an)assumed)corporate)name,)and)with)a)distinct)
legal) personality.) In) organizing) itself) as) a) collective) body,) it)
waives)no)constitutional)immunities)and)perquisites)appropriate)
to)such)a)body.)PSE$v.$Court$of$Appeals,$281$SCRA$232$(1997).$

only) final) and) executory) judgment.) Manacop$ v.$ Equitable$


PCIBank,$468$SCRA$256$(2005).$

Corporations) are) composed) of) natural) persons) and) their)


separate) corporate) personality) is) not) a) shield) for) the)
commission) of) injustice) and) inequity,) such) as) to) avoid) the)
execution)of)the)property)of)a)sister)company.)Tan$Boon$Bee$&$

Co.$v.$Jarencio,$163$SCRA$205$(1988).$

A) corporation) is) an) entity) separate) and) distinct) from) its)

partnership) where) the) death) of) a) partner) dissolves) the)


partnership.$

stockholders.) While) not) in) fact) and) in) reality) a) person,) the) law)
treats)the)corporation)as)though)it)were)a)person)by)process)of)
fiction) or) by) regarding) it) as) an) artificial) person) distinct) and)
separate)from)its)individual)stockholders.)Remo,$Jr.$v.$IAC,$172$

SCRA$405$(1989).$

The)transfer)of)the)corporate)assets)to)the)stockholders)is)not)in)
the)nature)of)a)partition)among)coGowners)but)is)a)conveyance)
from) one) party) to) another.) Stockholders) are) not) coGowners) of)

As) distinguished) from) a) partnership,) it) has) a) strong) legal)


personality) having) a) separate) and) distinct) personality) from) the)
members) composing) it,) unaffected) by) the) death,) resignation,)
insolvency) of) any) of) its) stockholders) or) members.) Its) creditG
worthiness) and) the) certainty) of) longGterm) contractual) dealings)
with) a) stable) person,) are) strengthened) by) such) continuity) of)
existence.1$
o A) corporation) can) survive) the) death) of) its) stockholders)
or) members) (i.e.) right) of) succession).) In) contrast) to) a)

)
VI.(ADVANTAGES(AND(DISADVANTAGES(OF(CORPORATE(FORM:(
(
A.(Four(Advantageous(Characteristics(of(Corporate(Medium:(
1. STRONG(AND(SOLEMN(JURIDICAL(PERSONALITY((Section(2)(

Execution)pending)appeal)may)be)allowed)when)the)prevailing)

The) shareholders) cannot) be) held) liable) as) an) individual) for) the)
liabilities) of) the) corporation) (see) LIMITED) LIABILITY) TO)
INVESTORS)AND)OFFICERS).$
o The)function)of)the)corporation)is)to)absorb)the)risk.)$

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
2. CENTRALIZED(MANAGEMENT((Section(23)(

stockholders) approval) for) certain) specific) acts.) Great$ Asian$


Sales$Center$Corp.$v.$Court$of$Appeals,$381$SCRA$557$(2002).$

(
Section(23.(The(board(of(directors(or(trustees.((
Unless( otherwise( provided( in( this( Code,( the( corporate( powers( of( all(
corporations( formed( under( this( Code( shall( be( exercised,( all( business(

bind) the) corporations,) unlike) in) a) partnership) setting,) where)


each) partner) may) bind) the) partnership,) even) without) the)
knowledge)of)the)other)partners.1)
o Therefore,) in) its) legal) relationship,) a) corporation)
presents) a) more) stable) and) efficient) system) of)
governance) and) dealings) with) third) parties,) since)
management)prerogatives)are)centralized)in)its)board)of)

conducted( and( all( property( of( such( corporations( controlled( and( held(
by( the( board( of( directors( or( trustees( to( be( elected( from( among( the(
holders( of( stocks,( or( where( there( is( no( stock,( from( among( the(
members( of( the( corporation,( who( shall( hold( office( for( one( (1)( year(
until(their(successors(are(elected(and(qualified.((28a)(
(
Every(director(must(own(at(least(one((1)(share(of(the(capital(stock(of(

directors.2)
3. LIMITED(LIABILITY(TO(INVESTORS(AND(OFFICERS(

the(corporation(of(which(he(is(a(director,(which(share(shall(stand(in(his(
name(on(the(books(of(the(corporation.(Any(director(who(ceases(to(be(
the( owner( of( at( least( one( (1)( share( of( the( capital( stock( of( the(
corporation( of( which( he( is( a( director( shall( thereby( cease( to( be( a(
director.( Trustees( of( nonWstock( corporations( must( be( members(
thereof.( A( majority( of( the( directors( or( trustees( of( all( corporations(
organized(under(this(Code(must(be(residents(of(the(Philippines.(

The)exercise)of)corporate)powers)rest)in)the)Board)of)Directors,)
save) in) those) instances) where) the) Corporation) Code) requires)

It)is)hornbook)law)that)corporate)personality)is)a)shield)against)
personal) liability) of) its) officersa) corporate) officer) and) his)
spouse) cannot) be) made) personally) liable) under) a) trust) receipt)
where) he) entered) into) and) signed) the) contract) clearly) in) his)
official)capacity.)Consolidated$Bank$and$Trust$Corp.$v.$Court$of$
Appeals,$356$SCRA$671$(2001).3$

As)can)be)gleaned)from)Section)23)of)Corporation)Code)It)is)the)
board) of) directors) or) trustees) which) exercises) almost) all) the)
corporate)powers)in)a)corporation.)Firme$ v.$ Bukal$ Enterprises$
and$Dev.$Corp.,$414$SCRA$190$(2003).$
o Management) is) lodged) essentially) with) the) board) of)
directors.$

One)of)the)advantages)of)the)corporation)is)the)limitation)of)an)
investors) liability) to) the) amount) of) investment,) which) flows)
from) the) legal) theory) that) a) corporate) entity) is) separate) and)
distinct) from) its) stockholders.) San$ Juan$ Structural$ and$ Steel$
Fabricators,$Inc.$v.$CA,$296$SCRA$631$(1998).$

Shareholders) are) not) agents) of) the) corporation,) nor) can) they)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
2
)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
3
)Ever)Electrical)Manufacturing,)Inc.)(EEMI))v.)Samahang)Manggagawa)ng)Ever)
Electrical/NAMAWU)Local)224,)672)SCRA)562)(2012);)Gotesco)Properties,)Inc.)v.)
Fajardo,)692)SCRA)319)(2013).)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Obligations) incurred) by) the) corporation) acting) through) its)


directors,) officers) and) employees,) are) its) sole) liabilities.)
Malayang$Samahan$ng$mga$Manggagawa$sa$M.$Greenfield$v.$
Ramos,$357$SCRA$77$(2001).$

However,) the) statutorily) granted) privilege) of) a) corporate) veil)


may) be) used) only) for) legitimate) purposes.) On) equitable)

laws.( Shares( of( stock( so( issued( are( personal( property( and( may( be(
transferred( by( delivery( of( the( certificate( or( certificates( endorsed( by(
the(owner(or(his(attorneyWinWfact(or(other(person(legally(authorized(to(
make( the( transfer.( No( transfer,( however,( shall( be( valid,( except( as(
between(the(parties,(until(the(transfer(is(recorded(in(the(books(of(the(

considerations,)the)veil)can)be)disregarded)when)it)is)utilized)as)
a) shield) to) commit) fraud,) illegality) or) inequity;) defeat) public)
convenience;)confuse)legitimate)issues;)or)serve)as)a)mere)alter)
ego) or) business) conduit) of) a) person) or) an) instrumentality,)
agency)or)adjunct)of)another)corporation.1$

corporation( showing( the( names( of( the( parties( to( the( transaction,( the(
date( of( the( transfer,( the( number( of( the( certificate( or( certificates( and(
the(number(of(shares(transferred.(
(
No( shares( of( stock( against( which( the( corporation( holds( any( unpaid(
claim(shall(be(transferable(in(the(books(of(the(corporation.((35)(

Where) the) creditor) of) the) corporation) sues) not) only) the)

company) but) also) all) stockholders) to) reach) their) unpaid)


subscription) which) appear) to) be) the) only) visible) assets) of) the)
company,)then)the)controlling)doctrine)is)that)a)stockholder)is)
personally)liable)for)the)financial)obligations)of)the)corporation)
to) the) extent) of) his) unpaid) subscription.$ Halley$ v.$ Printwell,$
Inc.$649$SCRA$116$(2011).$
4. FREEWTRANSFERABILITY( OF( UNITS( OF( OWNERSHIP( (SHARES)(
FOR(INVESTORS((Section(63)(
(
Section(63.(Certificate(of(stock(and(transfer(of(shares.(
The(capital(stock(of(stock(corporations(shall(be(divided(into(shares(for(
which( certificates( signed( by( the( president( or( vice( president,(
countersigned(by(the(secretary(or(assistant(secretary,(and(sealed(with(
the(seal(of(the(corporation(shall(be(issued(in(accordance(with(the(byW

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Transfer) of) shares) is) a) matter) of) right) of) the) holder.) The)
corporation)cannot)prevent)such)transfer.)You)need)to)have)to)
exit)from)the)corporation.$
o It) is) the) inherent) right) of) the) stockholder) to) dispose) of)
his) shares) of) stock) (which) he) owns) as) any) other)
property)of)his))anytime)he)so)desires.$Remo,$Jr.$v.$IAC,$
172$ SCRA$ 405$ (1989);$ PNB$ v.$ Ritratto$ Group,$ Inc.,$ 362$
SCRA$216$(2001).$

Authority)granted)to)regulate)the)transfer)of)its)stock)does)not)
empower) the) corporation) to) restrict) the) right) of) a) stockholder)
to) transfer) his) shares,) but) merely) authorizes) the) adoption) of)
regulations) as) to) the) formalities) and) procedure) to) be) followed)
in) effecting) transfer.$ Thomson$ v.$ Court$ of$ Appeals,$ 298$ SCRA$
280$(1998).$
o If)the)transfer)would)cause)violations)of)the)law)(such)as)
the) ratio) requirement) for) localGforeign) holdings),) then)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the) corporation) may) restrict) the) right) transfer) of) the)
holders)shares.$

However,) the) system) of) free) transferability) of) the) units) of)

and)wherein)any)one)of)the)members)may)contract)in)his)own)
name)with)third)persons,)shall)have)no)juridical)personality,)and)
shall)be)governed)by)the)provisions)relating)to)coGownership.)

investments)in)the)corporate)setting)presumes)a)wellGdeveloped)
market)for)shares)of)stocks.1)

By) provision) of) law,) while) it) is) true) that) in) so) far) as) the) buyer)

and)seller)is)concerned)the)sale)(and)transfer)of)the)certificates))
is)made)by)meeting)of)the)minds,)there)is)a)provision)in)the)law)
that) before) such) sale) is) binding) to) the) whole) word) it) must) be)
recorded)in)the)books)of)the)corporation.)
5. Advantages(Over(Unregistered(Associations(

(
B.(Disadvantages(of(the(Corporate(Medium:(

Note( on( disadvantages:( Anything)can)be)abused.)Anything)can)

be))to)a)devious)mind))be)used)for)wrongdoing.)(
o To) a) large) extent,) the) corporate) medium) cannot) be)
used)to)solve)all)needs,)but)the)disadvantages)have)a)lot)
to)do)with)the)manner)in)which)it)is)being)used.(
o It)is)a)tool)to)do)business,)but)not)to)commit)illegality.(
1. ABUSE(OF(CORPORATE(MANAGEMENT;(BREACH(OF(TRUST(

A) corporation) established) in) accordance) with) the) Corporation)


Code) has) benefits) or) advantages) over) that) of) an) unregistered)
association.) These) advantages) are:) It) enjoys) perpetual)
succession)under)its)corporate)name)and)in)an)artificial)form;)it)
has) the) capacity) to) take) and) grant) property,) and) contract)
obligations;) it) can) sue) and) be) sued) in) its) corporate) name) as) a)
juridical) person;) it) has) the) capacity) to) receive) and) enjoy)

common) grants) of) privileges) and) immunities;) and) its)


stockholders) or) members) have) generally) no) personal) liability)
beyond) the) value) of) their) shares. 2 )The) advantages) of) the)
corporation)over)unregistered)association)is)subject)to)the)rules)
pertaining)to)the)corporation)by)estoppel)doctrine.3)

There) is) ordinarily) lack) of) personal) element) in) view) of) the)
transferability) of) shares,) and) the) vesting) of) management)
powers) in) the) Board) of) Directors) who) may) be) professional)
managers.) This) has) spawned) corporate) irresponsibility) under)

the) theory) that) those) vested) with) corporate) powers) have) no)
personal) or) proprietary) stake) in) the) corporate) business)
enterprise.4(
2. ABUSE(OF(LIMITED(LIABILITY(FEATURE(

The) limited) liability) feature) of) the) corporation) has) often) been)
abused) by) business) in) order) to) avoid) having) to) provide)
adequate) protection) and) compensation) for) victims) of) the)
business)ventures)they)undertake.)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
2
)SEC) Opinion,) 26) June) 1989,) XIII) SEC) QUARTERLY) BULLETIN,) 19G20) (No.) 3,) Sept.)
1989)))
3
&See&Chapter&5&on)Corporate&Contract&Law.)

Article) 1775) of) the) Civil) Code) provides) that) associations) and)
societies,) whose) articles) are) kept) secret) among) the) members,)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

This) has) been) countered) by) the) development) of) jurisprudence)


of)the)doctrine)of)piercing)the)veil)of)corporate)fiction.)

3. HIGH(COST(OF(MAINTENANCE(OF(THE(CORPORATE(MEDIUM(

Sole) proprietorships) are) less) saddled) with) the) many)


requirements) and) regulations) which) corporations) are) often)
subjected)to)by)law.))

The) corporation) is) relatively) complicated) in) formation) and)


management.) When) compared) to) other) media) like) the) single)
proprietorship) or) the) partnership,) the) corporation) entails)

The)owner)is)in)command)of)his)whole)business)and)he)stands)
to)lose)as)much)as)he)puts)in)and)even)more)to)the)extent)of)all)
his)personal)holdings.)

relatively) high) cost) of) formation) and) operation.) There) is) a)


greater)degree)of)governmental)control)and)supervision)than)in)
other)forms)of)business)organization.1)
4. DOUBLE(TAXATION.(

Sole) proprietorships) work) well) only) for) carryingGon) simple) or)


small) business) endeavors,) and) do) not) function) well) in) cases) of)
large) enterprises) which) require) huge) capital) investments) and)
specialized)management)skills.)

Dividends) received) by) individuals) from) domestic) corporations)


are) subject) to) final) 10%) tax) for) income) earned) on) or) after) 01)
January)1998)(Section)24(B)(2),)1997)NIRC))

InterGcorporate) dividends) between) domestic) corporations,)


however,) are) not) subject) to) any) income) tax) (Section) 27(D)(4),)

(
B.( Partnerships( and( Other( Associations( (Arts.( 1768( and( 1775,( Civil(
Code)(
(
Partnership(

1997)NIRC))

There) is) reGimposition) of) the) 10%) improperly) accumulated)


earnings)tax)for)holding)companies)(Section)29,)1997)NIRC).)

Separate)and)distinct)juridical)personality)
The)withdrawal,)death)or)
insolvency)of)any)partner)would)
automatically)bring)about)the)
dissolution)of)the)partnership.)

A)corporation)has)a)stronger)legal)
personality,)enabling)it)to)continue)
despite)the)death,)insolvency)or)
withdrawal)of)any)of)its)
stockholders)or)members.)

Partners)are)liable)even)with)their)
personal)properties)

Limited)liability)of)investors)

A) sole) proprietorship) is) not) vested) with) juridical) personality) to)


file)or)defend)an)action.)Excellent$ Quality$ Apparel,$ Inc.$ v.$ Win$
MultiplebRich$Builders,$Inc.,$578$SCRA$272$(2009).$

Every)partner)is)an)agent)capable)
of)binding)the)partnership)

Only)the)Board)of)Directors)or)
constituted)agents)can)bind)the)
corporation)

(
VII.(COMPARED(WITH(OTHER(BUSINESS(MEDIA(
(
A.(Sole(Proprietorships(

Corporation(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

There)is)a)flexibility)that)partnerships)have)over)corporations.)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

The) corporation) is) required) to) have) a) primary) purpose)


and) this) should) be) specified.) In) this) sense,) it) is) less)
flexible) than) partnerships) since) deviation) from) the)
primary)purpose)would)make)the)act)ultra)vires.)

"Can)a)Defective)Attempt)to)Form)a)Corporation)Result)at)Least)
in)a)Partnership?))
o Pioneer$ Insurance$ v.$ Court$ of$ Appeals,$ 175$ SCRA$ 668$
(1989).$
o Lim$Tong$Lim$v.$Philippine$Fishing$Gear$Industries,$Inc.,$
317$SCRA$728$(1999).$
$
Pioneer$Insurance$v.$Court$of$Appeals$

(
Facts:( Jacob) S.) Lim) was) engaged) in) the) airline) business) as) ownerG
operator) of) Southern) Air) Lines) [SAL].) He) entered) into) a) sales) contract)
with) Japan) Domestic) Airlines) [JDA]) for) the) purchase) of) 2) DCG3A) Type)
aircrafts) and) necessary) spare) parts.) Pioneer) Insurance) and) Surety)
Corporation) became) a) surety) in) behalf) of) Lim.) To) pay) for) the) aircrafts,)
Lim) used) funds) contributed) by) Bormaheco,) Francisco) and) Modesto)
Cervantes)&)Constancio)Maglana)to)a)new)corporation)proposed)by)Lim)
to) expand) his) airline) business.) The) 3) contributors) also) executed) 2)
indemnity) agreements) in) favor) of) Pioneer.) The) agreements) stipulated)
that) the) indemnitors) principally) bind) themselves) as) surety) in) favor) of)

owners)of)the)aircrafts)and)were)not)privy)to)the)chattel)mortgage)and)
so)it)cannot)be)foreclosed.)
(
Issue:( Whether) or) not) Bormaheco,) Maglana) and) the) Cervanteses) are)
liable) to) share) the) obligations) incurred) by) Lim,) as) de) facto) partners,) in)
view)of)the)failed)incorporation.)
)
Held:( NO.) Lim) never) had) the) intention) to) form) a) corporation) with) the)
respondents)despite)his)representations)to)them.)This)gives)credence)to)
the)crossGclaims)of)the)respondents)to)the)effect)that)they)were)induced)
and)lured)by)Petitioner)to)make)contributions)to)a)proposed)corporation)
which) was) never) formed) because) the) petitioner) reneged) on) their)
agreement) when) Lim) executed) the) chattel) mortgage) on) the) aircrafts)
without) the) knowledge) nor) consent) of) Bormaheco,) et) al.) The) record)
shows)that)the)petitioner)was)acting)on)his)own)and)not)in)behalf)of)his)
other) wouldGbe) incorporators) in) transacting) the) sale) of) the) airplanes)
and) spare) parts.) Therefore,) Bormaheco) et) al) cannot) be) held) liable) to)
contribute)and)share)the)obligation)with)Lim.)
(
Doctrine:(When)parties)come)together)intending)to)form)a)corporation,)
but)no)corporation)is)formed)due)to)some)legal)cause,)then:)

Pioneer.)Lim,)in)behalf)of)SAL,)also)then)executed)a)registered)deed)of)
chattel) mortgage) over) the) aircrafts) in) favor) of) Pioneer,) as) security) for)
the) latters) suretyship.) Lim) however) defaulted) on) his) subsequent)
installment) payments.) JDA) went) after) Pioneer,) the) latter) paying) 300k.)
Pioneer)then)filed)for)extrajudicial)foreclosure)of)the)chattel)mortgage.)
The) Cervanteses) and) Maglana) however) alleged) that) they) were) coG

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

General( Rule:( Parties) who) had) intended) to) participate) or)


actually) participated) in) the) business) affairs) of) the) proposed)
corporation) would) be) considered) as) partners) under) a) de) facto)
partnership,) and) would) be) liable) as) such) in) an) action) for)
settlement)of)partnership)obligations))

Exception:( Parties) who) took) no) part) except) to) subscribed) for)
stock) in) a) proposed) corporation,) do) not) become) partners) with)
other) subscribers) who) engaged) in) business) under) the) name) of)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the) pretended) corporation,) and) are) not) liable) for) action) for)
settlement)of)the)alleged)partnership)contribution.)
$
Lim$Tong$Lim$v.$Philippine$Fishing$Gear$Industries,$Inc.$
(
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.)The)
buyers,)however,)failed)to)pay)for)the)fishing)nets)and)the)floats;)hence,)
private) respondents) filed) a) collection) suit) against) Chua,) Yao) and)
Petitioner) Lim) Tong) Lim) in) their) capacities) as) general) partners.) The)
complaint) alleged) that) "Ocean) Quest) Fishing) Corporation") was) a)
nonexistent) corporation) and) attachment) was) made) on) the) fishing) nets)
on)board)F/B)Lourdes.)
(
Issue:( Whether) or) not) by) their) acts,) Lim,) Chua,) and) Yao) could) be)

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.)Also,)under)the)
doctrine) of) corporation) by) estoppel,) all) those) who) benefited) from) the)
transaction) made) by) the) ostensible) corporation,) despite) knowledge) of)
its)legal)defects,)may)be)held)liable)for)contracts)they)impliedly)assented)
to)or)took)advantage)of.))
(
Doctrine:(
As)far)as)Lim)was)concerned,)there)was)a)corporate)entity)and)Lim)was)
allowing)himself)to)be)represented)as)part)of)the)corporation.)As)such,)
there)is)corporation)by)estoppel.)
)
Harmonize:( You) can) be) held) liable) as) a) partner) if) you) participated)
heavily)and)there)was)some)form)of)participation)on)your)part.)
)
C.(Joint(Ventures(

deemed)to)have)entered)into)a)partnership.)
)
Held:(YES.)From)the)factual)findings)of)both)lower)courts,)it)is)clear)that)
Chua,)Yao)and)Lim)are)partners.)In)their)Compromise)Agreement,)they)
subsequently)revealed)their)intention)to)pay)the)loan)with)the)proceeds)
of)the)sale)of)the)boats,)and)to)divide)equally)among)them)the)excess)or)
loss.) 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)in)furtherance)of)their)business.)It)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Joint) venture) is) an) association) of) persons) or) companies) jointly)
undertaking)some)commercial)enterprise;)$

Generally)all)contribute)assets)and)share)risks.)$

It) requires) a) community) of) interest) in) the) performance) of) the)
subject) matter,) a) right) to) direct) and) govern) the) policy) in)
connection) therewith,) and) duty,) which) may) be) altered) by)
agreement)to)share)both)in)profit)and)losses.)Kilosbayan,$Inc.$v.$
Guingona,$Jr.,$232$SCRA$110$(1994).$

Under) Philippine) law,) a) joint) venture) is) a) form) of) partnership)


and)should)thus)be)governed)by)the)law)of)partnerships,)which)
would) then) include) the) features) of) separate) juridical)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
personality,) mutual) agency) among) the) coGventurers,) and)
unlimited)liability.1)
(
D.(Cooperatives((Article(3,(R.A.(No.(6938)(
(
Cooperative(

Trust)relationship)is)centered)upon)properties,)and)which)places)
naked) titled) in) the) trustee,) and) beneficial) title) in) the)
beneficiary.2)
(
F.(Sociedades)Annimas(

Corporation(

where)upon)the)execution)of)the)public)instrument)in)which)its)
articles)of)agreement)appear,)and)the)contribution)of)funds)and)
personal) property,) becomes) a) juridical) person) ) an) artificial)
being,)invisible,)intangible,)and)existing)only)in)contemplation)of)

Separate)and)distinct)juridical)personality)
Limited)liability)of)investors)
Primary)objective)of)every)cooperative)is)selfGhelp:)to)
provide)goods)and)services)to)its)members)and)thus)

Organized)for)
profit)

law) ) with) power) to) hold,) buy,) and) sell) property,) and) to) sue)
and) be) sued) ) a) corporation) ) not) a) general) coGpartnership)
nor)a)limited)coGpartnership).).).)The)inscribing)of)its)articles)of)
agreement) in) the) commercial) register) was) not) necessary) to)
make) it) a) juridical) person;) such) inscription) only) operated) to)
show)that)it)partook)of)the)form)of)a)commercial)corporation.)
Mead$v.$McCullough,$21$Phil.$95$(1911).$

enable)them)to)attain)increased)income)and)savings)
Governed)by)principles)of)democratic)control)where)
the)members)in)primary)cooperatives)shall)have)equal)
voting)rights)on)a)oneGmemberGoneGvote)principle)

Centralized)
management)

Cooperatives) are) established) to) provide) a) strong) social) and)


economic) organization) to) ensure) that) the) tenantGfarmers) will)
enjoy)on)a)lasting)basis)the)benefits)of)agrarian)reforms.)Corpuz$
v.$Grospe,$333$SCRA$425$(2000).$

(
E.(Business(Trusts((Article(1442,(Civil(Code)((

A) sociedad( annima) was) considered) a) commercial) partnership)

The$ sociedades$ annimas$ were$ introduced) in) Philippine)


jurisdiction) on) 1) December) 1888) with) the) extension) to)
Philippine) territorial) application) of) Articles) 151) to) 159) of) the)
Spanish) Code) of) Commerce.) Those) articles) contained) the)
features)of)limited)liability)and)centralized)management)granted)
to) a) juridical) entity.) But) they) were) more) similar) to) the) English)
joint) stock) companies) than) the) modern) commercial)
corporations.) Benguet$ Consolidated$ Mining$ Co.$ v.$ Pineda,$ 98$
Phil.$711$(1956).$

As)compared)to)a)corporation,)a)business)trust)is)simply)a)deed)
of)trust)which)is)easier)and)less)expensive)to)constitute)for)it)is)
not)bound)by)any)legal)requirements)like)the)former.)It)does)not)
have)a)separate)juridical)personality,)and)is)mainly)governed)by)
contractual) doctrines) and) the) common) law) principles) on) trust.)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)Villanueva,)C.)L.,)&)VillanuevaGTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!

The$ old$ Corporation$ Law$ recognized$ the$ difference$ between$


sociedades( annimas( and( corporations( and( the( Court( will( not(
apply) legal) provisions) pertaining) to) the) latter) to) the) former.)
Phil.$Product$Co.$v.$Primateria$Societe$Anonyme,$15$SCRA$301$
(1965).$

(
G.(Cuentas(En(Participacion(

A) cuentas& en& participacion) is) an) accidental) partnership)


constituted) in) a) manner) that) its) existence) was) only) known) to)
those) who) had) an) interest) in) the) same,) there) being) no) mutual)
agreement) between) the) partners,) and) without) a) corporate)
name) indicating) to) the) public) in) some) way) that) there) were)
other) people) besides) the) one) who) ostensibly) managed) and)
conducted)the)business,)governed)under)Article)239)of)the)Code)
of)Commerce.)$

Those) who) contract) with) the) person) under) whose) name) the)
business) 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.) Bourns$ v.$ Carman,$ 7$ Phil.$ 117$
(1906).$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

NATURE'AND'ATTRIBUTES'OF'A'CORPORATION'
'
I.'NATURE'OF'POWER'TO'CREATE'A'CORPORATION'(Section'16,'Article'

)
B.'Examples'

prohibition(on(the(formation(of(a(private(corporation(by(special(
legislative( act( which( is( not( a( GOCC,( since( NDC( was( merely(
required(to(extend(a(loan(to(the(new(corporation,(and(the(new(
stocks(of(the(corporation(were(to(be(issued(to(the(old(investors(
and( stockholders( of( the( insolvent( Agrix( upon( proof( of( their(
claims( against( the( abolished( corporation.( NDC) v.) Philippine)
Veterans)Bank,)192)SCRA)257)(1990).)

XII,'1987'Constitution)'
'
1987'CONSTITUTION'OF'THE'PHILIPPINES'
Section'16'(Article'XII)'
The' Congress' shall' not,' except' by' general' law,' provide' for' the'
formation,' organization,' or' regulation' of' private' corporations.'
GovernmentUowned' or' controlled' corporations' may' be' created' or'
established'by'special'charters'in'the'interest'of'the'common'good'and'
subject'to'the'test'of'economic'viability.'

'
A.'Main'Point'

a( special( charter,( and( it( follows( that( Congress( can( create(


corporations( with( special( charters( only( if( such( are( GOCCs.(
Feliciano)v.)Commission)on)Audit,)419)SCRA)363)(2004).)
o When(a(government(passes(a(charter(for(the(creation(of(
a( GOCC,( implicit( in( that( is( that( it( has( to( remain( as( a(

PNRC(which(was(constituted(under(a(special(law,(is(not(a(GOCC(
because( it( is( not( by( its( charter( owned( by( the( Government,(
although(it(is(intended(to(do(public(functions,(it(is(owned(by(the(
private( sector.( Consequently,( the( PNRC( Charter,( insofar( as( it(
creates( the( PNRC( as( a( private( corporation( and( grants( it(
corporate(powers,(is(void(for(being(unconstitutional.(The(other(
provisions( of( the( PNRC( Charter( remain( valid( as( they( can( be(
considered(as(recognition(by(the(State(that(the(unincorporated(
PNRC(is(the(local(National(Society(of(the(International(Red(Cross(
and(Red(Crescent(Movement,(and(thus(entitled(to(the(benefits,(
exemptions(and(privileges(set(forth(in(the(PNRC(Charter.( Liban)

Congress(cannot(enact(a(law(creating(a(private(corporation(with(

GOCC.( If( it( is( transformed( into( a( private( corporation,(


then(it(must(divest(itself(of(the(special(charter(it(holds.)
Doubts(whether(the(charter(would(be(valid(if(the(shares(
of(the(GOCC(are(allowed(to(be(sold,(but(it(is(allowed(to(
retain(its(charter.)

P.D.( 1717( creating( New( Agrix,( Inc.( violated( the( constitutional(

v.)Gordon,)593)SCRA)68)(2009).)
)
II.'CORPORATION'AS'A'PERSON:'

The(Constitution(explicitly(prohibits(the(creation(and(regulation(
by(special(laws(of(private(corporations,(except(for(governmentA
owned(or(controlled(corporations((GOCCs).(Veterans)Federation)
of)the)Philippines)v.)Reyes,)483)SCRA)526)(2006).)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

A( corporation( is( but( an( association( of( individuals( under( an(


assumed( name( and( with( a( distinct( legal( entity.( In( organizing(
itself(as(a(collective(body(it(waives(no(constitutional(immunities(
appropriate(for(such(body.(Its(property(cannot(be(taken(without(
compensation;(can(only(be(proceeded(against(by(due(process(of(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
law;( and( is( protected( against( unlawful( discrimination.) Bache) &)
Co.)(Phil.),)Inc.)v.)Ruiz,)37)SCRA)823)(1971).)

'
A.'Entitled'to'Due'Process'and'Equal'Protection'

follow( that( a( corporation,( vested( with( special( privileges( and(


franchises,(may(refuse(to(show(its(hand(when(charged(with(an(
abuse(of(such(privilege.(Hale)v.)Henkel,)201)U.S.)43)(1906).1)

The( due( process( clause( is( universal( in( its( application( to( all(
persons,(and(covers(private(corporations(within(the(scope(of(the(
guaranty(insofar(as(their(properties(are(concerned.(Smith)Bell)&)
Co.)v.)Natividad,)40)Phil.)136,)144)(1920).)

A( corporation( is( protected( by( the( constitutional( guarantee(


against(unreasonable(searches(and(seizures,(but(its(officers(have(
no( cause( of( action( to( assail( the( legality( of( the( seizures,(
regardless(of(the(amount(of(shares(of(stock(or(of(the(interest(of(

A( warrant( of( arrest( cannot( be( issued( against( a( corporation(


The( agents( of( the( corporation( can( question( the( validity( of(
searches( and( seizures( in( behalf( of( such( corporation.( In( such(
cases,(the(personality(of(the(officers(would(be(the(personality(of(
the(company.)

'
C.'Not'Entitled'to'Privilege'Against'Self'Incrimination'

Atty.(Hofilea(!(Jurisprudence(does(indicate(that(corporations(
are( not( entitled( to( a( right( against( selfAincrimination.( My( own(
view( is( that( the( right( against( selfAincrimination( may( ultimately(
relate( to( the( ultimate( penalty( of( crimes( i.e.( imprisonment.(
Perhaps(this(is(the(underlying(reason(of(why(corporations(have(
no(right(against(selfAincrimination.)

because(you(cannot(arrest(a(corporation.)

Corporations(may(not(be(held(criminally(liable,(but(they(may(be(
held(civilly(liable.)
o Criminal(liability(will(attach(to(a(corporation(only(when(
there( is( a( law( providing( that( such( act( constitutes(
corporate(criminal(liability.)
o They(may(be(deprived(of(their(corporate(personality(as(
penalty,(but(they(cannot(be(imprisoned.)

each(of(them(in(said(corporation(because(the(corporation(has(a(
personality( distinct( and( separate( from( those( of( said( officers.(
Stonehill)v.)Diokno,)20)SCRA)383)(1967).)

Since( a( corporation( is( made( up( of( people,( there( is( nothing( its(
agents( may( say( that( will( constitute( as( incriminating( for( the(
corporation.( However,( the( members( of( the( corporations( (e.g.(
corporate(officers)(may(invoke(this(right.)

'
B.'Unreasonable'Searches'and'Seizure'

While(an(individual(may(lawfully(refuse(to(answer(incriminating(
questions(unless(protected(by(an(immunity(statute,(it(does(not(

It(is(elementary(that(the(right(against(selfAincrimination(has(no(
application( to( juridical( persons.( Bataan) Shipyard) &)
Engineering)v.)PCGG,)150)SCRA)181)(1987).)

Due'Process'and'Equal'Protection'v.'SelfUIncrimination2'
The(denial(of(the(right(against(selfAincrimination(from(corporations(does(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(Wilson(v.(United(States,(221(U.S.(361((1911);(United(States(v.(White,(322(U.S.(
694((1944).(
2
(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
not(really(invite(state(authorities(into(the(premises(or(physical(privacy(of(
the(stockholders(or(members(who(compose(the(corporation;(but(would(
deny( acting( individuals( the( right( to( abuse( the( corporate( medium( as( a(
means(to(do(folly.((
(
On( the( other( hand,( to( deny( the( due( process( rights( or( right( against(
unreasonable( searches( and( seizures( to( corporations( would( actually( be(
to(invite(state(authorities(to(physically(intrude(into(corporate(premises,(
and(therefore(also(intrude(into(the(personal(and(business(privacy(of(the(
stockholders(or(members(who(compose(it.((
(
Perhaps( that( is( the( basis( for( the( difference( in( stance( by( the( Supreme(
Court( between( two( sets( of( constitutional( rights( with( respect( to(
corporations.)
)
D.'Bill'of'Rights'
Note:'The(corporation(as(an(artificial(being(is(very(close(to(a(real(person(
as(it(is(allowed(to(possess(and(exercise(many(human(rights.(

Freedom(of(Speech(!(YES.(
Right(against(double(jeopardy(!(YES.(

To(be(protected(from(ex(post(facto(laws(!(YES.(

Freedom( of( Religion( !( YES.( Where( the( corporation( is(


incorporated(for(religious(purposes.(

Right(to(information(!(YES.(

Protection(of(property(from(unjust(taking(!(YES.(

NonAimpairment(of(Contracts(!(YES.(

Right(to(be(informed(about(cases(!(YES.(

Speedy(disposition(of(cases(!(YES.(

Right(to(form(associations(!(YES.(

Freedom(of(Assembly(!(MAYBE.(Example:(can(a(corporation(be(

Right( against( Involuntary( Servitude( !( MAYBE.( What( can(


corporations(do(that(will(constitute(involuntary(servitude?((

Right(to(bail(!(NO.(

Write(of(Habeas(Corpus(!(NO.(

Right(against(excessive(fine(or(imprisonment(for(debt(!(NO.(

Right(to(Travel(!(NO.(

(
III.'Practice'of'Profession'

Corporations(cannot(engage(in(the(practice(of(a(profession(since(
they( lack( the( moral( and( technical( competence( required( by( the(
PRC.)ULEP)v.)The)Legal)Clinic,)223)SCRA)378)(1993).)

confidentiality( of( the( communications( of( the( corporations(


agents(may(involve(the(interest(of(the(corporate(entity.(

Access(to(Courts(!(YES.(

held(liable(where(its(employees(take(part(in(an(illegal(assembly(
wearing(the(corporate(shirt?(

Confidentiality/Privacy( of( Communication( !( YES.( Because( the(

A( corporation( engaged( in( the( selling( of( eyeglasses( and( which(


hires(optometrists(is(not(engaged(in(the(practice(of(optometry.(
Samahan)ng)Optometrists)v.)Acebedo)International)Corp.,)270)
SCRA) 298) (1997);) Alfafara) v.) Acebedo) Optical) Company,) 381)
SCRA)293)(2002).)

COUNTERUREVOLUTION:(Architectural(professional(

corporations(allowed(under(Rep.(Act(No.(9266.(
(
IV.'Liability'for'Torts'
1. A' corporation' must' be' held' liable' for' all' the' contracts' and'
default' that' arise' from' those' entered' into' by' its' agent' within'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the'scope'of'his'authority,'or'even'those'outside'the'scope'of'
his'authority,'by'which'has'been'ratified'by'the'corporation.'

A( corporation( is( civilly( liable( in( the( same( manner( as( natural(
persons( for( torts,( because( the( rules( governing( the( liability( of( a(
principal( for( a( tort( committed( by( an( agent( are( the( same(
whether(the(principal(be(a(natural(person(or(a(corporation,(and(
whether( the( agent( be( a( natural( or( artificial( person.( That( a(
principal( is( liable( for( every( tort( which( he( expressly( directs( or(
authorizes,( is( just( as( true( of( a( corporation( as( a( natural( person.(
PNB)v.)Court)of)Appeals,)83)SCRA)237)(1978).)
o

It( seems( clear( from( the( ruling( that( not( every( tortuous(
act( committed( by( an( officer( can( be( ascribed( to( the(
corporation( as( its( liability,( for( it( is( reasonable( to(
presume( that( in( the( granting( of( authority( by( the(
corporation(to(its(agent,(such(a(grant(did(not(include(a(
direction( to( commit( tortuous( acts( against( third( parties.(
Only( when( the( corporation( has( expressly( directed( the(
commission( of( such( tortuous( act,( would( the( damages(
resulting( therefrom( be( ascribable( to( the( corporation.(
And( such( a( direction( by( the( corporation,( is( manifested(
either(by(its(board(adopting(a(resolution(to(such(effect,(
as(in(the(Philippine(National(Bank(case,(or(having(taken(
advantage( of( such( an( tortuous( act( the( corporation,(
through(its(board,(expressly(or(impliedly(ratifies(such(an(

act(or(is(estopped(from(impugning(such(an(act.(
Where(your(company(driver(came(into(an(accident(with(
your( car,( will( the( company( be( held( liable?( In( cases(
where(the(natural(person(who(committed(the(tort(is(an(

employee( of( the( corporation,( the( corporation( can( be(


held(liable(on(the(principle(of(agency.)
The(liability(of(the(corporation(with(regard(to(the(acts(of(
its( agents( and( employees( is( limited( to( instances( where(
they( are( negligent( in( the( performance( of( their( official(
duties.)

Atty.( Hofilea( !( the( corporation( as( an( artificial( being(


has( contact( with( the( world( through( its( employees( and(
officials.()
2. The' acting' officer' is' solidarily' liable' with' the' corporation' for'
the'damages'resulting'from'his'negligence'as'a'jointUtortfeasor'
o

Corporate) tort(!(consists(in(the(violation(of(a(right(given(or(
the(omission(of(a(duty(imposed(by(law;(a(breach(of(a(legal(duty.(
The(failure(of(the( corporate(employer(to(comply(with(the(duty(
under( the( Labor( Code( to( grant( separation( pay( to( employees( in(
case( of( cessation( of( operations( constitutes( tort( and( its(
stockholder( who( was( actively( engaged( in( the( management( or(
operation( of( the( business( should( be( held( personally( liable.(
Sergio)F.)Naguiat)v.)NLRC,)269)SCRA)564)(1997).)

While( in( theory( a( hospital( as( a( juridical( entity( cannot( practice(


medicine,( in( reality( it( utilizes( doctors,( surgeons( and( medical(
practitioners(in(the(conduct(of(its(business(of(facilitating(medical(
and( surgical( treatment.( Within( that( reality,( three( legal(
relationships(crisscross:((1)(between(the(hospital(and(the(doctor(
practicing(within(its(premises;((2)(between(the(hospital(and(the(
patient( being( treated( or( examined( within( its( premises;( and( (3)(
between( the( patient( and( the( doctor.( Regardless( of( its(
relationship( with( the( doctor,( the( hospital( may( be( held( directly(
liable( to( the( patient( for( its( own( negligence( or( failure( to( follow(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
established(standard(of(conduct(to(which(it(should(conform(as(a(
corporation.(Professional)Services,)Inc.)v.)Court)of)Appeals,)611)
SCRA)282)(2010).(
(
Professional)Services,)Inc.)v.)Court)of)Appeals)

committed( within( its( premises.( PSI( committed( a( serious( breach( of( its(
corporate( duty( when( it( failed( to( conduct( an( immediate( investigation(
into(the(reported(missing(gauzes.(
(
Doctrine:' Regardless( of( its( relationship( with( the( doctor,( the( hospital(

(
Facts:' PSI( together( with( Dr.( Miguel( Ampil( and( Dr.( Juan( Fuentes,( was(
impleaded(by(Enrique(Agana(and(Natividad(Agana((later(substituted(by(
her( heirs),( in( a( complaint( for( damages( for( the( injuries( suffered( by(
Natividad( when( Dr.( Ampil( and( Dr.( Fuentes( neglected( to( remove( from(
her(body(two(gauzes(which(were(used(in(the(surgery(they(performed(on(
her( on( April( 11,( 1984( at( the( Medical( City( General( Hospital.( PSI( was(

may( be( held( directly( liable( to( the( patient( for( its( own( negligence( or(
failure( to( follow( established( standard( of( conduct( to( which( it( should(
conform(as(a(corporation.(

impleaded(as(owner,(operator(and(manager(of(the(hospital.(
'
Issue:'Whether(or(not(PSI(is(liable(for(the(negligence(of(Dr.(Ampil.(
'
Held:'YES.(For(purposes(of(allocating(responsibility(in(medical(negligence(
cases,(an(employerAemployee(relationship(exists(between(hospitals(and(
their( consultants.( The( Court( denied( the( defense( of( PSI( saying( that( the(

REVISED'PENAL'CODE'
Article' 102.' Subsidiary' civil' liability' of' innkeepers,' tavernkeepers' and'
proprietors'of'establishments.''
In'default'of'the'persons'criminally'liable,'innkeepers,'tavernkeepers,'
and'any'other'persons'or'corporations'shall'be'civilly'liable'for'crimes'
committed' in' their' establishments,' in' all' cases' where' a' violation' of'

defense( raised( by( PSI( consisted( of( a( mere( general( denial( of( control( or(
responsibility( over( the( actions( of( Dr.( Ampil.( Furthermore,( the( hospital(
was(projecting(Dr.(Ampil(as(their(agent.(As(such,(under(the(doctrine(of(
apparent(authority(PSI(was(liable(for(the(negligence(of(Dr.(Ampil.(
(
Finally,(as(owner(and(operator(of(Medical(City(General(Hospital,(PSI(was(
bound( by( its( duty( to( provide( comprehensive( medical( services( to(
Natividad(Agana,(to(exercise(reasonable(care(to(protect(her(from(harm,(
to( oversee( or( supervise( all( persons( who( practiced( medicine( within( its(
walls,( and( to( take( active( steps( in( fixing( any( form( of( negligence(

(
V.' Corporate' Criminal' Liability' (Articles' 102' and' 103,' Revised' Penal'
Code):'
'

municipal'ordinances'or'some'general'or'special'police'regulation'shall'
have'been'committed'by'them'or'their'employees.'
'
Innkeepers' are' also' subsidiarily' liable' for' the' restitution' of' goods'
taken' by' robbery' or' theft' within' their' houses' from' guests' lodging'
therein,' or' for' the' payment' of' the' value' thereof,' provided' that' such'
guests' shall' have' notified' in' advance' the' innkeeper' himself,' or' the'
person'representing'him,'of'the'deposit'of'such'goods'within'the'inn;'
and' shall' furthermore' have' followed' the' directions' which' such'
innkeeper'or'his'representative'may'have'given'them'with'respect'to'
the'care'and'vigilance'over'such'goods.'No'liability'shall'attach'in'case'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
of' robbery' with' violence' against' or' intimidation' of' persons' unless'
committed'by'the'innkeeper's'employees.'
'
Article'103.'Subsidiary'civil'liability'of'other'persons.''
The' subsidiary' liability' established' in' the' next' preceding' article' shall'

insolvency.(
(
Issue:'Whether(or(not(West(Coast(can(be(held(liable(for(libel.(
'
Held:'NO.(The(courts(here(have(no(common(law(jurisdiction(or(powers.(

also'apply'to'employers,'teachers,'persons,'and'corporations'engaged'
in'any'kind'of'industry'for'felonies'committed'by'their'servants,'pupils,'
workmen,'apprentices,'or'employees'in'the'discharge'of'their'duties.'

If(they(have(any(powers(not(conferred(by(statute,(expressly(or(impliedly,(
they( would( naturally( come( from( Spanish( and( not( from( common( law(
sources.( Under( the( Spanish( criminal( law( and( procedure,( a( corporation(
could(not(have(been(proceeded(against(criminally,(and(as(such(it(could(
not( have( committed( a( crime( in( which( a( willful( purpose( or( a( malicious(
intent( was( required.( Criminal( actions( would( have( been( restricted( or(
limited,( under( that( system,( to( the( officials( of( such( corporations( and(

'

Corporations( cannot( be( held( criminally( liable( within( Philippine(


jurisdiction( since( there( is( no( law( relating( to( the( practice( and(
procedure( in( criminal( actions( whereby( a( corporation( may( be(
brought(to(court(to(be(proceeded(against(criminally.(West)Coast)
Life)Ins.)Co.)v.)Hurd,)27)Phil.)401)(1914).)
o Other( reasons:( (1)( the( impossibility( of( imposing( penal(
sanctions( on( a( corporation( and( (2)( lack( of( criminal(

never(would(have(been(directed(against(the(corporation(itself.(
(
Doctrine:' Corporations(cannot(be(indicted(criminally(because(such(acts(
require(malicious(intent,(which(a(corporation(cannot(possess.(

intent( or( malice( since( a( corporation( has( no( mind( of( its(
own.1)
)

corporation( cannot( be( held( criminally( liable( for( the( crime( of(
estafa(punished(under(the(Revised(Penal(Code(and(prior(to(the(
promulgation( of( the( Trust( Receipts( Decree( under( the( doctrine(
that(the(corporation(was([not](directly(required(by(law(to(do(an(
act(in(a(given(manner,(and(the(same(law(makes(the(person(who(

West)Coast)Life)Ins.)Co.)v.)Hurd)
'
Facts:' A(complaint(for(libel(was(filed(against(West(Coast(Life(Insurance(
Co.,(alleging(that(its(officers(John(Northcott(and(Manuel(Grey(caused(to(
be(printed(and(distributed(damaging(circulars(detrimental(to(the(Insular(
Life(Insurance(Company.(The(circulars(represent(that(Insular(Life(was(in(
a( dangerous( financial( condition( and( on( the( point( of( going( into(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

A( corporate( officer( who( signs( the( trust( receipt( in( behalf( of( the(

fails( to( perform( the( act( in( the( prescribed( manner( expressly(
liable(criminally.(Sia)v.)Court)of)Appeals,)121)SCRA)655)(1983).)

BUT:( The( Trust( Receipts( Law( recognizes( the( impossibility( of(


imposing(the(penalty(of(imprisonment(on(a(corporation,(hence,(
if( the( entrustee( is( a( corporation,( the( law( makes( the( officers( or(
employees(or(other(persons(responsible(for(the(offense(liable(to(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
suffer( the( penalty( of( imprisonment.( Ong) v.) Court) of) Appeals,)
401)SCRA)6478)(2003).)
)
Sia)v.)Court)of)Appeals)
'

personally( had( committed( any( fraud( or( deceit( in( connection( therewith(
or( that( he( had( personally( been( responsible( for( or( benefited( from( the(
corporations( failure( to( pay( the( bank( the( balance( due( under( the( trust(
receipt.(
(

Facts:' Jose( Sia( is( engaged( in( the( manufacturing( of( Steel( Office(
Equipment.(As(president(and(general(manager(of(Metal(Manufacturing(
of( the( Philippines,( he( obtained( delivery( of( 150( M/T( Cold( Rolled( Steel(
Sheets(under(a(Trust(Receipt(Agreement.(According(to(the(Agreement,(
he(was(obliged(to(hold(the(said(steel(sheets(in(trust(and(sell(them(then(
turn( over( the( proceeds( to( the( Continental( bank.( However,( he( failed( to(
perform( such( obligation,( and( instead( refused( to( return( the( said( cold(

Note:(If(this(case(was(decided(today,(Sia(may(be(held(liable(because(P.D.(
115(punishes(the(officers(of(a(corporation(who(violate(the(provisions(of(
the(trust(receipt.(

rolled( sheets( or( account( for( the( proceeds( thereof,( causing( damage( to(
Continental(Bank.(Sia(was(then(charged(of(estafa.'
'
Issue:' Whether(or(not(Sia(may(be(held(criminally(liable(as(an(officer(of(
the(corporation.(
'
Held:' NO.( Sia( was( never( intended( to( be( equally( liable( as( the(

purpose( of( bringing( a( civil( action( for( malicious( prosecution( for(


the( damages( incurred( by( the( corporation( for( the( criminal(
proceedings( brought( against( its( officer.( Cometa) v.) Court) of)
Appeals,)301)SCRA)459)(1999).)

corporation.(Without(being(made(so(liable(personally(as(the(corporation(
is,(there(would(then(be(no(basis(for(holding(him(criminally(liable(for(any(
violation(of(the(trust(receipt.(This(is(made(clearly(so(upon(consideration(
of( the( fact( that( in( the( violation( of( the( trust( agreement,( only( the(
corporation(benefited(and(not(Sia(personally.(
'
Doctrine:' (Concurring( Opinion( of( Justice( Teehankee)( All( of( the( acts(
involved( were( corporate( acts( with( Sia( representing( the( corporation( as(
its( president( and( general( manager.( There( is( not( the( slightest( evidence(
that( these( corporate( acts( were( unauthorized( or( that( petitioner(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

No( criminal( suit( can( lie( against( a( corporation:( Times,) Inc.) v.)
Reyes,)39)SCRA)303)(1971).))

BUT:( A( corporation( can( be( a( realApartyAinAinterest( for( the(

When( a( criminal( statute( forbids( the( corporation( itself( from(


doing(an(act,(the(prohibition(extends(to(the(Board(of(Directors,(
and( to( each( director( separately( and( individually.( People) v.)
Concepcion,)44)Phil.)129)(1922).)

The( existence( of( the( corporate( entity( does( not( shield( from(
prosecution( the( corporate( agent( who( knowingly( and(
intentionally( causes( the( corporation( to( commit( the( crime.( The(
corporation(obviously(acts,(and(can(act,(only(by(and(through(its(
human(agents,(and(it(is(their(conduct(which(the(law(must(deter.(
The( employee( or( agent( of( a( corporation( engaged( in( unlawful(
business( naturally( aids( and( abets( in( the( carrying( on( of( such(
business(and(will(be(prosecuted(as(principal(if,(with(knowledge(
of( the( business,( its( purpose( and( effect,( he( consciously(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
contributes( his( efforts( to( its( conduct( and( promotion( [illegal(
recruitment( in( this( case],( however( slight( his( contribution( may(
be.( The) Executive) Secretary) v.) Court) of) Appeals,) 429) SCRA) 81)
(2004);)People)v.)Tan)Boon)Kong,)54)Phil.)607)(1930).)

and(abets(in(the(carrying(on(of(such(business(and(will(be(prosecuted(as(
principal(if((with(knowledge(of(the(business,(its(purpose(and(effect)(he(
consciously( contributes( his( efforts( to( its( conduct( and( promotion,(
however(slight(his(contribution(may(be.(

)
The)Executive)Secretary)v.)Court)of)Appeals)

'
Facts:' The( Asian( Recruitment( Council( Philippine( Chapter,( Inc.( (ARCOA
Phil.)(filed(a(petition(for(declaratory(relief(to(declare(as(unconstitutional(
Section( 2,( paragraph( (g),( Section( 6,( paragraphs( (a)( to( (j),( (l)( and( (m),(
Section(7,(paragraphs((a)(and((b),(and(Sections(9(and(10(of(Republic(Act(
No.( 8042,( otherwise( known( as( the( Migrant( Workers( and( Overseas(
Filipinos(Act(of(1995.((
'
Issue:' Whether( or( not( Section( 6( of( R.A.( No.( 8042( which( provides( that(
employees( of( recruitment( agencies( may( be( criminally( liable( for( illegal(
recruitment(is(valid.(
'
Held:'YES.(An(employee(of(a(company(or(corporation(engaged(in(illegal(
recruitment(may(be(held(liable(as(principal,(together(with(his(employer,(
if( it( is( shown( that( he( actively( and( consciously( participated( in( illegal(
recruitment.((
(
Doctrine:( It( has( been( held( that( the( existence( of( the( corporate( entity(
does( not( shield( from( prosecution( the( corporate( agent( who( knowingly(
and( intentionally( causes( the( corporation( to( commit( a( crime.( The(
corporation(obviously(acts,(and(can(act,(only(by(and(through(its(human(
agents,(and(it(is(their(conduct(which(the(law(must(deter.(The(employee(
or( agent( of( a( corporation( engaged( in( unlawful( business( naturally( aids(

People)v.)Tan)Boon)Kong)
)
Facts:'Tan(Boon(Kong(is(the(manager(of(the(Visayan(General(Supply(Co.(
Inc.( in( Iloilo( which( was( engaged( in( the( purchase( and( sale( of( sugar,(
bayon,(copra(and(other(native(products.(In(1924,(he(filed(a(false(return(
for( the( purpose( of( taxation( thereby( failing( to( declare( the( amount( of(
200k(and(voluntarily(and(illegally(not(paying(the(Government(as(internal(
revenue( percentage( taxes( the( sum( of( P3k,( corresponding( to( 112( %( of(
said(undeclared(sales.'
'
Issue:'Whether(or(not(Tan(Boon(Kong,(as(manager(of(the(company,(may(
be(held(criminally(liable.(
'
Held:'YES.(A(corporation(can(act(only(through(its(officers(and(agents(and(
where(the(business(itself(involves(a(violation(of(law,(that(correct(rule(is(
that(all(who(participate(in(it(are(criminally(liable.(Tan(Boon(Kong,(being(
the(author(of(the(illegal(act,(must(be(held(liable.(
'
Doctrine:' For( crimes( committed( by( a( corporation,( the( responsible(
officers(thereof(would(be(personally(liable(for(the(crime.(Officer(of(the(
corporation( will( be( personally( liable( for( the( crime( only( if( it( is( directly(
prohibited( by( law,( and( not( if( the( act( was( merely( in( violation( of( the(
agreement(of(parties.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

If( the( crime( is( committed( by( a( corporation,( the( directors,(


officers,(employees(or(other(officers(thereof(responsible(for(the(
offense( shall( be( charged( and( penalized( for( the( crime,( precisely(
because(of(the(nature(of(the(crime(and(the(penalty(therefor.(A(
corporation(cannot(be(arrested(and(imprisoned;(hence,(cannot(
be(penalized(for(a(crime(punishable(by(imprisonment.(However,(
a(corporation(may(be(charged(and(prosecuted(for(a(crime(if(the(
imposable( penalty( is( fine.( Even( if( the( statute( prescribes( both(
fine( and( imprisonment( as( penalty,( a( corporation( may( be(
prosecuted(and,(if(found(guilty,(may(be(fined.(Ching)v.)Secretary)
of)Justice,)481)SCRA)602)(2006))

When(a(criminal(statute(designates(an(act(of(a(corporation(or(a(
crime(and(prescribes(punishment(therefor,(it(creates(a(criminal(
offense( which,( otherwise,( would( not( exist( and( such( can( be(
committed( only( by( the( corporation.( But( when( a( penal( statute(
does(not(expressly(apply(to(corporations,(it(does(not(create(an(
offense(for(which(a(corporation(may(be(punished.(On(the(other(
hand,(if(the(statute,(defines(a(crime(that(may(be(committed(by(a(
corporation( but( prescribes( the( penalty( therefor( to( be( suffered(
by( the( officers,( directors,( or( employees( of( such( corporation( or(
other(persons(responsible(for(the(offense,(only(such(individuals(
will( suffer( such( penalty.( Corporate( officers( or( employees,(
through( whose( act,( default( or( omission( the( corporation(
commits(a(crime,(are(themselves(individually(guilty(of(the(crime.(
Ching)v.)Secretary)of)Justice,)481)SCRA)602)(2006).)

)BUT'SEE:)Consolidated)Bank)v.)Court)of)Appeals,)356)SCRA)671)
(2003).)
)
)

Consolidated)Bank)v.)Court)of)Appeals)
'
Facts:'Continental(Cement(Corp(obtained(from(Consolidated(Bank(letter(
of(credit(used(to(purchase(500,000(liters(of(bunker(fuel(oil.(Respondent(
Corporation(made(a(marginal(deposit(to(petitioner.(A(trust(receipt(was(
executed( by( respondent( corporation,( with( respondent( Gregory( Lim( as(
signatory.( Claiming( that( respondents( failed( to( turn( over( the( goods( or(
proceeds,(petitioner(filed(a(complaint(for(sum(of(money(before(the(RTC(
of(Manila.(In(their(answer,(respondents(aver(that(the(transaction(was(a(
simple(loan(and(not(a(trust(receipt(one,(and(that(the(amount(claimed(by(
petitioner(did(not(take(into(account(payments(already(made(by(them.((
'
Issue:' Whether( or( not( Gregory( Lim( and( his( spouse( can( be( held(
personally(liable.(
'
Held:( NO.' Petitioner's( argument( that( respondent( Corporation( and(
respondent( Lim( and( his( spouse( are( one( and( the( same( cannot( be(
sustained.( The( transactions( sued( upon( were( clearly( entered( into( by(
respondent( Lim( in( his( capacity( as( Executive( Vice( President( of( the(
corporation.(We(stress(the(hornbook(law(that(corporate(personality(is(a(
shield( against( personal( liability( of( its( officers.( Thus,( we( agree( that(
respondents(Gregory(T.(Lim(and(his(spouse(cannot(be(made(personally(
liable(since(respondent(Lim(entered(into(and(signed(the(contract(clearly(
in(his(official(capacity(as(Executive(Vice(President.(The(personality(of(the(
corporation(is(separate(and(distinct(from(the(persons(composing(it'
'
Doctrine:' Hornbook( law( that( corporate( personality( is( a( shield( against(
personal(liability(of(its(officers'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

The( owners( of( a( corporate( organization( are( its( stockholders(


and(they(are(to(be(distinguished(from(its(directors(and(officers.(

Stockholders,( being( basically( investors( in( the( corporation,( and(


with( the( management( of( its( business( generally( vested( in( the(
Board(of(Directors,(cannot(be(held(liable(for(the(criminal(offense(
committed(on(behalf(of(the(corporation,(unless(they(personally(
took( part( in( the( same.( Espiritu) v.) Petron) Corp.,) 605) SCRA) 245)
(2009).)

damages(if(it(has(a(good(reputation(that(is(debased,(resulting(in(
social( humiliation( is( an( obiter( dictum.( Recovery( of( a(
corporation( would( be( under( Articles( 19,( 20( and( 21( of( the( Civil(
Code,( but( which( requires( a( clear( proof( of( malice( or( bad( faith.(
ABScCBN)Broadcasting)Corp.)v.)Court)of)Appeals,)301)SCRA)589)
(1999).)

Apart( from( its( sweeping( allegation( that( respondents(

moral( damages( arising( from( libel( falls( under( Article( 2219(7)( of(
the(Civil(Code,(which(expressly(authorizes(the(recovery(of(moral(
damages( in( cases( of( libel,( slander( or( any( other( form( of(
defamation,( and( does( not( qualify( whether( the( plaintiff( is( a(
natural( or( juridical( person.( Therefore,( a( juridical( person( can(

acts(may(be(held(criminally(liable.(Cruzvale,)Inc.)v.)Eduque,)589)
SCRA)534,)546)(2009).)

validly( complain( for( libel( or( any( other( form( of( defamation( and(
claim( for( moral( damages.) Filipinas) Broadcasting) Network) v.)
Ago)Medical)and)Educational)Center,)448)SCRA)413)(2005).)

A(corporation(may(be(sued(for(moral(damages,(but(it(cannot(sue(
A( corporation,( being( an( artificial( person,( cannot( experience(
physical( sufferings,( mental( anguish,( fright,( serious( anxiety,(
wounded( feelings,( moral( shock( or( social( humiliation( which( are(
basis( for( moral( damages( under( Article( 2217( of( the( Civil( Code.(
However,( a( corporation( may( have( a( good( reputation( which,( if(
besmirched,(may(be(a(ground(for(the(award(of(moral(damages.(
Mambulao) Lumber) Co.) v.) Philippine) National) Bank,) 22) SCRA)
359)(1968);)APT)v.)Court)of)Appeals,)300)SCRA)579)(1998).)

PREVAILING'RULE:'A(corporation,(being(an(artificial(person(and(
having( existence( only( in( legal( contemplation,( has( no( feelings,(
emotions( nor( senses;( therefore,( it( cannot( experience( physical(
suffering( and( mental( anguish.( Mental( suffering( can( be(
experienced( only( by( one( having( a( nervous( system( and( it( flows(
from(real(ills,(sorrows,(and(griefs(of(lifeall(of(which(cannot(be(
suffered( by( an( artificial( person.( Prime) White) Cement) Corp.) v.)
IAC,)220)SCRA)103)(1993).1)

for(moral(damages((except(for(human(relations))

NONETHELESS:(Likewise,(an(educational(corporations(claim(for(

misappropriated(or(converted(its(money(placements,(petitioner(
failed( to( establish( the( particular( role( or( actual( participation( of(
each( respondent( in( the( criminal( act;( neither( was( it( shown( that(
they(assented(to(its(commission.(It(is(basic(that(only(corporate(
officers( shown( to( have( participated( in( the( alleged( anomalous(

)
VI.'Recovery'of'Moral'and'Other'Damages'

BUT:( The( statement( in( People) v.) Manero) and) Mambulao)


Lumber) Co.) v.) PNB,( that( a( corporation( may( recover( moral(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(LBC( Express,( Inc.( v.( Court( of( Appeals,( 236( SCRA( 602( (1994);( Acme( Shoe,(
Rubber(&(Plastic(Corp.(v.(Court(of(Appeals,(260(SCRA(714((1996);(Solid(Homes,(
Inc.(v.(Court(of(Appeals,(275(SCRA(267((1997);(NPC(v.(Philipp(Brothers(Oceanic,(
Inc.,( 369( SCRA( 629( (2001);( Flight( Attendants( and( Stewards( Association( of( the(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
VII.'CORPORATE'NATIONALITY:'UNDER'WHOSE'LAWS'INCORPORATED'
(Section'123)'
'

Section'123.'Definition'and'rights'of'foreign'corporations.'
For' the' purposes' of' this' Code,' a' foreign' corporation' is' one' formed,'

organized' or' existing' under' any' laws' other' than' those' of' the'
Philippines'and'whose'laws'allow'Filipino'citizens'and'corporations'to'
do' business' in' its' own' country' or' state.' It' shall' have' the' right' to'
transact' business' in' the' Philippines' after' it' shall' have' obtained' a'
license' to' transact' business' in' this' country' in' accordance' with' this'
Code' and' a' certificate' of' authority' from' the' appropriate' government'
agency.'(n)'

the( citizenship( requirement( is( to( prevent( aliens( from( assuming(


control(of(public(utilities,(which(may(be(inimical(to(the(national(
interest.( This( specific( provision( explicitly( reserves( to( Filipino(
citizens( control( of( public( utilities,( pursuant( to( an( overriding(
economic( goal( of( the( 1987( Constitution:( to( conserve( and(
develop( our( patrimony( and( to( ensure( a( a( selfA( reliant( and(
independent( national( economy( effectively( controlled( by(

GENERAL'RULE:'The'Incorporation'Test)
o If( a( corporation( is( formed( under( the( laws( of( the(
Philippines,(then(it(is(a(domestic(corporation(regardless(
o

of(who(owns(the(company(at(that(point.)
You( look( at( the( stockholding( of( the( company( when( it(
becomes( necessary( to( comply( with( certain(
requirements(of(the(law.)
" The( national( of( whoever( owns( the( controlling(
shares( of( a( corporation( is( deemed( to( be( either(
foreign( or( domestic( depending( on( the(
"

The( 1987( Constitution( provides( for( the( Filipinization( of( public(


utilities( by( requiring( that( any( form( of( authorization( for( the(
operation(of(public(utilities(should(be(granted(only(to(citizens(of(
the( Philippines( or( to( corporation( or( associations( organized(
under( the( laws( of( the( Philippines( at( least( sixty( per( centum( of(
whose(capital(is(owned(by(such(citizens.(The(evident(purpose(of(

'

Domestic( corporations( which( are( under( the( control( of(


nationals( of( the( enemy( country( are( deemed( foreign(
enemy( corporations.( Haw) Pia) v.) China) Banking) Corp.,)
80)Phil.)604)(1948).1)

Filipinos.(We(rule(that(the(term(capital(in(Section(11,(Article(
XII(of(the(Constitution(refers(only(to(shares(of(stock(entitled(to(
vote( in( the( election( of( directors,( and( thus( in( the( present( case(
only( to( common( shares,( and( also( preferred( shares( that( are(
entitled( to( vote,( and( not( the( total( outstanding( capital( stock(
comprising( both( common( and( nonAvoting( preferred( shares.)
Gamboa) v.) Teves,) 652) SCRA) 690) (2011);) affirmed) in) Heirs) of)

nationality(of(the(controlling(owner.)
A( corporation( may( be( a( Philippine( corporation(
BUT(not(a(Philippine(national.)

Gamboa)v.)Teves,)682)SCRA)397)(2012).)
)
)

EXCEPTION:'Test'Of'Controlling'Ownership)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Philippines( v.( Philippine( Airlines,( 559( SCRA( 252( (2008);( Employees( Union( of(
Bayer(Phils.(V.(Bayer(Philippines,(Inc.,(636(SCRA(473((2010).(

(Filipinas(Compania(de(Seguros(v.(Christern,(Huenefeld(&(Co.,(Inc.,(89(Phil.(54(
(1951);(Davis(Winship(v.(Philippine(Trust(Co.,(90(Phil.(744((1952).(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Rachelle Anne Gutie, 11/13/13 2:36 PM


Comment [1]: Landmark!case!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
A.'Exploitation'of'Natural'Resources'(Section'140;'Section'2,'Article'XII,'
1987'Constitution)'
'

labor' intensity' of' the' activity,' the' export' potential,' as' well' as' other'
factors' which' are' germane' to' the' realization' and' promotion' of'
business'and'industry.'

Section'140.'Stock'ownership'in'certain'corporations.'
Pursuant'to'the'duties'specified'by'Article'XIV'of'the'Constitution,'the'

'

National' Economic' and' Development' Authority' shall,' from' time' to'


time,' make' a' determination' of' whether' the' corporate' vehicle' has'
been' used' by' any' corporation' or' by' business' or' industry' to' frustrate'
the' provisions' thereof' or' of' applicable' laws,' and' shall' submit' to' the'
Batasang' Pambansa,' whenever' deemed' necessary,' a' report' of' its'
findings,' including' recommendations' for' their' prevention' or'
correction.'
'
Maximum' limits' may' be' set' by' the' Batasang' Pambansa' for'
stockholdings'in'corporations'declared'by'it'to'be'vested'with'a'public'
interest' pursuant' to' the' provisions' of' this' section,' belonging' to'
individuals' or' groups' of' individuals' related' to' each' other' by'
consanguinity'or'affinity'or'by'close'business'interests,'or'whenever'it'
is'necessary'to'achieve'national'objectives,'prevent'illegal'monopolies'
or' combinations' in' restraint' or' trade,' or' to' implement' national'
economic' policies' declared' in' laws,' rules' and' regulations' designed' to'
promote'the'general'welfare'and'foster'economic'development.'
'
In'recommending'to'the'Batasang'Pambansa'corporations,'business'or'
industries' to' be' declared' vested' with' a' public' interest' and' in'
formulating'proposals'for'limitations'on'stock'ownership,'the'National'
Economic' and' Development' Authority' shall' consider' the' type' and'
nature' of' the' industry,' the' size' of' the' enterprise,' the' economies' of'
scale,' the' geographic' location,' the' extent' of' Filipino' ownership,' the'

1987'CONSTITUTION'OF'THE'PHILIPPINES'
Section'2.'(Article'XII)'
All'lands'of'the'public'domain,'waters,'minerals,'coal,'petroleum,'and'
other' mineral' oils,' all' forces' of' potential' energy,' fisheries,' forests' or'
timber,' wildlife,' flora' and' fauna,' and' other' natural' resources' are'
owned'by'the'State.'With'the'exception'of'agricultural'lands,'all'other'
natural' resources' shall' not' be' alienated.' The' exploration,'
development,' and' utilization' of' natural' resources' shall' be' under' the'
full' control' and' supervision' of' the' State.' The' State' may' directly'
undertake' such' activities,' or' it' may' enter' into' coUproduction,' joint'
venture,' or' productionUsharing' agreements' with' Filipino' citizens,' or'
corporations'or'associations'at'least'60'per'centum'of'whose'capital'is'
owned' by' such' citizens.' Such' agreements' may' be' for' a' period' not'
exceeding'twentyUfive'years,'renewable'for'not'more'than'twentyUfive'
years,'and'under'such'terms'and'conditions'as'may'provided'by'law.'In'
cases'of'water'rights'for'irrigation,'water'supply,'fisheries,'or'industrial'
uses' other' than' the' development' of' waterpower,' beneficial' use' may'
be'the'measure'and'limit'of'the'grant.'
'
The' State' shall' protect' the' nations' marine' wealth' in' its' archipelagic'
waters,' territorial' sea,' and' exclusive' economic' zone,' and' reserve' its'
use'and'enjoyment'exclusively'to'Filipino'citizens.'
'
The' Congress' may,' by' law,' allow' smallUscale' utilization' of' natural'
resources'by'Filipino'citizens,'as'well'as'cooperative'fish'farming,'with'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
priority' to' subsistence' fishermen' and' fish' workers' in' rivers,' lakes,'
bays,'and'lagoons.'
'
The' President' may' enter' into' agreements' with' foreignUowned'
corporations'involving'either'technical'or'financial'assistance'for'largeU
scale' exploration,' development,' and' utilization' of' minerals,'
petroleum,'and'other'mineral'oils'according'to'the'general'terms'and'
conditions' provided' by' law,' based' on' real' contributions' to' the'
economic' growth' and' general' welfare' of' the' country.' In' such'
agreements,'the'State'shall'promote'the'development'and'use'of'local'
scientific'and'technical'resources.'
'
The'President'shall'notify'the'Congress'of'every'contract'entered'into'
in' accordance' with' this' provision,' within' thirty' days' from' its'
execution.'

including( nonAvoting( shares,( would( be( entitled( to( vote.(


Therefore,( in( those( eight( case( enumerated( in( Section( 6,( even(
foreigners( who( hold( nonAvoting( shares( would( be( entitled( to(
vote.1(
'
B.'Ownership'of'Private'Land'(Section'7,'Article'XII,'1987'Constitution)'
'
1987'CONSTITUTION'OF'THE'PHILIPPINES'
Section'7.'(Article'XII)'
Save' in' cases' of' hereditary' succession,' no' private' lands' shall' be'
transferred' or' conveyed' except' to' individuals,' corporations,' or'
associations'qualified'to'acquire'or'hold'lands'of'the'public'domain.'
'

'

In(order(to(exploit(natural(resources,(the(corporations(must(be(

to( ownership( of( lands( in( the( Philippinesit( is( basic( that( an(
assignor( or( seller( cannot( assign( or( sell( something( he( does( not(
own(at(the(time(the(ownership,(or(the(rights(to(the(ownership,(
are(to(be(transferred(to(the(assignee(or(buyer.(The(assignment(
by(PNCC(of(the(real(properties(to(a(nominee(to(be(designated(by(
Radstock( is( a( circumvention( of( the( constitutional( prohibition(
against( a( private( foreign( corporation( owning( lands( in( the(

of(Philippine(nationality.(

The( constitutional( provision( does( not( distinguish( between(


voting(shares(and(nonAvoting(shares.(So(that,(even(if(the(voting(
shares( are( controlled( by( Filipinos,( if( the( total( shareholdings( of(
the( company( (both( voting( and( nonAvoting)( does( not( meet( the(
minimum( 60%( Filipino( ownership( requirement( of( the(
Constitution,( such( corporation( would( still( not( be( qualified( to(
engage( in( activities( that( seek( to( exploit( our( natural( resources.(
The( broadness( of( the( constitutional( language( by( not(
distinguishing( voting( from( nonAvoting( shares( seems( to( square(
with( Section( 6( of( the( Corporation( Code,( where( in( eight(
fundamental(corporate(restructuring(or(transactions,(all(shares,(

Radstock,( a( foreign( corporation( with( unknown( owners( whose(


nationalities( are( also( unknown,( is( not( qualified( to( own( land( in(
the(Philippines,(and(therefore(also(disqualified(to(own(the(rights(

Philippines.)Strategic)Alliance)Dev.)Corp.)v.)Radstock)Securities)
Ltd.,)607)SCRA)413)(2009).)
)
'

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Note:' Atty.( Hofilea( !( the( parties( probably( knew( from( the( beginning(
that(Radstock(could(not(own(property,(and(that(is(why(they(resorted(to(
an( assignment( setAup( whereby( Radstock( has( rights( of( ownership( over(
the(property(assigned.(
)

which(is(adversely(affected(by(the(capacity(of(the(corporation(to(
own(landthat(is,(the(corporation(becomes(disqualified(to(own(
land.)J.G.)Summit)Holdings,)Inc.)v.)Court)of)Appeals,)450)SCRA)
169)(2005).)

The( registration( of( the( donation( of( land( to( an( unincorporated(
religious( organization,( whose( trustees( are( foreigners,( would(
violate( constitutional( prohibition( and( the( refusal( would( not( be(
in(violation(of(the(freedom(of(religion(clause.(The(fact(that(the(
religious( association( has( no( capital( stock( does( not( suffice( to(
escape(the(constitutional(inhibition,(since(it(is(admitted(that(its(
members( are( of( foreign( nationalityand( the( spirit( of( the(
Constitution( demands( that( in( the( absence( of( capital( stock,( the(
controlling( membership( should( be( composed( of( Filipino(
citizens.( Register) of) Deeds) of) Rizal) v.) Ung) Sui) Si) Temple,) 97)
Phil.)58)(1955).)

BUT:) A( corporation( sole( being( a( creature( prior( to( the(


constitution,( has( no( nationality.( If( a( nationality( is( sought( to( be(
determined,(the(same(depends(of(the(nationality(of(the(majority(
of( the( lay( members( and( not( on( the( nationality( of( the( sole(
corporator.)Roman)Catholic)Apostolic)Administrator)of)Davao,)
Inc.) v.) LRC) and) the) Register) of) Deeds) of) Davao,) 102) Phil.) 596)
(1957).)

(
Note:' Atty.( Hofilea( !( if( 5( years( from( now,( the( population( of( the( lay(
members( of( the( church( is( mostly( Koreans,( would( that( mean( that( the(
corporation(sole(can(no(longer(own(real(property?(
)

If(the(foreign(shareholdings(in(a(landholding(corporation(exceed(
40%,(it(is(not(the(foreign(stockholders(ownership(of(the(shares(

The(prohibition(in(the(Constitution(applies(only(to(ownership(of(
land;( it( does( not( extend( to( immovable( or( real( property( as(
defined( under( Article( 415( of( the( Civil( Code.( Otherwise,( we(
would( have( a( strange( situation( where( the( ownership( of(
immovable( property( such( as( trees,( plants( and( growing( fruit(
attached( to( the( land( would( be( limited( to( Filipinos( and( Filipino(
corporations( only.( J.G.) Summit) Holdings,) Inc.) v.) Court) of)
Appeals,)450)SCRA)169)(2005).)

'
C.'Public'Utilities'(Section'11,'Article'XII,'Constitution)'
'
1987'CONSTITUTION'OF'THE'PHILIPPINES'
Section'11.'(Article'XII)'
No' franchise,' certificate,' or' any' other' form' of' authorization' for' the'
operation' of' a' public' utility' shall' be' granted' except' to' citizens' of' the'
Philippines'or'to'corporations'or'associations'organized'under'the'laws'
of'the'Philippines,'at'least'sixty'per'centum'of'whose'capital'is'owned'
by' such' citizens;' nor' shall' such' franchise,' certificate,' or' authorization'
be'exclusive'in'character'or'for'a'longer'period'than'fifty'years.'Neither'
shall'any'such'franchise'or'right'be'granted'except'under'the'condition'
that' it' shall' be' subject' to' amendment,' alteration,' or' repeal' by' the'
Congress' when' the' common' good' so' requires.' The' State' shall'
encourage'equity'participation'in'public'utilities'by'the'general'public.'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
long(as(it(does(not(operate(them(to(serve(the(public.(There(is(a(
clear(distinction(between(operation(of(a(public(utility(and(the(
ownership( of( the( facilities( and( equipment( used( to( serve( the(
public.(Tatad)v.Garcia,)Jr.,)243)SCRA)436)(1995).)
o Note:' Atty.( Hofilea( !( The( nationality( requirement(
applies( to( anyone( who( operates( a( public( utility.( The(

The' participation' of' foreign' investors' in' the' governing' body' of' any'
public'utility'enterprise'shall'be'limited'to'their'proportionate'share'in'
its' capital,' and' all' the' executive' and' managing' officers' of' such'
corporation'or'association'must'be'citizens'of'the'Philippines.'
(

Unlike( the( provisions( on( the( exploitation( of( natural( resources,(


the( aforequoted( provisions( expressly( includes( the( place( of(
incorporation(test(and(requires(that(only(domestic(corporations(
with( at( least( 60%( of( the( capital( stock( owned( by( Filipinos( may(
own(and(operate(public(utilities(in(the(Philippines.1(

The(nationality(test(for(public(utilities(applies(not(at(the(time(of(
the( grant( of( the( primary( franchise( that( makes( a( corporation( a(
juridical(person,(but(at(the(grant(of(the(secondary(franchise(that(
authorizes(the(corporation(to(engage(in(a(nationalized(industry.)
People)v.)Quasha,)93)Phil.)333)(1953).)

The( primary( franchise,( 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(be(conveyed(in(the(absence(
of(a(legislative(authority(to(do(so.(The(secondary(franchises(are(
vested( in( the( corporation( and( may( ordinarily( be( 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(public(use.)J.R.S.)Business)Corp.)
v.)Imperial)Insurance,)11)SCRA)634)(1964).)

The( Constitution( requires( a( franchise( for( the( operation( of( a(


public( utility;( however,( it( does( not( require( a( franchise( before(
one(can(own(the(facilities(needed(to(operate(a(public(utility(so(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(

nationality( requirement( does( not( need( to( be( complied(


with(if(it(is(merely(setting(up(or(owning(facilities(used(to(
deliver(public(utilities.)
'
D.'Mass'Media'(Section'11(1),'Article'XVI,'1987'Constitution)'
'
1987'CONSTITUTION'OF'THE'PHILIPPINES'
Section'11.'(Article'XVI)'
1.'The'ownership'and'management'of'mass'media'shall'be'limited'to'
citizens' of' the' Philippines,' or' to' corporations,' cooperatives' or'
associations,'whollyUowned'and'managed'by'such'citizens.'
'
The' Congress' shall' regulate' or' prohibit' monopolies' in' commercial'
mass'media'when'the'public'interest'so'requires.'No'combinations'in'
restraint'of'trade'or'unfair'competition'therein'shall'be'allowed.'
'
2.'The'advertising'industry'is'impressed'with'public'interest,'and'shall'
be' regulated' by' law' for' the' protection' of' consumers' and' the'
promotion'of'the'general'welfare.'
'
Only' Filipino' citizens' or' corporations' or' associations' at' least' seventy'
per'centum'of'the'capital'of'which'is'owned'by'such'citizens'shall'be'
allowed'to'engage'in'the'advertising'industry.'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Rachelle Anne Gutierrez 1/21/14 6:00 PM


Comment [2]: !
Franchise!of!public!utilities!!!at!least!60%!
owned,!proportional!management!
!
Mass!Media!!!100%!owned!and!managed!
!
Advertising!!!70%!owned,!proportional!
management!

CORPORATION)LAW)REVIEWER)(201332014))

The(term("mass(media"(shall(mean(the(gathering,(transmission(
of( news,( information,( messages,( signals,( and( forms( of( written,(
oral( and( all( visual( communication( and( shall( embrace( the( print(
medium,( radio,( television,( films,( movies,( advertising( in( all( its(
phases,(and(their(business(managerial.1(!

only( 100%( Filipino( ownership( of( the( capital( stock( of( the(
corporation,(but(also(100%AFilipino(management(of(the(entity.6!

The( distinctive( features( of( any( mass( media( undertaking( is( the(
dissemination( of( information( and( ideas( to( the( public,( or( a(
portion(thereof.2(!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(Pres.(Decree(36,(as(amended(by(Pres.(Decrees(191(and(197.((
(DOJ(Opinion(No.(120,(series(of(1982.(((
3
(Section(2,(Pres.(Decree(576;(SEC(Opinion,(24(March(1983,(addressed(to(Justice(
Manuel(Lazaro.((
2

Cable(Industry:(Cable(TV(operations(shall(be(governed(by(E.O.(
No.( 205( (s.1987).( If( CATV( operators( offer( public(
telecommunications( services,( they( shall( be( treated( just( like( a(
public(telecommunications(entity.((NTC(Memo(Circular(No.(8A9A
95)(

It(is(divided(into(the(print(media(and(the(broadcast(media;(!
o The( broadcast( media( includes( radio( and( television(
broadcasting( in( all( their( aspects( and( all( other(
cinematographic(or(radio(promotion(and(advertising.3(!
The( term( covers( any( medium( of( communication,( a(
newspaper,( radio,( motion( pictures,( or( television,(
designed(to(reach(the(masses(and(that(tends(to(set(the(

Although( the( constitutional( provision( governing( mass( media(


does( not( expressly( include( the( place( of( incorporation( test,( the(
same( shall( be( deemed( included( under( the( same( principle(
governing(exploitation(of(natural(resources.(In(fact,(the(ancillary(
control(test(for(mass(medium(under(the(Constitution(is(actually(
more(stringent(than(in(other(defined(areas,(since(it(requires(not(

'

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

standards,(ideals(and(aims(of(the(masses.4(The(term(has(
also(been(opined(to(include(cable(television.5!

'
The'participation'of'foreign'investors'in'the'governing'body'of'entities'
in' such' industry' shall' be' limited' to' their' proportionate' share' in' the'
capital' thereof,' and' all' the' executive' and' managing' officers' of' such'
entities'must'be'citizens'of'the'Philippines.'

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4

(DOJ(Opinion(163,(s.(1973;(SEC(Opinion(dated(15(July(1991,(XXV(SEC(QUARTERLY(
BULLETIN,(31((No.(4,(Dec.(1991).((
5
(The( National( Telecommunications( Commission( (NTC),( which( regulates( and(
supervises( the( cable( television( industry( in( the( Philippines( under( Section( 2( of(
Executive( Order( No.( 436,( s.( 1997,( has( provided( under( NTC( Memorandum(
Circular( No.( 8A9A95,( under( item( 920(a)( thereof( provides( that( Cable( TV(
operations(shall(be(governed(by(E.O.(No.(205,(s.(1987.(If(CATV(operators(offer(
public( telecommunications( services,( they( shall( be( treated( just( like( a( public(
telecommunications( entity.( Under( DOJ( Opinion( No.( 95,( series( of( 1999,( the(
Secretary( of( Justice,( taking( its( cue( from( Allied! Broadcasting,! Inc.! v.! Federal!
Communications! Commission,! 435( F.( 2d( 70,( considered( CATV( as( a( form( of(
mass(media(which(must,(therefore,(be(owned(and(managed(by(Filipino(citizens,(
or( corporations,( cooperatives( or( associations,( whollyAowned( and( managed( by(
Filipino(citizens(pursuant(to(the(mandate(of(the(Constitution.!
6
(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

Cable( TV( is( a( form( of( mass( media( which( must,(


therefore,( be( owned( and( managed( by( Filipino( citizens,(
or( corporations,( cooperatives( or( associations,( whollyA
owned(and(managed(by(Filipino(citizens(pursuant(to(the(
mandate( of( the( Constitution.( (DOJ( Opinion( No.( 95,( s.(
1999,( citing( Allied) Broadcasting,) Inc.) v.) Federal)

citizens( of( the( Philippines,( is( considered( a( Philippine( National(


entirely.(Unchuan)v.)Lozada,)585)SCRA)421)(2009).)
o This(espouses(the(Control(Test)
)
G.'Grandfather'Rule:'

Communications)Commission,)435)F.2d)70).(

of( Filipino( equity( in( a( corporation( engaged( in( nationalized(


and/or(partly(nationalized(areas(of(activities,(provided(for(under(
the(Constitution(and(other(nationalization(laws,(is(computed,(in(
cases( where( corporate( shareholders( are( present( in( the(

Atty.( Hofilea( !( What( about( foreign( mass( media( bodies( that(


broadcast(to(the(Philippines?(Would(it(constitute(a(violation(of(
the(Constitution?(Point(is,(its(hard(to(determine(the(boundaries(

because(of(technology.(
'
E.'Advertising'Business'(Section'11(2),'Article'XVI,'1987'Constitution)1'

situation,( by( attributing( the( nationality( of( the( second( or( even(
subsequent( tier( of( ownership( to( determine( the( nationality( of(
the(corporate(shareholder.(

Only( Filipino( citizens( or( corporations( or( associations( at( least(

It(also(provides(that(the(participation(of(foreign(investors(in(the(
governing( body( of( the( entities( in( such( industry( shall( be( limited(
to( their( proportionate( share( in( the( capital( thereof,( and( all( the(
executive( and( managing( officers( of( such( entities( must( be(
citizens(of(the(Philippines.(

'
F.'Investment'Test'as'to'Philippine'Nationals'(Section'3[a]'&'[b],'R.A.'
7042,'Foreign'Investments'Act'of'1992)'

Under( Section( 3( of( the( FIA( 91,( a( corporation( organized( under(


the(laws(of(the(Philippines(of(which(at(least(60%(of(the(capital(
stock( outstanding( and( entitled( to( vote( is( owned( and( held( by(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

(Villanueva,(C.(L.,(&(VillanuevaATiansay,(T.(S.((2013).(Philippine(Corporate(Law.(
(2013(ed.).(Manila,(Philippines:(Rex(Book(Store.(

In( recognizing( and( applying( the( grandfather( rule,( the( SEC( has(
adopted( the( formula( of( the( Secretary( of( Justice2(to( the( effect(
that:((
o Shares( belonging( to( corporations( or( partnerships( at(
least( 60%( of( the( capital( of( which( is( owned( by( Filipino(
citizens(shall(be(considered(as(of(Philippine(nationality,(
but( if( the( percentage( of( Filipino( ownership( in( the(
corporation( or( partnership( is( less( than( 60%( only( the(

70%( of( the( capital( of( which( is( owned( by( such( citizens( shall( be(
allowed(to(engage(in(the(advertising(industry.(

The( "grandfather( rule"( is( the( method( by( which( the( percentage(

number( of( shares( corresponding( to( such( percentage(


shall(be(counted(as(of(Philippine(nationality.(.(.3(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

(DOJ(Opinion(No.(18,(s.(1989.((
(SEC( Opinion,( 23( November( 1993,( XXVIII( SEC( QUARTERLY( BULLETIN( 39( (No.( 1,(
March(1994);(SEC(Opinion,(14(April(1993,(XXVII(SEC(QUARTERLY(BULLETIN(29((No.(3,((
Sept.(1993);(SEC(Opinion,(23(March(1993,(XXVII(SEC( QUARTERLY( BULLETIN(15((No.(
3,( Sept.( 1993);( SEC( Opinion,( 6( August( 1991,( SEC( QUARTERLY( BULLETIN( 44( (No.( 4,(
Dec.( 1991);( SEC( Opinion,( 30( May( 1990,( XXIV( SEC( QUARTERLY( BULLETIN( 52( (No.( 3,(
Sept.(1990);(SEC(Opinion,(14(December(1989,(XXIV(SEC(QUARTERLY(BULLETIN(7((No.(
3

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!

BUT'SEE:(SECAOGC(Opinion(No.(10A31,(dated(09(December(2010,(
addressed( to( Mr.( Leonardo( A.( Civil,( Chairman( of( the( Board( of(
CoAO( Small( Scale( Miners( Association,( Inc.,( penned( by( General(
Counsel(Vernette(G.(UmaliAPaco.(

The(grandfather(rule(can(only(extend(to(such(limited(as(to(those(
who( have( actual( control( of( the( affairs( of( the( corporation.(
Palting)v.)San)Jose)Petroleum)Inc.,)18)SCRA)924)(1966).)
o You( look( at( the( individual( shareholders.( Its( seeks( a(
purityAcentric(view.)

CURRENT' RULE:' At(least(60%(of(voting(shares(AND(60%(of(the(


whole(corporation(shares((voting(+(nonAvoting)(must(be(Filipino.)
o Atty.( Hofilea( !( This( current( rule( is( being( questioned(
for(its(effect(on(economic(viability(of(the(company.)

'
H.'Special'Classifications'of'Corporations'(Section'140)'
'
Section'140.'Stock'ownership'in'certain'corporations.''
Pursuant'to'the'duties'specified'by'Article'XIV'of'the'Constitution,'the'
National' Economic' and' Development' Authority' shall,' from' time' to'
time,' make' a' determination' of' whether' the' corporate' vehicle' has'
been' used' by' any' corporation' or' by' business' or' industry' to' frustrate'
the' provisions' thereof' or' of' applicable' laws,' and' shall' submit' to' the'
Batasang' Pambansa,' whenever' deemed' necessary,' a' report' of' its'
findings,' including' recommendations' for' their' prevention' or'
correction.'
'

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2,(June(1990);(SEC(Opinion,(6(November(1989,(XXIV(SEC(QUARTERLY(BULLETIN((56(
(No.(1,(March(1990.((

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CLASSIFICATIONS*OF*CORPORATIONS*

!
I.*In*Relation*to*the*State:*

of* a* portion* of* the* state.* Private* corporations* are* those* formed* for*
some* private* purpose,* benefit,* aim,* or* end,* as* distinguished* from*
public* corporations,* which* have* for* their* purpose* the* general* good*
and* welfare.* Private* corporations* are* divided* into* stock* corporations*
and* nonstock* corporations.* Corporations* which* have* a* capital* stock*
divided*into*shares*and*are*authorized*to*distribute*to*the*holders*of*
such*shares*dividends*or*allotments*of*the*surplus*profits*on*the*basis*
of* the* shares* held* are* stock* corporations.* All* other* private*
corporations*are*nonstock*corporations.*
*

Public! corporations! are! those! created! for! political! purposes!


connected!with!the!public!good!in!the!administration!of!the!civil!
government.!!

*
B*QuasiPpublic*Corporation.**

There! is! a! group! of! corporations! that! seem! to! be! a! cross!
between!private!corporations!and!public!corporations,!and!they!
are!classified!as!quasi<public!corporations.!!

Water! districts! organized! under! Presidential! Decree! No.! 198,!


although! considered! as! quasi<public! corporations! and!
authorized!to!exercise!the!powers,!rights!and!privileges!given!to!
private! corporations! under! existing! laws,! are! entirely! distinct!
from! corporations! organized! under! the! Corporation! Code,! and!
not! within! the! jurisdiction! of! the! SEC.! Marilao! Water!
Consumers!Asso.!v.!IAC,!201!SCRA!437!(1991).!

*
A.*Public*Corporation*(Section*3,*Act*No.*1459).*
*
ACT*No.*1459*
Section*3.*Corporations*may*be*public*or*private.**
Public*corporations*are*those*formed*or*organized*for*the*government*

These!usually!cover!school!districts,!water!districts,!and!
the!like.1!

*
C.*Private*Corporation*(Section*3,*Act*1459).*

Private! corporations! may! be! classified! according! to! their!


purposes:!!
o The! business! corporation,! or! the! profit<seeking!
o
o

corporations!
Religious!corporations,!
Eleemosynary! corporations! or! those! organized! for!
charitable,!scientific!or!vocational!corporations!

!
D.*Distinction*between*Public*and*Private*Corporations*
*
PUBLIC*CORPORATION*

PRIVATE*CORPORATION*

Government!usually!holds!the!
controlling!interest!

Government!MAY!hold!
controlling!interest!

Created!by!its!charter!

Created!under!the!general!
corporation!law!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Created!for!a!public!purpose!

controlled! corporations,! is! may! still! be! considered! as!


such,! or! under! the! 1987! Administrative! Code! as! an!
instrumentality! of! the! Government,! and! it! employees!
are! subject! to! the! Civil! Service! Law.! Boy! Scouts! of! the!
Philippines!v.!NLRC,!196!SCRA!176!(1991).!

Created!for!profit<generation!

Exists!primarily!for!the!government!of!a!
portion!of!the!state!
Subject!to!control!and!supervision!by!
the!State!or!its!agency.!
!

special! law! or! formed! as! subsidiaries! under! the! general!


corporation! law! are! governed! by! the! Civil! Service! Law! and! not!
by! the! Labor! Code,! has! been! supplanted! by! the! 1987!
Constitution.! The! present! doctrine! in! determining! whether! a!

Governments!majority!shares!does!not!make!an!entity!a!public!
corporation.!National!Coal!Co.,!v.!Collector!of!Internal!Revenue,!
46!Phil.!583!(1924).!

BUT:! being! a! GOCC! makes! it! liable! for! laws! and! provisions!
applicable!to!the!Government!or!its!entities!and!subject!to!the!

GOCC! is! subject! to! the! Civil! Service! Law! is! the! manner! of! its!
creation,!such!that!government!corporations!created!by!special!
charter! are! subject! the! Civil! Service! Law,! while! those!
incorporated! under! the! general! corporation! law! are! governed!
by!the!Labor!Code.!PNOCOEnergy!Dev.!Corp.!v.!NLRC,!201!SCRA!
487! (1991);! Davao! City! Water! District! v.! Civil! Service!
Commission,!201!SCRA!593!(1991).!

control! of! the! Government.! Cervantes! v.! Auditor! General,! 91!


Phil.!359!(1952).!
o Although!Boy!Scouts!of!the!Philippines!does!not!receive!
any! monetary! or! financial! subsidy! from! the!
Government,! and! its! funds! and! assets! are! not!
considered! government! in! nature! and! not! subject! to!
audit! by! the! COA,! the! fact! that! it! received! a! special!

charter! from! the! government,! that! its! governing! board!


are!appointed!by!the!Government,!and!that!its!purpose!
are! of! public! character,! for! they! pertain! to! the!
educational,! civic! and! social! development! of! the! youth!
which! constitute! a! very! substantial! and! important! part!
of!the!nation,!it!is!not!a!public!corporation!in!the!same!
sense! that! municipal! corporation! or! local! governments!
are! public! corporation! since! its! does! not! govern! a!
portion! of! the! state,! but! it! also! does! not! have!
proprietary! functions! in! the! same! sense! that! the!
functions! or! activities! of! government<owned! or!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! doctrine! that! employees! of! GOCCs,! whether! created! by!

Section! 31! of! Corporation! Code! (Liability! of! Directors!


and! Officers)! is! applicable! to! corporations! which! have!
been! organized! by! special! charters! since! Section! 4! of!
Corporation!Code!renders!the!provisions!supplementary!
applicable! to! all! corporations,! including! those! with!
special! or! individual! charters,! such! as! cooperatives!
organized! under! P.D.! 269,! so! long! as! those! provisions!
are! not! inconsistent! with! such! charters.! Benguet!
Electric!Cooperative,!Inc.!v.!NLRC,!209!SCRA!55!(1992).!

A! corporation! is! created! by! operation! of! law! under! the!


Corporation! Code! while! a! government! corporation! is! normally!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
created!by!special!law!referred!to!often!as!a!charter.!Bliss!Dev.!
Corp.!Employees!Union!v.!Calleja,!237!SCRA!271!(1994).!
o The! test! to! determine! whether! a! corporation! is!
government!owned!or!controlled,!or!private!in!nature!is!
simple.!Is!it!created!by!its!own!charter!for!the!exercise!
of! a! public! function,! or! by! incorporation! under! the!
general! corporation! law?! Those! with! special! charters!
are! government! corporations! subject! to! its! provisions,!
and!its!employees!are!under!the!jurisdiction!of!the!Civil!
Service! Commission,! and! are! compulsory! members! of!
the!GSIS.!Camparedondo!v.!NLRC,!312!SCRA!47!(1999)!

civil! service! laws! and! anti<graft! laws.! Feliciano! v.! COA,!


419!SCRA!363!(2004).!

separate!from!that!of!the!government,!and!the!intervention!in!a!
transaction!of!the!Office!of!the!President!through!the!Executive!
Secretary! does! not! change! the! independent! existence! of! a!
government! entity! as! it! deals! with! another! government! entity.!
PUP!v.!Court!of!Appeals,!368!SCRA!691!(2001).!
While! public! benefit! and! public! welfare! may! be!
attributable! to! the! operation! of! the! Bases! Conversion!
and!Development!Authority!(BCDA),!yet!it!is!certain!that!
the! functions! it! performs! are! basically! proprietary! in!
naturethe! promotion! of! economic! and! social!
development! of! Central! Luzon,! particularly,! and! the!
countrys! goal! for! enhancement.! Therefore,! the! rule!
that!prescription!does!not!run!against!the!State!will!not!
apply! to! BCDA,! it! being! said! that! when! title! of! the!
Republic! has! been! divested,! its! grantees,! although!
artificial! bodies! of! its! own! creation,! are! in! the! same!

When!the!law!vests!in!a!government!instrumentality!corporate!
powers,! the! instrumentality! does! not! become! necessarily! a!
corporation.! A! government<owned! or! controlled! corporation!
must! be! organized! as! a! stock! or! non<stock! corporation.! The!
MIAA! is! not! a! government<owned! or! controlled! corporation!
because! it! is! not! constituted! of! capital! divided! into! shares! of!
stock,!and!neither!is!it!a!nonstock!corporation!because!it!has!no!
members.! MIAA! is! a! government! instrumentality! vested! with!
corporate! powers! to! perform! efficiently! its! government!

Beyond!cavil,!a!GOCC!has!a!personality!of!its!own,!distinct!and!

category! as! ordinary! persons.! Shipside! Inc.! v.! Court! of!


Appeals,!352!SCRA!334!(2001).!
Water! districts! can! validly! exists! as! corporate! entities!
under! PD! 198,! and! provided! they! are! government<
owned! or! controlled,! and! their! board! of! directors! and!
other! personnel! are! government! employees! subject! to!

functions.! Manila! International! Airport! Authority! v.! Court! of!


Appeals,!495!SCRA!591!(2006).!

Although!PNRC!has!its!special!charter,!the!Chairman!of!PNRC!is!
not!appointed!by!the!President!or!any!member!of!the!Executive!
Branch.! Although! Camporendodo! v.! NLRC! had! ruled! that! PNRC!
is! GOCC! because! it! is! constituted! under! a! special! charter,! it!
failed! to! consider! the! definition! of! a! GOCC! as! provided! under!
Section! 2(13)! of! the! Administrative! Code! of! 1987,! which!
requires! that! a! GOCC! to! be! such! must! be! owned! by! the!
government,! and! in! the! case! of! a! stock! corporation,! at! least! a!
majority!of!its!capital!stock!must!be!owned!by!the!government.!
Liban!v.!Gordon,!593!SCRA!68!(2009).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
!
II.*As*to*Place*of*Incorporation:*
*
A.*Domestic*Corporation*

A! domestic! corporation! is! one! incorporated! under! laws! of! the!


Philippines.!!

*
B.*Foreign*Corporation*(Section*123)*
*

conditions!and!restrictions!it!deems!fit!to!impose.!1!
*
III.*As*to*Purpose*of*Incorporation:*
*
A.*Municipal*Corporation*

are!organized!for!the!purpose!of!serving!the!communal!welfare!
of!the!inhabitants!of!a!town!or!a!city.!
o Municipal! corporations! are! incorporated! to! continue!
the! existence! and! the! legal! status! of! the! town! or! city!
without! regard! to! the! coming! and! going! people! who!
inhabit!it.!!

The!objectives!of!the!statutory!provisions!prescribing!conditions!

them!by!subjecting!them!to!the!courts!of!the!state.!

Municipal! corporations,! with! respect! to! its! governmental!


functions,! i.e.,! political! subdivisions! created! by! the! legislature!
for! the! convenient! administration! of! the! government,! or! some!
aspect! of! the! government,! of! the! inhabitants! of! a! defined!
district,! remain! entirely! subject! to! the! legislative! control.! They!

Code* and* a* certificate* of* authority* from* the* appropriate* government*


agency.*(n)*

under!which!foreign!corporations!are!permitted!to!do!business!
in!a!state!other!than!that!of!their!creation:!
(a) To! place! them! on! an! equality! with! domestic!
corporations;!
(b) To! subject! them! to! inspection! so! that! their! condition!
may!be!known;!and!!
(c) To!protect!the!residents!of!the!state!doing!business!with!

Public! corporations! therefore! are! essentially! municipal!


corporation,! or! those! formed! and! organized! by! the! State! for!
government,! such! as! the! barangay,! municipality,! city! and! the!
province.! In! essence,! a! public! corporation,! being! a! mini<state,!
possesses! all! three! great! powers! of! government:! police! power,!
power!of!eminent!domain,!and!power!of!taxation.2!

Section*123.*Definition*and*rights*of*foreign*corporations.*
For* the* purposes* of* this* Code,* a* foreign* corporation* is* one* formed,*
organized* or* existing* under* any* laws* other* than* those* of* the*
Philippines*and*whose*laws*allow*Filipino*citizens*and*corporations*to*
do* business* in* its* own* country* or* state.* It* shall* have* the* right* to*
transact* business* in* the* Philippines* after* it* shall* have* obtained* a*
license* to* transact* business* in* this* country* in* accordance* with* this*

The! state,! in! extending! to! foreign! corporations! the! privilege! of!
doing! business,! may! impose! such! privilege! with! whatever!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

They! are! not! operated! for! profit,! and! the! operating!


expenses! are! levied! against! the! members! through! the!
process!of!taxation.!

A!municipal!corporation!possesses!a!two<fold!character:!!
(a) Public! or! governmental! character,! in! which! it! acts! as!
agent!of!the!state!and!exercises,!by!delegation!a!part!of!
the!sovereignty!of!the!state.!
! In! their! governmental! character,! the! municipal!
corporations!are!possessed!of!and!can!exercise!
the! so<called! police! power! of! the! state,! by!
delegation!of!the!legislature.!!
! They!may!levy!taxes!for!certain!purposes!under!
limitations!imposed!by!the!law!making!body.!
(b) A!private,!corporate!or!proprietary!character,!in!which!it!
acts!as!a!private!or!business!corporation,!and!stands!for!
the! community! in! the! administration! of! its! local! affairs!
wholly!beyond!the!sphere!of!public!purposes!for!which!
its!governmental!powers!are!conferred.!
! In! their! proprietary! character,! municipal!
corporations!are!empowered!to!mortgage!their!
property!under!certain!limitations.!!
! They!can!sue!and!be!sued,!enter!into!contracts!
and! may! be! held! liable! for! damages! for! torts!
committed! by! them! in! the! exercise! of! their!
corporate!functions!as!distinguished!from!public!
and!governmental!functions.!

*
B.*Religious*Corporation*(Sections*109*and*116)*
*

Section*109.*Classes*of*religious*corporations.**
Religious* corporations* may* be* incorporated* by* one* or* more* persons.*
Such* corporations* may* be* classified* into* corporations* sole* and*
religious*societies.*
*
Religious* corporations* shall* be* governed* by* this* Chapter* and* by* the*
general* provisions* on* nonPstock* corporations* insofar* as* they* may* be*
applicable.*(n)*
*
Section*116.*Religious*societies.**
Any* religious* society* or* religious* order,* or* any* diocese,* synod,* or*
district* organization* of* any* religious* denomination,* sect* or* church,*
unless*forbidden*by*the*constitution,*rules,*regulations,*or*discipline*of*
the*religious*denomination,*sect*or*church*of*which*it*is*a*part,*or*by*
competent* authority,* may,* upon* written* consent* and/or* by* an*
affirmative* vote* at* a* meeting* called* for* the* purpose* of* at* least* twoP
thirds* (2/3)* of* its* membership,* incorporate* for* the* administration* of*
its* temporalities* or* for* the* management* of* its* affairs,* properties* and*
estate*by*filing*with*the*Securities*and*Exchange*Commission,*articles*
of* incorporation* verified* by* the* affidavit* of* the* presiding* elder,*
secretary,* or* clerk* or* other* member* of* such* religious* society* or*
religious* order,* or* diocese,* synod,* or* district* organization* of* the*
religious*denomination,*sect*or*church,*setting*forth*the*following:*
*
1.* That* the* religious* society* or* religious* order,* or* diocese,* synod,* or*
district* organization* is* a* religious* organization* of* a* religious*
denomination,*sect*or*church;*
*
2.* That* at* least* twoPthirds* (2/3)* of* its* membership* have* given* their*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
written* consent* or* have* voted* to* incorporate,* at* a* duly* convened*
meeting*of*the*body;*
*
3.*That*the*incorporation*of*the*religious*society*or*religious*order,*or*
diocese,* synod,* or* district* organization* desiring* to* incorporate* is* not*
forbidden* by* competent* authority* or* by* the* constitution,* rules,*
regulations*or*discipline*of*the*religious*denomination,*sect,*or*church*
of*which*it*forms*a*part;*
*
4.* That* the* religious* society* or* religious* order,* or* diocese,* synod,* or*
district*organization*desires*to*incorporate*for*the*administration*of*its*
affairs,*properties*and*estate;*

deprived! of! his! sacred! office,! is! without! remedy! in! the! civil!
courts.!Long!v.!Basa,!366!SCRA!113!(2001).!
*
C.* Educational* Corporations* (Sections* 106,* 107* and* 108;* Section* 25,*
B.P.*Blg.*232)**
*
Section*106.*Incorporation.**
Educational*corporations*shall*be*governed*by*special*laws*and*by*the*
general*provisions*of*this*Code.*(n)*
*
Section*107.*PrePrequisites*to*incorporation.**
Except* upon* favorable* recommendation* of* the* Ministry* of* Education*

*
5.* The* place* where* the* principal* office* of* the* corporation* is* to* be*
established* and* located,* which* place* must* be* within* the* Philippines;*
and*
*
6.*The*names,*nationalities,*and*residences*of*the*trustees*elected*by*
the* religious* society* or* religious* order,* or* the* diocese,* synod,* or*

and*Culture,*the*Securities*and*Exchange*Commission*shall*not*accept*
or* approve* the* articles* of* incorporation* and* byPlaws* of* any*
educational*institution.*(168a)*
*
Section*108.*Board*of*trustees.*
Trustees* of* educational* institutions* organized* as* nonPstock*
corporations*shall*not*be*less*than*five*(5)*nor*more*than*fifteen*(15):*

district*organization*to*serve*for*the*first*year*or*such*other*period*as*
may* be* prescribed* by* the* laws* of* the* religious* society* or* religious*
order,* or* of* the* diocese,* synod,* or* district* organization,* the* board* of*
trustees*to*be*not*less*than*five*(5)*nor*more*than*fifteen*(15).*(160a)*

Provided,*however,*That*the*number*of*trustees*shall*be*in*multiples*
of*five*(5).*
*
Unless* otherwise* provided* in* the* articles* of* incorporation* on* the* byP
laws,*the*board*of*trustees*of*incorporated*schools,*colleges,*or*other*
institutions* of* learning* shall,* as* soon* as* organized,* so* classify*
themselves* that* the* term* of* office* of* onePfifth* (1/5)* of* their* number*
shall* expire* every* year.* Trustees* thereafter* elected* to* fill* vacancies,*

Since!in!matters!purely!ecclesiastical!the!decisions!of!the!proper!
church! tribunals! are! conclusive! upon! the! civil! tribunals,! then! a!
church! member! who! is! expelled! from! the! membership! by! the!
church! authorities,! or! a! priest! or! minister! who! is! by! them!

occurring* before* the* expiration* of* a* particular* term,* shall* hold* office*
only* for* the* unexpired* period.* Trustees* elected* thereafter* to* fill*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
vacancies* caused* by* expiration* of* term* shall* hold* office* for* five* (5)*
years.* A* majority* of* the* trustees* shall* constitute* a* quorum* for* the*
transaction*of*business.*The*powers*and*authority*of*trustees*shall*be*
defined*in*the*byPlaws.*
*

A.*Aggregate*Corporation*
*
B.*Corporation*Sole*(Sections*110*to*115)*
*

For*institutions*organized*as*stock*corporations,*the*number*and*term*
of*directors*shall*be*governed*by*the*provisions*on*stock*corporations.*
(169a)*

For*the*purpose*of*administering*and*managing,*as*trustee,*the*affairs,*
property* and* temporalities* of* any* religious* denomination,* sect* or*
church,* a* corporation* sole* may* be* formed* by* the* chief* archbishop,*
bishop,*priest,*minister,*rabbi*or*other*presiding*elder*of*such*religious*
denomination,*sect*or*church.*(154a)*
*
Section*111.*Articles*of*incorporation.*

*
BATASANG*PAMBANSA*BILANG*232*
Section*25.*Establishment*of*Schools*
All* schools* shall* be* established* in* accordance* with* law.* The*
establishment*of*new*national*schools*and*the*conversion*of*existing*
schools*from*elementary*to*national*secondary*or*tertiary*schools*shall*
be* by* law:* Provided,* That* any* private* school* proposed* to* be*
established*must*incorporate*as*an*nonPstock*educational*corporation*
in* accordance* with* the* provisions* of* the* Corporation* Code* of* the*
Philippines.* This* requirement* to* incorporate* may* be* waived* in* the*
case*of*familyPadministered*prePschool*institutions.*
*
Government*assistance*to*such*schools*for*educational*programs*shall*
be*used*exclusively*for*that*purpose.*
*
D.*Charitable,*Scientific*or*Vocational*Corporations*
*
E.**Business*Corporation*
*
IV.*As*to*Number*of*Members:*
*

Section*110.*Corporation*sole.**

In* order* to* become* a* corporation* sole,* the* chief* archbishop,* bishop,*
priest,*minister,*rabbi*or*presiding*elder*of*any*religious*denomination,*
sect*or*church*must*file*with*the*Securities*and*Exchange*Commission*
articles*of*incorporation*setting*forth*the*following:*
*
1.* That* he* is* the* chief* archbishop,* bishop,* priest,* minister,* rabbi* or*
presiding*elder*of*his*religious*denomination,*sect*or*church*and*that*
he*desires*to*become*a*corporation*sole;*
*
2.* That* the* rules,* regulations* and* discipline* of* his* religious*
denomination,*sect*or*church*are*not*inconsistent*with*his*becoming*a*
corporation*sole*and*do*not*forbid*it;*
*
3.* That* as* such* chief* archbishop,* bishop,* priest,* minister,* rabbi* or*
presiding* elder,* he* is* charged* with* the* administration* of* the*
temporalities* and* the* management* of* the* affairs,* estate* and*
properties* of* his* religious* denomination,* sect* or* church* within* his*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
territorial*jurisdiction,*describing*such*territorial*jurisdiction;*
*
4.* The* manner* in* which* any* vacancy* occurring* in* the* office* of* chief*
archbishop,* bishop,* priest,* minister,* rabbi* of* presiding* elder* is*
required*to*be*filled,*according*to*the*rules,*regulations*or*discipline*of*

benefit* of* his* religious* denomination,* sect* or* church,* including*


hospitals,* schools,* colleges,* orphan* asylums,* parsonages* and*
cemeteries*thereof.*(n)*
*
Section*113.*Acquisition*and*alienation*of*property.**

the*religious*denomination,*sect*or*church*to*which*he*belongs;*and*
*
5.*The*place*where*the*principal*office*of*the*corporation*sole*is*to*be*
established*and*located,*which*place*must*be*within*the*Philippines.*
The* articles* of* incorporation* may* include* any* other* provision* not*
contrary*to*law*for*the*regulation*of*the*affairs*of*the*corporation.*(n)*
*

Any*corporation*sole*may*purchase*and*hold*real*estate*and*personal*
property* for* its* church,* charitable,* benevolent* or* educational*
purposes,* and* may* receive* bequests* or* gifts* for* such* purposes.* Such*
corporation*may*sell*or*mortgage*real*property*held*by*it*by*obtaining*
an* order* for* that* purpose* from* the* Court* of* First* Instance* of* the*
province* where* the* property* is* situated* upon* proof* made* to* the*
satisfaction*of*the*court*that*notice*of*the*application*for*leave*to*sell*

Section*112.*Submission*of*the*articles*of*incorporation.*
The*articles*of*incorporation*must*be*verified,*before*filing,*by*affidavit*
or*affirmation*of*the*chief*archbishop,*bishop,*priest,*minister,*rabbi*or*
presiding*elder,*as*the*case*may*be,*and*accompanied*by*a*copy*of*the*
commission,* certificate* of* election* or* letter* of* appointment* of* such*
chief*archbishop,*bishop,*priest,*minister,*rabbi*or*presiding*elder,*duly*
certified*to*be*correct*by*any*notary*public.*

or* mortgage* has* been* given* by* publication* or* otherwise* in* such*
manner*and*for*such*time*as*said*court*may*have*directed,*and*that*it*
is* to* the* interest* of* the* corporation* that* leave* to* sell* or* mortgage*
should*be*granted.*The*application*for*leave*to*sell*or*mortgage*must*
be* made* by* petition,* duly* verified,* by* the* chief* archbishop,* bishop,*
priest,*minister,*rabbi*or*presiding*elder*acting*as*corporation*sole,*and*
may*be*opposed*by*any*member*of*the*religious*denomination,*sect*or*

*
From*and*after*the*filing*with*the*Securities*and*Exchange*Commission*
of*the*said*articles*of*incorporation,*verified*by*affidavit*or*affirmation,*
and* accompanied* by* the* documents* mentioned* in* the* preceding*
paragraph,* such* chief* archbishop,* bishop,* priest,* minister,* rabbi* or*
presiding*elder*shall*become*a*corporation*sole*and*all*temporalities,*
estate* and* properties* of* the* religious* denomination,* sect* or* church*
theretofore*administered*or*managed*by*him*as*such*chief*archbishop,*

church* represented* by* the* corporation* sole:* Provided,* That* in* cases*
where* the* rules,* regulations* and* discipline* of* the* religious*
denomination,* sect* or* church,* religious* society* or* order* concerned*
represented* by* such* corporation* sole* regulate* the* method* of*
acquiring,* holding,* selling* and* mortgaging* real* estate* and* personal*
property,* such* rules,* regulations* and* discipline* shall* control,* and* the*
intervention*of*the*courts*shall*not*be*necessary.*(159a)*
*

bishop,*priest,*minister,*rabbi*or*presiding*elder*shall*be*held*in*trust*
by* him* as* a* corporation* sole,* for* the* use,* purpose,* behalf* and* sole*

Section*114.*Filling*of*vacancies.*
The* successors* in* office* of* any* chief* archbishop,* bishop,* priest,*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
minister,* rabbi* or* presiding* elder* in* a* corporation* sole* shall* become*
the*corporation*sole*on*their*accession*to*office*and*shall*be*permitted*
to* transact* business* as* such* on* the* filing* with* the* Securities* and*
Exchange* Commission* of* a* copy* of* their* commission,* certificate* of*
election,*or*letters*of*appointment,*duly*certified*by*any*notary*public.*

4.* The* names* and* addresses* of* the* persons*who*are*to*supervise*the*


winding*up*of*the*affairs*of*the*corporation.*
*
Upon*approval*of*such*declaration*of*dissolution*by*the*Securities*and*
Exchange* Commission,* the* corporation* shall* cease* to* carry* on* its*

During* any* vacancy* in* the* office* of* chief* archbishop,* bishop,* priest,*
minister,* rabbi* or* presiding* elder* of* any* religious* denomination,* sect*
or* church* incorporated* as* a* corporation* sole,* the* person* or* persons*
authorized* and* empowered* by* the* rules,* regulations* or* discipline* of*
the* religious* denomination,* sect* or* church* represented* by* the*
corporation* sole* to* administer* the* temporalities* and* manage* the*
affairs,* estate* and* properties* of* the* corporation* sole* during* the*

operations*except*for*the*purpose*of*winding*up*its*affairs.*(n)*
*

existed! prior! to! the! Republic.! But! if! any! nationality! is! to! be!
accorded! to! a! corporation! sole! it! is! to! be! judged! from! the!
nationality! of! the! majority! of! the! faithfuls! thereof.! Roman!
Catholic!Apostolic!Administrator!of!Davao,!Inc.!v.!LRC!and!the!
Register!of!Deeds!of!Davao!City,!102!Phil.!596![1957]).!

vacancy*shall*exercise*all*the*powers*and*authority*of*the*corporation*
sole*during*such*vacancy.*(158a)*
*
Section*115.*Dissolution.**
A*corporation*sole*may*be*dissolved*and*its*affairs*settled*voluntarily*
by* submitting* to* the* Securities* and* Exchange* Commission* a* verified*
declaration*of*dissolution.*
*
The*declaration*of*dissolution*shall*set*forth:**
*
1.*The*name*of*the*corporation;*
*
2.*The*reason*for*dissolution*and*winding*up;*
*
3.* The* authorization* for* the* dissolution* of* the* corporation* by* the*
particular*religious*denomination,*sect*or*church;*
*

A! corporation! sole! has! no! nationality! being! an! institution! that!

The!doctrine!in!Republic!v.!Villanueva,!114!SCRA!875!(1982)!and!
Republic! v.! Iglesia! ni! Cristo,! 127! SCRA! 687! (1984),! that! a!
corporation! sole! is! disqualified! to! acquire/hold! alienable! lands!
of! the! public! domain,! because! of! the! constitutional! prohibition!
qualifying! only! individuals! to! acquire! land! and! the! provision!
under!the!Public!Land!Act!which!applied!only!to!Filipino!citizens!
or!natural!persons,!has!been!expressly!overturned!in!Director!of!
Land!v.!IAC,!146!SCRA!509!(1986).1!

!
V.*As*to*Legal*Status:*
*
A.*De*Jure*Corporation*

A! corporation! has! de! jure! existence! if! there! is! a! full! or!
substantial!compliance!with!the!requirements!of!an!existing!law!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Overturning! affirmed! in! Republic! v.! Iglesia! ni! Cristo,! 127! SCRA! 687! (1984);!
Republic!v.!IAC,!168!SCRA!165!(1988).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
permitting! organization! of! such! corporation! as! by! proper!
articles! of! incorporation! duly! executed! and! filed.! Generally,! its!
juridical! personality! is! not! subject! to! attack! in! the! courts! from!
any!source.1!
*
B.*De*Facto*Corporation*(Section*20)**

irregularities.!!
o It! would! be! a! rare! case! where! a! third! persons! dealing!
with! a! corporation! is! prejudiced! by! its! recognition! as! a!
separate! entity! despite! some! minor! defects! in! its!
incorporation.! It! would! be! unfair! to! allow! a! claimant!
against! the! alleged! corporation! to! insist! on! the!
individual!liability!of!innocent!investors!merely!because!
of!some!minor!flaws!in!its!incorporation.2!

*
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.*
*
Elements*of*de*facto*corporation:*
1. Valid!law!under!which!it!is!incorporated!
2. Attempt! in! good! faith! to! incorporate! (must! get! certificate! of!
incorporation)!
3. Assumption! of! corporate! powers! (must! at! least! elect! Board! of!
Directors)!

A!corporation!has!de#facto!existence!where!there!is!a!bona#fide!
attempt! to! incorporate,! colorable! compliance! with! the! statute!
and!user!of!corporate!powers.!

An! inquiry! to! the! de# facto# existence! of! a! corporation! may! be!
made!by!the!Solicitor!General!in!a!quo#warranto!proceeding.!

The!doctrine!grew!out!of!the!necessity!to!promote!the!security!
of! business! transactions! and! to! eliminate! quibbling! over!

*
C.*Corporation*by*Estoppel*(Section*21)*
*
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.*
*
One*who*assumes*an*obligation*to*an*ostensible*corporation*as*such,*
cannot*resist*performance*thereof*on*the*ground*that*there*was*in*fact*
no*corporation.*
*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Although!an!entity!may!not!be!a!corporation!de#jure!or!de#facto,!
a! particular! person! or! party! may,! by! estoppel! or! admission,! be!
precluded! from! denying! its! corporate! existence.! A! group! of!
persons! may! assume! to! do! business! as! a! corporation! without!
having! gone! far! enough! to! give! a! de# facto! existence! to! the!
entity.!

Under! certain! circumstances! and! for! certain! purposes,! either!


the! group! or! third! persons! contracting! with! the! purported!
corporation!may!be!estopped!to!deny!its!corporate!status.!

The!corporation!by!estoppel!doctrine!is!founded!on!procedural!
convenience,! avoidance! of! inquiries! into! irrelevant! formalities,!
and!fairness!to!all!parties!concerned.1!

*
D.*Corporation*by*Prescription!!

The! Roman! Catholic! Church! is! a! corporation! by! prescription,!


with! acknowledged! juridical! personality! inasmuch! as! it! is! an!
institution! which! "antedated! by! almost! a! thousand! years! any!
other! personality! in! Europe,! and! which! existed! when! Grecian!
eloquence! still! flourished! in! Antioch! and! when! idols! were! still!
worshipped!in!the!temple!of!Mecca."2!

into* shares* and* are* authorized* to* distribute* to* the* holders* of* such*
shares* dividends* or* allotments* of* the* surplus* profits* on* the* basis* of*
the*shares*held*are*stock*corporations.*All*other*corporations*are*nonP
stock*corporations.*
*
Section*5.*Corporators*and*incorporators,*stockholders*and*members.**
Corporators* are* those* who* compose* a* corporation,* whether* as*
stockholders* or* as* members.* Incorporators* are* those* stockholders* or*
members* mentioned* in* the* articles* of* incorporation* as* originally*
forming* and* composing* the* corporation* and* who* are* signatories*
thereof.*
*
Corporators* in* a* stock* corporation* are* called* stockholders* or*
shareholders.* Corporators* in* a* nonPstock* corporation* are* called*
members.*
*
A.*Stock*Corporation*

If!not!authorized!by!the!by<laws!to!distribute!the!dividends,!but!
it!is!a!stock!corporation,!can!a!corporation!distribute!dividends!
to!its!shareholders?!The!answer!seems!to!be!in!the!affirmative,!
since! one! of! the! expressed! powers! granted! to! stock!
corporations! under! Section! 43! of! the! Corporation! Code! is! the!
power!to!declared!dividends.!

*
VI.*As*to*Existence*of*Shares*(Sections*3*and*5):**
*
Section*3.*Classes*of*corporations.**
Corporations* formed* or* organized* under* this* Code* may* be* stock* or*
nonPstock*corporations.*Corporations*which*have*capital*stock*divided*

!
B.*NonPStock*Corporation*
*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Section*87.*Definition.**
For*the*purposes*of*this*Code,*a*nonPstock*corporation*is*one*where*no*
part* of* its* income* is* distributable* as* dividends* to* its* members,*

!Villanueva,!C.!L.,!&!Villanueva<Tiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
Barlin#v.#Ramirez,!7!Phil.!41!(1906).!!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!
trustees,* or* officers,* subject* to* the* provisions* of* this* Code* on*
dissolution:* Provided,* That* any* profit* which* a* nonPstock* corporation*
may*obtain*as*an*incident*to*its*operations*shall,*whenever*necessary*
or*proper,*be*used*for*the*furtherance*of*the*purpose*or*purposes*for*
which*the*corporation*was*organized,*subject*to*the*provisions*of*this*
Title.*
*
The* provisions* governing* stock* corporation,* when* pertinent,* shall* be*
applicable* to* nonP* stock* corporations,* except* as* may* be* covered* by*
specific*provisions*of*this*Title.*(n)*
*
Section*88.*Purposes.*
NonPstock* corporations* may* be* formed* or* organized* for* charitable,*
religious,* educational,* professional,* cultural,* fraternal,* literary,*
scientific,*social,*civic*service,*or*similar*purposes,*like*trade,*industry,*
agricultural*and*like*chambers,*or*any*combination*thereof,*subject*to*
the*special*provisions*of*this*Title*governing*particular*classes*of*nonP
stock*corporations.*(n)*
*

Thus,!every!time!there!is!an!express!authorization!in!either!the!
articles! of! incorporation! or! by<laws! of! a! corporation! to! declare!
dividends,!it!is!undoubtedly!a!stock!corporation.!When!there!is!
no! express! prohibition! not! to! distribute! dividends,! it! would!
seem!that!the!corporation!is!a!non<stock!corporation.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

SEPARATE'JURIDICAL'PERSONALITY'AND'DOCTRINE'
OF'PIERCING'THE'VEIL'OF'CORPORATE'FICTION'

composing! it! as! well! as! from! any! other! legal! entity! to! which! it!
may!be!related,!with!the!following!consequences:!
1. The! first! consequence! of! the! doctrine! of! legal! entity! of! the!
separate! personality! of! the! corporation! may! not! be! made! to!
answer! for! acts! and! liabilities! of! its! stockholders! or! those! of!
legal! entities! to! which! it! may! be! connected! or! vice! versa.!

'
I.' MAIN' DOCTRINE:! A! Corporation! Has! A! Personality! Separate! and!
Distinct!from!its!Stockholders!or!Members.!(Sec.!2;!Article!44,!Civil!Code)!
!

General'Credit'Corp.'v.'Alsons'Dev.'and'Investment'Corp.,'513'
SCRA'225'(2007);1!
2. This! separate! and! distinct! personality! is,! however,! merely! a!
fiction!created!by!law!for!conveyance!and!to!promote!the!ends!
of!justice.'LBP'v.'Court'of'Appeals,'364'SCRA'375'(2001).2'

Section'2.'Corporation'defined.'
A'corporation'is'an'artificial'being'created'by'operation'of'law,'having'
the' right' of' succession' and' the' powers,' attributes' and' properties'
expressly'authorized'by'law'or'incident'to'its'existence.'
'
CIVIL'CODE'

!
B.'Applications:'

Article'44.''
The'following'are'juridical'persons:'
'
1.'The'State'and'its'political'subdivisions;'
'
2.' Other' corporations,' institutions' and' entities' for' public' interest' or'
purpose,'created'by'law;'their'personality'begins'as'soon'as'they'have'
been'constituted'according'to'law;'
'
3.' Corporations,' partnerships' and' associations' for' private' interest' or'
purpose' to' which' the' law' grants' a' juridical' personality,' separate' and'
distinct'from'that'of'each'shareholder,'partner'or'member.'(35a)'
'
A.'Importance'of'Main'Doctrine:'

A! corporation,! upon! coming! into! existence,! is! invested! by! law!


with! a! personality! separate! and! distinct! from! those! persons!

1. Majority'Equity'Ownership'and'Interlocking'Directorship:'

Mere! ownership! by! a! single! stockholder! or! by! another!


corporation! of! all! or! nearly! all! of! the! capital! stock! of! a!
corporation!is!not!of!itself!sufficient!ground!for!disregarding!the!
separate! corporate! personality.! Sunio' v.' NLRC' ,' 127' SCRA' 390'
(1984).3'

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!McLeod!v.!NLRC,!512!SCRA!222!(2007);!Uy!v.!Villanueva,!526!SCRA!73!(2007);!
Pantranco!Employees!Association!(PEAY!PTGWO)!v.!NLRC,!581!SCRA!598!(2009);!
Shrimp!Specialists,!Inc.!v.!FujiYTriumph!AgriYIndustrial!Corp.,!608!SCRA!1!(2009).!
2
!Martinez!v.!Court!of!Appeals,!438!SCRA!139!(2004);!Prudential!Bank!v.!Alviar,!
464!SCRA!353!(2005);!EDSA!ShangriYLa!Hotel!and!Resorts,!Inc.!v.!BF!Corp.,!556!
SCRA!25!(2008);!Siain!Enterprises,!Inc!v.!Cupertino!Realty!Corp.,!590!SCRA!435!
(2009).!
3
!Asionics!Philippines,!Inc.!v.!NLRC,!290!SCRA!164!(1998);!Francisco!v.!Mejia,!362!
SCRA!738!(2001);!Matutina!Integrated!Wood!Products,!Inc.!v.!CA,!263!SCRA!490!
(1996);!Manila!Hotel!Corp.!v.!NLRC,!343!SCRA!1!(2000);!Secosa!v.!Heirs!of!Erwin!
Suarez!Fancisco,!433!SCRA!273!(2004);!EDSA!ShangriYLa!Hotel!and!Resorts,!Inc.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

entities.!Cruz'v.'Dalisay,'152'SCRA'487'(1987);'Booc'v.'Bantuas,'
354'SCRA'279'(2001).'

Ownership! of! a! majority! of! capital! stock! and! the! fact! that!
majority! of! directors! of! a! corporation! are! the! directors! of!
another! corporation! creates! no! employerYemployee!
relationship!with!the!latters!employees.!DBP'v.'NLRC,'186'SCRA'
841'(1990).1!

Having!

interlocking!

directors,!

corporate!

officers!

personal! liability! of! its! officers! ! a! corporate! officer! and! his!


spouse! cannot! be! made! personally! liable! under! a! trust! receipt!
where! he! entered! into! and! signed! the! contract! clearly! in! his!
official!capacity.!Intestate'Estate'of'Alexander'T.'Ty'v.'Court'of'
Appeals,'356'SCRA'61'(2001).4!

and!

shareholders! is! not! enough! justification! to! pierce! the! veil! of!
corporate! fiction! in! the! absence! of! fraud! or! other! public! policy!
considerations.'Velarde'v.'Lopez,'419'SCRA'422'(2004).2'
2. Being'Corporate'Officer:'

Being! an! officer! or! stockholder! of! a! corporation! does! not! by!

Fancisco,'433'SCRA'273'(2004).'

The! mere! fact! that! one! is! President! does! not! render! the!

When! the! compulsory! counterclaim! filed! against! corporate!


officers! for! their! alleged! fraudulent! act! indicate! that! such!
corporate!officers!are!indispensable!parties!in!the!litigation,!the!
original!inclusion!of!the!corporation!in!the!suit!does!not!thereby!
allow!the!denial!of!a!specific!counterYclaim!being!filed!to!make!
the! corporate! officers! personally! liable.! A! corporation! has! a!
legal! personality! entirely! separate! and! distinct! from! that! of! its!
officers!and!cannot!act!for!and!on!their!behalf,!without!being!so!
authorized.! Lafarge' Cement' Phils.,' Inc.' v.' Continental' Cement'
Corp.,'443'SCRA'522'(2004).'

property! he! owns! the! property! of! the! corporation,! since! the!
president,! as! an! individual,! and! the! corporation! are! separate!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
v.! BF! Corp.,! 556! SCRA! 25! (2008);! Pantranco! Employees! Association! (PEAY
PTGWO)!v.!NLRC,!581!SCRA!598!(2009).!
1
!Also!Suldao!v.!Cimech!System!Construction,!Inc.,!506!SCRA!256!(2006);!Union!
Bank!of!the!Philippines!v.!Ong,!491!SCRA!581!(2006);!Shrimp!Specialists,!Inc.!v.!
FujiYTriumph!AgriYIndustrial!Corp.,!608!SCRA!1!(2009);!Hacienda!Luisita,!Inc.!v.!
Presidential!Agrarian!Reform!Council,!660!SCRA!525!(2011).!
2
!Also!Sesbreno!v.!Court!of!Appeals,!222!SCRA!466!(1993);!G!Holdings,!Inc.!v.!
National!Mines!and!Allied!Workers!Union!Local,!103!(NAMAWU),!604!SCRA!73!
(2010).!
3
!Bautista!v.!Auto!Plus!Traders,!Inc.!561!SCRA!223!(2008);!Prisma!Construction!&!
Dev.!Corp.!v.!Menchavez,!614!SCRA!590!(2010).!

The! President! of! the! corporation! which! becomes! liable! for! the!
accident! caused! by! its! truck! driver! cannot! be! held! solidarily!
liable!for!the!judgment!obligation!arising!from!quasiYdelict,!since!
the! fact! alone! of! being! President! is! not! sufficient! to! hold! him!
solidarily! liable! for! the! liabilities! adjudged! against! the!
corporation!and!its!employee.' Secosa' v.' Heirs' of' Erwin' Suarez'

itself!make!ones!property!also!that!of!the!corporation,!and!viceY
versa,!for!they!are!separate!entities,!and!that!shareholders!who!
are! officers! are! in! no! legal! sense! the! owners! of! corporate!
property! which! is! owned! by! the! corporation! as! a! distinct! legal!
person.! Good' Earth' Emporium,' Inc.' v.' CA,' 194' SCRA' 544'
(1991).3!

It!is!hornbook!law!that!corporate!personality!is!a!shield!against!

3. Dealings'Between'Corporation'and'Stockholders:'

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4

!Consolidated!Bank!and!Trust!Corp.!v.!Court!of!Appeals,!356!SCRA!671!(2001).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

The!fact!that!the!majority!stockholder!had!used!his!own!money!
to!pay!part!of!the!loan!of!the!corporation!cannot!be!used!as!the!

basis! to! pierce:! It! is! understandable! that! a! shareholder! would!


want!to!help!his!corporation!and!in!the!process,!assure!that!his!
stakes! in! the! said! corporation! are! secured.! LBP' v.' Court' of'
Appeals,'364'SCRA'375'(2001).'

corporation!they!represent.!Crisologo' v.' People,' 686' SCRA' 782'


(2012);'Heirs'of'Fe'Tan'Uy'v.'International'Exchange'Bank,'690'
SCRA'519'(2013).'
o Corporate!debt!or!credit!is!not!the!debt!or!credit!of!the!
stockholder! nor! is! the! stockholder's! debt! or! credit! that!
of!the!corporation.!Traders'Royal'Bank'v.'CA,'177'SCRA'
789'(1989).'
o A! corporation! has! no! legal! standing! to! file! a! suit! for!

Use!of!a!controlling!stockholders!initials!in!the!corporate!name!
is! not! sufficient! reason! to! pierce,! since! by! that! practice! alone!
does!it!mean!that!the!said!corporation!is!merely!a!dummy!of!the!
individual!stockholder,!provided!such!act!is!lawful.!LBP'v.'Court'
of'Appeals,'364'SCRA'375'(2001).'

Just! because! two! foreign! companies! came! from! the! same!

country!and!closely!worked!together!on!certain!projects!would!
the!conclusion!arise!that!one!was!the!conduit!of!the!other,!thus!
piercing! the! veil! of! corporate! fiction.! Marubeni' Corp.' v.' Lirag,'
362'SCRA'620'(2001).'
4. On'the'Properties'of'the'Corporation:''

stockholders.! Manila' Gas' Corp.' v.' Collector' of' Internal'


Revenue,'62'Phil.'895'(1936).'
6. Obligations'and'Debts:'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! majority! stockholder! cannot! be! held! personality! liable! for!


the! attorneys! fees! charged! by! a! lawyer! for! representing! the!
corporation.!Laperal'Dev.'Corp.'v.'CA,'223'SCRA'261'(1993).'

Appeals,'363'SCRA'307'(2001).'
5. On'Privileges'Enjoyed:''
The!tax!exemption!clause!in!the!charter!of!a!corporation!cannot!
be! extended! to! nor! enjoyed! even! by! the! controlling!

recovery! of! certain! parcels! of! land! owned! by! its!


members! in! their! individual! capacity,! even! when! the!
corporation! is! organized! for! the! benefit! of! the!
members.!Sulo'ng'Bayan'v.'Araneta,'Inc.,'72'SCRA'347'
(1976).'
Stockholders! have! no! personality! to! intervene! in! a!
collection! case! covering! the! loans! of! the! corporation!
since!the!interest!of!shareholders!in!corporate!property!
is!purely!inchoate.!Saw'v.'CA,'195'SCRA'740'(1991);'and'
vice[versa' Francisco' Motors' Corp.' v.' Court' of' Appeals,'
309'SCRA'72'(1999).'

The!creation!by!DBP!as!the!mother!company!of!the!three!mining!
corporations!to!manage!and!operate!the!assets!acquired!in!the!
foreclosure! sale! lest! they! deteriorate! from! nonYuse! and! lose!
their!value,!does!not!indicate!fraud!or!wrongdoing!and!will!not!
constitute!application!of!the! piercing!doctrine.!DBP' v.' Court' of'

Debts! incurred! by! directors,! officers,! and! employees! acting! as!


corporate! agents! are! not! their! direct! liability! but! of! the!

The! obligations! of! a! stockholder! in! one! corporation! cannot! be!


offset! from! the! obligation! of! the! stockholder! in! a! second!
corporation,! since! the! corporation! has! a! separate! juridical!
personality.!CKH' Industrial' and' Dev.' Corp' v.' Court' of' Appeals,'
272'SCRA'333'(1997).!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

A! corporate! defendant! against! whom! a! writ! of! possession! has!


been!issued,!cannot!use!the!fact!that!it!has!obtained!controlling!
equities! in! the! corporate! plaintiffs! to! suspend! enforcement! of!
the!writ,!for!they!are!separate!juridical!persons,!and!thus!their!
separate!business!and!proprietary!interests!remain.!Silverio,' Jr.'
v.'Filipino'Business'Consultants,'Inc.,'466'SCRA'584'(2005).'

!
II.'PIERCING'THE'VEIL'OF'CORPORATE'FICTION:'
'
A.' Source' of' Incantation:' U.S.' v.' Milwaukee' Refrigerator' Transit' Co.,'
142'Fed.'247'(1905).'
'
U.S.'v.'Milwaukee'Refrigerator'Transit'Co.'
'
Facts:' The!Elkins!Act!was!enacted!to!prohibit!railroads!from!giving!and!
receiving! of! unlawful! rebates.! After! the! enactment! of! the! said! Act,!
officers! of! a! brewing! company,! who! were! also! its! controlling!
stockholders,! organized! a! transit! company! named! Milwaukee!
Refrigerator!Transit,!et!al!and!became!its!officers!and!the!owners!of!all!
of!its!stock.!On!behalf!of!the!brewing!company,!the!officers!contracted!
with! the! transit! company! to! make! all! the! shipments! for! the! brewing!
company.!The!transit!company!contracted!for!shipments!with!interstate!
carriers,!where!they!would!only!pay!it!from!1/10!to!1/8!of!the!published!

corporation.'
'
Held:'NO.!The!transit!company!was!created!with!intent!to!evade!the!law!
making! the! transit! company! as! a! mere! alter! ego! of! the! brewing!
corporation,! both! being! substantially! identical! in! interest! and! control,!
and! the! brewing! company! the! ultimate! beneficiary.! It! clearly! appears!
that!the!shipper!practically!controls!the!transit!company,!and!this!shows!
a!sufficient!identity!of!interest!among!the!shareholders!of!both.!
!
Doctrine:'As!a!general!rule,!a!corporation!will!be!looked!upon!as!a!legal!
entity,! until! sufficient! reason! to! the! contrary! appears.! An! exception! to!
this! is! when! the! notion! of! legal! entity! is! used! to! defeat! public!
convenience,! justify! wrong,! protect! fraud,! defend! crime,! the! law! will!
regard! the! corporation! as! an! association! of! persons;! and,! where! one!
corporation! was! organized! and! is! owned! by! the! officers! and!
stockholders! of! another,! making! their! interests! identical,! they! may! be!
treated!as!identical!when!the!interests!of!justice!require!it.!
!

rate,! for! the! transportation,! supposedly! as! a! commission! for! obtaining!


the! business,! but! was! known! really! a! rebate! for! the! benefit! of! the!
brewing!company.!
'
Issue:' Whether! or! not! a! corporation! organized! and! owned! by! the!
officers! and! stockholders! of! another! is! in! fact! an! independent!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

As! a! general! rule,! a! corporation! will! be! looked! upon! as! a! legal!
entity,! unless! and! until! sufficient! reason! to! the! contrary!
appears.!When!the!notion!of!legal!entity!is!used!to!defeat!public!
convenience,!justify!wrong,!protect!fraud,!or!defend!crime,!the!
law! will! regard! the! corporation! as! an! association! of! persons.!
Also,!the!corporate!entity!may!be!disregarded!in!the!interest!of!
justice! in! such! cases! as! fraud! that! may! work! inequities! among!
members!of!the!corporation!internally,!involving!no!rights!of!the!
public!or!third!persons.!In!both!instances,!there!must!have!been!
fraud!and!proof!of!it.!For!the!separate!juridical!personality!of!a!
corporation!to!be!disregarded,!the!wrongYdoing!must!be!clearly!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
and!convincingly!established.!It!cannot!be!presumed.!Suldao' v.'
Cimech'System'Construction,'Inc.,'506'SCRA'256'(2006).'

The! legal! fiction! of! separate! corporate! existence! is! not! at! all!
times! invincible! and! the! same! may! be! pierced! when! employed!
as!a!means!to!perpetrate!a!fraud,!confuse!legitimate!issues,!or!
used! as! a! vehicle! to! promote! unfair! objectives! or! to! shield! an!
otherwise! blatant! violation! of! the! prohibition! against! forumY!
shopping.! While! it! is! settled! that! the! piercing! of! the! corporate!
veil! has! to! be! done! with! caution,! this! corporate! fiction! may! be!
disregarded! when! necessary! in! the! interest! of! justice.! Rovels'
Enterprises,'Inc.'v.'Ocampo,'391'SCRA'176'(2002).'
o The! notion! of! corporate! entity! will! be! pierced! or!
disregarded! and! the! individuals! composing! it! will! be!
treated!as!identical!if!the!corporate!entity!is!being!used!
as! a! cloak! or! cover! for! fraud! or! illegality;! as! a!
justification!for!a!wrong;!or!as!an!alter!ego,!an!adjunct,!
or! a! business! conduit! for! the! sole! benefit! of! the!
stockholders.!Gochan'v.'Young,'354'SCRA'207'(2001).1!

!
B.'Objectives'and'Effect'of'the'Application'of'the'Doctrine'

Under! the! doctrine! of! piercing! the! veil! of! corporate! fiction,!
the! courts! look! at! the! corporation! as! a! mere! collection! of!
individuals!or!an!aggregation!of!persons!undertaking!business!as!
a! group,! disregarding! the! separate! juridical! personality! of! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

corporation!unifying!the!group.!Traders'Royal'Bank'v.'Court'of'
Appeals,'269'SCRA'15'(1997).2!
!

!DBP!v.!Court!of!Appeals,!357!SCRA!626,!358!SCRA!501,!363!SCRA!307!(2001);!
Velarde!v.!Lopez,!419!SCRA!422!(2004);!R!&!E!Transport,!Inc.!v.!Latag,!422!SCRA!
698! (2004);.Secosa! v.! Heirs! of! Erwin! Suarez! Fancisco,! 433! SCRA! 273! (2004);!
Martinez!v.!Court!of!Appeals,!438!SCRA!139!(2004);!McLeod!v.!NLRC,!512!SCRA!
222! (2007);! Siain! Enterprises,! Inc! v.! Cupertino! Realty! Corp.,! 590! SCRA! 435!
(2009).!

Traders'Royal'Bank'v.'Court'of'Appeals'
'
Facts:'Central!Bank!Certificates!of!Indebtedness!(CBCIs)!under!the!name!
of! Filriters! were! transferred! by! the! Filriters! Senior! Vice! President! for!
Treasury! Alfredo! Banaria! to! PhilFinance! (a! company! which! also! owns!
90%! of! Filriters).! PhilFinace! then! entered! into! a! repurchase! agreement!
with!the!petitioner!Traders!Royal!Bank!(TRB)!wherein!PhilFinace!sold!the!
CBCIs! to! TRB! then! pay! installments! to! buy! back! the! same.! PhilFinance!
defaulted!in!its!payments!and!hence,!forfeited!the!CBCIs!in!favor!of!TRB.!
TRB!sought!to!transfer!the!CBCIs!(still!under!the!name!of!Filriters)!under!
its! name! but! was! refused! by! the! Central! Bank.! Filriters! interposed! the!
defense! of! invalidity! of! the! initial! transfer! to! Philfinance.! The! initial!
transfer! was! done! by! Banaria! without! any! board! resolution! knowledge!
or! consent! of! the! Board! of! Directors,! and! without! authority! from! the!
Insurance!Commissioner.!
!
Filriters!!!Philfinance!!!Traders!Royal!Bank!
'
Issue:'Whether!or!not!the!veil!of!corporate!entity!must!be!pierce!on!the!
basis! of! the! allegation! that! Filriters! was! 90%! owned! by! PhilFinace! and!
that!although!they!are!separate!entities!on!paper,!they!have!used!their!
corporate!fiction!to!defraud!TRB.!
'
Held:'NO.!The!corporate!separateness!between!Filriters!and!Philfinance!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!Pantranco!Employees!Association!(PEAYPTGWO)!v.!NLRC,!581!SCRA!598!(2009)!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
remains,! despite! the! petitioners! insistence! on! the! contrary.! For! one,!
other!than!the!allegation!that!Filriters!is!90%!owned!by!Philfinance,!and!
the!identity!of!one!shall!be!maintained!as!to!the!other,!there!is!nothing!
else! which! could! lead! the! court! under! circumstance! to! disregard! their!
corporate!personalities.!The!fact!that!Filfinance!owns!majority!shares!in!

which!the!law!aims!to!protect!by!this!doctrine.!(Victim!Standing)!
!

case!is!to!remove!the!barrier!between!the!corporation!from!the!
persons! comprising! it! to! thwart! the! fraudulent! and! illegal!
schemes!of!those!who!use!the!corporate!personality!as!a!shield!
for! undertaking! certain! proscribed! activities.! However,! in! the!
case! at! bar,! instead! of! holding! certain! individuals! or! person!

Filriters!is!not!by!itself!a!ground!to!disregard!the!independent!corporate!
status!of!Filriters.!
!
In!the!case!at!bar,!there!is!sufficient!showing!that!the!petitioner!was!not!
defrauded!at!all!when!it!acquired!the!subject!certificate!of!indebtedness!
from! Philfinance.! On! its! face! the! subject! certificates! states! that! it! is!
registered! in! the! name! of! Filriters.! This! should! have! put! the! petitioner!
on! notice,! and! prompted! it! to! inquire! from! Filriters! as! to! Philfinance's!
title!over!the!same!or!its!authority!to!assign!the!certificate.!As!it!is,!there!
is!no!showing!to!the!effect!that!petitioner!had!any!dealings!whatsoever!
with! Filriters,! nor! did! it! make! inquiries! as! to! the! ownership! of! the!
certificate.! Because! the! transfer! of! the! CBCIs! from! Filriters! to!
PhilFinance! was! fictitious,! PhilFinance! had! no! title! to! convey! to! TRB.!
Consequently,! the! title! of! Filriters! over! the! CBCIs! must! be! upheld! over!
the!interest!claimed!by!TRB.!
'
Doctrine:' This! doctrine! may! not! be! employed! by! a! corporation! to! be!
able! to! complete! its! claims! against! another! corporation,! and! cannot!
therefore! be! employed! by! the! claimant! who! does! not! interpose! to! be!
the!victim!of!any!wrong!or!fraud.!In!order!to!pierce!the!veil!of!corporate!
entity,!the!court!must!be!sure!that!the!corporate!fiction!was!misused!to!
such! an! extent! that! injustice,! fraud! or! crime! was! committed! upon!
another,!disregarding,!thus,!his,!her,!or!its!rights.!It!is!the!protection!of!
the!interests!of!innocent!third!persons!dealing!with!the!corporate!entity!

The!rationale!behind!piercing!a!corporations!identity!in!a!given!

responsible!for!an!alleged!corporate!act,!the!situation!has!been!
reversed.! It! is! the! petitioner! as! a! corporation! which! is! being!
ordered!to!answer!for!the!personal!liability!of!certain!individual!
directors,! officers! and! incorporators! concerned.! Hence,! it!
appears! to! us! that! the! doctrine! has! been! turned! upside! down!
because!of!its!erroneous!invocation.!Francisco'Motors'Corp.'v.'
CA,'309'SCRA'72'(1999).'
'
Francisco'Motors'Corp.'v.'CA'
'
Facts:' Francisco! Motors! Corporation! (FMC)! filed! a! complaint! against!
Spouses! Gregorio! and! Librada! Manuel! to! recover! a! sum! of! money!
representing!the!balance!of!the!jeep!body!purchased,!and!an!additional!
sum! representing! the! unpaid! balance! on! the! cost! of! repair! of! the!
vehicle.! Spouses! Manuel! interposed! a! counterclaim! for! unpaid! legal!
services!by!Gregorio!Manuel,!which!was!not!paid!by!the!incorporators,!
directors! and! officers! of! the! FMC.! Manuel! alleges! that! he! represented!
members!of!the!Francisco!family!in!the!intestate!estate!proceedings!of!
the! late! Benita! Trinidad.! However,! after! the! termination! of! the!
proceedings,! his! services! were! not! paid.! Said! family! members,! he! said,!
were!also!incorporators,!directors!and!officers!of!petitioner.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
individual! hid! his! assets! in! a! corporation.! ! See! Emilio' Cano'
Enterprises'v.'CIR,'13'SCRA'291'(1965).'

'
Issue:! Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
fiction! can! be! applied! to! hold! the! company! liable! for! unpaid! legal!
services!rendered!to!its!incorporators!in!an!intestate!proceeding.'
'

business! enterprises! are! owned,! conducted! and! controlled! by!


the! same! parties,! both! law! and! equity! will,! when! necessary! to!
protect!the!rights!of!third!parties,!disregard!the!legal!fiction!that!
two! corporations! are! distinct! entitled! and! treat! them! as!
identical! or! one! and! the! same.! General' Credit' Corp.' v.' Alsons'
Dev.'and'Investment'Corp.,'513'SCRA'225'(2007).1!
o The! attempt! to! make! the! security! agencies! appear! as!

Held:' NO.! Gregorio! Manuel! his! services! were! solicited! as! counsel! for!
members! of! the! Francisco! family! to! represent! them! in! the! intestate!
proceedings!over!Benita!Trinidads!estate.!These!estate!proceedings!did!
not!involve!any!business!of!FMC.!His!move!to!recover!unpaid!legal!fees!
through!a!counterclaim!against!Francisco!Motors!Corporation,!to!offset!
the!unpaid!balance!of!the!purchase!and!repair!of!a!jeep!body!could!only!
result! from! an! obvious! misapprehension! that! FMCs! corporate! assets!

two! separate! entities,! when! in! reality! they! were! but!


one,!was!a!devise!to!defeat!the!law![i.e.,!in!this!case!to!
avoid! liabilities! under! labor! laws]! and! should! not! be!
permitted.!Enriquez' Security' Services,' Inc.' v.' Cabotaje,'
496'SCRA'169'(2006).'
1. Recent' Attempts' to' Narrow' the' Objectives' for' Availing' of'
Piercing:''

could! be! used! to! answer! for! the! liabilities! of! its! individual! directors,!
officers,! and! incorporators.! Such! result! if! permitted! could! easily!
prejudice! the! corporation.! Whatever! obligation! said! incorporators,!
directors!and!officers!of!the!corporation!had!incurred,!it!was!incurred!in!
their!personal!capacity.!In!conclusion,!FMC!cannot!be!held!responsible.!
'
Doctrine:' The! rationale! behind! piercing! a! corporations! identity! in! a!

given! case! is! to! remove! the! barrier! between! the! corporation! from! the!
persons! comprising! it! to! thwart! the! fraudulent! and! illegal! schemes! of!
those! who! use! the! corporate! personality! as! a! shield! for! undertaking!
certain!proscribed!activities.!
'

Atty.! Hofilea! !! Can! there! be! a! situation! whereby! the! Court!


will!allow!a!case!against!an!individual!to!be!a!basis!for!reaching!
the!corporations!assets?!YES.!But!not!on!the!sole!basis!that!you!
personally! dont! have! properties! to! satisfy! your! personal!
obligations.! There! may! conceivably! be! situations! wherein! the!

Another! formulation! of! this! doctrine! is! that! when! two! (2)!

Piercing!is!not!allowed!unless!the!remedy!sought!is!to!make!the!
officer! or! another! corporation! pecuniarily! liable! for! corporate!
debts.! Indophil' Textile' Mill' Workers' Union[PTGWO' v.' Calica,'
205'SCRA'697'(1992).'
'
Indophil'Textile'Mill'Workers'Union[PTGWO'v.'Calica'

'
Facts:' Indophil! Textile! and! the! petitioner! executed! a! Collective!
Bargaining! Agreement! (CBA)! whereby! the! petitioner! is! the! exclusive!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Marques!v.!Far!East!Bank!and!Trust!Co.,!639!SCRA!312!(2011);!Sarona!v.!NLRC,!
663!SCRA!394!(2012);!PNB!v.!Hydro!Resources!Contractors!Corp.,!693!SCRA!294!
(2013).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
bargaining! agent! of! all! the! rankYandYfile! employees! of! Indophil! Textile!
Mills,! Incorporated.! Later,! Indophil! Acrylic! Manufacturing! Corporation!
was!formed,!and!its!employees!also!unionized!and!executed!a!CBA!with!
the!said!corporation.!In!1990!or!a!year!after!the!workers!of!Acrylic!have!
been! unionized! and! a! CBA! executed,! the! petitioner! union! claimed! that!
the!plant!facilities!built!and!set!up!by!Acrylic!should!be!considered!as!an!
extension!or!expansion!of!the!facilities!of!respondent!Company.!
'
Issue:' Whether! or! not! Indophil! Acrylic! is! but! an! extension! of! Indophil!
Textile,! and! as! such! the! workers! of! Indophil! Acrylic! may! be! considered!
as!part!of!the!bargaining!unit!of!Indophil!Textile.!
'
Held:'NO.!The!fact!that!the!businesses!of!private!respondent!and!Acrylic!
are!related,!that!some!of!the!employees!of!the!private!respondent!are!
the! same! persons! manning! and! providing! for! auxiliary! services! to! the!
units! of! Acrylic,! and! that! the! physical! plants,! offices! and! facilities! are!
situated!in!the!same!compound,!it!is!our!considered!opinion!that!these!
facts! are! not! sufficient! to! justify! the! piercing! of! the! corporate! veil! of!
Acrylic.! Hence,! Indophil! Acrylic! not! being! an! extension! or! expansion! of!
private! respondent,! Indophil! Textile,! the! rankY! andYfile! employees! of!
Acrylic! should! not! be! recognized! as! the! bargaining! representative! of!
private!respondent.!
'
Doctrine:' We! already! emphasized! that! "the! legal! corporate! entity! is!
disregarded! only! if! it! is! sought! to! hold! the! officers! and! stockholders!
directly! liable! for! a! corporate! debt! or! obligation."! In! the! instant! case,!
petitioner!does!not!seek!to!impose!a!claim!against!the!members!of!the!
Acrylic.!
'

BUT' SEE:! La' Campana' Coffee' Factory' v.' Kaisahan' ng'


Manggagawa,'93'Phil.'160'(1953).'

'
La'Campana'Coffee'Factory'v.'Kaisahan'ng'Manggagawa'
'
Facts:' Tan! Tong! and! his! family! own! two! corporations,! namely:! La!
Campana! Gaugau! Packing! (The! Gaugau! Corporation)! and! La! Campana!
Coffee! Factory,! Inc.! (The! Coffee! Corporation).! Both! are! located! in! the!
same!office!in!Espana.!In!1951,!the!laborers!of!the!two!corporations!of!
Tan!Tong!formed!a!labor!union!named!as!Kaisahan!ng!Manggagawa!sa!
La! Compana! (The! Kaisahan).! The! 66! members! of! which! are! under! one!
payroll!of!the!two!corporations.!A!dispute!arose!between!Tan!Tong!and!
Kaisahan!when!they!could!not!agree!concerning!increased!wages!under!
the!corporate!bargaining!agreement,!and!this!was!given!to!the!Court!of!
Industrial!Relations.!!
!
Tan! Tong! now! pushes! for! the! dismissal! of! the! case! in! the! Court! of!
Industrial!Relations!for!lack!of!jurisdiction.!The!claim!that!the!number!of!
workers! in! the! La! Campana! Coffee! Factory! is! only! 14! and! the! Court! of!
Industrial!Relations!requires!that!to!have!jurisdiction!over!a!dispute,!an!
organization!must!have!at!least!31!members.!
'
Issue:' Whether! or! not! La! Campana! Gaugau! Packing! (The! Gaugau!
Corporation)! and! La! Campana! Coffee! Factory,! Inc.! (The! Coffee!
Corporation)!are!one!and!the!same,!and!therefore!the!dispute!would!be!
within!the!jurisdiction!of!the!Court!of!Industrial!Relations.!
'
Held:'YES.!It!has!been!proven!that!the!corporations!owned!by!Tan!Tong!
are!merely!one!and!the!same.!This!is!for!the!fact!that!they!are!based!in!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

only! one! office,! its! goods! (gaugau! and! coffee)! are! stored! in! one! place!
and!in!one!warehouse,!delivery!trucks!indicate!deliveries!of!both!gaugau!
and! coffee.! It! is! also! stated! that! the! employees! receive! their! salaries!
from! only! one! payroll! and! from! one! Natividad! Garcia,! Tan! Tongs!
secretary.! In! this! case,! the! court! treats! the! two! companies! as! one.!

Facts:! Felix!Gochan!and!Sons!Realty!Corporation!(FGSRC)!was!registered!
under! the! SEC! on! June,! 1951! with! Felix! Gochan,! Sr.! as! one! of! the!
incorporators.!Felixs!daughter,!Alice,!is!the!mother!of!the!respondents.!
Upon!the!death!of!Alice!and!later!her!husband,!the!certificates!were!still!
under!the!name!of!John!Young!Sr.,!not!their!children.!Four!years!later,!

Therefore,!the!count!of!employees!should!be!taken!as!a!whole,!which!is!
66,! very! well! above! the! minimum! number! required! for! the! Court! of!
Industrial!Relations!to!acquire!jurisdiction.'
'
Doctrine:'The!law!treats!two!corporations!as!one,!in!a!case!filed!against!
them,! when! they! have! only! one! management,! set! of! shareholders,!
office,!and!payroll.'

the!Uys!and!the!Youngs!filed!a!complaint!against!the!directors!of!FGSRC!
with! the! SEC! alleging! that! the! directors! were! using! the! corporation! for!
fraudulent!purposes.!FGSRC!apparently!sold!some!of!its!real!properties!
to! 2! other! corporations,! with! these! corporations! having! the! same!
directors!as!FGSRC.'
'
Issue:'Whether!or!not!a!derivative!may!be!brought!by!the!Uys!in!behalf!

'

of!the!corporation!against!the!FGSRC!directors.!
'
Held:'YES.!As!the!complaint!already!avers!that!the!corporation!suffered!
damage! as! a! result! of! the! action! of! the! directors,! the! derivative! suit!
could! prosper.! The! complainants! need! not! be! stockholders! of! the! two!
other! corporations! in! order! to! make! them! parties! to! the! case.! On! the!
complaint,! it! was! stated! that! the! directors! were! using! those! 2! other!

2. Applicable'to'Third^Parties:'

That!respondents!are!not!stockholders!of!the!sister!corporations!
does!not!make!them!nonYparties!to!this!case,!since!it!is!alleged!
that!the!sister!corporations!are!mere!alter!egos!of!the!directorsY
petitioners,! and! that! the! sister! corporations! acquired! the!
properties! sought! to! be! reconveyed! to! FGSRC! in! violation! of!
directorsYpetitioners! fiduciary! duty! to! FGSRC.! The! notion! of!
corporate!entity!will!be!pierced!and!the!individuals!composing!it!
will!be!treated!as!identical!if!the!corporate!entity!is!being!used!
as!a!cloak!or!cover!for!fraud!or!illegality;!as!a!justification!for!a!
wrong;!or!as!an!alter!ego,!an!adjunct,!or!a!business!conduit!for!
the! sole! benefit! of! the! stockholders.! Gochan' v.' Young,' 354'
SCRA'207'(2001).'

'
Gochan'v.'Young'
'

corporations! as! alterYegos,! and! the! Uys! and! Youngs! wanted! the! lands!
sold! to! these! two! corporations! reconveyed! in! the! name! of! FGSRC.!The!
other!two!corporations!to!whom!the!properties!were!being!transferred!
have! the! same! stockholders,! and! the! fact! that! they! were! not!
stockholders! in! those! companies! cannot! prevent! Uy! and! Young! from!
suing! them! since! FGSRC! and! those! two! companies! would! be! one! the!
same.! There! was! an! intent! to! defraud! Uy! and! Young! by! hiding! the!
properties!in!the!other!corporations.!
!
Doctrine:' The!notion!of!corporate!entity!will!be!pierced!or!disregarded!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
and!the!individuals!composing!it!will!be!treated!as!identical!if,!as!alleged!
here,!the!corporate!entity!is!being!used!as!a!cloak!or!cover!for!fraud!or!
illegality;!as!a!justification!for!a!wrong;!or!as!an!alterYego,!an!adjunct,!or!
a!business!conduit!for!the!sole!benefit!of!the!stockholders.!
!
C.' Nature' of' the' Piercing' Doctrine' as' an' Equitable' Remedy:! The!
doctrine! of! piercing! the! corporate! veil! is! an! equitable! doctrine!
developed! to! address! situations! where! the! separate! corporate!
personality! of! a! corporation! is! abused! or! used! for! wrongful! purposes.!
PNB'v.'Ritratto'Group,'Inc.,'362'SCRA'216'(2001).!CONSEQUENTLY:!
'
PNB'v.'Ritratto'Group,'Inc.'
'
Facts:!PNB!International!Finance!Ltd.!(PNBYIFL),!a!subsidiary!company!of!
PNB,! extended! credit! to! Ritratto! and! secured! by! the! real! estate!
mortgages! on! four! parcels! of! land.! Since! there! was! default,! PNBYIFL!
(thru! PNB! as! its! attorneyYinYfact)! foreclosed! the! properties! and! were!
subject!to!public!auction.!Ritratto!Group!filed!a!complaint!for!injunction!
against!PNB!claiming!that!that!PNB!is!merely!an!alter!ego!or!a!business!
conduit!of!PNBYIFL!that!is!why!it!is!being!impleaded!in!the!case.!!
'
Issue:'Whether!or!not!PNB!is!a!mere!alterYego!of!PNBYIFL.!
'
Held:' NO.! The! contract! questioned! is! one! entered! into! between!
respondent!and!PNBYIFL.!PNB!is!a!mere!attorneyYinY!fact!for!the!PNBYIFL!

!
In! any! case,! the! parentYsubsidiary! relationship! between! PNB! and! PNBY
IFL!is!not!the!significant!legal!relationship!involved!in!this!case!since!the!
petitioner!was!not!sued!as!the!parent!company!of!PNBYIFL.!Rather,!the!
petitioner!was!sued!because!it!acted!as!an!attorneyYinYfact!of!PNBYIFL!in!
initiating! the! foreclosure! proceedings.! A! suit! against! an! agent! cannot!
without!compelling!reasons!be!considered!a!suit!against!the!principal.!
'
Doctrine:'The!Circumstance!rendering!the!subsidiary!an!instrumentality.!
It!is!manifestly!impossible!to!catalogue!the!infinite!variations!of!fact!that!
can! arise! but! there! are! certain! common! circumstances! which! are!
important! and! which,! if! present! in! the! proper! combination,! are!
controlling.!These!are!as!follows:!
1. The!parent!corporation!owns!all!or!most!of!the!capital!stock!of!
the!subsidiary.!
2. The!parent!and!subsidiary!corporations!have!common!directors!
or!officers.!
3. The!parent!corporation!finances!the!subsidiary.!
4. The!parent!corporation!subscribes!to!all!the!capital!stock!of!the!

with!full!power!and!authority!to!foreclose!on!the!properties!mortgaged!
to!secure!their!loan!obligations!with!PNBYIFL.!In!other!words,!PNB!is!an!
agent! with! limited! authority! and! specific! duties.! It! is! not! privy! to! the!
loan!contracts!entered!into!by!respondents!and!PNBYIFL.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

5.
6.
7.

8.

subsidiary!or!otherwise!causes!its!incorporation.!!
The!subsidiary!has!grossly!inadequate!capital.!
The!parent!corporation!pays!the!salaries!and!other!expenses!or!
losses!of!the!subsidiary.!
The! subsidiary! has! substantially! no! business! except! with! the!
parent!corporation!or!no!assets!except!those!conveyed!to!or!by!
the!parent!corporation.!
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!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
responsibility!is!referred!to!as!the!parent!corporations!own.!
9. The!parent!corporation!uses!the!property!of!the!subsidiary!as!its!
own.!
10. The! directors! or! executives! of! the! subsidiary! do! not! act!
independently! in! the! interest! of! the! subsidiary! but! take! their!

!
Rivera! then! approached! Modesto! Cervantes,! president! of! Bormaheco,!
and!bought!a!Caterpillar!Tractor,!which!was!also!the!chattel!mortgage!in!
favor!of!Bormaheco.!This!sale!was!secured!by!Insurance!Corporation!of!
the! Philippines,! and! reYinsured! by! an! Agreement! of! Counter! Guaranty!

orders!from!the!parent!corporation.!
11. The! formal! legal! requirements! of! the! subsidiary! are! not!
observed.!

whereby!as!security!for!the!bond!given!by!ICP,!the!Castillos!mortgaged!
to!ICP!the!4!parcels!of!land.!!
!
The!4!parcels!of!land!were!foreclosed!by!ICP!for!violation!of!the!terms!
and!conditions!of!the!Counter!Guaranty.!These!were!then!sold!by!ICP!to!
Phil.! Machinery! Parts! Manufacturing! Co.! (also! owned! by! Modesto!
Cervantes)! who! then! sent! a! letter! to! Mauricia! Castillo! asking! her! to!

!
NOTE:'
Atty.! Hofilea! !! What! level! of! control! is! necessary! for! a! subsidiary!
company!to!be!considered!as!a!mere!alterYego!of!the!parent!company?!
Domination.!The!parent!corporation!must!dominate!the!subsidiary,!and!
it!must!be!the!reason!behind!the!latters!incorporation.!
!
1. It' is' a' Remedy' of' Last' Resort:! Piercing! the! corporate! veil! is!
remedy!of!last!resort!and!is!not!available!when!other!remedies!
are! still! available.' Umali' v.' Court' of' Appeals,' 189' SCRA' 529'
(1990).'
'
Umali'v.'Court'of'Appeals'
'
Facts:'The!Castillo!family!owns!a!parcel!of!land!in!Lucena!City!which!was!
mortgaged! to! the! Development! Bank! of! the! Philippines.! For! failing! to!
pay,!the!property!was!about!to!be!foreclosed.!Santiago!Rivera,!nephew!
of!Mauricia!Castillo,!proposed!that!the!4!lots!adjacent!to!the!mortgaged!
property! be! converted! into! a! subdivision! to! raise! funds! to! redeem! the!
mortgaged! lot.! Thus,! Castillo! and! Rivera! executed! an! agreement!
whereby!Rivera!would!pay!the!Castillos!for!the!development!project.!!

vacate!the!property.!The!heirs!of!the!late!Felipe!Castillo!filed!an!action!
for!annulment!of!title!before!the!CFI!of!Quezon!contending!that!all!the!
aforementioned! transactions! are! void! for! being! entered! into! in! fraud!
and! without! the! consent! and! approval! of! the! CFI! of! Quezon! before!
whom!the!administration!proceedings!was!proceeding.!
'
Issue:' Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
entity!should!be!applied!against!the!respondentYCorporations.!
'
Held:' NO.! In! the! case! at! bar,! petitioners! seek! to! pierce! the! veil! of!
corporate! entity! of! Bormaheco,! ICP! and! PM! Parts,! alleging! that! these!
corporations!employed!fraud!in!causing!the!foreclosure!and!subsequent!
sale! of! the! real! properties! belonging! to! petitioners.! While! we! do! not!
discount! the! possibility! of! the! existence! of! fraud! in! the! foreclosure!
proceeding,! neither! are! we! inclined! to! apply! the! doctrine! invoked! by!
petitioners!in!granting!the!relief!sought.!Petitioners!are!merely!seeking!
the!declaration!of!the!nullity!of!the!foreclosure!sale,!which!relief!may!be!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
3. Piercing' Doctrine' Not' Applicable' to' Theorizing' or' to'
Advance/Create' New' Rights' or' Interest:' Piercing!of!the!veil!of!
corporate! fiction! is! not! allowed! when! it! is! resorted! under! a!
theory!of!coYownership!to!justify!continued!use!and!possession!
by! stockholders! of! corporate! properties.! Boyer[Roxas' v.' Court'
of'Appeals,'211'SCRA'470'(1992).'

obtained! without! having! to! disregard! the! aforesaid! corporate! fiction!


attaching! to! respondent! corporations.! Secondly,! petitioners! failed! to!
establish! by! clear! and! convincing! evidence! that! private! respondents!
were! purposely! formed! and! operated,! and! thereafter! transacted! with!
petitioners,!with!the!sole!intention!of!defrauding!the!latter.!
!
It!must!be!noted!that!Modesto!N.!Cervantes!served!as!ViceYPresident!of!
Bormaheco! and,! later,! as! President! of! PM! Parts.! On! this! fact! alone,! it!
cannot!be!said!that!PM!Parts!had!no!knowledge!of!the!aforesaid!several!
transactions!executed!between!Bormaheco!and!petitioners.!
!
Doctrine:' The! mere! fact! that! the! businesses! of! two! or! more!
corporations!are!interrelated!is!not!a!justification!for!disregarding!their!
separate! personalities,! absent! sufficient! showing! that! the! corporate!
entity! was! purposely! used! as! a! shield! to! defraud! creditors! and! third!
persons!of!their!rights.'
'

It! is! essential! that! the! corporate! fiction! is! the! very! means! by!

which!to!defeat!public!convenience,!justify!wrong,!protect!fraud!
and!defend!crime.!Jardine''Davies,'Inc.'v.'JRB'Realty,'Inc.,'463'
SCRA'555,'565'(2005).'
2. Can' Be' Availed^of' Only' to' Prevent' Fraud:! Piercing! doctrine! is!
meant!to!prevent!fraud,!and!cannot!be!employed!when!the!net!

Boyer[Roxas'v.'Court'of'Appeals'
'
Facts:'Two!separate!ejectment!cases!were!filed!against!Guillermo!Roxas!
and!Rebecca!BoyerYRoxas,!respectively!by!the!Heirs!of!Eugenia!V.!Roxas,!
Incorporated.!The!corporation!alleges!that!both!Guillermo!and!Rebecca!
are!occupying!houses!within!a!resort!owned!by!the!corporation,!and!this!
was!only!tolerated.!!
!
In! their! answers,! Guillermo! and! Rebecca! alleged! that! they! were! also!
heirs!of!Eugenia!Roxas!and!as!such!they!have!a!share!in!the!resort,!and!
that!they!have!the!right!to!stay!in!the!property.!According!to!them,!the!
veil! of! corporate! fiction! must! be! pierced! insofar! as! it! does! not! allow!

The!theory!of!corporate!entity!was!not!meant!to!promote!unfair!

them!to!possess!the!properties!owned!by!the!corporation!even!though!
they! are! coYowners! of! the! corporation! and! its! properties! along! with!
other!stockholders.!
'
Issue:'Whether!or!not!the!corporate!veil!must!be!pierced.!
'
Held:' NO.! The! fact! that! the! corporation! was! incorporated! with! the!
estate!left!by!Eugenia!Roxas!as!capital,!and!that!Rebecca/Guillermo,!as!

objectives!or!otherwise,!nor!to!shield!them.!Villanueva'v.'Adre,'
172'SCRA'876'(1989).'

heirs! of! Roxas,! were! stockholders! of! the! company,! do! not! justify! the!
piercing! of! the! corporate! veil.! Even! if! the! former! manager! of! the!

result! would! be! to! perpetrate! fraud! or! a! wrong.' Gregorio'


Araneta,' Inc.' v.' Tuason' de' Paterno' and' Vidal,' 91' Phil.' 786'
(1952).'

'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Corporation! granted! permission! to! Rebecca/Guillermo! to! possess! the!
property,!the!Corporation!is!not!forever!bound!by!this!permission.!In!the!
absence! of! any! contract! between! the! Corporation! and!
Rebecca/Guillermo! regarding! the! length! of! their! possession,! the! Board!
may! at! any! time! revoke! the! permission! through! a! board! resolution,! as!

amended!real!estate!mortgage.!
'
Issue:! Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
fiction!was!properly!applied.'
'

what!they!did!in!the!case!at!bar.!
'
Doctrine:' Properties! registered! in! the! name! of! the! corporation! are!
owned!by!it!as!an!entity!separate!and!distinct!from!its!members.'While!
shares! of! stock! constitute! personal! property,! they! do! not! represent!
property!of!the!corporation.!A!stockholder!is!not!entitled!to!possess!any!
definite!property!of!the!corporation.!

Held:' YES.! Cupertino! presented! overwhelming! evidence! that! Siain!


Enterprises! Inc.,! and! its! affiliate! corporations! (Yuyek! and! Siain!
Transport)! had! received! the! proceeds! of! the! loan! which! was! the!
consideration! of! the! amended! real! estate! mortgage.! Moreover,! it! was!
established! in! the! lower! courts! that! Siain! Enterprises! and! Yuyek! had! a!
common!set!of!incorporators,!stockholders!and!board!of!directors,!the!
same! bookkeeper! and! accountant,! the! same! office! address! and! the!

same! majority! stockholder! which! is! Cua! Le! Leng.! Cua! Le! Leng! had! the!
unlimited! liability! to! use! Siain! Transports! funds! to! pay! the! obligations!
incurred!by!Siain!Enterprises.!Thus,!it!is!clear!that!Siain!Enterprises,!Siain!
Transport!and!Yuyek!are!characterized!by!oneness!of!operations!vested!
in!Cua!Le!Leng!alone.!Consequently,!these!corporations!were!proven!to!
be!mere!alterYegos!of!Cua!Le!Leng.!
'

BUT' SEE:! Siain' Enterprises,' Inc' v.' Cupertino' Realty' Corp.,' 590'
SCRA'435'(2009).'

'
Siain'Enterprises,'Inc'v.'Cupertino'Realty'Corp.'
'
Facts:' Siain! Enterprises! obtained! a! loan! (and! executed! a! promissory!
note)! from! Cupertino! Realty! Corporation! secured! by! a! mortgage! over!
two! parcels! of! land! and! other! machineries! and! equipment.! Another!
promissory! note! in! favor! of! Cupertino! was! executed! by! Cua! Le! Leng!
(President! of! Siain! Enterprises)! where! the! latter! was! bound! in! her!
personal! capacity.! Later,! Cupertino! instituted! foreclosure! proceedings,!
but!Siain!Enterprises!claim!that!the!amended!real!estate!mortgage!was!
null! and! void! because! it! never! received! the! P160M! loan.! The! lower!
courts!ruled!in!favor!of!Cupertino!and!applied!the!doctrine!of!piercing!
the! veil! of! corporate! fiction! to! preclude! Siain! Enterprises! from!
disavowing! the! receipt! of! the! loan! and! paying! its! obligation! under! the!

Doctrine:' Where! clear! evidence! presented! support! the! fact! that! a!


corporations!affiliates!have!received!large!amounts!which!became!the!
consideration!for!the!company!execution!of!a!real!estate!mortgage!over!
its!properties,!then!the!piercing!doctrine!shall!be!applied!to!support!the!
fact! that! the! real! estate! mortgage! was! valid! and! supported! by! proper!
consideration.'
'

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The!piercing!cannot!be!availed!of!in!order!to!dislodge!from!SECs!
jurisdiction! a! petition! for! suspension! of! payments! filed! under!
P.D.!902YA,!on!the!ground!that!the!petitioning!individuals!should!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
be! treated! as! the! real! petitioners! to! the! exclusion! of! the!
petitioning!corporate!debtor:!doctrine!only!applies!when!such!
corporate! fiction! is! used! to! defeat! public! convenience,! justify!
wrong,!protect!fraud!or!defend!crime.!Union' Bank' v.' Court' of'
Appeals,'290'SCRA'198'(1998).'

unintended! may! result! from! an! erroneous! application.! PNB' v.'


Andrada' Electric' &' Engineering' Co.,' 381' SCRA' 244' (2002). 1!
Thus:!
o The! organization! of! the! corporation! at! the! time! when!
the! relationship! between! the! landowner! and! the!
developer!were!still!cordial!cannot!be!used!as!a!basis!to!

Application!of!the!piercing!of!the!subsidiary!company!to!merge!
it! with! the! holding! company! cannot! be! allowed! to! support! a!
theory! of! setYoff! or! compensation,! there! being! no! allegation!
much!less!any!proof!of!fraud.!Nisce'v.'Equitable'PCI'Bank,'Inc.,'
516'SCRA'231'(2007).'

An! employee! who! has! officially! retired! from! the! company! and!
availed! of! her! retirement! benefit,! but! who! continued! to! be!
employed! as! a! consultant! with! affiliate! companies,! cannot!
employ! piercing! in! order! to! treat! her! stint! with! the! affiliate!

companies! as! part! of! her! employment! with! the! main! company!
she! retired! from! ! there! is! no! fraud! or! employment! of! unfair!
shielding.! Rivera' v.' United' Laboratories,' Inc.,' 586' SCRA' 269'
(2009).'
4. Basis'Must'Be'Clear'Evidence'

To!disregard!the!separate!juridical!personality!of!a!corporation,!
it! is! elementary! that! the! wrongdoing! cannot! be! presumed! and!
must!be!clearly!and!convincingly!established.!Application!of!the!
doctrine! of! piercing! the! corporate! veil! should! be! done! with!
caution.!A!court!should!be!mindful!of!the!milieu!where!it!is!to!be!
applied.! It! must! be! certain! that! the! corporate! fiction! was!
misused! to! such! an! extent! that! injustice,! fraud,! or! crime! was!
committed! against! another,! in! disregard! of! its! rights.! The!
wrongdoing! must! be! clearly! and! convincingly! established;! it!
cannot! be! presumed.! Otherwise,! an! injustice! that! was! never!

hold! the! corporation! liable! later! on! for! the! obligations!


of! the! landowner! to! the! developer! under! the! mere!
allegation! that! the! corporation! is! being! used! to! evade!
the! performance! of! obligation! by! one! of! its! major!
stockholders.! Luxuria' Homes,' Inc.' v.' Court' of' Appeals,'
302'SCRA'315'(1999).'
In!this!case,!the!Court!finds!that!the!Remington!failed!to!
discharge!its!burden!of!proving!bad!faith!on!the!part!of!
Marinduque!Mining!and!its!transferees!in!the!mortgage!
and! foreclosure! of! the! subject! properties! to! justify! the!
piercing!of!the!corporate!veil.!DBP'v.'Court'of'Appeals,'
363'SCRA'307'(2001).2!
Neither!has!it!been!alleged!or!proven!that!Merryland!is!
so! organized! and! controlled! and! its! affairs! are! so!
conducted! as! to! make! it! merely! an! instrumentality,!
agency! conduit! or! adjunct! of! Cardale.! Even! assuming!
that! the! businesses! of! Cardale! and! Merryland! are!
interrelated,! this! alone! is! not! justification! for!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!General! Credit! Corp.! v.! Alsons! Dev.! and! Investment! Corp.,! 513! SCRA! 225!
(2007);!Pantranco!Employees!Association!(PEAY!PTGWO)!v.!NLRC,!581!SCRA!598!
(2009);!Halley!v.!Printwell,!Inc.!649!SCRA!116!(2011).!
2
!Also! McLeod! v.! NLRC,! 512! SCRA! 222! (2007);! Uy! v.! Villanueva,! 526! SCRA! 73!
(2007).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

disregarding! their! separate! personalities,! absent! any!


showing!that!Merryland!was!purposely!used!as!a!shield!
to! defraud! creditors! and! third! persons! of! their! rights.!
Francisco'v.'Mejia,'362'SCRA'738'(2001).1!
The! mere! assertion! by! a! Filipino! litigant! against! the!
existence! of! a! tandem! between! two! Japanese!

for!which!the!doctrine!was!applied.!Koppel'(Phil.)'Inc.'v.'Yatco,'
77'Phil.'496'(1946).3'

person! of! the! corporation,! but! merely! an! equity! remedy! that!
pertains!to!the!transactions!in!controversy.4'

corporations!cannot!be!the!basis!for!piercing,!which!can!
only! be! applied! by! showing! wrongdoing! by! clear! and!
convincing!evidence.!Marubeni'Corp.'v.'Lirag,'362'SCRA'
620'(2001).'

The! party! seeking! to! pierce! has! the! burden! of! presenting! clear!

and! convincing! evidence! to! justify! the! setting! aside! of! the!
separate!corporate!personality!rule.!The!question!of!whether!a!
corporation!is!a!mere!alter!ego!is!a!purely!one!of!fact,!and!the!
burden!is!on!the!party!who!alleges!it.!PNB'v.'Andrada'Electric'&'
Engineering'Co.,'381'SCRA'244'(2002).2!
5. Piercing' is' a' power' belonging' to' the' court' and! cannot! be!

!Also! Ramoso! v.! Court! of! Appeals,! 347! SCRA! 463! (2000);! Guatson! Intl! Travel!
and!Tours,!Inc.!v.!NLRC,!230!SCRA!815!(1990).!!
2
!Also! Concept! Builders,! Inc.! v.! NLRC,! 257! SCRA! 149! (1996);! Heirs! of! Ramon!
Durano,! Sr.! v.! Uy,! 344! SCRA! 238! (2000);! MR! Holdings,! Ltd.! V.! Bajar,! 380! SCRA!
617!(2002);!Ramirez!v.!Mar!Fishing!Co.,!Inc.,!672!SCRA!137!(2012).!

When!the!doctrine!is!applied,!the!consequences!would!be!that!
the! members! or! stockholders! of! the! corporation! will! be!
considered! as! the! corporation,! that! is,! liability! will! attach!
directly! to! the! officers! and! stockholders.! Umali' v.' Court' of'
Appeals,'189'SCRA'529'(1990).'

!
D.'CLASSIFICATION'OF'PIERCING'CASES:'

DEFEAT' OF' PUBLIC' CONVENIENCE' (EQUITY' PIERCING):! When!


the!application!of!the!separate!corporate!personality!would!be!
inconsistent! with! the! business! purpose! of! the! legal! fiction,! or!
when! piercing! the! corporate! fiction! is! necessary! to! achieve!
justice! or! equity! for! those! who! deal! in! good! faith! with! the!
corporation,! or! when! the! use! of! the! separate! juridical!

assumed! improvidently! by! a! sheriff.' Cruz' v.' Dalisay,' 152' SCRA'


482'(1987);'D.R.'CATC'Services'v.'Ramos,'477'SCRA'18'(2005).'
6. Piercing' Has' Only' Res' Judicata' Effect:! Application! of! the!
doctrine! to! a! particular! case! does! not! deny! the! corporation! of!
legal! personality! for! any! and! all! purposes,! but! only! for! the!
particular! transaction! or! instance,! or! the! particular! obligation!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

The! application! of! the! piercing! doctrine! does! not! attach! to! the!

personality!is!used!to!confuse!legitimate!issues.!

FRAUD' PIERCING:! When! corporate! entity! used! to! commit! a!


crime,!to!undertake!fraud!or!do!a!wrong,!or!that!the!corporate!
veil! is! used! as! a! means! to! evade! the! consequences! of! ones!
criminal!or!fraudulent!acts.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3

!Tantoco! v.! Kaisahan! ng! Mga! Manggagawa! sa! La! Campana,! 106! Phil.! 198!
(1959);!Francisco!v.!Mejia,!362!SCRA!738!(2001).!
4
!Villanueva,!C.!L.,!&!VillanuevaYTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

ALTER^EGO' PIERCING:! When! corporate! entity! merely! a! farce!


since!the!corporation!is!merely!the!alter!ego,!business!conduit,!
or!instrumentality!of!a!person!or!another!entity.!

Authorities! are! agreed! on! at! least! three! (3)! basic! areas! where!
piercing! the! veil,! with! which! the! law! covers! and! isolates! the!
corporation! from! any! other! legal! entity! to! which! it! may! be!
related,!is!allowed.!These!are:!1)!defeat!of!public!convenience,!
as! when! the! corporation! is! used! as! vehicle! for! the! evasion! of!
existing!obligation;!2)!fraud!cases!or!when!the!corporate!entity!
is!used!to!justify!wrong,!protect!fraud,!or!defend!a!crime;!or!3)!
alter!ego!cases,!where!the!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.!General'Credit'Corp.'
v.' Alsons' Dev.' and' Investment' Corp.,' 513' SCRA' 225' (2007)1!
citing' VILLANUEVA,' COMMERCIAL' LAW' REVIEW' (2004' ed),' at'
p.'576.!
'
General'Credit'Corp.'v.'Alsons'Dev.'and'Investment'Corp.'

'
Facts:' General! Credit! Corp! (GCC),! then! known! as! Commercial! Credit!
Corp! (CCC),! established! CCC! franchise! companies! in! different! urban!
centers!in!the!country.!CCC!Equity!Corporation!(EQUITY)!was!organized!
by!GCC!for!the!purpose!of!taking!over!the!operations!and!management!
of! the! various! franchise! companies.! Alsons! Devt! &! Investment! Corp!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Also! Pantranco! Employees! Association! (PEAYPTGWO)! v.! NLRC,! 581! SCRA! 598!
(2009);!Prisma!Construction!&!Dev.!Corp.!v.!Menchavez,!614!SCRA!590!(2010);!
Sarona!v.!NLRC,!663!SCRA!394!(2012).!

(ALSONS)!and!the!Alcantara!Family!each!owned!shares!in!the!aforesaid!
GCC!franchise!companies,!e.g.,!CCC!Davao!and!CCC!Cebu.!!
!
In! December! 1980,! ALSONS! and! the! Alcantara! Family! sold! their!
shareholdings! (101,953shares)! in! the! CCC! franchise! companies! to!
EQUITY! for! P2M,! for! which! EQUITY! issued! a! bearer! promissory! note!
for!P2M!with!a!oneYyear!maturity!date!and!18%!interest!per!annum.!!
!
Some! four! years! later,! the! Alcantara! Family! assigned! its! rights! and!
interests!over!the!bearer!note!to!ALSONS.!Even!before!the!execution!of!
the! assignment! deal,! letters! for! demand! for! interest! payment! were!
already! sent! to! EQUITY! through! its! President,! Wilfredo! Labayen,! who!
pleaded!inability!to!pay!the!stipulated!interest,!EQUITY!no!longer!having!
assets! or! property! neither! to! settle! its! obligation! nor! being! extended!
financial!support!by!GCC.!
!
On! January! 14,! 1986,! ALSONS! filed! a! complaint! for! a! sum! of! money!
against!EQUITY!and! GCC.! GCC! was! impleaded! as! partyYdefendant!since!
EQUITY!has!been!organized!as!a!tool!and!mere!conduit!of!GCC.!
'
Issue:' Whether! or! not! the! doctrine! of! Piercing! the! Veil! of! Corporate!
Fiction!should!be!applied!
'
Held:' YES.! The! relationship! of! GCC! and! EQUITY! have! been! that! of!
parentYsubsidiary! corporations,! the! doctrine! is! applicable! in! the! case!
at! bar.! There! are! at! least! 20! documented! circumstances! and!
transactions!which,!taken!together,!strongly!support!the!conclusion!that!
EQUITY! was! an! adjunct! /! instrumentality! /! business! conduit! of! GCC! !
i.e.!commonality!of!directors,!officers!and!stockholders,!sharing!of!office!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
between! GCC! and! EQUITY,! financing! and! management! arrangements!
allowing!GCC!to!handle!the!funds!of!EQUITY,!virtual!control!of!GCC!over!
finances,! business! policies! and! practices! of! EQUITY,! and! the!
establishment!of!EQUITY!by!GCC!to!circumvent!CB!rules.!!
'
Doctrine:' Another!formulation!of!this!doctrine!is!that!when!2!business!
enterprises! are! owned,! conducted! and! controlled! by! the! same! parties,!
both! law! and! equity! will! disregard! the! legal! fiction! that! 2! corporations!
are! distinct! entities! and! treat! them! as! one! and! the! same,! when!
necessary!to!protect!third!parties!rights.'
!
1. Rundown'on'Piercing'Application:''

This! Court! pierced! the! corporate! veil! to! ward! off! a! judgment!
credit,! to! avoid! inclusion! of! corporate! assets! as! part! of! the!
estate!of!the!decedent,!to!escape!liability!arising!for!a!debt,!or!
to! perpetuate! fraud! and/or! confuse! legitimate! issues! either! to!

promote!or!to!shield!unfair!objectives!to!cover!up!an!otherwise!
blatant! violation! of! the! prohibition! against! forum! shopping.!
Only!is!these!and!similar!instances!may!the!veil!be!pierced!and!
disregarded.! PNB' v.' Andrada' Electric' &' Engineering' Co.,' 381'
SCRA'244'(2002).'
2. Summary'of'Probative'Factors:'Concept'Builders,'Inc.'v.'NLRC,'
257'SCRA'149'(1996).1'

The!absence!of!these!elements!prevents!piercing!the!corporate!
veil.!Lim'v.'Court'of'Appeals,'323'SCRA'102'(200).2!

'
Concept'Builders,'Inc.'v.'NLRC'
'
Facts:' Concept! Builders! Inc.! was! engaged! in! the! construction! business!
and!lost!in!a!case!before!the!NLRC!concerning!the!termination!of!private!
respondents!whom!it!had!employed!as!laborers,!carpenters!and!riggers!
in!a!project!which!Concept!claims!was!finished,!but!upon!inspection!was!
found!to!be!the!contrary.!The!Labor!Arbiter!rendered!judgment!against!
Concept!requiring!it!to!pay!private!respondents!back!wages.!The!Sheriff!
then! tried! to! execute! the! writ! of! execution! but! found! that! the! office!
previously!occupied!by!Concept!is!now!occupied!by!Hydro!Phils.!Inc.!!a!
manufacturing!company!allegedly!owned!by!the!same!stockholders.!
'
Issue:' Whether! or! not! the! doctrine! of! piercing! the! corporate! veil! is!
applicable!to!this!case.!
'
Held:' YES.! While! petitioners! claimed! it! ceased! operations! in! 1986,! it!
filed! an! Information! Sheet! with! the! SEC! in! 1987! stating! that! its! office!
address! is! their! old! address.! Both! information! sheets! were! filed! by!
Virgilio! Casino,! the! same! corporate! secretary.! They! had! the! same!
President,! Board! of! Directors! and! substantially! the! same! subscribers.!
Clearly,!petitioner!ceased!its!business!operations!in!order!to!evade!the!
payment! to! private! respondents! of! back! wages! and! to! bar! their!
reinstatement! to! their! former! positions.! HPPI! is! obviously! a! business!
conduit! of! Concept! Builders! and! its! emergence! was! skillfully!
orchestrated!to!avoid!the!latters!financial!liability.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!PNB!v.!Ritratto!Group,!Inc.,!362!SCRA!216!(2001);!Velarde!v.!Lopez,!419!SCRA!
422! (2004);! Jardine! Davies,! Inc.! v.! JRB! Realty,! Inc.,! 463! SCRA! 555! (2005);!
Pantranco!Employees!Association!(PEAYPTGWO)!v.!NLRC,!581!SCRA!598!(2009).!

!Child! Learning! Center,! Inc.! v.! Tagorio,! 475! SCRA! 236! (2005);! General! Credit!
Corp.! v.! Alsons! Dev.! and! Investment! Corp.,! 513! SCRA! 225! (2007);! Nisce! v.!
Equitable!PCI!Bank,!Inc.,!516!SCRA!231!(2007).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
'
Doctrine:'Probative!factors!of!identity!that!will!justify!the!application!of!
the!doctrine:!
1. Stock!membership!by!one!or!common!ownership!of!both!!
2. Identity!of!directors!and!officers!(management)!
3. Manner!of!keeping!corporate!books!and!records!(management)!
4. Methods!of!conducting!business!(management).!
!
3. Distinction' Between' Fraud' Piercing' and' Alter^ego' Piercing:'
Lipat'v.'Pacific'Banking'Corp.,'402'SCRA'339'(2003).'
'
Lipat'v.'Pacific'Banking'Corp.'
'
Facts:' Spouses! Lipat! (Alfredo! and! Estelita)! owns! Belas! Export! Trading!
(BET),! a! single! proprietorship! engaged! in! garment! manufacturing! in!
Quezon!City.!The!Lipats!also!owned!the!Mystical!Fashions!in!the!United!
States,! which! sells! goods! imported! from! the! Philippines! through! BET.!
Estelita! designated! her! daughter,! Teresita,! to! manage! BET! in! the!
Philippines! while! she! was! managing! Mystical! Fashions! in! the! United!
States.!
!
In!order!to!facilitate!the!convenient!operation!of!BET,!Estelita!executed!
a! special! power! of! attorney! appointing! Teresita! as! her! attorneyYinYfact!
to!obtain!loans.!By!virtue!of!this!SPA,!Teresita!obtained!a!sizeable!loan!
from! Pacific! Bank.! Three! months! after! the! loan,! BET! was! incorporated!
into! a! family! corporation! named! Belas! Export! Corporation! (BEC),!
engaged!in!the!same!business!and!utilized!the!same!properties.!The!loan!
was!restructured!in!the!name!of!BEC!and!secured!with!Lipats!property.!
!

BEC! defaulted,! and! the! bank! foreclosed! on! the! real! mortgage.! The!
spouses!Lipat!claim!that!the!loan!obtained!by!Teresita!were!ultra!vires!
acts!because!they!were!executed!without!the!requisite!board!resolution!
of!the!Board!of!Directors!of!BEC.!
'
Issue:' Whether! or! not! the! doctrine! of! piercing! the! veil! of! corporate!
fiction!applies!in!this!case.'
'
Held:' YES.! In! finding! the! Lipats! mortgaged! property! liable! for! the!
obligations!of!BEC,!both!courts!below!relied!upon!the!alter!ego!doctrine!
or!instrumentality!rule.!
!
Evidence! suggests! an! alter! ego! case! in! the! sense! that:! (1)! the! spouses!
are!the!owners!and!majority!shareholders!of!BET!and!BEC;!(2)!both!firms!
were!managed!by!their!daughter,!Teresita;!(3)!both!firms!were!engaged!
in! the! garment! business,! supplying! products! to! Mystical! Fashion,! a! US!
firm! established! by! Estelita;! (4)! both! firms! held! office! in! the! same!
building! owned! by! the! Lipats;! (5)! BEC! is! a! family! corporation! with! the!
Lipats! as! its! majority! stockholders;! (6)! the! business! operations! of! the!
BEC! were! so! merged! with! those! of! Mrs.! Lipat! such! that! they! were!
practically! indistinguishable;! (7)! the! corporate! funds! were! held! by!
Estelita! Lipat! and! the! corporation! itself! had! no! visible! assets;! (8)! the!
board!of!directors!of!BEC!was!composed!of!the!Burgos!and!Lipat!family!
members;!(9)!Estelita!had!full!control!over!the!activities!of!and!decided!
business! matters! of! the! corporation;! and! that! (10)! Estelita! Lipat! had!
benefited! from! the! loans! secured! from! Pacific! Bank! to! finance! her!
business! abroad! and! from! the! export! bills! secured! by! BEC! for! the!
account! of! Mystical! Fashion.! It! could! not! have! been! coincidental! that!
BET!and!BEC!are!so!intertwined!with!each!other!in!terms!of!ownership,!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
business!purpose,!and!management.!
'
Doctrine:' When! the! corporation! is! the! mere! alter! ego! or! business!
conduit!of!a!person,!the!separate!personality!of!the!corporation!may!be!
disregarded.'

TESCON! contested! the! judgment! claiming! that! the! admission! made! in!
the! "Employer's! Report! of! Accident! or! Sickness"! was! due! to! honest!
mistake!and/or!excusable!negligence!on!its!part,!and!that!the!illness!for!
which!compensation!is!sought!is!not!an!occupational!disease,!hence,!not!
compensable!under!the!law.!

!
E.' DEFEAT' OF' PUBLIC' CONVENIENCE' (EQUITY' PIERCING):' Juridical'
Personality'Cannot'Be'Employed:'
1. To' Confuse' Legitimate' Issues:' Telephone' Engineering' and'
Service'Co.,'Inc.'V.'WCC,'104'SCRA'354'(1981).'
'
Telephone'Engineering'and'Service'Co.,'Inc.'V.'WCC'

'
Issue:'Whether!or!not!TESCO!may!be!held!liable!for!the!death.!
'
Held:' YES.! TESCO'S! denial! at! this! stage! that! it! is! the! employer! of! the!
deceased! is! obviously! an! afterthought,! a! devise! to! defeat! the! law! and!
evade!its!obligations.!This!denial!also!constitutes!a!change!of!theory!on!
appeal! which! is! not! allowed! in! this! jurisdiction.! The! Court! pierced! the!

'
Facts:' Petitioner! engaged! in! the! business! of! manufacturing! telephone!
equipment.! Its! sister! company,! the! Utilities! Management! Corporation!
(UMACOR),!with!offices!in!the!same!location.!UMACOR!is!also!under!the!
management!of!Jose!Luis!Santiago.!UMACOR!employed!the!late!Pacifica!
L.! Gatus! as! Purchasing! Agent.! Then! was! detailed! with! petitioner!

veil!between!TESCO!and!UMARCO!in!the!interest!of!justice!and!equity.!
'
Doctrine:'Although!respect!for!the!corporate!personality!as!such,!is!the!
general! rule,! there! are! exceptions.! In! appropriate! cases,! the! veil! of!
corporate!fiction!may!be!pierced!as!when!the!same!is!made!as!a!shield!
to!confuse!the!legitimate!issues.!

company.!He!reported!back!to!UMACOR!and!after!2!years!he!contracted!
illness!and!died!of!"liver!cirrhosis!with!malignant!degeneration."!
!
Respondent! Leonila! S.! Gatus,! filed! a! "Notice! and! Claim! for!
Compensation"! with! Workmen's! Compensation! Commission! subYoffice,!
alleging!that!her!husband!was!an!employee!of!TESCO,!and!that!he!died!
of!liver!cirrhosis.!UMACOR!submitted!an!Employer's!Report!of!Accident!

'

or! Sickness! which! indicated! that! the! employee! contracted! illness! in!
regular! occupation.! On! this! basis,! the! Acting! Referee! awarded! death!
benefits!plus!burial!expenses!in!favor!of!the!heirs!of!Gatus.!
!

against! Emilio,! Ariston! and! Rodolfo! Cano! as! president! and! proprietor,!
field! supervisor! and! manager,! respectively,! of! Emilio! Cano! Enterprises,!
Inc.! An! order! of! execution! was! issued! to! reinstate! Honorata! and! to!
deposit! with! the! court! the! amount! P7,222.58! within! 10! days! from!

2. To'Raise'Legal'Technicalities:'Emilio'Cano'Enterprises'v.'CIR,'13'
SCRA'291'(1965).'
'
Emilio'Cano'Enterprises'v.'CIR'
'
Facts:! A!complaint!for!unfair!labor!practice!was!filed!By!Honorata!Cruz!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
receipt! of! the! order,! failing! which! the! court! will! order! either! a! levy! on!
respondents!properties!or!the!filing!of!an!action!for!contempt!of!court.!
(The! order! of! execution! was! directed! against! the! properties! of! Emilio!
Cano!Enterprises,!Inc.)!
'

(1962).1!

Issue:'Whether!or!not!the!judgment!against!Emilio!and!Rodolfo!in!their!
capacity!as!officials!of!the!corporation!can!be!made!effective!against!the!
property!of!the!latter!which!was!not!a!party!to!the!case.!
!
Held:' YES.! While! it! is! an! undisputed! rule! that! a! corporation! has! a!
personality! separate! and! distinct! from! its! members! or! stockholders!
because!of!a!fiction!of!the!law,!here!we!should!not!lose!sight!of!the!fact!

Where! a! debtor! registers! his! residence! to! a! family! corporation!


in! exchange! of! shares! of! stock! and! continues! to! live! therein,!
then! the! separate! juridical! personality! may! be! disregarded.!
PBCom'v.'CA,'195'SCRA'567'(1991).'

Where!corporate!fiction!was!used!to!perpetrate!social!injustice!
or! as! a! vehicle! to! evade! obligations! or! confuse! the! legitimate!
issues!(as!in!this!case!where!the!actions!of!management!of!the!
two! corporations! created! confusion! as! to! the! proper! employer!
of! claimants),! the! two! corporations! would! be! merged! as! one.!
Azcor'Manufacturing,'Inc.'v.'NLRC,'303'SCRA'26'(1999).'

that! the! Emilio! Cano! Enterprises,! Inc.! is! a! closed! family! corporation!
where!the!incorporators!and!directors!belong!to!one!single!family.!Here!
is! an! instance! where! the! corporation! and! its! members! can! be!
considered! as! one.! And! to! hold! such! entity! liable! for! the! acts! of! its!
members!is!not!to!ignore!the!legal!fiction!but!merely!to!give!meaning!to!
the!principle!that!such!fiction!cannot!be!invoked!if!its!purpose!is!to!use!
it!as!a!shield!to!further!an!end!subversive!of!justice.!

The! corporate! veil! cannot! be! used! to! blatantly! violate! the!
prohibition! against! forumYshopping.! Where! the! corporation!

itself!has!not!been!remiss!in!vigorously!prosecuting!or!defending!
corporate! causes! and! in! using! and! applying! remedies! available!
to!it,!then!shareholders,!whether!suing!as!the!majority!in!direct!
actions!or!as!the!minority!in!a!derivative!suit,!cannot!be!allowed!
to! pursue! the! same! claims.! First' Philippine' International' Bank'
v.'Court'of'Appeals,'252'SCRA'259'(1996).'
3. The'Case'for'Thinly^Capitalized'Corporations:'McConnel'v.'CA,'

'
Doctrine:' And! so! it! has! been! held! that! while! a! corporation! is! a! legal!
entity! existing! separate! and! apart! from! the! persons! composing! it,! that!
concept! cannot! be! extended! to! a! point! beyond! its! reason! and! policy,!
and! when! invoked! in! support! of! an! end! subversive! of! this! policy! it!
should!be!disregarded!by!the!courts.!
'

One! cannot! evade! civil! liability! by! incorporating! properties! or!


the! business.! Palacio' v.' Fely' Transportation' Co.,' 5' SCRA' 1011'

1'SCRA'722'(1961).'
'
McConnel'v.'CA'
'
Facts:! Park! Rite! Co.! (PRC)! leased! from! Rafael! Samanillo! a! vacant! lot!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Also!Mendoza!and!Yotoko!v.!Banco!Real!Dev.!Bank,!470!SCRA!86!(2005).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
which! was! used! for! parking! motor! vehicles! for! consideration.! It! turned!
out!that!in!operating!its!parking!business,!the!corporation!occupied!and!
used! not! only! the! Samanillo! lot! it! had! leased! but! also! an! adjacent! lot!
belonging! to! Padilla! (respondent)! without! the! owners! knowledge! and!
consent.!Padilla!wanted!payment!for!the!use!and!occupation!of!the!lot.!

the!corporate!obligations.!
'
Doctrine:' While! the! mere! ownership! of! all! or! nearly! all! of! the! capital!
stock! of! a! corporation! is! a! mere! business! conduit! of! the! stockholder,!
that!conclusion!is!amply!justified!where!it!is!shown!that!the!operations!

!
Judgment! was! rendered! against! Park! Rite,! but! it! was! found! to! be!
without!any!assets!apart!from!the!money!deposited!with!the!Court.!The!
judgment! creditors! then! filed! suit! in! the! CFI! Manila! against! the!
corporation! and! its! past! and! present! stockholders,! to! recover! from!
them,! jointly! and! severally,! the! unsatisfied! balance! of! the! judgment,!
plus!legal!interest!and!costs.!

of!the!corporation!were!so!merged!with!those!of!the!stockholders!as!to!
be!practically!indistinguishable!from!them.!
'

fraudulent! act! or! fraudulent! means! perpetrated! upon! the!


investing!public!who!were!made!to!believe!that!ASBHI!had!the!
financial! capacity! to! repay! the! loans! it! enticed! petitioners! to!
extend,!despite!the!fact!that!it!had!an!authorized!capital!stock!
of! only! P500,000.00! and! paid! up! capital! of! only! P125,000.00),!
with! the! deficient! capitalization! evidenced! by! its! articles! of!
incorporation,! the! treasurers! affidavit,! the! audited! financial!

!
Issue:' Whether! or! not! there! was! justification! for! disregarding! the!
corporate! entity! of! Park! Rite! Co.,! Inc.! and! holding! its! controlling!
stockholders!personally!responsible!for!a!judgment!against!the!corp.!
'
Held:' YES.! The! evidence! clearly! shows! that! these! persons! completely!
dominated!and!controlled!the!corporation!and!that!the!functions!of!the!
corporation!were!solely!for!their!benefits.!It!is!obvious!from!the!sharing!
that!only!1!or!2!people!possess!the!majority!shares.!Other!incorporators!
had! about! 1! or! 2! each! which! were! merely! qualifying! shares.! That! the!
corporation! was! a! mere! extension! of! their! personality! is! shown! by! the!
fact!that!the!office!of!Cirilo!Paredes!and!that!of!Park!Rite!Co.,!Inc.!were!
located!in!the!same!building,!in!the!same!floor!and!in!the!same!room!!
at!507!Wilson!Building.!This!is!further!shown!by!the!fact!that!the!funds!
of! the! corporation! were! kept! by! Cirilo! Paredes! in! his! own! name.! The!
facts! show! that! the! corporation! is! a! mere! instrumentality! of! the!
individual! stockholders;! hence! the! latter! must! individually! answer! for!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! DOJ! Resolution! explicitly! identified! the! false! pretense,!

statements.! Moreover,! respondents! argument! assumes! that!


there!is!legal!obligation!on!the!part!of!petitioners!to!undertake!
an!investigation!of!ASBHI!before!agreeing!to!provide!the!loans.!
There! is! no! such! obligation.! It! is! unfair! to! expect! a! person! to!
procure! every! available! public! record! concerning! an! applicant!
for!credit!to!satisfy!himself!of!the!latters!financial!standing.!At!
least,! that! is! not! the! way! an! average! person! takes! care! of! his!
concerns.!Gabionza'v.'Court'of'Appeals,'565'SCRA'38'(2008).!

Where!the!corporation!was!under!the!control!of!its!stockholders!
who! ranYup! quite! a! high! obligation! with! the! printing! company!
knowing!fully!well!that!their!corporation!was!not!in!a!position!to!
pay! for! the! accounts,! and! where! in! fact! they! personally!
benefited! from! the! operations! of! the! company! to! which! they!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
never!paid!their!subscription!in!full,!would!constitute!piercing!of!
the! veil! to! allow! the! creditor! to! be! able! to! collect! what!
otherwise! were! debts! owed! by! the! company! which! has! no!
visible!assets!and!has!ceased!all!operations.!Halley'v.'Printwell,'
Inc.'649'SCRA'116'(2011).'
'
Halley'v.'Printwell,'Inc.'
'
Facts:'BMPI!(Business!Media!Philippines!Inc.)!is!a!corporation!under!the!
control!of!its!stockholders,!including!Donnina!Halley.!In!the!course!of!its!
business,! BMPI! commissioned! PRINTWELL! to! print! Philippines,! Inc.! (a!
magazine! published! and! distributed! by! BMPI).! BMPI! placed! several!

'
Doctrine:' TRUST! FUND! DOCTRINE.! Under! which! corporate! debtors!
might! look! to! the! unpaid! subscriptions! for! the! satisfaction! of! unpaid!
corporate! debts.! Subscriptions! to! the! capital! of! a! corporation!
constitutes! a! trust! fund! for! the! payment! of! the! creditors! (by! mere!
analogy)! In! reality,! corporation! is! a! simple! debtor.! The! creditor! is!
allowed! to! maintain! an! action! upon! any! unpaid! subscriptions! and!
thereby!steps!into!the!shoes!of!the!corporation!for!the!satisfaction!of!its!
debt.!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!

orders! amounting! to! P3160,000! but! was! only! able! to! pay! P25,000.!
PRINTWELL!sued!BMPI!for!collection!of!the!unpaid!balance!and!later!on!
impleaded!BMPIs!original!stockholders!and!incorporators!to!recover!on!
their!unpaid!subscriptions.!
'
Issue:' Whether! or! not! a! stockholder! (Halley! in! this! case)! who! was! in!
active! management! of! the! business! of! the! corporation! and! still! has!

payment!of!corporate!debts.!

unpaid! subscriptions! should! be! made! liable! for! the! debts! of! the!
corporation!by!piercing!the!veil!of!corporate!fiction!
'
Held:' YES.! Such! stockholder! should! be! made! liable! up! to! the! extent! of!
her!unpaid!subscription.!It!was!found!that!at!the!time!the!obligation!was!
incurred,!BMPI!was!under!the!control!of!its!stockholders!who!know!fully!
well!that!the!corporation!was!not!in!a!position!to!pay!its!account!(thinly!
capitalized).! And,! that! the! stockholders! personally! benefited! from! the!

'
Facts:' Yutivo! Sons! Hardware! Co.! is! a! company! engaged! in! the!
importation!and!sale!of!hardware!supplies!and!equipment.!The!former!
bought!a!number!of!cars!from!General!Motors!Overseas!Corporation.!As!
importer,!GM!paid!sales!tax!prescribed!by!sections!184,!185!and!186!of!
the! Tax! Code! on! the! basis! of! its! selling! price! to! Yutivo.! Said! tax! being!

operations! of! the! corporation! even! though! they! never! paid! their!
subscriptions!in!full.!

'
4. Avoidance'or'Minimization'of'Taxes:'Yutivo'Sons'Hardware'v.'
Court' of' Tax' Appeals' 1' SCRA' 160' (1961);' Liddell' &' Co.' v.'
Collector'of'Internal'Revenue,'2'SCRA'632'(1961).'
'
Yutivo'Sons'Hardware'v.'Court'of'Tax'Appeals'

collected!only!once!on!original!sales,!Yutivo!paid!no!further!sales!tax!on!
its! sales! to! the! public.! Eventually,! Yutivo! sold! exclusively! to! Southern!
Motors,! which! was! organized! to! engage! in! the! business! of! selling! cars,!
trucks,!and!spare!parts!to!the!public.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
!
When!GM!decided!to!withdraw!from!the!Philippines,!it!appointed!Yutivo!
as! importer! for! the! Visayas! and! Mindanao,! and! Yutivo! continued! its!
previous!arrangement!of!selling!exclusively!to!SM.!In!the!same!way!that!
GM! used! to! pay! sales! taxes! based! on! its! sales! to! Yutivo,! the! latter,! as!

to!arrive!at!the!true!tax!liability!of!Yutivo.!
'
Doctrine:'
'

importer,!paid!sales!tax!prescribed!on!the!basis!of!its!selling!price!to!SM,!
and! since! such! sales! tax,! as! already! stated,! is! collected! only! once! on!
original!sales,!SM!paid!no!sales!tax!on!its!sales!to!the!public.!
!
After!some!time,!the!CIR!made!an!assessment!on!Yutivo!and!demanded!
from! the! latter! P1,804,769.85! as! deficiency! sales! tax,! claiming! that! the!
taxable!sales!were!the!retail!sales!by!SM!to!the!public!and!not!the!sales!

mere! instrumentality,! or! adjunct! of! Yutivo,! the! Court! CTA! correctly!
disregarded!the!technical!defense!of!separate!corporate!entity!in!order!

Use!of!nominees!to!constitute!the!corporation!for!the!benefit!of!
the! controlling! stockholder! who! sought! to! avoid! payment! of!
taxes.!Marvel'Building'v.'David,'9'Phil.'376'(1951).'

The!plea!to!pierce!the!veil!of!corporate!fiction!on!the!allegation!
that! the! corporations! true! purpose! is! to! avoid! payment! by! the!
incorporating! spouses! of! the! estate! taxes! on! the! properties!
transferred!to!the!corporations:!With!regard!to!their!claim!that!
[the! companies]! Ellice! and! Margo! were! meant! to! be! used! as!

at! wholesale! made! by! Yutivo! to! the! latter! inasmuch! as! SM! and! Yutivo!
were!one!and!the!same!corporation,!the!former!being!the!subsidiary!of!
the!latter.!
'
Issue:'Whether!or!not!Southern!Motors!was!a!mere!adjunct!of!Yutivo.!
'
Held:' YES.! Briefly! stated,! Yutivo! financed! principally,! if! not! wholly,! the!
business!of!SM!and!actually!extended!all!the!credit!to!the!latter!not!only!
in! the! form! of! starting! capital! but! also! in! the! form! of! credits! extended!
for! the! cars! and! vehicles! allegedly! sold! by! Yutivo! to! SM! as! well! as!
advances! or! loans! for! the! expenses! of! the! latter! when! the! capital! had!
been! exhausted.! The! funds! of! SM! were! all! merged! in! the! cash! fund! of!
Yutivo.!At!all!times,!Yutivo,!through!officers!and!directors!common!to!it!
and! SM,! exercised! full! control! over! the! cash! funds,! policies,!
expenditures!and!obligations!of!the!latter.!Southern!Motors!being!but!a!

mere! tools! for! the! avoidance! of! estate! taxes,! suffice! it! to! say!
that!the!legal!right!of!a!taxpayer!to!reduce!the!amount!of!what!
otherwise! could! be! his! taxes! or! altogether! avoid! them,! by!
means! which! the! law! permits,! cannot! be! doubted.! Gala' v.'
Ellice'Agro[Industrial'Corp.,'418'SCRA'431'(2003).'

HOWEVER:! The! mere! existence! of! parentYsubsidiary! relations,!


or! the! fact! that! one! corporation! is! affiliated! with! another!
corporation! does! not! justify! piercing! based! on! serving! public!
convenience.! Comm.' of' Internal' Revenue' v.' Norton' and'
Harrison,'11'SCRA'704'(1954).1'

!
F.'FRAUD'CASES:'

When! the! legal! fiction! of! the! separate! corporate! personality! is!
abused,! such! as! when! the! same! is! used! for! fraudulent! or!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Tomas! Lao! Construction! v.! NLRC,! 278! SCRA! 716! (1997).! Marques! v.! Far! East!
Bank!and!Trust!Co.,!639!SCRA!312!(2011).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
wrongful! ends,! the! courts! have! not! hesitated! to! pierce! the!
corporate!veil.!Francisco'v.'Mejia,'362'SCRA'738'(2001).!
'
'

payment!of!taxes!so!that!the!properties!may!be!levied!upon!and!be!the!
subject! of! an! auction! where! Merryland! could! bid,! which! was! exactly!
what!happened.!
'
Doctrines:'With!specific!regard!to!corporate!officers,!the!general!rule!is!

Facts:' Andrea!Gutierrez!was!the!owner!of!a!parcel!of!land!in!Caloocan.!
This!property!was!subdivided!into!five!lots,!four!of!which!are!the!subject!
of! this! controversy.! The! four! lots! were! sold! to! Cardale! Financing! and!
Realty!Corporation!which!made!an!initial!payment,!and!the!balance!was!
secured! by! 3! of! 4! lots! mortgaged! to! Gutierrez! herself.! When! Cardale!
failed! to! pay,! Gutierrez! filed! a! suit! for! rescission.! Cardale! was!
represented!by!its!VP!and!Treasurer,!herein!petitioner!Adalia!Francisco.!

that! the! officer! cannot! be! held! personally! liable! with! the! corporation,!
whether! civilly! or! otherwise,! for! the! consequences! of! his! acts,! if! he!
acted! for! and! in! behalf! of! the! corporation,! within! the! scope! of! his!
authority!and!in!good!faith.!In!such!cases,!the!officers!acts!are!properly!
attributed! to! the! corporation.! However,! if! it! is! proven! that! the! officer!
has! used! the! corporate! fiction! to! defraud! a! third! party,! or! that! he! has!
acted! negligently,! maliciously! or! in! bad! faith,! then! the! corporate! veil!

!
The! case! dragged! on! for! 14! years,! during! which! the! taxes! for! the!
mortgaged!properties!were!not!paid.!As!a!result,!the!government!levied!
upon!them.!They!became!subject!of!an!auction!sale.!The!highest!bidder!
was! Merryland! Development! Corporation,! whose! President! was! also!
Adalia! Francisco.! Because! of! these,! Rita! Mejia,! the! administrator! of!
Gutierrezs! estate,! filed! a! complaint! for! damages! against! Francisco! for!

shall! be! lifted! and! he! shall! be! held! personally! liable! for! the! particular!
corporate!obligation!involved.!

Francisco'v.'Mejia'

fraud.!
'
Issue:'Whether!or!not!Francisco!may!be!held!liable.!
'
Held:' YES,!it!was!evident!that!Francisco!was!in!bad!faith,!not!informing!
Gutierrezs!estate!of!the!tax!delinquencies.!Apparently,!Francisco!made!
use! of! her! involvement! in! Cardale! and! Merryland! to! secure! an!
advantage! for! the! latter.! Cardale! as! the! mortgagor! had! the! duty! of!
paying!the!taxes!for!the!properties.!Evidence!showed!that!Francisco!as!
Cardales! Treasurer,! intended! to! conceal! the! delinquency! in! the!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! general! rule! is! that! obligations! incurred! by! a! corporation,!


acting! through! its! directors,! officers! or! employees,! are! its! sole!
liabilities.! However,! there! would! be! piercing! of! the! veil! when!
the! corporation! is! used! by! any! of! them! as! a! cloak! or! cover! for!
fraud!or!illegality!or!injustice.!Here,!the!fraud!was!committed!by!
petitioners! to! the! prejudice! of! respondent! bank.' Mendoza' v.'
Banco'Real'Dev.'Bank,'470'SCRA'86'(2005).'

Fraud!and!bad!faith!on!the!part!of!certain!corporate!officers!or!
stockholders! may! warrant! the! piercing! of! the! veil! of! corporate!
fiction! so! that! the! said! individual! may! not! seek! refuge! therein,!
but!may!be!held!individually!and!personally!liable!for!his!or!her!
actions.! Lafarge' Cement' Phils.,' Inc.' v.' Continental' Cement'
Corp.,'443'SCRA'522'(2004).'

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

or!when!they!practice!fraud!on!internal!revenue!laws,!the!fiction!
of! their! separate! and! distinct! corporate! identities! shall! be!
disregarded,! and! both! entities! treated! as! one! taxable! person,!
subject! to! assessment! for! the! same! taxable! transaction.!
Commissioner'of'Internal'Revenue'v.'Menguito,'565'SCRA'461'
(2008).'

However,! mere! allegation! of! fraud! or! bad! faith,! without!


evidence!supporting!such!claims!cannot!warrant!the!piercing!of!

the!corporate!veil.!DBP'v.'Court'of'Appeals,'357'SCRA'626,'358'
SCRA'501,'363'SCRA'307'(2001).'
1. Acts'by'Controlling'Shareholder:'

The! fact! that! a! corporation! owns! all! of! the! stocks! of! another!
corporation,! taken! alone,! is! not! sufficient! to! justify! their! being!
treated!as!one!entity.!If!used!to!perform!legitimate!functions,!a!
subsidiarys! separate! existence! shall! be! respected,! and! the!
liability!of!the!parent!corporation,!as!well!as!the!subsidiary!shall!
be!confined!to!those!arising!in!their!respective!business.!Nisce'v.'
Equitable'PCI'Bank,'Inc.,'516'SCRA'231'(2007).1!

3. Guiding'Principles'in'Fraud'Cases:'
'

Where! a! stockholder,! who! has! absolute! control! over! the!

Why'is'there'inordinate'showing'of'alter^ego'elements?'
1. There! must! have! been! fraud! or! an! evil! motive! in! the! affected!
transaction,!and!the!mere!proof!of!control!of!the!corporation!by!
itself!would!not!authorize!piercing;!
2. The!corporate!fiction!is!used!as!a!means!to!commit!the!fraud!or!

business!and!affairs!of!the!corporation,!entered!into!a!contract!
with! another! corporation! through! fraud! and! false!
representations,! such! stockholder! shall! be! liable! solidarily! with!
coYdefendant! corporation! even! when! the! contract! sued! upon!
was! entered! into! on! behalf! of! the! corporation.! Namarco' v.'

avoid!the!consequences!thereof;!and!
3. The! main! action! should! seek! for! the! enforcement! of! pecuniary!
claims! pertaining! to! the! corporation! against! corporate! officers!
or!stockholders.!
!

Associated'Finance'Co.,'19'SCRA'962'(1967).'

or! even! share! the! same! address,! or! have! interlocking!


incorporators,! directors! or! officers,! in! the! absence! of! fraud! or!
other!public!policy!consideration,!does!not!warrant!piercing!the!
veil!of!corporate!fiction.!McLeod'v.'NLRC,'512'SCRA'222'(2007),'
quoting'from'Indophil'Textile'Mill'Workers'Union'v.'Calica,'205'

Where! the! corporation! is! used! as! a! means! to! appropriate! a!


property! by! fraud! which! property! was! later! resold! to! the!
controlling!stockholders,!then!piercing!should!be!allowed.!Heirs'

of'Ramon'Durano,'Sr.'v.'Uy,'344'SCRA'238'(2000).'
2. Tax'Evasion'or'Fraud:'

SCRA' 697' (1992),' and' Del' Rosario' v.' NLRC,' 187' SCRA' 777'
(1990);'Heirs'of'Fe'Tan'Uy'v.'International'Exchange'Bank,'690'
SCRA'519'(2013).'

In! a! number! of! cases,! the! Court! has! shredded! the! veil! of!
corporate!identity!and!ruled!that!where!a!corporation!is!merely!
an!adjunct,!business!conduit!or!alter!ego!of!another!corporation!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Marques!v.!Far!East!Bank!and!Trust!Co.,!639!SCRA!312!(2011).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Respondent!corporations!may!be!engaged!in!the!same!business!

Mere! substantial! identity! of! incorporators! of! two! corporations!


does!not!necessarily!imply!fraud,!nor!warrant!the!piercing!of!the!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
veil!of!corporate!fiction.!In!the!absence!of!clear!and!convincing!
evidence!to!show!that!the!corporate!personalities!were!used!to!
perpetuate! fraud,! or! circumvent! the! law,! the! corporations! are!
to! be! rightly! treated! as! distinct! and! separate! from! each! other.!
To! disregard! the! said! separate! juridical! personality! of! a!
corporation,! the! wrongdoing! must! be! proven! clearly! and!
1

convincingly.!Laguio'v.'NLRC,'262'SCRA'715'(1996). !
!
G.'ALTER^EGO'CASES:'
1. Using'Corporation'as'Conduit'or'Alter'Ego:'

Where!the!capital!stock!is!owned!by!one!person!and!it!functions!
only! for! the! benefit! of! such! individual! owner,! the! corporation!
and! the! individual! should! be! deemed! the! same.! Arnold' v.'
Willets'and'Patterson,'Ltd.,'44'Phil.'634'(1923).'
'
Arnold'v.'Willets'and'Patterson,'Ltd.'

'
Facts:'Willits!&!Patterson!was!a!partnership!organized!in!San!Francisco,!
California.!In!1916,!they!engaged!the!services!of!Arnold!to!be!their!agent!
in!the!Philippines!who!will!enjoy!profitYsharing!and!a!fixed!salary.!Arnold!
was!to!be!Willits!&!Pattersons!agent!for!five!years,!and!he!was!tasked!
to!operate!a!certain!oil!mill.!
!

Philippines! with! the! same! name.! Again,! he! owned! practically! all! the!
shares!(legally,!the!San!Francisco!corporation!owned!all!the!assets!and!
liabilities! of! the! Manila! corporation).! Sometime! in! 1919,! Willits! and!
Arnold!entered!into!another!contract,!marked!Exhibit!B,!which!clarified!
Arnolds!mode!of!compensation.!
!
Willits! corporation! went! through! financial! trouble,! and! its! creditors!
committee! refused! to! honor! Exhibit! B! because! according! to! it,! the!
corporation! never! allowed! or! acceded! to! such! a! contract! or!
understanding,!and!that!Willits!signed!it!without!authority.!
'
Issue:'Whether!or!not!Exhibit!B!is!binding!upon!the!corporation!and!the!
creditors!committee!despite!the!lack!of!approval!from!the!Board!
'
Held:' YES.! The! approval! of! the! Board! is! not! needed! since! it! is! evident!
that!Willis!owns!and!controls!the!corporation.!Willits!actions!were!done!
not! just! to! benefit! him! as! a! shareholder! but! to! control! the! whole!
corporation! and! to! affect! the! transaction! of! its! business,! in! the! same!
manner!as!if!it!had!been!clothed!with!all!the!formalities!of!a!corporate!

Sometime! later,! Patterson! retired,! and! Willits! then! created! a! new!


corporation! under! the! same! name.! Under! this! corporation,! Willits!
owned!practically!all!the!shares!except!those!nominal!shares!needed!to!
qualify! directors.! Willits! also! created! another! corporation! in! the!

act.!Also,!Exhibit!B!came!into!effect!in!1919!and!since!then,!was!used!by!
the!corporation!in!determining!Arnolds!salary!and!dues.!There!was!no!
objection! ever! raised! against! it! except! two! years! later,! in! 1921,! by! the!
creditors! committee.! Its! a! wellYsettled! doctrine! that! acts! of! officers,!
though! unauthorized,! may! be! ratified! by! the! corporation! where! the!
latter! acquiesces! to! the! act.! Here,! the! creditors! committee! cannot!
object! to! Exhibit! B! because! the! corporation! has! in! effect! ratified! its!
validity!by!applying!it!for!two!years.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

'
Doctrine:'When!the!stock!of!a!corporation!owned!by!one!individual!and!

!Martinez!v.!Court!of!Appeals,!438!SCRA!130!(2004).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
subsidiarys! separate! existence! shall! be! respected,! and! the!
liability!of!the!parent!corporation,!as!well!as!the!subsidiary!shall!
be! confined! to! those! arising! in! their! respective! business.! A!
corporation! has! a! separate! personality! distinct! from! its!
stockholders! and! from! other! corporations! to! which! it! may! be!
conducted!!a!legal!fiction!created!by!law!for!convenience!and!

the!corporation!functions!for!his!benefit,!the!corporation!and!individual!
should!be!deemed!the!same.!
'

A! corporation! has! a! personality! separate! and! distinct! from! the!


persons! composing! it,! as! well! as! from! any! other! legal! entity! to!
which!it!may!be!related.!Equally!wellYsettled!is!the!principle!that!
the! corporate! mask! may! be! removed! or! the! corporate! veil!
pierced!when!the!corporation!is!just!an!alter!ego!of!a!person!or!

to!prevent!injustice.!Nisce'v.'Equitable'PCI'Bank,'Inc.,'516'SCRA'
231'(2007).'
2. Mixing^up'Operations;'Disrespect'to'the'Corporate'Entity:'

of!another!corporation.!Sarona'v.'NLRC,'663'SCRA'394'(2012).!
o When! 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).1'

accounts.! Ramirez' Telephone' Corp.' v.' Bank' of' America,' 29'


SCRA'191'(1969).'

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.! Thus,! when! the! foreign! parent!

The! fact! that! a! corporation! owns! all! of! the! stocks! of! another!
corporation,! taken! alone,! is! not! sufficient! to! justify! their! being!
treated!as!one!entity.!If!used!to!perform!legitimate!functions,!a!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!General! Credit! Corp.! v.! Alsons! Dev.! and! Investment! Corp.,! 513! SCRA! 225!
(2007).!

Where! 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).'

The! fictive! veil! of! corporate! personality! holds! lesser! sway! for!

company!leased!a!large!parcel!of!land!purposely!for!the!benefit!
of! its! subsidiary,! which! took! over! possession! of! the! leased!
premises,!the!subsidiary!was!a!mere!alter!ego!of!ESSO!Eastern.!
Mariano'v.'Petron'Corp.,'610'SCRA'487'(2010).'

Mixing! of! personal! accounts! with! corporate! bank! deposit!

Employment! of! same! workers;! single! place! of! business,! etc.,!


may! indicate! alter! ego! situation.! Shoemart' v.' NLRC,' 225' SCRA'
311'(1993).'
'
Shoemart'v.'NLRC'

'
Facts:! Moris!Industries!was!engaged!in!manufacture!of!leather!goods.!In!
1985,!56!out!of!74!workers!decided!to!form!the!Moris!Industries!Union.!
When!the!Union!contacted!Moris!in!order!to!fix!a!collective!bargaining!
agreement,!Moris!suddenly!shut!down!and!ceased!operations!two!days!
later.!Because!of!this,!the!Union!filed!a!case!with!the!NLRC!against!Moris!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
for! unfair! labor! practice,! recovery! of! wage! differentials! and! other!
monetary! benefits.! Shoemart,! and! its! president,! Henry! Sy,! was! also!
impleaded! because! according! to! the! Union,! Shoemart! and! Moris! had!
only!one!juridical!personality.!
!
Issue:' Whether!or!not!the!NLRC!correctly!applied!the!piercing!doctrine!
by!holding!SM!liable!together!with!Moris!
'
Held:' YES.! The! facts! show! that! Moris! was! the! mere! alter! ego! of! SM.!
Thus,! in! order! to! protect! the! rights! of! the! workers,! the! NLRC! properly!
applied! the! piercing! of! the! corporate! veil! doctrine.! And! since! Moris!
doesnt!exist!anymore!to!rehire!the!workers,!who!also!cant!work!for!SM!
because! of! a! difference! in! expertise! of! labor,! then! the! SC! deemed! it!
proper!to!hold!SM!solidarily!liable!with!Moris!for!separation!pay.!
!
1. The! Union! presented! one! Cresencio! Edic! as! a! witness.! Edic!
testified!that!he!was!first!hired!by!the!persons!who!owned!SM!
to! make! samples! to! be! displayed! on! the! store! windows.! When!
he! was! promoted! as! overYall! supervisor,! the! factory! was!
transferred,! the! production! division! was! separately!
incorporated! and! underwent! many! name! changes.! However,!
the!owners!remained!the!same.!
2. An! examination! of! the! Incorporation! papers! of! SM! Shoe! Mart!
and!Moris!Manufacturing!show!(sic)!that!except!for!Elizabeth!Sy!
! all! other! five! (5)! incorporators! and! directors! of! Morris!
Industries!are!major!stockholders!of!SM!Shoe!Mart!as!of!July!20,!
1985;!
3. The! SM! Shoe! Mart! is! the! exclusive! buyer! of! all! of! Moris'!
products;!

4. Both!are!housed! in! one! building! and! Moris! for! many! years!has!


been!using!the!payrolls!of!SM!Shoe!Mart.!SM!glibly!excuses!this!
fact! by! alleging! that! this! was! done! without! its! knowledge.! We,!
however,!considering!the!close!relationship!of!parties,!find!this!
incredible.!
'
Doctrine:'See!above.!
'

The! facts! that! two! corporations! may! be! sister! companies,! and!
that! they! may! be! sharing! personnel! and! resources,! without!
more,! is! insufficient! to! prove! that! their! separate! corporate!
personalities! are! being! used! to! defeat! public! convenience,!
justify!wrong,!protect!fraud,!or!defend!crime.!Padilla'v.'Court'of'
Appeals,'370'SCRA'208'(2001).'
'
Padilla'v.'Court'of'Appeals'

'
Facts:'Susana!Realty!Inc.!(SRI)!sold!to!Light!Rail!Transit!Authority!(LRTA)!
several!parcels!of!land!along!Taft!Avenue!whereby!SRI!had!a!right!of!first!
refusal!in!case!LRTA!decided!to!develop!the!land.!LRTA!contracted!with!
PhoenixYOmega! Development! and! Management! Corporation! (PhoenixY
Omega)!to!develop!the!land!to!which!SRI!later!agreed!on!the!condition!
that!all!plans!must!be!approved!by!it.!PhoenixYOmega!then!assigned!its!
rights!to!PKA!Development!and!Management!Corporation!(PKA)!whose!
President! and! General! Manager! is! Padilla! (who! is! at! the! same! time!
Chairman!of!the!Board!of!PhoenixYOmega).!
!
So! now,! PKA! was! in! charge! of! developing! the! properties.! However,! it!
continuously!failed!to!and!eventually!its!building!permit!was!revoked!for!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
defects! in! construction.! PKA! then! filed! for! rescission! of! the! contract,!
alleging! that! SRI! maliciously! withheld! approval! of! the! plans,! which! in!
turn! led! to! PKA! being! unable! to! comply! with! its! obligations.! However,!
the!judgment!went!in!favor!of!SRI.!!
!

Doctrine:' For! the! separate! juridical! personality! of! a! corporation! to! be!
disregarded,! the! wrongdoing! must! be! clearly! and! convincingly!
established.!It!cannot!be!presumed.!In!this!case,!there!was!no!reason!to!
justify!piercing!the!corporate!veil.!
'

The!contract!was!rescinded,!and!PKA!was!ordered!to!indemnify!SRI!for!
damages.!The!properties!were!returned!to!SRI,!but!PKA!failed!to!pay!the!
monetary! awards.! Thus,! SRI! filed! a! motion! for! the! issuance! of! an! alias!
writ!against!Padilla!and!PhoenixYOmega,!saying!that!they!were!one!and!
the! same! entity! with! PKA.! Padilla! and! PhoenixYOmega! claimed! they!
were! denied! due! process! because! Phoenix! was! not! given! its! days! in!
Court.!

3. Guiding'Principles'in'Alter^Ego'Cases:'

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;!

'
Issue:'Whether!or!not!Padillas!participation!in!the!proceedings!as!PKAs!
President!and!General!Manager!could!be!construed!as!the!opportunity!
to!be!heard!in!court!of!Padilla!and!PhoenixYOmega!
!
Held:'NO.!Padilla!and!PhoenixYOmega!were!not!given!their!day!in!court.!
It! is! clear! that! Padilla! participated! in! the! proceedings! as! General!

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.!

HOWEVER:! The! mere! existence! of! a! parentYsubsidiary!

separating!ownership!from!management;!

relationship! between! two! corporation,! or! that! one! corporation!


is! affiliated! with! another! company! does! not! by! itself! allow! the!
application!of!the!alterYego!piercing!doctrine.!Koppel'(Phil.),'Inc.'
v.'Yatco,'77'Phil.'97'(1946);'PHIVIDEC'v.'Court'of'Appeals,'181'
SCRA'669'(1990).'

Manager!of!PKA!and!not!in!any!other!capacity.!The!fact!that!he!was!the!
Chairman! of! the! Board! of! PhoenixYOmega! cannot! equate! to!
participation! by! PhoenixYOmega! in! the! same! proceedings.! PhoenixY
Omega!was!never!a!party!to!the!case!and!so!could!not!have!participated!
therein.! PKA! and! PhoenixYOmega! are! admittedly! sister! companies,! and!
may! be! sharing! personnel! and! resources,! but! there! was! no! allegation,!
much! less! positive! proof,! that! their! separate! corporate! personalities!
were! being! used! to! defeat! public! convenience,! justify! wrong,! protect!
fraud,!or!defend!crime.!
'

Doctrine! applies! even! in! the! absence! of! evil! intent,! because! of!
the! direct! violation! of! a! central! corporate! law! principle! of!

A! subsidiary! corporation! has! an! independent! and! separate!


juridical! personality,! distinct! from! that! of! its! parent! company,!
hence,! any! claim! or! suit! against! the! latter! does! not! bind! the!
former!and!viceY!versa.!Jardine' Davies,' Inc.' v.' JRB' Realty,' Inc.,'
463'SCRA'555'(2005).1!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Fortune!v.!Quinsayas,!690!SCRA!336!(2013).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

If! used! to! perform! legitimate! functions,! a! subsidiarys!


separate! existence! shall! be! respected,! and! the! liability!
of! the! parent! corporation! as! well! as! the! subsidiary! will!
be! confined! to! those! arising! in! their! respective!
businesses.! Even! when! the! parent! corporation! agreed!
to! the! terms! to! support! a! standby! credit! agreement! in!

judgment! rendered! by! the! court.! Padilla' v.' Court' of' Appeals,'
370'SCRA'208'(2001).'
2. When'corporate'officers'are'sued'in'their'official'capacity,'the'
corporation' which' was' not' made' a' party,' is' not' denied' due'
process.'Emilio'Cano'Enterprises'v.'CIR,'13'SCRA'291'(1965).'

favor! of! the! subsidiary,! does! not! mean! that! its!


personality!has!merged!with!that!of!the!subsidiary.!MR.'
Holdings,'Ltd.'V.'Bajar,'380'SCRA'617'(2002).'

120! [1992]),! an! appellate! proceedings! involving! petitioner!


Arcillas!bid!to!avoid!the!adverse!CA!decision!on!argument!that!
he! is! not! personally! liable! for! the! amount! adjudged! since! the!
same!constitutes!a!corporate!liability!which!nevertheless!cannot!

!
H.'PIERCING'DOCTRINE'AND'THE'DUE'PROCESS'CLAUSE'
1. Need'to'Bring'a'New'Case'Against'the'Officer.'McConnel'v.'CA,'
1'SCRA'723'(1961).'

A! suit! against! individual! shareholders! is! not! a! suit! against! the!


corporation.!Failure!to!implead!the!corporations!as!defendants!
and! merely! annexing! a! list! of! such! corporations! to! the!
complaints!is!a!violation!of!due!process!for!it!would!in!effect!be!
disregarding! their! distinct! and! separate! personality! without! a!
hearing.!PCGG'v.'Sandiganbayan,'365'SCRA'538'(2001).!

Although! both! lower! courts! found! sufficient! basis! for! the!


conclusion! that! PKA! and! Phoenix! Omega! were! one! and! the!
same,! and! the! former! is! merely! a! conduit! of! the! other! the!
Supreme!Court!held!void!the!application!of!a!writ!of!execution!
on!a!judgment!held!only!against!PKA,!since!the!RTC!obtained!no!
jurisdiction!over!the!person!of!Phoenix!Omega!which!was!never!
summoned!as!formal!party!to!the!case.!The!general!principle!is!
that!no!person!shall!be!affected!by!any!proceedings!to!which!he!
is! a! stranger,! and! strangers! to! a! case! are! not! bound! by! the!

We! suggest! as! much! in! Arcilla! v.! Court! of! Appeals,! (215! SCRA!

be! enforced! against! the! corporation! which! has! not! been!


impleaded! as! a! party! below.' Violago' v.' BA' Finance' Corp.,' 559'
SCRA'69'(2008).'
3. Provided'that'evidential'basis'has'been'adduced'during'trial'to'
apply' the' piercing' doctrine.' Jacinto' v.' Court' of' Appeals,' 198'
SCRA'211'(1991).1'
'
Jacinto'v.'Court'of'Appeals'
'
Facts:'The!case!is!an!appeal!concerning!the!decision!of!the!Regional!Trial!
Court! ordering! Inland! Industries! Inc.! and! Roberto! Jacinto! to! pay! jointly!
and! severally! Metropolitan! Bank! and! Trust! Co.! The! Bank! claims! that!
Roberto!Jacinto!can!be!held!personally!liable!because!he!is!the!President!
and! General! Manager! of! Inland! Industries! Inc.! and! his! wife! owns! a!
majority! of! its! shares.! While! on! the! face! of! the! complaint! there! is! no!
specific!allegation!that!the!corporation!is!a!mere!alter!ego!of!petitioner,!
subsequent! developments,! from! the! stipulation! of! facts! up! to! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Arcilla!v.!Court!of!Appeals,!215!SCRA!120!(1992).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
presentation! of! evidence! and! the! examination! of! witnesses,!
unequivocally! show! that! respondent! Metropolitan! Bank! and! Trust!
Company!sought!to!prove!that!petitioner!and!the!corporation!are!one!or!
that! he! is! the! corporation.! No! serious! objection! was! heard! from!
petitioner.!

Court!may!deny!your!right!to!claim!a!separate!personality.!
1. Commit!a!fraud!!!Bogus!NGOs;!so!long!as!the!fraud!is!proved,!
the! Court! will! deny! separate! personality,! provided! that! it! was!
committed/concealed!thru!the!use!of!separate!personality.!
2. AlterYego/Instrumentalities!!!The!Court!has!pierced!the!veil!in!

'
Issue:'Whether!or!not!the!application!of!piercing!the!veil!was!supported!
with!evidence.!
'
Held:' YES.! Roberto! A.! Jacinto,! it! would! appear! that! he! is! in! fact,! the!
corporation! itself! known! as! Inland! Industries,! Inc.! Aside! from! the! fact!
that! he! is! admittedly! the! President! and! General! Manager! of! the!

occasions! where! the! act! committed! is! short! of! fraud! on! the!
ground! of! interlinking! which! indicates! that! the! subsidiary!
company!is!but!an!alterYego.!
3. Defeating! public! convenience,! equity! and! justice! !! As! such,!
piercing!of!the!corporate!veil!should!be!a!last!resort.!If!there!is!
another! way,! the! Courts! should! take! that! path! in! order! to!
preserve!such!an!important!feature!of!the!corporate.!

corporation! and! a! substantial! stockholder! thereof,! it! was! defendant!


Roberto! A.! Jacinto! who! dealt! entirely! with! the! plaintiff! in! those!
transactions.!In!the!Trust!Receipts!that!he!signed!supposedly!in!behalf!of!
Inland! Industries,! Inc.,! it! is! not! even! mentioned! that! he! did! so! in! this!
official!capacity.'
'
Doctrine:'When!evidence!is!presented!by!one!party,!with!the!express!or!

4. There!is!no!hard!and!fast!rule!regarding!piercing.!It!is!subject!to!
the!circumstances!of!the!case,!and!(unfortunately?)!dependent!
on!who!the!Justices!are.!
5. These!cases!of!piercing!the!corporate!veil,!when!the!Court!says!
that! the! stockholder! shares! the! same! personality! as! the!
corporation,!that!is!good!for!purposes!of!the!issue!that!is!being!
rule! upon.! But! it! does! not! result! in! a! complete! denial! of! the!

implied! consent! of! the! adverse! party,! as! to! issues! not! alleged! in! the!
pleadings,! judgment! may! be! rendered! validly! as! regards! those! issues,!
which!shall!be!considered!as!if!they!have!been!raised!in!the!pleadings.!
There! is! implied! consent! to! the! evidence! thus! presented! when! the!
adverse!party!fails!to!object!thereto.!

separate! personality! of! the! corporate! entity! for! matters!


unrelated!to!the!issue.!
!

!
NOTE:'Atty.!Hofilea!
GENERAL' RULE:! The! Corporation! has! a! personality! separate! from!
officers,!stockholders!and!related!companies.!
EXCEPTION:! When! it! is! necessary! to! advance! the! cause! of! justice,! the!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATE(CONTRACT(LAW(
(
I.(Pre0Incorporation(Contracts(
(
A.(Who(Are(Promoters?(

Promoter)is)a)person)who,)acting)alone)or)with)others,)takes)
initiative) in) founding) and) organizing) the) business) or) enterprise)
of)the)issuer)and)receives)consideration)therefor.)(Section(3.10,(
Securities(Regulation(Code([R.A.(8799])(

It)is)necessary)to)identify)the)promoters)because)it)fills)the)gap)
between)the)intention)to)create)the)corporation,)and)its)actual)
birth.)(
o In)the)normal)scheme)of)things,)should)the)promoter)be)
liable)for)contracts?)NO.)Because)when)the)corporation)
is)born,)all)contracts)are)transferred)to)it.(
o However,)where)the)company)was)not)formed,)then)the)
liability)of)the)promoters)become)significant.(

(
B.(Nature(of(Pre0incorporation(Agreements((Sections(60(and(61)(
(
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(within(the(meaning(of(this(Title,(notwithstanding(the(fact(
that(the(parties(refer(to(it(as(a(purchase(or(some(other(contract.((n)(
(
Section(61.(Pre0incorporation(subscription.(
A( subscription( for( shares( of( stock( of( a( corporation( still( to( be( formed(

shall( be( irrevocable( for( a( period( of( at( least( six( (6)( months( from( the(
date(of(subscription,(unless(all(of(the(other(subscribers(consent(to(the(
revocation,( or( unless( the( incorporation( of( said( corporation( fails( to(
materialize( within( said( period( or( within( a( longer( period( as( may( be(
stipulated( in( the( contract( of( subscription:( Provided,( That( no( pre0
incorporation(subscription(may(be(revoked(after(the(submission(of(the(
articles( of( incorporation( to( the( Securities( and( Exchange( Commission.(
(n)(
(
C.((Theories(on(Liabilities(for(Promoter's(Contracts:(

Cagayan&Fishing&Dev.&Co.,&Inc.&v.&Teodoro&Sandiko,&65&Phil.&223&
(1937).&&

Rizal&Light&&&Ice&Co.,&Inc.&v.&Public&Service&Comm.,&25&SCRA&285&
(1968).&&

Caram,&Jr.&v.&CA,&151&SCRA&372&(1987).&

&
Cagayan&Fishing&Dev.&Co.,&Inc.&v.&Teodoro&Sandiko&
(
Facts:( Manuel) Tabora) owns) 4) parcels) of) land) covered) by) three)
mortgages) which) it) sold) to) Cagayan) Fisheries) Dev.) Co.) Inc.) at) a) time)
when)it)was)still)in)the)process)of)incorporation)for)a)consideration)of)P1)
and) under) the) condition) that) the) company) would) pay) Taboras)
indebtedness) to) PNB.) 5) months) later,) Cagayan) was) incorporated,) but)
the) mortgage) loan) was) not) paid.) Subsequently) the) land) was) sold) to)
Sandiko) under) the) name) of) the) corporation) with) the) same) conditions.)
Sandiko) failed) to) comply) with) his) obligation) so) Cagayan) filed) an)action)
praying)that)the)judgment)be)rendered.)
(
Issue:(Whether)or)not)Sandiko)is)liable)to)Cagayan.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
Held:( NO.)The)transfer)to)Cagayan)was)null)because)at)the)time)it)was)
effected,) Cagayan) was) nonQexistent.) If) Cagayan) could) not) and) did) not)
acquire)the)4)parcels)of)land,)it)follows)that)it)had)no)right)to)sell)them)
to) Sandiko.) A) corporation,) until) organized,) has) no) being,) franchise) or)

Securities)and)Exchange)Commission)just)before)the)Certificate)of)Public)
Convenience) was) granted) to) it.) Rizal) Light) contended) that) Morong)
Electric)did)not)have)a)corporate)personality)at)the)time)it)was)granted)a)
franchise) by) the) Municipality) and) as) such) was) not) even) a) de) facto)
corporation.)

faculties.)Nor)do)those)engaged)in)bringing)it)into)being)have)any)power)
to) bind) it) by) contract,) unless) so) authorized) by) the) charter.! Manuel)
Tabora,)his)wife)and)others,)as)mere)promoters)of)a)corporation)on)the)
other) hand.) The) lands) remain) inscribed) in) Taboras) name.) Sandiko)
always) regarded) Tabora) as) the) owner) of) the) lands.) He) dealt) with) the)
latter) directly.) The) President) of) Cagayan) only) intervened) to) sign) the)
contract) in) behalf) of) Cagayan.) Even) PNB) always) treated) Tabora) as) the)

(
Issue:( Whether) or) not) Morong) Electric) could) validly) be) granted) a)
franchise)and)apply)for)a)Certificate)of)Public)Convenience)even)when)it)
did)not)yet)have)a)separate)corporate)legal)personality)at)those)times)
(
Held:(YES.)Morong)Electric)might)not)yet)have)a)corporate)personality)at)
those)times)but)ultimately,)it)was)granted)its)certificate)of)incorporation)

owner)of)the)lands.)
(
Doctrine:( These) promoters) could) not) have) acted) as) agent) for) a)
projected) corporation) since) that) which) had) no) legal) existence) could)
have)no)agent.)A)corporation,)until)organized,)has)no)life)and)therefore)
no) faculties.) However,) this) does) not) mean) that) acts) of) promoters) can)
never)be)ratified)by)the)corporation)when)it)is)subsequently)organized.)

by) the) SEC) and) it) accepted) its) franchise) according) to) the) terms) and)
conditions.)In)effect,)the)doctrine)of)ratification)was)applied)in)favor)of)
Morong)Electric.)
(
Doctrine:( The) fact) that) a) company) is) not) completely) incorporated) at)
the)time)the)grant)is)made)to)it)does)not)affect)the)validity)of)the)grant.)
But) such) grant) cannot) take) effect) until) the) corporation) is) organized.)

There)are)exceptions)

American)courts)generally)hold)that)contracts)made)by)the)promoters)of)
a)corporation)on)its)behalf)may)be(adopted,)accepted,)or)ratified)by)the)
corporation)when)organized.)
(
General(Rule:(For)corporations)that)are)not)yet)incorporated,)they)dont)
have)capacity)to)act)yet.)

(
Rizal&Light&&&Ice&Co.,&Inc.&v.&Public&Service&Comm.&
(
Facts:(Rizal)Light)and)Ice)has)been)distributing)electricity)in)the)Morong,)
Rizal) Area) since) 1949) when) it) was) awarded) a) Certificate) of) Public)
Convenience)by)the)Public)Service)Commission.)In)1962,)Morong)Electric)
Company) was) granted) a) franchise) to) operate) an) electric) service) in) the)
Municipality) of) Morong,) and) it) applied) for) a) Certificate) of) Public)
Convenience.) Its) Certificate) of) Incorporation) was) granted) by) the)

)
Caram,&Jr.&v.&CA&
(
Facts:( The) Carams) are) challenging) the) validity) of) the) Court) of) Appeals)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
decision)ordering)them)to)pay)jointly)and)severally)with)Filipinas)Orient)
Airways) and) with) Barretto) and) Garcia) plaintiff) Arellano) for) his) services)
which) helped) in) the) incorporation) of) Filipinas) Orient) Airways.) The)
Carams)claim)that)they)were)not)the)ones)who)requested)the)services)of)
Arellano,) and) were) merely) financiers) of) the) airways.) As) such) they)
cannot)be)held)personally)liable.)
(
Issue:(Whether)or)not)the)Carams)are)also)and)personally)liable)for)such)
expenses)and,)if)so,)to)what)extent.)
(
Held:( NO.) After) a) perusal) of) the) decision) of) the) CA,) the) SC) found) that)
the)Carams)were)not)really)involved)in)the)initial)steps)that)finally)led)to)
the) incorporation) of) the) Filipinas) Orient) Airways.) It) was) Barretto) and)
Garcia)who)handled)the)preparation)of)the)project)study.)The)said)study)
being)then)subsequently)presented)to)the)Carams)to)induce)the)latter)in)
investing)to)the)proposed)airlines.)The)Carams)were)merely)among)the)
financiers)who)were)persuaded)by)the)strength)of)the)project)study)to)
invest)in)the)proposed)airline.)Furthermore,)there)was)no)showing)that)
the)Filipinas)Orient)Airways)was)a)fictitious)corporation)and)did)not)have)
a)separate)juridical)personality,)to)be)able)to)justify)making)the)Carams,)
as)principal)stockholders)thereof,)responsible)for)its)obligations.)
(
Doctrine:(
(
II.(De(Facto(Corporation((Section(20)(
(
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.(
(

A)de)facto)corporation)is)one)that)has)not)yet)been)certified)as)
existing) by) the) SEC,) but) who) believes) in) good) faith) that) it) has)
authority)and)power)to)operate)as)a)corporation.(
o You) cant) claim) to) be) in) good) faith) if) there) is) no)
certificate)of)incorporation)since)you)know)that)it)is)only)
upon)the)issuance)of)the)certificate)by)the)SEC)that)the)
corporation)is)given)juridical)personality.(

(
A.(Elements:(Arnold&Hall&v.&Piccio,&86&Phil.&634&(1950).&
&
Arnold&Hall&v.&Piccio&
(
Facts:! Arnold)and)Bradley)Hall)(petitioners))and)Fred)and)Emma)Brown,)
Chapman,) and) Abella) (respondents)) signed) and) acknowledged) the)
articles)of)incorporation)of)the)Far)Eastern)Lumber)and)Commercial)Co.,)
Inc.) Attached) to) the) articles) of) incorporation) was) an) affidavit) of) the)
treasurer)stating)that)about)23k)of)the)stocks)were)subscribed)and)fully)
paid)with)properties)transferred)to)the)corporation.)
)
Pending)action)of)the)SEC)concerning)the)articles,)the)respondents)filed)
a) case) against) petitioners) where) they) claimed) that) FELC) was) an)
unregistered) partnership) and) now) they) wished) to) dissolve) it) due) to)
dissension) among) members.) The) Halls) filed) a) case,) claiming) that) the)
court) had) no) jurisdiction) to) decree) the) dissolution) of) the) company,)
because)it)being)a)de)facto)corporation,)dissolution)may)only)be)ordered)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
in)a)quo)warranto)proceeding)before)the)Solicitor)General)and)that)the)
respondents,) having) signed) the) articles) of) incorporation,) are) estopped)
from)denying)that)it)is)a)corporation.)
(
Issue:( Whether) or) not) the) court) had) jurisdiction) to) decree) the)

III.( Corporation( by( Estoppel( Doctrine( (Section( 21;& Salvatierra& v.&


Garlitos,& 103& Phil.& 757& [1958];& Albert& v.& University& Publishing& Co.,& 13&
SCRA&84&[1965];&Asia&Banking&Corp.&v.&Standard&Products,&46&Phil.&145&
[1924];&Madrigal&Shipping&Co.,&v.&Ogilvie,&55&O.G.&No.&35,&p.&7331)(
(

dissolution)
(
Held:( YES.) The) parties) very) well) know) that) the) SEC) has) not) issued) the)
certificate)of)corporation.)Thus,)they)couldnt)claim)in)good)faith)to)be)a)
corporation.)In)this)case,)there)is)no)de)facto)corporation)immune)from)
collateral)attack.)Besides,)this)corporation)is)not)a)party)to)this)case.)The)
case) is) a) litigation) between) stockholders,) for) the) purpose) of) obtaining)

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(

dissolution.) Even) the) existence) of) a) de) jure) corporation) may) be)
terminated) in) a) private) suit) for) its) dissolution) between) stockholders,)
without)the)intervention)of)the)state.)
(
Doctrine:( Personality) of) a) corporation) begins) to) exist) only) from) the)
moment) such) certificate) is) issued.) Immunity) from) collateral) attack) is)
granted) to) corporations) claiming) in) good) faith) to) be) a) corporation)

lack(of(corporate(personality.(
(
One(who(assumes(an(obligation(to(an(ostensible(corporation(as(such,(
cannot(resist(performance(thereof(on(the(ground(that(there(was(in(fact(
no(corporation.(

under) the) Corporation) Law.) When) both) parties) are) aware) that) a)
corporation) has) not) been) duly) organized,) then) the) corporation) by)
estoppel)doctrine)does)not)apply.)

1. One)who)assumes)an)obligation)to)an)ostensible)corporation)as)
such,) cannot) resist) performance) thereof) on) the) ground) that)
there)was)in)fact)no)corporation.)Section(21(2)(
2. Both)parties)must)recognize)the)corporate)party)even)when)one)
does)not)exist.)At)least)one)party)to)the)contract)was)under)the)
impression) that) the) other) corporate) party) was) a) duly)
incorporated)entity.)It)can)only)apply)when)a)certificate)is)issued)

(
A.(Elements(of(the(Doctrine(Corporation(by(Estoppel((

By) its) failure) to) submit) its) byQlaws) on) time,) the) AIIBP) may) be)
considered) a) de) facto) corporation) whose) right) to) exercise)
corporate) powers) may) not) be) inquired) into) collaterally) in) any)
private) suit) to) which) such) corporations) may) be) a) party.)
Sawadjaan&v.&Court&of&Appeals,&459&SCRA&516&(2005).&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

but) where,) for) lack) of) the) other) criteria,) the) de) facto)
corporation)doctrine)cannot)apply.)Arnold&Hall&v.&Piccio,&86&Phil.&
634&(1950).)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
Salvatierra&v.&Garlitos&
(
Facts:( Manuela) Salvatierra) entered) into) a) contract) of) lease) with)
Philippine) Fibers) Producers) Corp.) (represented) by) its) President)

out)of)such)transaction.)
(
Doctrine(1:(A)registered)corporation)has)a)juridical)personality)separate)
and)distinct)from)its)component)members)or)stockholders)and)officers)
and) conversely,) a) stockholder) or) member) cannot) be) held) personally)

Refuerzo))over)a)parcel)of)land)in)Leyte)owned)by)the)former.)Barely)a)
year) after) the) lease,) Salvatierra) filed) for) damages,) accounting) and)
rescission;) she) averred) that) the) corporation) violated) the) provisions) in)
the) contract.) The) Court) rendered) a) judgment) in) favour) of) Salvatierra,)
and)moved)to)subject)parcels)of)land)owned)by)Refuerzo)to)attachment)
because)the)corporation)had)no)properties)in)its)name.)Refuerzo)filed)a)
motion) claiming) that) the) decision) rendered) was) null) and) void) with)

liable) for) any) financial) obligation) of) the) corporation) in) excess) of) his)
unpaid) subscription.) But) this) rule) is) understood) to) refer) merely) to)
registered)corporations)and)cannot)be)made)applicable)to)the)liability)of)
members)of)an)unincorporated)association.)
)

respect)to)him,)there)being)no)allegation)in)the)complaint)pointing)to)his)
personal) liability.) His) defense) was) that) for) while) it) was) stated) in) the)
complaint)that)he)was)a)signatory)to)the)lease)contract,)he)did)so)in)his)
capacity)as)president)of)the)corporation.)
(
Issue( 1:(Whether)or)not)Refuerzo,)in)his)personal)capacity,)can)be)held)
liable)for)corporate)debts.)

applicable)in)this)case.)
)
Held( 2:( NO.)The)doctrine)of)corporation)by)estoppel)does)not)apply)in)
this)case)because)fraud)was)part)of)the)transaction.)In)the)instant)case,)
on)plaintiff's)charge)that)she)was)unaware)of)the)fact)that)the)Philippine)
Fibers) Producers) Co.,) Inc.,) had) no) juridical) personality,) defendant)
Refuerzo) gave) no) confirmation) or) denial) and) the) circumstances)

(
Held(1:(YES.! A)person)who)acts)as)an)agent)without)authority)or)without)
a) principal) is) himself) regarded) as) the) principal;) a) person) acting) or)
purporting) to) act) on) behalf) of) a) corporation) which) has) no) valid)
existence) assumes) such) obligations) and) comes) personally) liable) for)
contracts) entered) into.) Refuerzo,) as) president) of) the) unregistered)
corporation) Phil.) Fibers,) was) the) agent) of) a) nonQexistent) principal,) his)
liability)cannot)be)limited)or)restricted)to)that)imposed)upon)corporate)

surrounding) the) execution) of) the) contract) lead) to) the) inescapable)
conclusion)that)plaintiff)Manuela)T.)Vda.)de)Salvatierra)was)really)made)
to)believe)that)such)corporation)was)duly)organized)in)accordance)with)
law.)
)
Doctrine(2:(While)as)a)general)rule)a)person)who)has)contracted)or)dealt)
with) an) association) in) such) a) way) as) to) recognize) its) existence) as) a)

shareholders.)In)acting)on)behalf)of)a)corporation)which)he)knew)to)be)
unregistered,) he) assumed) the) risk) of) reaping) the) consequential) arising)

(
Issue( 2:( Whether) or) not) the) doctrine) of) corporation) by) estoppel) is)

corporate)body)is)estopped)from)denying)the)same)in)an)action)arising)
out)of)such)transaction)or)dealing,)yet)this)doctrine)may)not)be)held)to)
be)applicable)where)fraud)takes)a)part)in)the)said)transaction.))

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
)

Agency) Doctrine:) Making) the) agent) of) an) inexistent) principal)


liable)on)the)contract)entered)upon.1)
o This) agency) doctrine) applies) only) where) there) is) fraud)
or)misrepresentation)on)the)part)of)one)of)the)contract)
parties.)The)doctrine)of)corporation)by)estoppel)has)not)
application) to) a) situation) where) both) parties) to) the)
contract) acted) in) the) honest) belief) that) a) contracting)
corporate)entity)did)exist.)
o It)is)in)such)noQfraud)or)noQmisrepresentation)cases)that)
Salvatierra) v.) Garlitos) is) clearly) inadequate.) This) is)
where)the)present)statutory)version)of)the)corporation)
by)estoppel)doctrine)applies,)since)its)applicability)does)
not)require)fault)or)conscious)misrepresentation.)
&
Albert&v.&University&Publishing&Co.&

(
Facts:(UP)Co.)through)Jose)Aruego,)its)President,)entered)into)a)contract)
with) Mariano) Albert) for) the) exclusive) right) to) publish) his) revised)
Commentaries)on)the)Revised)Penal)Code.)Because)of)UP)Co.s)failure)to)
pay)its)installments)to)Albert,)the)latter)sued)UP)Co.)alleging)that)it)was)
a) corporation) duly) organized) and) existing) under) the) laws) of) the)
Philippines.)UP)Co.)also)admitted)to)Alberts)allegation)of)its)corporate)
existence)as)well)as)to)the)execution)and)terms)of)the)contract.)Albert)
won)the)case,)and)thereafter)petitioned)for)a)writ)of)execution)against)
Aruego) as) the) real) defendant) because) it) was) recently) discovered) that)

there)is)no)such)entity)as)University)Publishing)Co.,)Inc.)The)SEC)records)
show) that) UP) Co.) was) never) registered) either) as) a) corporation) or)
partnership.)Aruego)claimed)he)is)not)a)party)to)the)case.)
)
Issue:! Whether) or) not) the) judgment) may) be) executed) against) Jose) M.)
Aruego,)supposed)President)of)University)Publishing)Co.,)Inc.,)as)the)real)
defendant.)
(
Held:( YES.) On) account) of) the) nonQregistration) UP) Co.) cannot) be)
considered) a) corporation,) not) even) a) corporation) de) facto.) It) has)
therefore) no) personality) separate) from) Jose) M.) Aruego;) it) cannot) be)
sued) independently.) It) is) patently) clear) that) Jose) M.) Aruego,) acting) as)
representative) of) a) nonQexistent) principal,) was) the) real) party) to) the)
contract)sued)upon,)reaping)the)benefits)resulting)from)it.)Responsibility)
under) the) judgment) falls) on) him) since) partial) payments) of) the)
consideration) were) made) by) him,) he) violated) its) terms,) which)
precipitated)the)previous)suit)in)question.)
NOTE:)Doctrine)of)corporation)by)estoppel)did)not)apply)to)this)case.)
)
Doctrine:( In) a) suit) against) a) corporation) with) no) valid) existence,) the)
person)who)had)and)exercised)the)rights)to)control)the)proceedings,)to)
make)defense,)to)adduce)and)to)crossQexamine)witnesses,)and)to)appeal)
from) a) decision,) is) the) real) defendant,) and) the) enforcement) of) a)
judgment)against)the)corporation)upon)him)is)substantial)observance)of)
due)process)of)law.&
)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Albert) therefore) offers) us) the) "philosophical) bridge") between)


the)two)doctrines:))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o
o

First.)That)a)corporation)can)be)deemed)to)exist)when)in)
fact)none)may)exist,)in)order)to)validate)a)contract;)and))
Second.)That)although)the)veil)of)corporate)fiction)is)set)
up,)it)will)be)pierced)to)enforce)the)contract,)to)hold)the)
actors) behind) such) misrepresentation) liable) for) the)
obligations)arising)from)such)contract.1)

)
Asia&Banking&Corp.&v.&Standard&Products&
(
Facts:( Standard) Products,) Co.,) Inc.) was) indebted) to) Asia) Banking)
Corporation) and) secured) its) indebtedness) through) a) promissory) note.)
Upon) demand) for) the) balance) due,) Standard) failed) to) pay.) Hence) an)
action) was) brought) by) Asia) Banking) Corporation,) which) it) won.) But,)
Standard) Products,) Inc.) contended) that) Asia) Banking) Corp) failed) to)
prove) affirmatively) the) corporate) existence) of) the) parties,) and) the)
appellant) insists) that) under) these) circumstances) the) court) erred) in)
finding)that)the)parties)were)corporations)with)juridical)personality)and)
assigns)same)as)reversible)error.)
(

corporate)existence.)Under)these)circumstances)it)was)unnecessary)for)
the) plaintiff) to) present) other) evidence) of) the) corporate) existence) of)
either)of)the)parties.)
(
Doctrine:(The)general)rule)is)that)in)the)absence)of)fraud)a)person)who)
has)contracted)or)otherwise)dealt)with)an)association)in)such)a)way)as)
to)recognize)and)in)effect)admit)its)legal)existence)as)a)corporate)body)is)
thereby)estopped)to)deny)its)corporate)existence)in)any)action)leading)
out) of) or) involving) such) contract) or) dealing,) unless) its) existence) is)
attacked)for)cause)which)have)arisen)since)making)the)contract)or)other)
dealing)relied)on)as)an)estoppel)and)this)applies)to)foreign)as)well)as)to)
domestic)corporations.)
)
NOTE:( Atty.) Hofilea) !) The) doctrines) in) three) cases) were) laid) down)
before)the)Corporate)Code.)As)such,)these)doctrines)were)embodied)in)
the)Section)21)of)the)Corporation)Code.)
(
B.(Nature(of(Doctrine(

Issue:( Whether)or)not)respondent)Standard)Products)is)estopped)from)
denying)the)corporate)existence)of)the)plaintiff)Asia)Banking)Corp.)
(
Held:( YES.)The)defendant)having)recognized)the)corporate)existence)of)
the)plaintiff)by)making)a)promissory)note)in)its)favor)and)making)partial)
payments) on) the) same) is) therefore) estopped) to) deny) said) plaintiff's)
corporate)existence.)It)is,)of)course,)also)estopped)from)denying)its)own)

third) person) is) involved) in) the) conflict,) there) is) no) corporation)
by) estoppel.) A) failed) consolidation) therefore) cannot) result) in) a)
consolidated)corporation)by)estoppel.(Lozano&v.&De&Los&Santos,&
274&SCRA&452&(1997)&

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Founded) on) principles) of) equity) and) designed) to) prevent)


injustice) and) unfairness,) the) doctrine) applies) when) persons)
assume)to)form)a)corporation)and)exercise)corporate)functions)
and)enter)into)business)relations)with)third)persons.)Where)no)

The) doctrine) is) meant) to) hold) contractual) parties) to) their)
representations) or) expectations) at) the) time) the) contract) was)
perfected;) and) it) does) not) allow) parties) to) draw) on) a) basic)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
defect) ) lack) of) one) contracting) party) ) to) avoid) the)
enforcement)of)the)contract.1)
o A)party)cannot)challenge)the)personality)of)the)plaintiff)
as) a) duly) organized) corporation) after) having)
acknowledged) same) when) entering) into) the) contract)
with) the) plaintiff) as) such) corporation) for) the)

transportation) of) its) merchandise.) Ohta& Dev.& Co.& v.&


Steamship&Pompey,&49&Phil.&117&(1926).2)
A) person) who) accepts) employment) in) an)
unincorporated)charitable)association)is)estopped)from)
alleging) its) lack) of) juridical) personality.) Christian&
Childrens&Fund&v.&NLRC,&174&SCRA&681&(1989).&

The)doctrine)has)evolved)in)Corporate)Law)primarily)as)a)rule)to)
promote)the)integrity)of)commercial)contracts;)the)basic)role)of)
the) doctrine) of) corporation) by) estoppel) is) to) promote) the)
public's) underlying) faith) in) contracts) drawn) with) corporate)
entities,)rather)than)to)promote)corporate)principles.3)
o

One) who) deals) with) an) unincorporated) association)


which)is)not)duly)incorporated)is)not)estopped)to)deny)
its)corporate)existence)when)his)purpose)is)not)to)avoid)
liability,) but) precisely) to) enforce) the) contract) against)
the) action) for) the) purported) corporation.& Intl& Express&
Travel&v.&Court&of&Appeals,&343&SCRA&674&(2000).&

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)
2
)The)same)principle)applied)in)Compania)Agricole)de)Ultramar)v.)Reyes,)4)Phil.)
1)(1911),)but)that)case)pertained)to)a)commercial)partnership)which)required)
registration)in)the)registry)under)the)terms)of)the)Code)of)Commerce).)
3
)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

Under) the) law) on) estoppel) including) that) under) Section) 21) of)
Corporation) Code,) 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.)Lim&Tong&Lim&
v.&Philippine&Fishing&Gear&Industries,&Inc.,&317&SCRA&728&(1999).&

&
Lim&Tong&Lim&v.&Philippine&Fishing&Gear&Industries,&Inc.&
(
Facts:( Chua) and) Yao,) on) behalf) of) Ocean) Quest) Fishing) Corp.,) entered)
into) a) contract) for) the) purchase) of) fishing) nets) from) respondentQPFGI.)
They)claimed)that)they)were)engaged)in)a)business)with)petitionerQLim)
who)was)not)a)signatory)of)the)agreement.)However,)the)buyers)failed)
to) pay) for) their) purchases;) hence,) PFGI) filed) a) collection) suit) against)
Chua,) Yao) and) Lim) with) a) prayer) for) a) writ) of) preliminary) attachment.)
The)trial)court)ruled)that)a)partnership)existed)among)the)Lim,)Chua)and)
Yao)and)held)them)jointly)liable)to)pay)PFGI)based)on)the)testimonies)of)
witnesses) presented) and) the) Compromise) Agreement) executed) by) the)
three.)Lim)claims)that)he)should)not)be)held)liable)for)the)purchase)price)
since)he)was)not)part)of)the)negotiations)with)respondentQPFGI.)
)
Issue:( Whether) or) not) under) the) doctrine) of) corporation) by) estoppel,)
liability)can)be)imputed)only)to)Chua)and)Yao)and)not)to)Lim.)
(
Held:(NO.)Unquestionably,)petitioner)benefited)from)the)use)of)the)nets)
found)inside)F/B)Lourdes,)the)boat)that)has)earlier)been)proven)to)be)an)
asset) of) the) partnership.) Although) it) was) never) legally) formed) for)
unknown)reasons,)this)fact)alone)does)not)preclude)the)liabilities)of)the)
three)as)contracting)parties)in)representation)of)it.)Technically,)it)is)true)
that) petitioner) did) not) directly) act) on) behalf) of) the) corporation.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
thereof.)People&v.&Garcia,&271&SCRA&621&(1997);&People&
v.&Pineda,&G.R.&No.&117010,&18&April&1997&(unpub).&
2. On)the)other)hand,)when)no)fraud)or)misrepresentation)occurs,)
although) it) does) not) make) persons) acting) for) the) purported)
corporation) liable) personally,) it) would) prevent) both) sides) from)
raising)the)nonQexistence)of)the)corporation)as)a)means)to)avoid)

However,) having) reaped) the) benefits) of) the) contract) entered) into) by)
persons) with) whom) he) previously) had) an) existing) relationship,) he) is)
deemed)to)be)part)of)said)association)and)is)covered)by)the)scope)of)the)
doctrine)of)corporation)by)estoppel.)
(
Doctrine:(Clearly,)under)the)law)on)estoppel,)those)acting)on)behalf)of)a)
corporation) and) those) benefited) by) it,) knowing) it) to) be) without) valid)
existence,)are)held)liable)as)general)partners.&

enforcement)of)the)contract.2)
o In)noQfraud)or)noQmisrepresentation)cases,)the)estoppel)
doctrine) under) Section) 21) would) create) a) corporation)
when) none) exists) to) uphold) the) validity) and)
enforceability)of)the)contract)
o Limited)Partner)liability)!)One)who)acts)for)a)purported)
corporation)not)knowing)that)it)had)no)authority)to)do)

(
C.(Two(Levels:((i)(With(Fraud;(and((ii)(Without(Fraud(
1. When)fraud)or)misrepresentation)occurs)with)the)perfection)of)
the)contract)with)a)purported)corporation,)then)section)makes)
the)actor)personally)liable)on)the)contract)as)a)general)partner.1)
o General) Partners) !) liable) not) only) with) what) he)
purported)to)invest)in)the)venture,)but)he)could)be)held)
liable) to) all) his) properties,) even) those) not) actually)
invested)or)promised)to)be)invested)in)the)venture.&
o When) the) incorporators) represent) themselves) to) be)
officers) of) the) corporation) which) was) never) duly)

so) would) be) liable,) by) way) of) distinction,) only) as) a)
limited) partner;) that) is,) he) would) be) liable) only) to) the)
extent)of)his)investment)or)promised)investment)in)the)
purported) corporate) venture.) In) a) noQfraud) or) noQ
misrepresentation)case,)the)persons)acting)in)good)faith)
for) the) purported) corporation) would) still) be) personally)
liable,)but)only)to)the)extent)of)their)actual)or)promised)

registered) with) SEC,) and) engage) in) the) name) of) the)
purported) corporation) in) illegal) recruitment,) they) are)
estopped) from) claiming) that) they) are) not) liable) as)
corporate)officers)under)Section)25)of)Corporation)Code)
which)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,)

investment) in) the) corporate) venture.) This) logically) ties)


in) with) the) limited) liability) feature) of) a) purported)
corporation) given) legal) recognition) in) the) estoppel)
doctrine.)
3. When) there) was) clear) intention) to) form) a) partnership) venture)
through) a) corporate) vehicle,) which) essentially) means) that) the)
partners)had)intended)to)be)active)participants)in)the)business)

liabilities) and) damages) incurred) or) arising) as) a) result)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
of) the) corporation,) then) even) those) who) did) not) directly)
participate) in) the) contract) or) transaction) being) sued) upon,) but)
benefited) therefrom) may) be) held) liable) as) general) partners)
under)the)corporation)by)estoppel)doctrine.)On)the)other)hand,)
when) the) investors) intended) only) to) invest) in) a) corporate)
venture) with) no) intention) of) participating) in) its) corporate)

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,)

affairs,) and) the) corporation) was) not) formed,) no) partnership)


relation)is)deemed)established)by)the)failure)to)incorporate,)and)
such)investors)cannot)even)be)held)liable)for)the)contracts)and)
transaction) sued) upon) even) when) such) contracts) and)
transactions) were) entered) into) by) the) corporate) actors) in) the)
name)of)an)ostensible)corporation.1)Lim& Tong& Lim& v.& Philippine&
Fishing&Gear&Industries,&Inc.,&317&SCRA&728&(1999).)

any)disposition)of)corporate)funds)to)the)prejudice)of)creditors)
is) null) and) void.) Boman& Environmental& Dev.& Corp.& v.& CA,& 167&
SCRA&540&(1988).&

)
IV.(TRUST(FUND(DOCTRINE(
(
A.(Commercial/Common(Law(Premise:(Equity(versus(Debts;(Preference(
of(Creditors(over(Equity(Holders((Art.(2236,(Civil(Code)(
(

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)requirement)of)unrestricted)retained)earnings)to)cover)the)
shares)is)based)on)the)trust)fund)doctrine)which)means)that)the)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)Villanueva,)C.)L.,)&)VillanuevaQTiansay,)T.)S.)(2013).)Philippine)Corporate)Law.)
(2013)ed.).)Manila,)Philippines:)Rex)Book)Store.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

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).&

CIVIL(CODE(
Article(2236.(
The( debtor( is( liable( with( all( his( property,( present( and( future,( for( the(
fulfillment( of( his( obligations,( subject( to( the( exemptions( provided( by(
law.((1911a)(

Under) the) trust) fund) doctrine,) the) capital) stock,) property) and)

Atty.)Hofilea)!)a)shareholder)cannot)be)compelled)to)
pay) more) than) what) they) subscribed) to) in) order) to)
address)the)debts)of)the)corporation.&

Even) when) the) foreclosure) on) the) corporate) assets) was)


wrongfully) 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) of) the)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporation)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).&
o Atty.)Hofilea)!)the)creditors)have)no)right)to)compel)
the) company) to) sell) the) unsubscribed) shares) it) has) left)
of)the)authorized)capital)stock.)

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.&

&

Halley&v.&Printwell,&Inc.&
(
Facts:(BMPI)(Business)Media)Philippines)Inc.))is)a)corporation)under)the)
control)of)its)stockholders,)including)Donnina)Halley.)In)the)course)of)its)
business,) BMPI) commissioned) PRINTWELL) to) print) Philippines,) Inc.) (a)
magazine) published) and) distributed) by) BMPI).) BMPI) placed) several)
orders) amounting) to) P316,000) but) was) only) able) to) pay) P25,000.)
PRINTWELL)sued)BMPI)for)collection)of)the)unpaid)balance)and)later)on)
impleaded)BMPIs)original)stockholders)and)incorporators)to)recover)on)
their)unpaid)subscriptions.)
(
Issue:( Whether) or) not) a) stockholder) (Halley) in) this) case)) who) was) in)
active) management) of) the) business) of) the) corporation) and) still) has)
unpaid) subscriptions) should) be) made) liable) for) the) debts) of) the)
corporation)by)piercing)the)veil)of)corporate)fiction)
(
Held:( YES.) Such) stockholder) should) be) made) liable) up) to) the) extent) of)
her)unpaid)subscription.)It)was)found)that)at)the)time)the)obligation)was)
incurred,)BMPI)was)under)the)control)of)its)stockholders)who)know)fully)
well)that)the)corporation)was)not)in)a)position)to)pay)its)account)(thinly)
capitalized).) And,) that) the) stockholders) personally) benefited) from) the)
operations) of) the) corporation) even) though) they) never) paid) their)
subscriptions)in)full.)
(
Doctrine:( TRUST( FUND( DOCTRINE.) Under) which) corporate) debtors)
might) look) to) the) unpaid) subscriptions) for) the) satisfaction) of) unpaid)
corporate) debts.) Subscriptions) to) the) capital) of) a) corporation)
constitutes) a) trust) fund) for) the) payment) of) the) creditors) (by) mere)
analogy)) In) reality,) corporation) is) a) simple) debtor.) The) creditor) is)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
allowed) to) maintain) an) action) upon) any) unpaid) subscriptions) and)
thereby)steps)into)the)shoes)of)the)corporation)for)the)satisfaction)of)its)
debt.)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.&
&
C.(To(Purchase(Own(Shares((Sections(8,(41,(43(and(122,(last(paragraph)(
(
Section(8.(Redeemable(shares.(
Redeemable(shares(may(be(issued(by(the(corporation(when(expressly(
so(provided(in(the(articles(of(incorporation.(They(may(be(purchased(or(
taken( up( by( the( corporation( upon( the( expiration( of( a( fixed( period,(
regardless( of( the( existence( of( unrestricted( retained( earnings( in( the(
books(of(the(corporation,(and(upon(such(other(terms(and(conditions(as(
may( be( stated( in( the( articles( of( incorporation,( which( terms( and(
conditions(must(also(be(stated(in(the(certificate(of(stock(representing(
said(shares.(
(

Unrestricted) Retained) Earnings) !) These) are) earnings) which) is)


not)earmarked)for)any)particular)purpose.(

Dividends) come) from) the) unrestricted) retained) earnings.)


Otherwise,)you)will)impair)the)capital)of)the)corporation.(
o Stock)Dividend)!)instead)of)giving)you)cash)dividend)to)
which) you) are) entitled) to,) you) will) be) given) a) stock) as)

Decision)to)issue)stock)dividends)is)made)by)2/3)
of)the)stockholders)and)majority)of)the)Board.(
Cash)Dividend)!)liquidated)cash(
" Distribution) is) decided) upon) by) the) Board) of)
Directors.(
"

Redeemable) shares) need) to) be) classified) from) the) beginning)


that)they)are)redeemable.(
o This) is) the) exception) to) the) general) rule) that) you) need)
URE)in)order)to)buyQback)shares.(

(
Section(41.(Power(to(acquire(own(shares.(
A( stock( corporation( shall( have( the( power( to( purchase( or( acquire( its(
own(shares(for(a(legitimate(corporate(purpose(or(purposes,(including(
but(not(limited(to(the(following(cases:(Provided,(That(the(corporation(
has(unrestricted(retained(earnings(in( its( books( to( cover(the( shares( to(
be(purchased(or(acquired:(
(
1.(To(eliminate(fractional(shares(arising(out(of(stock(dividends;(
(
2.( To( collect( or( compromise( an( indebtedness( to( the( corporation,(
arising( out( of( unpaid( subscription,( in( a( delinquency( sale,( and( to(
purchase(delinquent(shares(sold(during(said(sale;(and(
(
3.(To(pay(dissenting(or(withdrawing(stockholders(entitled(to(payment(
for(their(shares(under(the(provisions(of(this(Code.((n)(
(

equivalent.) Its) like) reinvesting) your) dividends) to) the)


corporation.(

The) URE) is) also) what) the) corporation) can) use) to) buyQback) its)
shares)from)its)stockholders.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Section(43.(Power(to(declare(dividends.((
The( board( of( directors( of( a( stock( corporation( may( declare( dividends(
out( of( the( unrestricted( retained( earnings( which( shall( be( payable( in(
cash,( in( property,( or( in( stock( to( all( stockholders( on( the( basis( of(
outstanding( stock( held( by( them:( Provided,( That( any( cash( dividends(

be( continued( as( a( body( corporate( for( three( (3)( years( after( the( time(
when(it(would(have(been(so(dissolved,(for(the(purpose(of(prosecuting(
and(defending(suits(by(or(against(it(and(enabling(it(to(settle(and(close(
its( affairs,( to( dispose( of( and( convey( its( property( and( to( distribute( its(
assets,(but(not(for(the(purpose(of(continuing(the(business(for(which(it(

due(on(delinquent(stock(shall(first(be(applied(to(the(unpaid(balance(on(
the( subscription( plus( costs( and( expenses,( while( stock( dividends( shall(
be( withheld( from( the( delinquent( stockholder( until( his( unpaid(
subscription( is( fully( paid:( Provided,( further,( That( no( stock( dividend(
shall(be(issued(without(the(approval(of(stockholders(representing(not(
less(than(two0thirds((2/3)(of(the(outstanding(capital(stock(at(a(regular(
or(special(meeting(duly(called(for(the(purpose.((16a)(

was(established.(
(
At(any(time(during(said(three((3)(years,(the(corporation(is(authorized(
and(empowered(to(convey(all(of(its(property(to(trustees(for(the(benefit(
of( stockholders,( members,( creditors,( and( other( persons( in( interest.(
From(and(after(any(such(conveyance(by(the(corporation(of(its(property(
in( trust( for( the( benefit( of( its( stockholders,( members,( creditors( and(

(
Stock( corporations( are( prohibited( from( retaining( surplus( profits( in(
excess( of( one( hundred( (100%)( percent( of( their( paid0in( capital( stock,(
except:((1)(when(justified(by(definite(corporate(expansion(projects(or(
programs( approved( by( the( board( of( directors;( or( (2)( when( the(
corporation(is(prohibited(under(any(loan(agreement(with(any(financial(
institution( or( creditor,( whether( local( or( foreign,( from( declaring(

others( in( interest,( all( interest( which( the( corporation( had( in( the(
property( terminates,( the( legal( interest( vests( in( the( trustees,( and( the(
beneficial( interest( in( the( stockholders,( members,( creditors( or( other(
persons(in(interest.(
(
Upon( the( winding( up( of( the( corporate( affairs,( any( asset( distributable(
to(any(creditor(or(stockholder(or(member(who(is(unknown(or(cannot(

dividends(without(its/his(consent,(and(such(consent(has(not(yet(been(
secured;( or( (3)( when( it( can( be( clearly( shown( that( such( retention( is(
necessary( under( special( circumstances( obtaining( in( the( corporation,(
such( as( when( there( is( need( for( special( reserve( for( probable(
contingencies.((n)(

be( found( shall( be( escheated( to( the( city( or( municipality( where( such(
assets(are(located.(
(
Except( by( decrease( of( capital( stock( and( as( otherwise( allowed( by( this(
Code,( no( corporation( shall( distribute( any( of( its( assets( or( property(
except(upon(lawful(dissolution(and(after(payment(of(all(its(debts(and(
liabilities.((77a,(89a,(16a)(

(
Section(122.(Corporate(liquidation.(
Every( corporation( whose( charter( expires( by( its( own( limitation( or( is(
annulled(by(forfeiture(or(otherwise,(or(whose(corporate(existence(for(
other(purposes(is(terminated(in(any(other(manner,(shall(nevertheless(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Under) common) law,) there) were) originally) conflicting) views) on)


whether) a) corporation) had) the) power) to) purchase) its) own)

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
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(

The) violation) of) terms) embodied) in) a) subscription) agreement,)


with)are)personal)commitments,)do)not)constitute)legal)ground)
to)rescind)the)subscription)agreement)since)such)would)violate)
the) Trust) Fund) Doctrine) and) the) procedures) for) the) valid)
distribution)of)assets)and)property)under)the)Corporation)Code.)
In) the) instant) case,) the) rescission) of) the) PreQSubscription)
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).&

&
Ong&Yong&v.&Tiu&
(
Facts:( The) Tiu) family) members) are) the) owners) of) First) Landlink) Asia)
Development)Corporation)(FLADC).)One)of)the)corporations)projects)is)
the) construction) of) Masagana) Citimall) in) Pasay) City.) However,) due) to)
financial) difficulties) (they) were) indebted) to) PNB) for) P190) million),) the)
Tius) feared) that) the) construction) would) not) be) finished.) So) to) prevent)
the) foreclosure) of) the) mortgage) on) the) two) lots) where) the) mall) was)
being) built,) they) invited) the) Ongs) to) invest) in) FLADC.) The) two) parties)
entered)into)a)Presubscription)Agreement)whereby)each)of)them)would)
hold)1,000,000)shares)each)and)be)entitled)to)nominate)certain)officers.)
The) Tius) contributed) a) building) and) two) lots,) while) the) Ongs)
contributed)P100M.)
)
Two) years) later,) the) Tuis) filed) for) rescission) of) the) Presubscription)
Agremement) because) the) Ongs) refused) to) issue) them) their) shares) of)
stock) and) from) assuming) positions) of) VP) and) Treasurer) to) which) they)
were) entitled) to) nominate.) The) Ongs) contended) that) they) could) not)
issue) the) new) shares) to) the) Tius) because) the) latter) did) not) pay) the)
capital) gains) tax) and) the) documentary) stamp) tax) of) the) lots.) And)
because) of) this,) the) SEC) would) not) approve) the) valuation) of) the)
property) contribution) of) the) Tius.) The) Court) of) Appeals) ordered)
liquidation)of)FLADC)to)enforce)rescission)of)the)contract.)
(
Issue:( Whether)or)not)the)liquidation)of)FLADC)violated)the)Trust)Fund)
Doctrine)
(
Held:( YES.) In) this) case,) the) rescission) would) certainly) be) a) violation) of)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!
the) doctrine) and) also) of) the) Corporation) Code) because) the) rescission)
would) result) in) the) unauthorized) distribution) of) the) assets) of) the)
corporation.)Rescission)based)on)a)breach)in)the)terms)of)a)subscription)
agreement) is) not) one) of) the) instances) when) distribution) of) a)
corporations)assets)and)property)is)allowed)(Section)122).)It)would)not)
only) be) unlawful) but) it) would) also) be) prejudicial) to) the) corporate)
creditors) who) enjoy) absolute) priority) of) payment) over) any) individual)
stockholder.)
(
Doctrine:(This)doctrine)enunciates)that)subscriptions)to)the)capital)stock)
of)a)corporation)constitute)a)fund)to)which)the)creditors)have)a)right)to)
look) for) the) satisfaction) of) their) claims.) This) doctrine) is) the) underlying)
principle) in) the) procedure) for) the) distribution) of) capital) assets,)
embodied) in) the) Corporation) Code,) which) allows) the) distribution) of)
corporate)capital)only)in)three)instances:)(1))amendment)of)the)Articles)
of)Incorporation)to)reduce)the)authorized)capital)stock,)(2))purchase)of)
redeemable) shares) by) the) corporation,) regardless) of) the) existence) of)
unrestricted) retained) earnings,) and) (3)) dissolution) and) eventual)
liquidation)of)the)corporation.&
&
NOTE:(
Atty.) Hofilea) !) To) release) a) person) from) his) obligation) to) pay) his)
subscribed)shares)is)offensive)to)the)Trust)Fund)Doctrine.)

Trust) Fund) Doctrine) applies) to) all) properties) of) the) company,)
and)not)limited)to)simply)the)unpaid)subscriptions.)

A) company) may) do) what) it) wills) with) its) properties,) but)
creditors)are)protected.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

ARTICLES)OF)INCORPORATION)

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;)
6. The) number) of) directors) or) trustees,) which) shall) not) be) less)
than)five)(5))nor)more)than)fifteen)(15);)

)
I.)Nature)of)Charter:)The$charter$is$in$the$nature$of$a$contract$between$
the$ corporation$ and$ the$ government." Government" of" P.I." v." Manila"
Railroad"Co.,"52"Phil."699"(1929)."

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)

The$ articles$ of$ incorporation$ has$ been$ described$ as$ one$ that$
defines$ the$ charter$ of$ the$ corporation$ and$ the$ contractual$
relationships$ between$ the$ state$ and$ the$ corporation,$ the$
stockholders$and$the$State,$and$between$the$corporation$and$its$
stockholders.$Lanuza"v."Court"of"Appeals,"454"SCRA"54"(2005)."

)
II.)Procedure)and)Documentary)Requirements)(Section)14)and)15))
)

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)nonTstock)corporation,)the)amount)of)its)capital,)the)
names,) nationalities) and) residences) of) the) contributors) and)

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)he)secondary)purpose)
or) purposes:) Provided,) That) a) nonTstock) 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)

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)twentyTfive)(25%))percent)of)the)authorized)capital)stock)
of)the)corporation)has)been)subscribed,)and)at)least)twentyTfive)(25%))
of) the) total) subscription) has) been) fully) paid) to) him) in) actual) cash)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
and/or) in) property) the) fair) valuation) of) which) is) equal) to) at) least)
twentyTfive) (25%)) percent) of) the) said) subscription,) such) paidTup)
capital)being)not)less)than)five)thousand)(P5,000.00))pesos.)

stockholders$or$members$as$long$as$they$are$not$incorporators.1"

A.)As)to)Number)and)Residency)of)Incorporators)(Section)10))
)

own)or)be)a)subscriber)to)at)least)one)(1))share)of)the)capital)stock)of)
the)corporation.)
)

corporations$to$the$capital$stock$of$a$corporation$in$the$
process$ of$ incorporation$ be$ fully$ paid$ due$ to$ their$
limited$ liability$ capacity; 3 $but$ after$ incorporation,$
corporations$may$subscribe$without$having$to$fully$pay$
their$ subscription$ under$ the$ premise$ that$ the$ risk$ of$
insolvency$no$longer$exist$at$that$point.4"

It$ is$ possible$ for$ a$ business$ to$ be$ wholly$ owned$ by$ one$
individual,$ and$ the$ validity$ of$ its$ incorporation$ is$ not$ affected$
when$he$gives$nominal$ownership$of$only$one$share$of$stock$to$
each$ of$ the$ other$ four$ incorporators.$ This$ arrangement$ is$ not$
necessarily$ illegal,$ but$ it$ is$ valid$ only$ between$ and$ among$ the$
incorporators$ privy$ to$ the$ agreement.$ It$ does$ not$ bind$ the$
corporation$which$will$consider$all$stockholders$of$record$as$the$
lawful$ owners$ of$ their$ registered$ shares.$ As$ between$ the$
corporation$ on$ the$ one$ hand,$ and$ its$ stockholders$ and$ third$
persons$on$the$other,$the$corporation$looks$only$to$its$books$for$
the$ purpose$ of$ determining$ who$ its$ shareholders$ are.$ Nautica"
Canny"Corp."v."Yumul,"473"SCRA"415"(2005)."

In$ practice,$ the$ SEC$ would$ allow$ the$ incorporation$ of$ a$


corporation$ which$ would$ have$ as$ original$ stockholder$ in$ the$
articles$ of$ incorporation,$ as$ long$ as$ the$ minimum$ number$ of$
individual$incorporators$appear.$"
o In$one$opinion,$the$SEC$has$posited$that$both$domestic$
and$ foreign$ corporations,$ if$ allowed$ by$ their$ charters,$
may$ be$ initial$ subscribers$ to$ the$ capital$ stock$ of$ a$
corporation,$ but$ their$ subscription$ will$ not$ be$
considered$in$the$computation$of$the$25%$requirement$
for$incorporation.2$"
o The$ SEC$ also$ requires$ that$ the$ subscription$ of$

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)

Only$ natural$ persons$ can$ be$ incorporators.$ However,$ the$ law$


does$not$preclude$corporations$and$partnership$from$becoming$

The$ Corporation$ Code$ maintains$ the$ requirement$ that$ at$ least$


five$ (5)$ individuals$ must$ be$ incorporators$ of$ a$ corporation$ for$
perhaps$a$more$practical$reason.$"

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Government!of!the!Philippine!Islands!v.!El!Hogar!Filipino,$50$Phil.$399,$460Q461$
(1929).$$
2
$SEC$Opinion,$23$May$1967,$SEC$FOLIO$1960Q1976,$at$p.$284;$Also,$SEC$Opinion,$
14$November$1978.$$
3
$SEC$Opinion,$23$May$1967,$SEC$FOLIO$1960Q1976,$at$p.$284.$
4
$SEC$Opinion,$29$June$1976,$SEC$FOLIO$1960Q1976,$at$p.$936.$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

Our$ jurisdiction$ recognizes$ the$ existence$ of$ promoter's$


contracts,$ or$ contracts$ entered$ into$ on$ behalf$ of$ a$
corporation$ still$ in$ the$ process$ of$ organization.$ Indeed,$
transactions$ may$ already$ be$ pursued$ with$ the$ parties$
aware$ that$ the$ corporation$ is$ still$ under$ registration$
proceedings.$ If$ anything$ goes$ wrong$ with$ the$

incorporation$ process,$ and$ there$ may$ have$ been$


liabilities$created$at$the$time$of$incorporation,$then$the$
existence$ of$ five$ individual$ incorporators$ allows$ the$
public$ or$ injured$ party$ to$ run$ after$ the$ persons$ who$
cannot$hide$behind$a$corporate$fiction$or$who$can$avail$
of$ limited$ liability$ features.$ In$ addition,$ there$ must$ still$
indeed$be$individuals,$who$can$be$held$criminally$liable,$

wish$to$establish$a$foreign$brand$in$the$Philippines,$they$
will$either$reside$in$the$Philippines$or$ask$people$to$act$
as$incorporators$(who$are$usually$their$lawyers).$
" Incorporators$are$not$at$all$times$the$promoters$
or$majority$stockholders.$This$is$not$necessarily$
illegal,$ although$ it$ brings$ out$ the$ problem$
whereby$ the$ incorporators$ are$ not$ necessarily$

for$ acts$ done$ relating$ to$ incorporation$ process.$ Such$


remedies$would$be$unavailing$or$would$be$meaningless$
if$the$incorporators$are$themselves$juridical$entities."

the$ people$ who$ should$ be$ held$ responsible$


since$they$are$not$the$promoters.$
Atty.$Hofilea$!$in$case$of$public$utilities,$the$company$
must$ be$ 60%$ owned$ and$ controlled.$ As$ such,$ if$ the$
incorporators$ own$ only$ one$ share,$ then$ the$ company$
cannot$be$a$public$utility.$$
" People$ v.$ Quasha$ !$ at$ the$ time$ of$ the$

If$ only$ two$ incorporators$ are$ residents$ of$ the$ Philippines$ a$


corporation$still$exists$$a$de!facto$corporation$provided$that$at$
least$ five$ (5)$ incorporators$ must$ sign$ the$ articles$ of$
incorporation.1$"
o This$however$does$not$prevent$the$existence$of$the$soQ
called$ oneQman$ corporation,$ where$ business$ is$ actually$
owned$ by$ one$ individual,$ it$ is$ still$ possible$ for$ him$ to$
incorporate$ by$ giving$ nominal$ ownership$ of$ only$ one$

establishment$ of$ the$ company,$ it$ is$ not$


necessary$ that$ the$ company$ be$ Filipino.$
However,$ if$ they$ want$ to$ get$ a$ franchise$ to$
operate$ as$ a$ public$ utility,$ then$ they$ must$ first$
meet$ the$ requirement$ of$ the$ 60%$ citizenship$
requirement$of$the$law.$

share$ of$ stock$ to$ each$ of$ 4$ other$ personsthis$ is$ not$
necessarily$illegal.$"

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

There$ is$ no$ general$ requirement$ of$ Philippine$


citizenship$only$a$majority$of$the$incorporators$must$be$
residents$ of$ the$ Philippines.$ However,$ there$ are$ some$
areas$ of$ business$ and$ industry$ wherein$ ownership$ is$
reserved,$wholly$or$partially$to$Filipinos."
Atty.$ Hofilea$ !$ if$ there$ are$ 5$ American$ citizens$ who$

$SEC$Opinion,$11$October$1971,$SEC$FOLIO$1960Q1976,$at$p.$495.$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

An$incorporator$will$always$retain$his$status$as$the$incorporator$
of$the$corporation$because$such$status$is$acquired$by$the$mere$

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
fact$ of$ being$ one$ of$ the$ persons$ who$ originally$ composed$ the$
corporation.$$
o He$may$cease$to$be$a$stockholder$or$a$member,$he$may$
lose$all$his$rights$and$interest$in$the$corporation,$but$he$
will$always$be$known$as$the$incorporator.$The$articles$of$
incorporation$ cannot$ therefore$ be$ amended$ to$ delete$

the$name$of$an$incorporator$and$substitute$it$with$that$
of$another,$the$latter$not$being$an$incorporator.1$
" You$ cannot$ remove$ an$ original$ incorporator$
from$the$charter.$
Atty.$Hofilea$!$can$a$person$sue$an$incorporator$who$
is$ no$ longer$ involved$ with$ the$ company$ (let$ go$ of$ his$
share)?$NO.$$

Where$there$is$a$change$in$the$initial$directors$(indicated$in$the$
articles$of$incorporation),$there$is$no$need$to$amend$the$articles$
of$incorporation.$$

)
B.)Corporate)Name)(Sections)18,)14(1))and)42))
)
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)

)
Section)42.)Power)to)invest)corporate)funds)in)another)corporation)or)
business)or)for)any)other)purpose.)
Subject)to)the)provisions)of)this)Code,)a)private)corporation)may)invest)
its)funds)in)any)other)corporation)or)business)or)for)any)purpose)other)
than) the) primary) purpose) for) which) it) was) organized)when) approved)
by)a)majority)of)the)board)of)directors)or)trustees)and)ratified)by)the)
stockholders)representing)at)least)twoTthirds)(2/3))of)the)outstanding)
capital)stock,)or)by)at)least)two)thirds)(2/3))of)the)members)in)the)case)
of) nonTstock) corporations,) at) a) stockholder's) or) member's) meeting)
duly)called)for)the)purpose.)Written)notice)of)the)proposed)investment)
and) the) time) and) place) of) the) meeting) shall) be) addressed) to) each)
stockholder) or) member) at) his) place) of) residence) as) shown) on) the)
books) of) the) corporation) and) deposited) to) the) addressee) in) the) post)
office) with) postage) prepaid,) or) served) personally:) Provided,) That) any)
dissenting) stockholder) shall) have) appraisal) right) as) provided) in) this)
Code:) Provided,) however,) That) where) the) investment) by) the)
corporation)is)reasonably)necessary)to)accomplish)its)primary)purpose)
as) stated) in) the) articles) of) incorporation,) the) approval) of) the)
stockholders)or)members)shall)not)be)necessary.)(17)1/2a))
)

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.)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

$SEC$Opinion,$7$January$1974,$VIII$SEC$QUARTERLY$BULLETIN$21$($No.$I,$Jan.$1974).$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

1. Corporate)Name)Guidelines)

Similarity$in$corporate$names$between$two$corporations$would$
cause$ confusion$ to$ the$ public$ especially$ when$ the$ purposes$
stated$ in$ their$ charter$ are$ also$ the$ same$ type$ of$ business.$
Universal"Mills"Corp."v."Universal"Textile"Mills"Inc.,"78"SCRA"62"
(1977)."
o Atty.$ Hofilea$ !$ NOT$ DECEPTIVE$ PER$ SE.$ Latitude$ is$
given$ to$ someone$ in$ terms$ of$ determining$ whether$ a$

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
name$is$deceptive.$Where$a$name$is$deceptive$per$se,$it$
will$be$disallowed$by$the$SEC.)
" The$use$of$Inc.$in$required$under$Section$15)
" The$ use$ of$ a$ persons$ name$ in$ the$ corporation$
name$ is$ allowed$ only$ where$ the$ person$ is$ a$
shareholder$ or$ he$ has$ a$ significant$ position$ in$

intent,$ may$ be$ prevented$ by$ the$ corporation$ having$ a$ prior$


right.$ Ang" Mga" Kaanib" sa" Iglesia" ng" Dios" Kay" Kristo" Hesus" v."
Iglesia"ng"Dios"Kay"Dristo"Jesus,"372"SCRA"171"(2001)."

The$name$of$a$corporation$is$essential$not$only$for$its$existence$
as$a$juridical$person,$but$also$in$manner$of$dealing$with$it,$and$in$

the$ Approval$ of$ Corporate$ and$ Partnership$ Names,$ two$


requisites$ must$ be$ proven,$ to$ wit:$ (a)$ That$ the$ complainant$
corporation$ acquired$ a$ prior$ right$ over$ the$ use$ of$ such$
corporate$ name;$ and$ (b)$ the$ proposed$ name$ is$ either:$ (i)$
identical,$or$(ii)$deceptively$or$confusingly$similar$to$that$of$any$
existing$corporation$or$to$any$other$name$already$protected$by$

the$ exercise$ of$ its$ juridical$ capacities;$ it$ cannot$ be$ changed$
except$ in$ the$ manner$ provided$ for$ by$ law.$ Red" Line" Trans." v."
Rural"Transit,"60"Phil."549"(1934)."

law;$or$(iii)$patently$deceptive,$confusing$or$contrary$to$existing$
laws.$Philips"Export"B.V."v."Court"of"Appeals,"206"SCRA"457,"463"
(1992)"

the$ corporation$ or$ he$ is$ neither$ but$ has$ his$


consent.)

Section$18$of$Corporation$Code$expressly$prohibits$the$use$of$a$
corporate$name$which$is$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.$ The$ policy$ behind$ the$ foregoing$
prohibition$ is$ to$ avoid$ fraud$ upon$ the$ public$ that$ will$ occasion$
to$ deal$ with$ the$ entity$ concerned,$ the$ evasion$ of$ legal$
obligations$ and$ duties,$ and$ the$ reduction$ of$ difficulties$ of$
administration$ and$ supervision$ over$ corporations.$ Industrial"
Refractories"Corp."v."Court"of"Appeals,"390"SCRA"252"(2002).1$

Incorporators$must$choose$a$name$at$their$peril;$and$the$use$of$
a$name$similar$to$one$adopted$by$another$corporation,$whether$
a$business$or$a$nonprofit$organization,$if$misleading$or$likely$to$
injure$ the$ exercise$ of$ its$ corporate$ functions,$ regardless$ of$

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

To$ fall$ within$ the$ prohibition$ of$ the$ law$ Revised$ Guidelines$ in$

$Also$Lyceum$of$the$Philippines$v.$Court$of$Appeals,$219$SCRA$610,$615$(1993).$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

A$corporation$has$no$right$to$intervene$in$a$suit$using$a$name,$
not$even$its$acronym,$other$than$its$registered$name,$as$the$law$
requires$ and$ not$ another$ name$ which$ it$ had$ not$ registered.$
Laureano" Investment" and" Dev." Corp." v." Court" of" Appeals," 272"
SCRA"253"(1997).$

There$would$be$no$denial$of$due$process$when$a$corporation$is$

sued$and$judgment$is$rendered$against$it$under$its$unregistered$
trade$ name:$ A$ corporation$ may$ be$ sued$ under$ the$ name$ by$
which$ it$ makes$ itself$ known$ to$ its$ workers.$ PisonZArceo" Agri."
Dev."Corp."v."NLRC,"279"SCRA"312"(1997)."
2. Change)in)Corporate)Name)

A$ corporation$ may$ change$ its$ name$ by$ the$ amendment$ of$ its$
articles$ of$ incorporation,$ but$ the$ same$ is$ not$ effective$ until$
approved$ by$ the$ SEC.$ Phil." First" Insurance" Co." v." Hartigan," 34"
SCRA"252"(1970)."

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

A$ change$ in$ the$ corporate$ name$ does$ not$ make$ a$ new$


corporation,$ and$ has$ no$ effect$ on$ the$ identity$ of$ the$

"

corporation,$ or$ on$ its$ property,$ rights,$ or$ liabilities.$ Republic"


Planters"Bank"v."Court"of"Appeals,"216"SCRA"738"(1992).1$
3. SEC)Jurisdiction)Over)Issues)Involving)Corporate)Names)

SEC$has$quasiQjudicial$powers$to$hear$and$decide$a$controversy$

)
C.)Purpose)Clauses)(Sections)14(2))and)42))

organized$to$illegally$avoid$the$provisions$on$land$reform$and$to$
avoid$the$payment$of$estate$taxes,$as$being$prohibited$collateral$
attack.$ Gala" v." Ellice" AgroZIndustrial" Corp.," 418" SCRA" 431"
(2003)."

The$ significance$ of$ the$ purpose$ clause$ in$ the$ articles$ of$
incorporation$ is$ that$ it$ confers,$ as$ well$ as$ limits,$ the$ powers$
which$a$corporation$may$exercise.2$
o The$statement$of$the$primary$purpose$in$the$articles$of$
incorporation$is$means$to$protect$shareholders$so$they$
will$know$the$main$business$of$the$corporation$and$file$
derivative$ suits$ if$ the$ corporation$ deviates$ from$ the$

primary$ purpose.$ Uy" Siuliong" v." Director" of" Commerce"


and"Industry,"40"Phil."541"(1919)."
Some$of$the$other$reasons$for$indicating$purpose$in$the$
charter$of$the$corporation$are$so$that:$
" (a)$Prospective$investors$shall$know$the$kind$of$
business$the$corporation$deals$with;$
" (b)$ Management$ shall$ know$ the$ limits$ of$ its$
actions;$

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

$P.C.$Javier$&$Sons,$Inc.$v.$Court$of$Appeals,$462$SCRA$36$(2005).$
$Villanueva,$C.$L.,$&$VillanuevaQTiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$
2

The$best$proof$of$the$purpose$of$a$corporation$is$its$articles$of$
incorporation$ and$ byQlaws.$ The$ articles$ of$ incorporation$ must$
state$ the$ primary$ and$ secondary$ purposes$ of$ the$ corporation,$
while$the$byQlaws$outline$the$administrative$organization$of$the$
corporation,$ which,$ in$ turn,$ is$ supposed$ to$ insure$ or$ facilitate$
the$ accomplishment$ of$ said$ purpose.$ Therefore,$ the$ Court$
brushed$ aside$ the$ contention$ that$ the$ corporations$ were$

between$two$corporation$as$to$who$has$a$better$right$to$the$use$
of$a$particular$corporate$name.$Industrial" Refractories" Corp." v."
Court"of"Appeals,"390"SCRA"252"(2002).)

(c)$ A$ thirdQparty$ can$ know$ whether$ his$ dealing$


with$ the$ corporation$ are$ with$ corporate$
functions$and$powers.$

The$ SEC$ has$ ruled$ that$ the$ rules$ governing$ the$ construction$ of$
charters$ of$ corporations$ are,$ for$ the$ most$ part,$ the$ same$ as$
those$ which$ govern$ the$ construction$ and$ interpretation$ of$
statutes,$contracts$and$other$written$instruments.3$

$
D.)Corporate)Term)(Section)11))
)
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)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3

SEC$ Opinion,$ 26$ January$ 1994,$ XXVIII$ SEC$ QUARTERLY$ BULLETIN$ 46$ (No.$ 2,$ June$
1994),$citing!7A$FLETCHER,$Section$3640,$and$6$FLETCHER$CYC.$CORP.,$Section$2483.$$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
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)

be) held) in) the) city) or) municipality) where) the) principal) office) of) the)
corporation) is) located,) and) if) practicable) in) the) principal) office) of) the)
corporation:) Provided,) That) Metro) Manila) shall,) for) purposes) of) this)
section,)be)considered)a)city)or)municipality.)
)

Exchange)Commission.)

Notice)of)meetings)shall)be)in)writing,)and)the)time)and)place)thereof)
stated)therein.)
)
All)proceedings)had)and)any)business)transacted)at)any)meeting)of)the)
stockholders) or) members,) if) within) the) powers) or) authority) of) the)
corporation,) shall) be) valid) even) if) the) meeting) be) improperly) held) or)
called,) provided) all) the) stockholders) or) members) of) the) corporation)

No$extension$of$term$can$be$effected$once$dissolution$stage$has$
been$reached,$as$it$constitutes$new$business.$Alhambra"Cigar"v."
SEC,"24"SCRA"269"(1968)."

Article$605$of$Civil$Code$clearly$limits$any$usufruct$constituted$
in$favor$of$a$corporation$or$association$to$50$years.$A$usufruct$is$
meant$ only$ as$ a$ lifetime$ grant.$ Unlike$ a$ natural$ person,$ a$
corporation$ or$ associations$ lifetime$ may$ be$ extended$
indefinitely.$ The$ usufruct$ would$ then$ be$ perpetual.$ This$ is$
especially$ invidious$ in$ cases$ where$ the$ usufruct$ given$ to$ a$
corporation$or$association$covers$public$land.$NHA" v." Court" of"
Appeals,"456"SCRA"17"(2005)."

are)present)or)duly)represented)at)the)meeting.)(24)and)25))
)

Atty.$Hofilea$!$The$corporation$takes$a$loan$that$is$payable$in$
10$ years,$ but$ it$ expires$ in$ 5$ years.$ Although$ not$ illegal,$ it$ is$ a$
question$of$wisdom$on$the$part$of$the$loaning$entity."
o 50$years$from$filing$!$the$corporate$life$is$shortened."
o 50$ years$ !$ counted$ beginning$ from$ the$ issuance$ of$
the$certificate$of$incorporation."

$
E.)Principal)Place)of)Business)(Section)51))
)
Section)51.)Place)and)time)of)meetings)of)stockholders)or)members.)
Stockholders')or)members')meetings,)whether)regular)or)special,)shall)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Although$ the$ Rules$ of$ Court$ do$ not$ provide$ that$ when$ the$
plaintiff$ is$ a$ corporation,$ the$ complaint$ should$ be$ filed$ in$ the$
location$ of$ its$ principal$ office$ as$ indicated$ in$ its$ articles$ of$
incorporation,$ jurisprudence$ has,$ however,$ settled$ that$ the$
place$ where$ the$ principal$ office$ of$ a$ corporation$ is$ located,$ as$
stated$ in$ the$ articles,$ indeed$ establishes$ its$ residence.$ This$
ruling$is$important$in$determining$the$venue$of$an$action$by$or$
against$ a$ corporation,$ as$ in$ the$ present$ case.$ Hyatt" Elevators"
and" Escalators" Corp." v." Goldstar" Elevators," Phils.," Inc.," 473"
SCRA" 705" (2005)," citing" VILLANUEVA," PHILIPPINE" CORPORATE$
LAW"(1998),"p."162."
o Corporate)Residence)for)IntraTCorporate)Disputes"
" Section$ 1,$ Rule$ 1$ of$ the$ Interim$ Rules$ of$
Procedure$ for$ IntraQCorporate$ Controversies,$
provides$that$when$the$articles$of$incorporation$

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

indicate$ that$ the$ principal$ place$ of$ business$ is$


Metro$ Manila,$ then$ the$ action$ must$ be$ filed$ in$
the$city$where$the$head$office$is$actually$located"
Corporate)Residence)for)Corporate)Recovery)Cases"
" Action$ must$ be$ filed$ in$ the$ regional$ trial$ court$
which$has$jurisdiction$over$the$principal$office."

Under$Section$11,$Rule$14$of$the$1997$Rules$of$Civil$Procedure$
of$ the$ Philippines,$ if$ the$ defendant$ in$ a$ suit$ is$ a$ corporation$
organized$ under$ the$ laws$ of$ the$ Philippines,$ service$ may$ be$
made$ on$ the$ President,$ general$ manager,$ secretary,$ treasurer,$
or$inQhouse$counsel.1$

Place$of$residence$of$the$corporation$is$the$place$of$its$principal$
office.$Clavecilla"Radio"System"v."Antillon,"19"SCRA"379"(1967)"
o The$residence$of$its$president$is$not$the$residence$of$the$
corporation$ because$ a$ corporation$ has$ a$ personality$
separate$ and$ distinct$ from$ that$ of$ its$ officers$ and$
stockholders.$ Sy" v." Tyson" Enterprises," Inc.," 119" SCRA"
367"(1982)."

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.)

Atty.$ Hofilea$ !$ the$ principal$ address$ is$ necessarily$ just$ one$


otherwise$ it$ would$ not$ be$ principal.$ It$ is$ also$ necessary$ for$
regulation$purposes$of$the$government.$

$
F.) Minimum) Capitalization) (Section) 12):) Why) is) maximum)
capitalization)required)to)be)indicated?)
)

In$ normal$ practice,$ SEC$ will$ not$ allow$ a$ corporation$ to$ be$
organized$ with$ P5,000$ minimum$ paidQup$ capital$ because$ it$ is$
too$ thinly$ capitalized.$ More$ likely$ SEC$ would$ require$ a$ higher$
paidQup$amount$for$incorporation.$SEC$can$do$this$because$as$an$
administrative$body$it$can$make$rules.2$

)
G.)Subscription)and)PaidTup)Requirements)(Section)13))
)
Section)13.)Amount)of)capital)stock)to)be)subscribed)and)paid)for)the)
purposes)of)incorporation.))
At) least) twentyTfive) 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) twentyTfive) (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)paidTup)capital)be)less)than)five)Thousand)(P5,000.00))
pesos.)
)

Section)12.)Minimum)capital)stock)required)of)stock)corporations.)

The$ entries$ in$ the$ articles$ of$ incorporation$ of$ the$ original$
issuances$of$shares$of$stock$has$a$stronger$weight$that$the$stock$

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

$Villanueva,$C.$L.,$&$VillanuevaQTiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$

$Villanueva,$C.$L.,$&$VillanuevaQTiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
and$ transfer$ book$ in$ determining$ the$ validity$ and$ issuance$ of$
such$shares.$Lanuza"v."Court"of"Appeals,"454"SCRA"54"(2005)."
o The$ACS$and$Subscribed$stocks$are$found$in$the$articles$
of$incorporation.$
o For$ PaidQin$ Capital,$ you$ can$ look$ at$ Certificate$ of$
Deposits,$and$verify$via$bank$accounts.$

"Capital$ Stock"$ !$ is$ the$ amount$ fixed$ in$ the$ articles$ of$
corporation$procured$to$be$subscribed$and$paidQin.$It$is$settled$
that$shares$issued$in$excess$of$the$authorized$capital$stocks$are$
void.$

"Outstanding$Capital$Stock"$!$is$the$total$shares$of$stock$issued$
to$subscribers$or$stockholders,$whether$or$not$fully$or$partially$
paid$ (as$ long$ as$ there$ is$ a$ binding$ subscription$ agreement),$
except$treasury$shares.$$

"Subscribed$Capital$Stock"$!$is$that$portion$of$the$capital$stock$
subscribed$(i.e.$procured$to$be$paid)$whether$or$not$fully$paid.$

"Subscription"$ !$ is$ the$ mutual$ agreement$ of$ the$ corporation$


and$subscriber$to$take$and$pay$for$the$stock$a$corporation.$

The$ subscription$ must$ be$ paid$ upon$ demand$ of$ the$ Board$ of$
Directors,$or$on$the$date$that$you$have$promised$to$pay.$

$
H.)Steps)and)Documents)Required)in)SEC)
1. Certificate)of)Deposit)

SEC$ Guidelines$ require$ that$ a$ bank$ certificate$ covering$ the$


deposit$ of$ the$ paidQup$ capital,$ in$ accordance$ with$ a$ prescribed$

form$ under$ oath$ by$ a$ responsible$ official$ of$ the$ bank,$ must$
accompany$the$incorporation$papers.1$
2. Letter)of)Authority)to)examine)bank)deposit)

In$addition,$a$letter$of$authority$authorizing$the$SEC$to$examine$

not$ only$ the$ bank$ deposit$ but$ also$ the$ corporations$ books$ of$
accounts$ and$ supporting$ records$ to$ determine$ the$ existence$
and$ utilization$ of$ the$ paidQup$ capital$ stock$ must$ also$ be$
submitted.$ The$ letter$ of$ authority$ shall$ be$ binding$ upon$ the$
corporation$even$if$there$is$a$change$of$corporate$officers.2$
3. Written)Undertaking)to)Change)Corporate)Name)

The$SEC$also$requires$that$incorporators$are$required$to$submit$
a$written$undertaking$to$change$their$partnership$or$corporate$
name$in$case$there$is$another$person,$firm$or$entity$with$a$prior$
right$to$the$use$of$the$said$name$or$one$similar$to$it.3$

$
III.)Grounds)for)Disapproval)(Section)17))
)
Section) 17.) Grounds) when) articles) of) incorporation) or) amendment)
may)be)rejected)or)disapproved.)
The) Securities) and) Exchange) Commission) may) reject) the) 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)

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

Section$ 1,$ SEC$ GUIDELINES$ FOR$ THE$ VERIFICATIONS$ OF$ THE$ PAIDQUP$ CAPITAL$ (CASH)$ OF$
CORPORATIONS$(1976).$
2
Section$2,$ibid.$
3
SEC$GUIDELINES$IN$THE$APPROVAL$OF$CORPORATE$AND$PARTNERSHIP$NAMES$(1977).$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
benefit$ of$ the$ residents,$ the$ object$ is$ unlawful$ and$ the$ articles$
can$ be$ denied$ registration.$ Asuncion" v." De" Yriarte," 28" Phil." 67"
(1914)."

disapproval:)
)
1.)That)the)articles)of)incorporation)or)any)amendment)thereto)is)not)
substantially)in)accordance)with)the)form)prescribed)herein;)
)

articles$of$incorporation,$is$lawful,$then$the$SEC$has$no$authority$
to$ inquire$ whether$ the$ corporation$ has$ purposes$ other$ than$
those$ stated,$ and$ mandamus$ will$ lie$ to$ compel$ it$ to$ issue$ the$
certificate$ of$ incorporation.$ Gala" v." Ellice" AgroZIndustrial"
Corp.,"418"SCRA"431"(2003)."

2.) That) the) purpose) or) purposes) of) the) corporation) are) patently)
unconstitutional,)illegal,)immoral,)or)contrary)to)government)rules)and)
regulations;)
)
3.) That) the) Treasurer's) Affidavit) concerning) the) amount) of) capital)
stock)subscribed)and/or)paid)if)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) quasiTbanking) 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.)
)

When$the$proposed$articles$show$that$the$object$is$to$organize$
a$ barrio$ into$ a$ separate$ corporation$ for$ the$ purpose$ of$ taking$
possession$ and$ having$ control$ of$ all$ municipal$ property$ within$
the$ incorporated$ barrio$ and$ administer$ it$ exclusively$ for$ the$

It$is$well$to$note$that,$if$a$corporations$purpose,$as$stated$in$the$

The$ SECs$ function$ is$ merely$ ministerial$ because$ they$ are$


required$to$issue$the$certificate$of$incorporation.$"
o There$ is$ room$ for$ the$ exercise$ of$ discretion$ in$ that$ it$
may$ dismiss$ an$ application$ for$ incorporation,$ but$
otherwise,$it$has$no$other$right$to$exercise$discretion."
o

You$ can$ compel$ the$ SEC$ to$ approve$ the$ articles$ of$
incorporation."

$
IV.)Amendments)to)the)Articles)of)Incorporation)(Section)16).)
)
Section)16.)Amendment)of)Articles)of)Incorporation.))
Unless) otherwise) prescribed) by) this) Code) or) by) special) law,) and) for)
legitimate) purposes,) any) provision) or) matter) stated) in) the) articles) of)
incorporation) may) be) amended) by) a) majority) vote) of) the) board) of)
directors)or)trustees)and)the)vote)or)written)assent)of)the)stockholders)
representing)at)least)twoTthirds)(2/3))of)the)outstanding)capital)stock,)
without) prejudice) to) the) appraisal) right) of) dissenting) stockholders) in)
accordance) with) the) provisions) of) this) Code,) or) the) vote) or) written)
assent)of)at)least)twoTthirds)(2/3))of)the)members)if)it)be)a)nonTstock)
corporation.)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
)
The)original)and)amended)articles)together)shall)contain)all)provisions)
required) by) law) to) be) set) out) in) the) articles) of) incorporation.) Such)
articles,)as)amended)shall)be)indicated)by)underscoring)the)change)or)
changes) made,) and) a) copy) thereof) duly) certified) under) oath) by) 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.)
)

corporate)secretary)and)a)majority)of)the)directors)or)trustees)stating)
the) fact) that) said) amendment) or) amendments) have) been) duly)
approved)by)the)required)vote)of)the)stockholders)or)members,)shall)
be)submitted)to)the)Securities)and)Exchange)Commission.)
)
The) amendments) shall) take) effect) upon) their) approval) by) the)
Securities)and)Exchange)Commission)or)from)the)date)of)filing)with)the)
said)Commission)if)not)acted)upon)within)six)(6))months)from)the)date)
of)filing)for)a)cause)not)attributable)to)the)corporation.)
)

Typically,$meetings$do$take$place$to$pass$upon$an$amendment.)
o

Although$ the$ law$ does$ not$ expressly$ provide$ that$ a$


meeting$be$made$where$the$votes$will$be$cast$and$the$
written$assents$made.)

)
V.)Commencement)of)Corporate)Existence)(Section)19).)
)
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)

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

BY#LAWS(

I.(Nature(and(Functions:(

The$power$to$adopt$by.laws$is$an$inherent$power$on$the$part$of$

By.laws$are$intramural$in$nature$and$not$meant$to$bind$parties$
outside$the$corporate$family.)
o

One$ point$ of$ view$ is$ that$ since$ by.laws$ operate$ merely$
as$internal$rules$among$the$stockholders$and$corporate$
officers,$ they$ cannot$ affect$ nor$ prejudice$ third$ persons$
who$deal$in$good$faith$with$the$corporation,$unless$they$
have$knowledge$of$the$same;$and$that$strangers$are$not$
bound$ to$ know$ the$ by.laws$ of$ a$ corporation$ which$ are$
merely$ provisions$ for$ the$ government$ of$ a$ corporation$
and$notice$of$them$will$not$be$presumed.$

Under$ such$ theory,$ since$ by.law$ provisions$ are$


intramural$in$nature$and$are$not$meant$to$bind$parties$
outside$ the$ corporate$ family,$ it$ stands$ to$ reason$ that$
the$public$dealing$with$the$corporation$is$not$supposed$
to$ be$ interested$ in$ the$ provisions$ of$ the$ corporation's$
by.laws,$and$therefore$should$not$be$bound$thereby.$1$

those$ forming$ a$ corporation$ or$ any$ other$ form$ of$ association.$


Gokongwei)v.)SEC,)89)SCRA)337)(1979).)

As$ the$ rules$ and$ regulations$ or$ private$ laws$ enacted$ by$ the$
corporation$ to$ regulate,$ govern$ and$ control$ its$ own$ actions,$
affairs$ and$ concerns$ and$ its$ stockholders$ or$ members$ and$
directors$ and$ officers$ with$ relation$ thereto$ and$ among$
themselves$in$their$relation$to$it,$by.laws$are$indispensable$to$
corporations.$These$may$not$be$essential$to$corporate$birth$but$
certainly,$ these$ are$ required$ by$ law$ for$ an$ orderly$ governance$
and$ management$ of$ corporations.$ Loyola) Grand) Villas)
Homeowners)v.)CA,)276)SCRA)681)(1997).)
o By.laws$ have$ traditionally$ been$ defined$ as$ regulations,$
ordinances,$ rules$ or$ laws$ adopted$ by$ an$ association$ or$
corporation$ or$ the$ like$ for$ its$ internal$ governance,$
including$ rules$ for$ routine$ matters$ such$ as$ calling$
meetings$and$the$like.$If$those$key$by.law$provisions$on$
matters$such$as$quorum$requirements,$meetings,$or$on$
the$ internal$ governance$ of$ the$ local/chapter$ are$
themselves$ already$ provided$ for$ in$ the$ constitution,$
then$it$would$be$feasible$to$overlook$the$requirements$
for$ by.laws.$ Indeed$ in$ such$ an$ event,$ to$ insist$ on$ the$
submission$ of$ a$ separate$ document$ denominated$ as$
By.Laws$would$be$an$undue$technicality,$as$well$as$a$
redundancy.$ San) Miguel) Corp.) v.) Mandaue) Packing)
Products)Plants)UnionL)FFW,)467)SCRA)107)(2005).)

$
A.(Common(Law(Limitations(on(By#Laws((Requisites(of(Valid(By#Laws)(
1. By#Laws(Cannot(Be(Contrary(to(Law(and(Charter(

By.laws$ are$ intended$ merely$ for$ the$ protection$ of$ the$


corporation,$and$prescribe$regulation,$not$restrictions;$they$are$
always$subject$to$the$charter$of$the$corporation.$Rural)Bank)of)
Salinas,)Inc.)v.)Court)of)Appeals,)210)SCRA)510)(1992).)

Although$ the$ power$ of$ the$ corporation$ to$ adopt$ by.laws$ is$ an$
inherent$ right,$ and$ it$ exist$ even$ without$ the$ law$ expressly$
granting$ such$ power,$ nevertheless,$ Section$ 36$ of$ the$
Corporation$Code$expressly$enumerates$as$one$of$the$powers$of$

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

$Villanueva,$C.$L.,$&$Villanueva.Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
a$corporation,$the$power$to$adopt$by.laws$"not$contrary$to$law,$
morals$ or$ public$ policy."$ Jurisprudence$ has$ long$ before$
established$that$by.law$provisions$cannot$contravene$the$law.1$)

amending$ its$ by.laws$ and$ providing$ that$ his/her$ position$ shall$


cease$ to$ exist$ upon$ the$ occurrence$ of$ a$ specified$ event.$
Salafranca)v.)Philamlife)(Pamplona))Village)Homeowners,)300)
SCRA)469)(1998).)
2. By#Law( Provisions( Cannot( Be( Unreasonable( or( Be( Contrary( to(
the(Nature(of(By#laws.(

The$ corporation$ being$ a$ creature$ of$ the$ law,$ its$ by.law$


provisions$ cannot$ prevail$ over$ legal$ provisions$ and$ the$ lawful$
court$orders$and$processes.2)
Examples:(

A$ by.law$ provision$ that$ empowers$ the$ Board$ of$ Directors$ to$


cancel$ the$ shares$ of$ any$ member$ and$ return$ to$ the$ owner$
thereof$ the$ value$ thereof$ was$ declared$ void$ for$ being$ in$
violation$of$the$provision$in$the$Corporation$Law$that$provided$
that$capital$can$only$be$returned$after$dissolution.$Government)
of)P.I.)v.)El)Hogar)Filipino,)50)Phil.)399)(1927))

articles$ of$ incorporation$ to$ the$ contrary$ would$ supersede$ the$


similar$provision$in$the$by.laws$of$a$corporation.$In$other$words,$
any$provision$in$the$by.laws$which$contravenes$the$provision$in$
the$ articles$ of$ incorporation$ must$ give$ way$ to$ the$ article$
provision,$ even$ when$ the$ nature$ of$ the$ subject$ matter$ is$
something$ that$ would$ normally$ find$ it$ provided$ in$ the$ by.laws$
rather$than$in$the$articles$of$incorporation.3$

A$by.law$provision$granting$to$a$stockholder$permanent$seat$in$
the$ Board$ of$ Directors$ is$ contrary$ to$ the$ provision$ in$
Corporation$ Code$ requiring$ all$ members$ of$ the$ Board$ to$ be$
elected$ by$ the$ stockholders.$ Even$ when$ the$ members$ of$ the$
association$ may$ have$ formally$ adopted$ the$ provision,$ their$

Authority$granted$to$a$corporation$to$regulate$the$transfer$of$its$
stock$does$not$empower$the$corporation$to$restrict$the$right$of$
a$ stockholder$ to$ transfer$ his$ shares,$ but$ merely$ authorizes$ the$

The$ by.laws$ provisions$ cannot$ be$ such$ or$ be$ amended$ to$ be$

adoption$ of$ regulations$ as$ to$ the$ formalities$ and$ procedure$ to$
be$followed$in$effecting$transfer.$Thomson)v.)Court)of)Appeals,)
298)SCRA)280)(1998).)
3. By#Law(Provisions(Cannot(Discriminate.(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!Government!of!the!Philippine!Islands!v.!El!Hogar!Filipino,$50$Phil.$399$(1927).$
$Villanueva,$C.$L.,$&$Villanueva.Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$
2

Example:(

action$would$be$of$no$avail$because$no$provision$of$the$by.laws$
can$ be$ adopted$ if$ it$ is$ contrary$ to$ law.$ Grace) Christian) High)
School)v.)Court)of)Appeals,)281)SCRA)133)(1997).)
able$ to$ go$ around$ the$ security$ of$ tenure$ clause$ of$ employees$
nor$ impair$ the$ obligation$ of$ existing$ contracts$ or$ rights$
otherwise,$ it$ would$ enable$ an$ employer$ to$ remove$ any$
employee$ from$ his$ employment$ by$ the$ simple$ expediency$ of$
1

Under$ Section$ 47$ of$ the$ Corporation$ Code,$ even$ specified$


provisions$ of$ the$ by.laws$ are$ "subject$ to$ the$ provisions$ of$ the$
Constitution,$ this$ Code,$ other$ special$ laws,$ and$ the$ articles$ of$
incorporation."$ That$ would$ mean$ that$ any$ provision$ in$ the$

$
B.(Binding(Effects(on(By#laws(on(the(Dealing(Public:(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3

$Villanueva,$C.$L.,$&$Villanueva.Tiansay,$T.$S.$(2013).$Philippine$Corporate$Law.$
(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

The$ rule$ is$ that$ by.law$ provisions$ must$ be$ reasonable$ and$
calculated$ to$ carry$ into$ effect$ the$ objects$ of$ the$ corporation$
comes$ from$ the$ theory$ that$ by.laws,$ as$ a$ basic$ contract$
document,$ has$ the$ sole$ purpose$ of$ regulating$ the$ relationship$
between$ and$ among$ the$ parties$ within$ the$ intra.corporate$
relationship.$ Consequently,$ any$ by.law$ provision$ that$ does$ not$
fulfill$such$objective$is$deemed$to$be$unreasonable$and$void.$)
o General(Rule:(The$validity$or$reasonableness$of$a$by.law$
provision$is$a$question$of$law.$
o Exception:$ This$ rule$ is$ subject$ to$ the$ limitation$ that$
"where$the$reasonableness$of$a$by.law$is$a$mere$matter$
of$ judgment,$ and$ one$ upon$ which$ reasonable$ minds$
must$necessarily$differ,$a$court$would$not$be$warranted$
in$ substituting$ its$ judgment$ instead$ of$ the$ judgment$ of$
those$ who$ are$ authorized$ to$ make$ by.laws$ and$ who$
have$exercised$their$authority."1$
Example:(

By.law$provisions$on$the$required$quorum$for$special$meetings$
of$ the$ Board$ have$ the$ force$ of$ law$ and$ are$ binding$ even$ on$
third.parties$ who$ deal$ with$ the$ properties$ of$ the$ corporation.$
Pea%v.%Court%of%Appeals,%193%SCRA%717%(1991).)
)
Pea%v.%Court%of%Appeals)

(
Facts:( Pampanga' Bus' Co.' (PAMBUSCO)' owned' several' mortgaged' lots.'
The$ lots$ were$ foreclosed$ and$ were$ sold$ to$ Rosita$ Pea,$ as$ highest$

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Ibid,$at$pp.$361.362,!citing$People!ex!rel.!Wildi!v.!Ittner,$165$Ill.$App.$360,$367$
(1911).$

bidder.$ PAMBUSCO$ through$ 3$ of$ 5$ directors$ (the$ only$ ones$ present$ at$
that$ meeting)$ resolved$ to$ authorize$ Briones$ (one$ of$ the$ directors)$ to$
execute& a& deed& of& assignment& of& their& right& of& redemption& in& favor& of&
Marcelino*Enriquez,*who*thereafter*sold*the*same*to*Spouses*Yap.*Pea*
contends$that$there$could$be$no$valid$sale$to$the$spouses$Yap$because$
the$deed$of$assignment$in$favor$of$Enriquez$was$void$for$being$executed$
ultra$ vires$ and$ against$ the$ by.laws$ of$ the$ corporation$ which$ provided$
that$ a$ quorum$ requires$ that$ at$ least$ 4$ directors$ be$ present$ at$ the$
meeting,$ otherwise$ the$ meeting$ may$ be$ invalidated$ by$ failure$ or$
irregularity$of$notice.$
$
Issue:(Whether$or$not$the$act$of$the$board$was$against$the$corporations$
by.laws,$and$consequently,$void.$
(
Held:(YES.$Section$4$of$PAMBUSCOs$by.laws$provided$that$at$least$four$
directors$ should$ be$ present$ to$ constitute$ a$ quorum.$ According$ to$ the$
Corporation$ Code$ any$ action$ resolved$ by$ the$ board$ with$ less$ than$ the$
number$ provided$ in$ the$ by.laws$ of$ the$ corporation$ to$ constitute$ a$
quorum$ would$ not$ bind$ the$ corporation.$ When$ a$ quorum$ is$ not$
reached,$all$the$present$directors$could$do$is$to$adjourn.$Moreover,$the$
purported$directors$who$attended$the$meeting$and$voted$in$favor$of$the$
assignment$ were$ bogus$ directors$ as$ they$ were$ not$ listed$ in$ the$ SEC$ as$
directors,$nor$were$they$stockholders$of$the$company.$
$
Doctrine:( The$ by.laws$ of$ a$ corporation$ are$ its$ own$ private$ laws$ which$
substantially$have$the$same$effect$as$the$laws$of$the$corporation.$In$this$
sense$they$become$part$of$the$fundamental$law$of$the$corporation$with$
which$the$corporation$and$its$directors$and$officers$must$comply.$
$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
WHAT( IF:( Atty.$ Hofilea$ !$ if$ the$ other$ two$ directors$ showed$ up$ and$
agreed$ to$ what$ the$ three$ others$ had$ initially$ made,$ would$ judgment$
have$been$different?$NO.$$
(

NonLBinding) Effects) of) ByLLaws) to) Outsiders.) The$ nature$ of$


by.laws$being$intramural$instruments$would$mean$that$they$are$
not$ binding$ on$ third.$ parties,$ except$ those$ who$ have$ actual$
knowledge$ of$ their$ contents.$ China) Banking) Corp.) v.) Court) of)
Appeals,)270)SCRA)503)(1997).)
)
China)Banking)Corp.)v.)Court)of)Appeals)

(
Facts:( Galicano$ Calapatia,$ Jr.$ is$ a$ stockholder$ of$ private$ respondent$
Valley$Golf$&$Country$Club,$Inc.$(VGCCI).$He$pledged$his$Stock$Certificate$
to$ petitioner$ China$ Banking$ Corp.$ (CBC)$ to$ secure$ a$ debt.$ This$ was$
recorded$in$the$corporate$books$with$VGCCIs$consent.$Calapatia$failed$
to$pay$his$obligations,$so$CBC$filed$a$petition$for$extrajudicial$foreclosure$
and$ informed$ VGCCI$ asking$ that$ the$ pledged$ stock$ be$ transferred$ to$
CBCs$name.$However,$VGCCI$also$informed$CBC$that$it$will$not$be$able$
to$ do$ so$ because$ Calapatia$ has$ unsettled$ accounts$ with$ the$ club.$
Subsequently,$ because$ of$ Calapatias$ unsettled$ accounts$ with$ the$ club,$
VGCCI$sold$the$stocks$in$a$public$auction$in$accordance$with$Section$3,$
Article$VIII$of$its$By.Laws.$Three$years$after,$CBC$informed$VGCCI$that$it$
was$ the$ new$ owner$ by$ virtue$ of$ the$ auction$ sale,$ however,$ VGCCI$
replied$that$for$reason$of$delinquency,$the$same$share$of$stock$was$sold$
at$the$public$auction.$So$of$course,$CBC$protested$and$filed$a$case$with$
the$ RTC$ of$ Makati$ for$ the$ nullification$ of$ the$ auction$ sale$ and$ the$
issuance$of$a$new$stock$certificate$in$its$name.$
(

Issue:(Whether$or$not$the$by.laws$of$VGCCI$can$affect$CBC.$
$
Held:(NO.$VGCCI$only$began$sending$notices$of$delinquency$to$Calapatia$
after$it$was$informed$by$CBC$of$its$foreclosure$proceedings.$Also,$even$
though$ VGCCI$ acknowledged$ the$ pledge$ agreement$ between$ Calapatia$
and$ CBC,$ it$ completely$ disregarded$ CBCs$ rights$ as$ a$ pledgee$ by$ not$
informing$it$of$the$public$auction$it$initiated.$$
$
VGCCI$ contended$ that$ CBC$ had$ actual$ knowledge$ of$ the$ clubs$ by.laws$
and$therefore$must$be$bound.$However,$in$order$to$be$bound,$the$third$
party$ must$ have$ acquired$ knowledge$ of$ the$ by.laws$ at$ the$ time$ the$
agreement$ was$ entered$ into$ between$ him$ and$ the$ shareholder.$ In$ the$
case$ at$ bar,$ CBC$ was$ only$ informed$ of$ the$ by.laws$ after$ it$ informed$
VGCCI$ of$ the$ public$ auction.$ Also,$ VGCCI$ could$ have$ easily$ informed$
petitioner$of$its$by.laws$when$it$sent$notice$formally$recognizing$CBC$as$
pledge$of$one$of$its$shares$registered$in$Calapatias$name.$
(
Doctrine:(
General( Rule:( Third$ persons$ are$ not$ bound$ by$ the$ by.laws$ of$ a$
corporation$since$they$are$not$privy$thereto.$
Exception:( When$ third$ persons$ have$ actual$ knowledge$ or$ constructive$
knowledge$ of$ the$ same.$ However,$ this$ knowledge$ of$ the$ by.laws$ must$
be$ present$ at$ the$ time$ of$ the$ perfection$ of$ the$ contract,$ and$ not$ only$
during$the$proceedings.$
$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Neither$ can$ we$ concede$ that$ such$ contract$ would$ be$ invalid$
just$because$the$signatory$thereon$was$not$the$Chairman$of$the$
Board$which$allegedly$violated$the$corporations$by.laws.$Since$
by.laws$ operate$ merely$ as$ internal$ rules$ among$ the$

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
stockholders,$they$cannot$affect$or$prejudice$third$persons$who$
deal$ with$ the$ corporation,$ unless$ they$ have$ knowledge$ of$ the$
same.$PMI)Colleges)v.)NLRC,)277)SCRA)462)(1997).)
$
C.(Principle(of(Waiver(of(Applicable(to(By#Laws(

A$by.law$may$be$waived$by$a$stockholder$or$member$when$it$is$
he$ whose$ individual$ rights$ are$ advanced$ or$ protected$ by$ its$
provisions.$If$a$corporation$acts$or$contracts$in$disregard$of$a$by.
law$ with$ the$ consent$ or$ acquiescence$ of$ the$ stockholders$ or$
members,$there$is$a$waiver$of$the$by.laws,$at$least$pro$hac$vice,$
whether$ it$ is$ afterwards$ sought$ to$ set$ up$ the$ by.laws$ against$
strangers$or$as$against$its$stockholder$or$members.1$

(
II.(Adoption(Procedure((Section(46)(
(
Section(46.(Adoption(of(by#laws.(
Every(corporation(formed(under(this(Code(must,(within(one((1)(month(
after( receipt( of( official( notice( of( the( issuance( of( its( certificate( of(
incorporation( by( the( Securities( and( Exchange( Commission,( adopt( a(
code(of(by#laws(for(its(government(not(inconsistent(with(this(Code.(For(
the(adoption(of(by#laws(by(the(corporation(the(affirmative(vote(of(the(
stockholders(representing(at(least(a(majority(of(the(outstanding(capital(
stock,( or( of( at( least( a( majority( of( the( members( in( case( of( non#stock(
corporations,( shall( be( necessary.( The( by#laws( shall( be( signed( by( the(
stockholders( or( members( voting( for( them( and( shall( be( kept( in( the(
principal( office( of( the( corporation,( subject( to( the( inspection( of( the(

stockholders( or( members( during( office( hours.( A( copy( thereof,( duly(


certified(to(by(a(majority(of(the(directors(or(trustees(countersigned(by(
the(secretary(of(the(corporation,(shall(be(filed(with(the(Securities(and(
Exchange( Commission( which( shall( be( attached( to( the( original( articles(
of(incorporation.(
(
Notwithstanding( the( provisions( of( the( preceding( paragraph,( by#laws(
may(be(adopted(and(filed(prior(to(incorporation;(in(such(case,(such(by#
laws( shall( be( approved( and( signed( by( all( the( incorporators( and(
submitted( to( the( Securities( and( Exchange( Commission,( together( with(
the(articles(of(incorporation.(
(
In( all( cases,( by#laws( shall( be( effective( only( upon( the( issuance( by( the(
Securities(and(Exchange(Commission(of(a(certification(that(the(by#laws(
are(not(inconsistent(with(this(Code.(
(
The(Securities(and(Exchange(Commission(shall(not(accept(for(filing(the(
by#laws( or( any( amendment( thereto( of( any( bank,( banking( institution,(
building( and( loan( association,( trust( company,( insurance( company,(
public( utility,( educational( institution( or( other( special( corporations(
governed( by( special( laws,( unless( accompanied( by( a( certificate( of( the(
appropriate( government( agency( to( the( effect( that( such( by#laws( or(
amendments(are(in(accordance(with(law.((20a)(
(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

$SEC$ Opinion$ No.$ 22,$ series$ of$ 2003,$ addressed$ to$ Flores$ Ladia$ Bacalla$ Law$
Firm$as$cited$in$Villanueva,$C.$L.,$&$Villanueva.Tiansay,$T.$S.$(2013).$Philippine$
Corporate$Law.$(2013$ed.).$Manila,$Philippines:$Rex$Book$Store.$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

There$ can$ be$ no$ automatic$ dissolution$ simply$ because$ the$


incorporators$ failed$ to$ file$ the$ required$ by.laws$ under$ Section$
46$ of$ Corporation$ Code.$ There$ is$ no$ outright$ demise$ of$
corporate$ existence.$ Proper$ notice$ and$ hearing$ are$ cardinal$
components$ of$ due$ process$ in$ any$ democratic$ institution,$

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
agency$ or$ society.$ In$ other$ words,$ the$ incorporators$ must$ be$
given$ the$ chance$ to$ explain$ their$ neglect$ or$ omission$ and$
remedy$the$same.$Loyola)Grand)Villas)Homeowners)v.)CA,)276)
SCRA)681)(1997).)

A$ corporation$ which$ has$ failed$ to$ file$ its$ by.laws$ within$ the$
prescribed$ period$ does$ not$ ipso$ facto$ lose$ its$ powers$ as$ such,$
and$ may$ be$ considered$ a$ de$ facto$ corporation$ whose$ right$ to$
exercise$corporate$powers$may$not$be$inquired$into$collaterally$
in$ any$ private$ suit$ to$ which$ such$ corporations$ may$ be$ a$ party.$
[?]$Sawadjaan)v.)Court)of)Appeals,)459)SCRA)516)(2005).)
o

There$is$a$matter$of$compliance$with$the$requirements$
so$there$is$a$corporation,$but$it$is$simply$defective.)

(
III.(Contents((Section(47)(
(
A.(Matters(Usually(Found(in(the(By#Laws(
(
Section(47.(Contents(of(by#laws.(
Subject( to( the( provisions( of( the( Constitution,( this( Code,( other( special(
laws,( and( the( articles( of( incorporation,( a( private( corporation( may(
provide(in(its(by#laws(for:(
(
1.( The( time,( place( and( manner( of( calling( and( conducting( regular( or(
special(meetings(of(the(directors(or(trustees;(
(
2.( The( time( and( manner( of( calling( and( conducting( regular( or( special(
meetings(of(the(stockholders(or(members;(
(
3.(The(required(quorum(in(meetings(of(stockholders(or(members(and(

the(manner(of(voting(therein;(
(
4.(The(form(for(proxies(of(stockholders(and(members(and(the(manner(
of(voting(them;(
(
5.(The(qualifications,(duties(and(compensation(of(directors(or(trustees,(
officers(and(employees;(
(
6.(The(time(for(holding(the(annual(election(of(directors(of(trustees(and(
the(mode(or(manner(of(giving(notice(thereof;(
(
7.(The(manner(of(election(or(appointment(and(the(term(of(office(of(all(
officers(other(than(directors(or(trustees;(
(
8.(The(penalties(for(violation(of(the(by#laws;(
(
9.( In( the( case( of( stock( corporations,( the( manner( of( issuing( stock(
certificates;(and(
(
10.( Such( other( matters( as( may( be( necessary( for( the( proper( or(
convenient(transaction(of(its(corporate(business(and(affairs.((21a)(
(
(
B.(Other(Matters(that(May(Be(Included(in(By#Laws(

The$by.laws$relate$to$the$internal$affairs$of$the$corporation.(
o

It$ may$ contain$ the$ duties$ and$ responsibilities$ of$ the$


people$comprising$the$corporation.(

$
Other(matters(which(under(the(Corporation(Code(may(be(provided(for(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
in(the(by#laws(are(as(follows:(
(
(a)( Designation( of( time( when( voting( rights( may( be( exercised( by(
stockholders(of(record;1(
(

(
(i)(Providing(for(interest(on(unpaid(subscriptions;9(
$
(j)(Entries(to(be(made(in(the(stock(and(transfer(book;10(and(
(

(b)(Providing(for(additional(officers(for(the(corporation;2(
(
(c)(Provisions(for(the(compensation(of(the(directors;3(
(
(d)(Creation(of(an(executive(committee;4(
(
(e)( Date( of( the( annual( meeting( or( provisions( of( special(

(k)( Providing( for( meetings( of( the( members( in( a( non#stock(


corporation(outside(of(the(principal(office(of(the(corporation.11$
(
C.(Matters(That(May(Be(Found(in(Articles(of(Incorporation(and(By#Laws(
(

incorporation$vis..vis$the$by.laws?(
o Those$expressly$stated$in$the$Corporation$Code$must$be$
placed$in$either$document$accordingly.(
o However,$ with$ regard$ to$ information$ that$ is$ not$ in$ the$
articles$of$incorporation,$then$it$is$left$to$the$discretion$

meetings(of(the(stockholders(or(members(of(the(corporation; (
(
(f)( Quorum( on( meetings( of( stockholders( or( members( of( the(
corporation;6(
(
(g)( Providing( for( the( presiding( officer( at( meetings( of( the(
directors( or( trustees,( as( well( as( of( the( stockholders( or(
members;7(
(
(h)(Procedure(for(issuance(of(certificates(of(shares(of(stock;8(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

$Section$24,$Corporation$Code.$
$Section$25.$ibid.$
3
$Section$30.$ibid.$
4
$Section$35.$ibid.$
5
$Sections$50$and$53.$ibid.$
6
$Section$52.$ibid.$
7
$Section$54.$ibid.$
8
$Section$63.$ibid.$
2

How$ do$ you$ determine$ what$ goes$ into$ the$ articles$ of$

of$ the$ directors/incorporators$ where$ to$ place$ the$


information.$ Provided,! that! what! is! in! the! articles! of!
incorporation!cannot!be!contained!in!the!by@laws(?)!
(
In(addition,(the(Corporation(Code(expressly(allows(certain(matters(to(
be(provided(for(either)in)the)articles)of)incorporation)or)the)byLlaws(of(
the(corporation,(thus:(
(
(a)(Providing(for(cumulative(voting(in(non#stock(corporations;12(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
9

$Section$66.$ibid.$
$Section$74.$ibid.$
11
$Section$93.$ibid.$
12
$Section$24.$ibid.$
10

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
(b)( Providing( for( a( higher( quorum( requirement( for( a( valid(
board(meeting;1(
(
(c)(Limiting,(broadening(or(denial(of(the(right(to(vote,(including(
2

voting(by(proxy,(for(members(in(non#stock(corporations; (
(
(d)(Transferability(of(membership(in(a(non#stock(corporations;3(((
(
(e)(Termination(of(membership(in(non#stock(corporations;4(
(
(f)( Manner( of( election( and( term( of( office( of( trustees( and(
5

officers(in(non#stock(corporations; (
(
(g)(Manner(of(distribution(of(assets(in(non#stock(corporations(
upon(dissolution;6(and(
(
(h)(Providing(for(staggered(board(in(educational(institutions;7(
(
In(a(close(corporation,(restrictions(on(the(right(to(transfer(shares(must(
appear(both(in(the(articles(of(incorporation(and(in(the(by#laws,(as(well(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

$Section$25.$ibid.$
2
$Section$89.$ibid.$
3
$Section$90.$ibid.$
4
$Section$91.$ibid.$
5
$Section$92.$ibid.$
6
$Section$94.$ibid.$
7
$Section$108.$ibid.$

as( in( the( certificate( of( stock;( otherwise,( the( restriction( shall( not( be(
binding(on(any(purchaser(thereof(in(good(faith.8(
(
D.(Matters(That(Cannot(Be(Provided(for(in(By#Laws(
(
On(the(other(hand,(under(the(provisions(of(the(Corporation(Code,(the(
following(matters(must(be(provided(for(in(the(articles(of(incorporation,(
and(consequently(cannot(be(governed(by(the(corporation's(by#laws:(
(
(a)( Classification( of( shares( of( stock( and( preferences( granted( to(
preferred(shares;9(
(
(b)(Provisions(on(founder's(shares;10(
(
(c)(Providing(for(redeemable(shares;11(
(
(d)(Provisions(on(the(purposes(of(the(corporation;12(
(
(e)(Providing(for(the(corporate(term(of(existence;13(
(
(f)(Capitalization(of(stock(corporations;14(
(
(g)(Corporate(name;1(and(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8

$Section$98.$ibid.$
$Section$6,$Corporation$Code.$
10
$Section$7,$ibid.$
11
$Section$8,$ibid.$
12
$Sections$14,$15,$36(11)$and$45,$ibid.$
13
$Sections$11,$14$and$37,$ibid.$
14
$Sections$13$and$14,$ibid..$
9

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
(h)(Denial(of(pre#emptive(rights;2$
(
IV.(Amendments(and(Revisions(of(By#Laws((Section(48)(
(
Section(48.(Amendments(to(by#laws.(
The(board(of(directors(or(trustees,(by(a(majority(vote(thereof,(and(the(
owners( of( at( least( a( majority( of( the( outstanding( capital( stock,( or( at(
least( a( majority( of( the( members( of( a( non#stock( corporation,( at( a(
regular(or(special(meeting(duly(called(for(the(purpose,(may(amend(or(
repeal( any( by#laws( or( adopt( new( by#laws.( The( owners( of( two#thirds(
(2/3)( of( the( outstanding( capital( stock( or( two#thirds( (2/3)( of( the(
members( in( a( non#stock( corporation( may( delegate( to( the( board( of(
directors( or( trustees( the( power( to( amend( or( repeal( any( by#laws( or(
adopt(new(by#laws:(Provided,(That(any(power(delegated(to(the(board(
of(directors(or(trustees(to(amend(or(repeal(any(by#laws(or(adopt(new(
by#laws(shall(be(considered(as(revoked(whenever(stockholders(owning(
or( representing( a( majority( of( the( outstanding( capital( stock( or( a(

the( same( to( be( attached( to( the( original( articles( of( incorporation( and(
original(by#laws.(
(
The(amended(or(new(by#laws(shall(only(be(effective(upon(the(issuance(
by(the(Securities(and(Exchange(Commission(of(a(certification(that(the(
same(are(not(inconsistent(with(this(Code.((22a(and(23a)(
(
SUMMATION(
!$ Although$ the$ law$ provides$ a$ 1.month$ lee.way$ where$ a$ corporation$
can$submit$their$by.laws.$$

articles$ of$ incorporation.$ This$ practice$ has$ been$ around$ so$


much$that$the$SEC$may$sometimes$reject$your$application$if$the$
by.laws$are$not$attached.$
$
!$Articles$+$By.Laws$=$Companys$Constitutive$Documents$

majority(of(the(members(in(non#stock(corporations,(shall(so(vote(at(a(
regular(or(special(meeting.(
(
Whenever( any( amendment( or( new( by#laws( are( adopted,( such(
amendment(or(new(by#laws(shall(be(attached(to(the(original(by#laws(in(
the(office(of(the(corporation,(and(a(copy(thereof,(duly(certified(under(
oath( by( the( corporate( secretary( and( a( majority( of( the( directors( or(
trustees,( shall( be( filed( with( the( Securities( and( Exchange( Commission(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2

$Sections$14$and$18,$ibid..$
$Section$39,$ibid..$

However,$ in$ practice,$ the$ by.laws$ are$ submitted$ with$ the$

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Hierarchy:$Law$!$Articles$of$Incorporation$!$By.Laws(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

CORPORATE(POWERS(AND(AUTHORITY(
(
I.(Corporate(Power(and(Capacity((Article(46,(Civil(Code;(Sections(36(and(
45)(
(
CIVIL(CODE(
Article(46.(
Juridical(persons(may(acquire(and(possess(property(of(all(kinds,(as(well(
as( incur( obligations( and( bring( civil( or( criminal( actions,( in( conformity(
with(the(laws(and(regulations(of(their(organization.((38a)(
(

This%article%compliments%Section%36(1)%of%the%Corporation%Code.%(
o As% such,% even% if% the% right% to% sue% and% be% sued% was% not%
granted% in% the% Corporation% Code,% the% corporation% can%
still%invoke%it%under%the%Civil%Code.(

(
Section(36.(Corporate(powers(and(capacity.(
Every( corporation( incorporated( under( this( Code( has( the( power( and(
capacity:(
(
1.(To(sue(and(be(sued(in(its(corporate(name;(
(
2.(Of(succession(by(its(corporate(name(for(the(period(of(time(stated(in(
the(articles(of(incorporation(and(the(certificate(of(incorporation;(
(
3.(To(adopt(and(use(a(corporate(seal;(
(
4.( To( amend( its( articles( of( incorporation( in( accordance( with( the(

provisions(of(this(Code;(
(
5.(To(adopt(byYlaws,(not(contrary(to(law,(morals,(or(public(policy,(and(
to(amend(or(repeal(the(same(in(accordance(with(this(Code;(
(
6.( In( case( of( stock( corporations,( to( issue( or( sell( stocks( to( subscribers(
and( to( sell( stocks( to( subscribers( and( to( sell( treasury( stocks( in(
accordance(with(the(provisions(of(this(Code;(and(to(admit(members(to(
the(corporation(if(it(be(a(nonYstock(corporation;(
(
7.(To(purchase,(receive,(take(or(grant,(hold,(convey,(sell,(lease,(pledge,(
mortgage( and( otherwise( deal( with( such( real( and( personal( property,(
including( securities( and( bonds( of( other( corporations,( as( the(
transaction( of( the( lawful( business( of( the( corporation( may( reasonably(
and( necessarily( require,( subject( to( the( limitations( prescribed( by( law(
and(the(Constitution;(
(
8.( To( enter( into( merger( or( consolidation( with( other( corporations( as(
provided(in(this(Code;(
(
9.( To( make( reasonable( donations,( including( those( for( the( public(
welfare( or( for( hospital,( charitable,( cultural,( scientific,( civic,( or( similar(
purposes:( Provided,( That( no( corporation,( domestic( or( foreign,( shall(
give(donations(in(aid(of(any(political(party(or(candidate(or(for(purposes(
of(partisan(political(activity;(
(
10.(To(establish(pension,(retirement,(and(other(plans(for(the(benefit(of(
its(directors,(trustees,(officers(and(employees;(and(
(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
11.(To(exercise(such(other(powers(as(may(be(essential(or(necessary(to(
carry( out( its( purpose( or( purposes( as( stated( in( the( articles( of(
incorporation.(
(
Section(45.(Ultra(vires(acts(of(corporations.(

No(corporation(under(this(Code(shall(possess(or(exercise(any(corporate(
powers( except( those( conferred( by( this( Code( or( by( its( articles( of(
incorporation( and( except( such( as( are( necessary( or( incidental( to( the(
exercise(of(the(powers(so(conferred.((n)(
%
A.(Classification(of(Corporate(Powers:(Express;(Implied,(and(Incidental(

A%corporation%has%only%such%powers%as%are%expressly%granted%to%
o

it%by%law%and%by%its%articles%of%incorporation,%those%which%may%be%
incidental% to% such% conferred% powers,% those% reasonably%
necessary% to% accomplish% its% purposes% and% those% which% may% be%
incident% to% its% existence.% Pilipinas( Loan( Company( v.( SEC,( 356(
SCRA(193((2001).(
o Expressed%!%Those%stated%in%the%law,%the%Code,%and%the%
articles%of%incorporation/byFlaws(
" The% powers% granted% under% the% Corporation%
Code% need% not% be% in% the% articles% of%
incorporation%or%the%byFlaws%to%be%exercised.(
" Some% of% the% powers% expressly% granted% under%
Section% 36% are% considered% to% be% inherent% or%
incidental%powers,%which%means%that%even%when%
not% granted% under% the% law% expressly,% such%
incidental%powers%are%deemed%to%be%within%the%

capacity% of% corporate% entities,% such% as% the%


power%to%adopt%and%amend%a%set%of%byFlaws.1(
Implied%!%Sometimes%referred%to%as%necessary;%Those%
powers% exercised% necessarily% to% perform% the% primary%
purpose%for%which%the%company%was%formed.(
" You% can% use% your% common% sense% to% determine%
whether%your%corporation%has%an%implied%power%
to%exercise%or%pursue%certain%actions.(
" Example:%you%can%hire%accountants%because%the%
SEC%requires%you%to%file%financial%statements.(
Incidental% !% Those% powers% which% the% corporation% can%
exercise%by%virtue%of%the%purpose%of%the%corporation.(
Atty.% Hofilea% !% Dont% kill% yourself% trying% to% find% an%
objective% distinction% between% implied% or% incidental%
powers.%It%can%be%fluid.(
(

Express(

Implied(

Incidental(

Comes%from%the%law,%
Flow%from%the%nature%
byFlaws%and%articles%of% of%the%underlying%

Flow%from%the%nature%
of%the%corporation%as%

incorporation.%

business%enterprise%

a%juridical%person.%

These%enumerated%
powers%constitute%
part%of%the%express%
powers%of%every%
juridical%person%

These%exist%as%a%
necessary%
consequence%of%the%
grant%and/or%exercise%
of%the%express%powers%

Powers%that%attach%to%
a%corporation%the%
moment%of%its%
creation%without%
regard%to%its%express%

constituted%within%
of%the%corporation%or%
Philippine%jurisdiction.% the%pursuit%of%its%

powers%or%particular%
primary%purpose.%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

! Gokongwei!v.!Securities!and!Exchange!Commission,!89%SCRA%337%(1979).%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
purposes%are%provided%
in%its%articles.%

%
B.(Where(Corporate(Power(Lodged(

A% corporation% has% no% power% except% those% expressly% conferred%


on% it% by% the% Corporation% Code% and% those% that% are% implied% or%
incidental% to% its% existence.% In% turn,% a% corporation% exercises% said%
powers%through%its%board%of%directors%and/or%its%duly%authorized%

To%issue%or%sell%stocks%to%subscribers%or%admit%members%for%nonF
stock%corporations%
o Issue%v.%Sell%
" Issue% (of% new% shares)% !% Taken% from% the%
unissued/unsubscribed% shares,% which% no% one%

officers% and% agentsIn% turn,% physical% acts% of% the% corporation,%


like%the%signing%of%documents,%can%be%performed%only%by%natural%
persons%duly%authorized%for%the%purpose%by%corporate%byFlaws%or%
by%a%specific%act%of%the%board%of%directors.%Shipside(Inc.(v.(Court(
of(Appeals,(352(SCRA(334((2001).1(
%
C.(Powers(of(the(Corporation(

The%right%of%succession%
o
o

This%is%possessed%for%as%long%as%the%corporation%exists.%
This%power%is%the%key%by%which%a%corporation%is%deemed%
to% have% a% strong% juridical% personality,% and% is% the%
foundation%of%the%primary%doctrine%that%the%personality%

To%adopt%and%use%a%corporate%seal%
o What:% It% is% an% emblem% or% sign% that% represents% the%
corporation.%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Salenga%v.%Court%of%Appeals,%664%SCRA%635%(2012);%Ellice%AgroFIndustrial%Corp.%
v.%Young,%686%SCRA%51%(2012);%Fausto%C.%Ignacio%v.%Home%Bankers%Savings%and%
Trust%Co.,%689%SCRA%173%(2013).%

owns.% The% company% is% giving% or% accepting% a%


new%subscription;%an%act%of%the%corporation.%
" Sell% (previously% issued% shares)% !% Taken% from%
shares% which% were% previously% owned;% an% act% of%
the%corporation%OR%the%owner%of%shares.%
Atty.% Hofilea% !% normally% a% corporation% cannot% sell%
shares% to% the% subscribers.% However,% there% are%
exceptions%whereby%the%company%can%sell%shares%which%
it%owns.%
" A% corporation% can% become% the% owners% of% (and%
eventually% sell)% issued% shares% if% it% buys% it% back%
from% the% subscribers.% These% are% TREASURY%
SHARES.%These%do%not%become%unissued%shares,%
but%are%still%considered%as%outstanding%stocks.%

of%the%corporation%is%separate%and%distinct%from%that%of%
its%stockholders%or%members.%

Function:% A% corporate% signature% that% may% represent%


consent% or% agreement.% However,% this% is% not% necessary%
for%validity%of%agreemets.%
Atty.%Hofilea%!%this%seems%to%be%a%remnant%of%the%past%
where%matters%of%solemnity%were%if%importance.%

To%merge%and%consolidate%with%other%corporations%
o It%can%be%done%within%reasonable%bounds.%

(
SUMMARY(
! (Corporations%have%inherent%powers%which%it%may%exercise%even%if%it%is%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
not%noted%in%the%articles%of%incorporation%or%byFlaws.%
!%Succeeding%articles%deal%with%powers%of%the%corporation.%
(
II.(Express(Powers(

(
A.(Enumerated(Powers((Section(36)(

To%sell,%lease,%dispose,%or%encumber%assets%
o Is%there%a%limitation%on%the%power%of%the%corporation%to%
deal%with%property?%The%Corporation%Code%provides%that%
it%is%in%line%with%the%business%of%the%corporation.%
" Doctrine:% The% property% bought% does% not%
necessarily% have% to% be% directly% related% to% the%
operations% of% the% business,% but% it% can% be%
justified%by%overFall%good%of%the%corporation.%
" Can% the% company% % whose% main% business% is% to%
operate% taxis% in% the% Philippines% % acquire% a%

"

condominium% unit% in% New% York% at% a% time% when%


it% is% considered% a% bad% investment?% % Such%
investment%can%be%justifiable.%%
Atty.%Hofilea%!%This%kind%of%situation%is%not%so%
much% whether% the% corporation% has% the% power%
or%not,%but%whether%it%is%wise%or%not.%The%Court%
will% allow% the% board% of% directors% to% decide% on%
wisdom%of%the%matter.%The%Courts%however,%can%
come% in% where% there% is% an% allegation% that% the%
corporation%has%no%power%to%do%so.%This%may%be%
initiated% where% someone% alleges% that% the% act% is%
ultra% vires.% In% our% age% (2013),% the% world% has%
become%smaller%and%so%it%can%be%argued%that%in%

the%long%run,%such%investment%can%be%beneficial%
to%the%company%%so%its%a%matter%of%argument.%
A%corporation%can%own%stocks%of%another%corporation.%

(
B.(Extend(or(Shorten(Corporate(Term((Sections(37(and(81[1])(
(
Section(37.(Power(to(extend(or(shorten(corporate(term.(
A(private(corporation(may(extend(or(shorten(its(term(as(stated(in(the(
articles( of( incorporation( when( approved( by( a( majority( vote( of( the(
board( of( directors( or( trustees( and( ratified( at( a( meeting( by( the(
stockholders(representing(at(least(twoYthirds((2/3)(of(the(outstanding(
capital(stock(or(by(at(least(twoYthirds((2/3)(of(the(members(in(case(of(
nonYstock(corporations.(Written(notice(of(the(proposed(action(and(of(
the( time( and( place( of( the( meeting( shall( be( addressed( to( each(
stockholder( or( member( at( his( place( of( residence( as( shown( on( the(
books( of( the( corporation( and( deposited( to( the( addressee( in( the( post(
office( with( postage( prepaid,( or( served( personally:( Provided,( That( in(
case( of( extension( of( corporate( term,( any( dissenting( stockholder( may(
exercise(his(appraisal(right(under(the(conditions(provided(in(this(code.(
(n)(
(
Section(81.(Instances(of(appraisal(right.(
Any( stockholder( of( a( corporation( shall( have( the( right( to( dissent( and(
demand( payment( of( the( fair( value( of( his( shares( in( the( following(
instances:(
(
1.( In( case( any( amendment( to( the( articles( of( incorporation( has( the(
effect( of( changing( or( restricting( the( rights( of( any( stockholder( or( class(
of( shares,( or( of( authorizing( preferences( in( any( respect( superior( to(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
those(of(outstanding(shares(of(any(class,(or(of(extending(or(shortening(
the(term(of(corporate(existence;(
(
2.(In(case(of(sale,(lease,(exchange,(transfer,(mortgage,(pledge(or(other(
disposition( of( all( or( substantially( all( of( the( corporate( property( and(

amounts% to% an% amendment% of% the% articles% of% incorporation.%


When% such% amendment% takes% place,% the% rules% on% amending%
must%be%complied%with.%
2. Appraisal(Rights(Issues(

assets(as(provided(in(the(Code;(and(
(
3.(In(case(of(merger(or(consolidation.((n)(

The%power%to%extend%corporate%life%is%not%a%inherent%power%of%a%
corporation,%since%the%corporate%term%is%not%only%a%matter%that%
constitutes% an% integral% clause% of% the% articles% of% incorporation,%
but% also% the% State% in% granting% juridical% personality% to% a%
corporation%is%presumed%to%have%granted%only%for%the%period%of%
time%provided%in%the%corporation's%charter.%%

The% power% to% shorten% corporate% life,% although% an% item% that%
would% cover% an% amendment% of% the% articles% of% incorporation,% is%
for% practical% purposes,% an% inherent% right% on% the% part% of% the%
corporation,%since%the%decision%to%shorten%the%business%life%of%a%
business% endeavor% should% really% be% addressed% to% the% business%
decision% of% the% business% venturers.% Although% the% State% would%
have% to% approve% formally% the% shortening% of% the% original%
corporate% term% of% a% corporation,% for% all% practical% purposes,% the%
State% really% compels% the% underlying% enterprise% to% go% on% when%
the%coFventurers%have%decided%to%cease%operations%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

In% case% of% extension% of% corporate% term,% any% dissenting%


stockholder% may% exercise% his% appraisal% right% to% have% his% shares%
bought% back% at% fair% value% by% the% corporation.% % Nevertheless,%
under% Section% 81% of% the% Code,% the% appraisal% right% is% also%
available% to% a% dissenting% stockholder% even% when% it% covers% the%
shortening%of%the%term%of%corporate%existence.%

(
1. Nature(of(Power1(

Atty.%Hofilea%!%The%Corporate%Term%is%embodied%in%the%articles%
of% incorporation.% As% such,% to% change% the% corporate% term%

(
C.(Increase(or(Decrease(Capital(Stock((Section(38)(
(
Section( 38.( Power( to( increase( or( decrease( capital( stock;( incur,( create(
or(increase(bonded(indebtedness.(
No( corporation( shall( increase( or( decrease( its( capital( stock( or( incur,(
create( or( increase( any( bonded( indebtedness( unless( approved( by( a(
majority(vote(of(the(board(of(directors(and,(at(a(stockholder's(meeting(
duly(called(for(the(purpose,(twoYthirds((2/3)(of(the(outstanding(capital(
stock(shall(favor(the(increase(or(diminution(of(the(capital(stock,(or(the(
incurring,(creating(or(increasing(of(any(bonded(indebtedness.(Written(
notice(of(the(proposed(increase(or(diminution(of(the(capital(stock(or(of(
the(incurring,(creating,(or(increasing(of(any(bonded(indebtedness(and(
of( the( time( and( place( of( the( stockholder's( meeting( at( which( the(
proposed(increase(or(diminution(of(the(capital(stock(or(the(incurring(or(
increasing( of( any( bonded( indebtedness( is( to( be( considered,( must( be(
addressed( to( each( stockholder( at( his( place( of( residence( as( shown( on(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the( books( of( the( corporation( and( deposited( to( the( addressee( in( the(
post(office(with(postage(prepaid,(or(served(personally.(
(
A(certificate(in(duplicate(must(be(signed(by(a(majority(of(the(directors(
of( the( corporation( and( countersigned( by( the( chairman( and( the(

(
Any(increase(or(decrease(in(the(capital(stock(or(the(incurring,(creating(
or(increasing(of(any(bonded(indebtedness(shall(require(prior(approval(
of(the(Securities(and(Exchange(Commission.(
(

secretary(of(the(stockholders'(meeting,(setting(forth:(
(
1.(That(the(requirements(of(this(section(have(been(complied(with;(
(
2.(The(amount(of(the(increase(or(diminution(of(the(capital(stock;(
(
3.( If( an( increase( of( the( capital( stock,( the( amount( of( capital( stock( or(

One( of( the( duplicate( certificates( shall( be( kept( on( file( in( the( office( of(
the( corporation( and( the( other( shall( be( filed( with( the( Securities( and(
Exchange( Commission( and( attached( to( the( original( articles( of(
incorporation.(From(and(after(approval(by(the(Securities(and(Exchange(
Commission( and( the( issuance( by( the( Commission( of( its( certificate( of(
filing,( the( capital( stock( shall( stand( increased( or( decreased( and( the(
incurring,( creating( or( increasing( of( any( bonded( indebtedness(

number( of( shares( of( noYpar( stock( thereof( actually( subscribed,( the(
names,( nationalities( and( residences( of( the( persons( subscribing,( the(
amount(of(capital(stock(or(number(of(noYpar(stock(subscribed(by(each,(
and(the(amount(paid(by(each(on(his(subscription(in(cash(or(property,(
or( the( amount( of( capital( stock( or( number( of( shares( of( noYpar( stock(
allotted( to( each( stockYholder( if( such( increase( is( for( the( purpose( of(
making(effective(stock(dividend(therefor(authorized;(

authorized,(as(the(certificate(of(filing(may(declare:(Provided,(That(the(
Securities( and( Exchange( Commission( shall( not( accept( for( filing( any(
certificate( of( increase( of( capital( stock( unless( accompanied( by( the(
sworn( statement( of( the( treasurer( of( the( corporation( lawfully( holding(
office(at(the(time(of(the(filing(of(the(certificate,(showing(that(at(least(
twentyYfive( (25%)( percent( of( such( increased( capital( stock( has( been(
subscribed(and(that(at(least(twentyYfive((25%)(percent(of(the(amount(

(
4.(Any(bonded(indebtedness(to(be(incurred,(created(or(increased;(
(
5.( The( actual( indebtedness( of( the( corporation( on( the( day( of( the(
meeting;(
(
6.(The(amount(of(stock(represented(at(the(meeting;(and(
(

subscribed( has( been( paid( either( in( actual( cash( to( the( corporation( or(
that( there( has( been( transferred( to( the( corporation( property( the(
valuation( of( which( is( equal( to( twentyYfive( (25%)( percent( of( the(
subscription:( Provided,( further,( That( no( decrease( of( the( capital( stock(
shall( be( approved( by( the( Commission( if( its( effect( shall( prejudice( the(
rights(of(corporate(creditors.(
(
NonYstock( corporations( may( incur( or( create( bonded( indebtedness,( or(

7.(The(vote(authorizing(the(increase(or(diminution(of(the(capital(stock,(
or(the(incurring,(creating(or(increasing(of(any(bonded(indebtedness.(

increase(the(same,(with(the(approval(by(a(majority(vote(of(the(board(
of( trustees( and( of( at( least( twoYthirds( (2/3)( of( the( members( in( a(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporation%must%not%only%comply%with%the%provisions%of%Section%
38,% but% also% with% the% provisions% of% Section% 16% of% the% Code%
governing%the%amendment%of%the%articles%of%incorporation.%%
o Atty.%Hofilea%!%decrease%of%capital%stock%is%not%allowed%
when% it% would% prejudice% creditors.% Creditors% deal% with%
the%corporation%that%there%would%be%a%specific%capital%to%

meeting(duly(called(for(the(purpose.(
(
Bonds( issued( by( a( corporation( shall( be( registered( with( the( Securities(
and( Exchange( Commission,( which( shall( have( the( authority( to(
determine(the(sufficiency(of(the(terms(thereof.((17a)(
(

Despite% the% board% resolution% approving% the% increase% in% capital%


stock% and% the% receipt% of% payment% on% the% future% issues% of% the%

help%back%the%debt%incurred.%
2. Appraisal(Rights(Issues(

shares% from% the% increased% capital% stock,% such% funds% do% not%
constitute% part% of% the% capital% stock% of% the% corporation% until%
approval% of% the% increase% by% SEC.% Central( Textile( Mills,( Inc.( v.(
NWPC,(260(SCRA368((1996).(

capital%stock%redefines%the%contractual%relations%in%the%corporate%
setting% as% it% requires% the% approval% of% stockholders% owning% or%
representing% twoFthirds% (2/3)% of% the% outstanding% capital% stock,%
does%not%include%the%appraisal%right%on%the%part%of%the%dissenting%
stockholders,% in% the% sense% that% every% stockholder% should% come%
into% the% corporate% setting% fully% aware% that% the% expediencies% of%
corporate%life%may%require%that%eventually%the%corporation%may%

A% reduction% of% capital% to% justify% the% mass% layoff% of% employees,%

especially% of% union% members,% amounts% to% nothing% but% a%


premature%and%plain%distribution%of%corporate%assets%to%obviate%
a% just% sharing% to% labor% of% the% vast% profits% obtained% by% its% joint%
efforts% with% capital% through% the% years,% and% would% constitute%
unfair%labor%practice.%Madrigal(&(Co.(v.(Zamora,(151(SCRA(355(
(1987).(
1. Nature(of(Power1(
The% power% to% increase% or% decrease% capital% stock% is% not% an%
inherent%power%of%the%corporation,%not%only%because%it%touches%
upon% an% item% expressly% required% to% be% provided% for% in% the%
articles% of% incorporation,% but% also% the% capital% stock% of% a%
corporation%is%governed%by%common%law%doctrines,%such%as%the%
trust% fund% doctrine,% and% preFemptive% rights.% Therefore,% in%
increasing%or%decreasing%the%capital%stock%of%the%corporation,%the%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The% policy% embodied% in% Section% 38% of% the% Corporation% Code%
therefore,%although%it%recognizes%that%an%increase%in%authorized%

need% to% increase% capitalization% to% fund% its% operations% or%


expansions,%and%needs%to%look%primarily%into%its%equity%investors%
to%fund%the%same.%
3. Effectivity(of(Increase(in(Capital(Stock(

Prior% to% SEC% approval% of% the% increase% in% the% authorized% capital%
stock% of% the% corporation,% and% despite% the% board% resolution%
approving% the% increase% in% capital% stock,% and% the% receipt% of%
payment%on%the%future%issues%of%the%shares%from%the%increased%
capital% stock,% such% funds% do% not% constitute% part% of% the% capital%
stock% of% the% corporation% until% approval% of% the% increase% by% the%
SEC.%

CORPORATION)LAW)REVIEWER)(201332014))
!

4. Special(Rules(on(Listed(Shares(1(

The% SEC% Rules% in% the% case% of% corporations% whose% securities% are%
listed% in% the% stock% exchange% or% registered% under% the% then%
Revised%Securities%Act%(now%covered%by%the%Securities%Regulation%
Code),%is%that%no%announcement%of%an%offer%of%rights%to%acquire%
share%or%to%issue%stock%dividends%to%stockholders%shall%be%made%
after% an% increase% of% capital% stock% without% a% definite% fixed% date%
for%the%exercise%of%such%right%or%issuance%of%stock%dividends.%%
o The% rule% is% meant% to% avoid% delays% in% the% issuance% of%
rights%or%distribution%of%stock%dividends%after%an%increase%

Atty.% Hofilea% !% regardless% of% the% status% of% the% ACS,% you% can%
apply%for%an%increase.%
o The%law%does%not%require%that%the%unissued%shares%first%

Differentiate(between(Article(38(or(Article(40(

%Section% 1,% Rules% Requiring% Definite% Dates% for% the% Exercise% of% PreFEmptive% or%
Other%Rights%or%For%the%Issuance%of%Stock%Dividends%(1973).%
2
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

Debentures%are%issued%on%the%basis%of%the%general%credit%of%the%

Atty.% Hofilea% !% Public% indebtedness;% not% similar% to% debts%

secured%for%the%ordinary%course%of%business.%
2. Nature(of(Power(

The% power% to% incur,% create% and% increase% bonded%


indebtedness% governed% by% Section% 38% of% the% Civil% Code%
should% be% analyzed% from% the% fact% that% it% constitutes% an%
aspect% of% the% inherent% power% of% every% corporation% to%
borrow% or% to% incur% loan% obligations.% Ordinarily,% this%
exercise% to% borrow% falls% within% the% business% judgment%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

In% one% opinion,% the% SEC% has% limited% the% term% "bonded%
indebtedness"% to% cover% only% indebtedness% of% the% corporation%

corporation%and%are%not%secured%by%collaterals,%and%therefore%do%
not% constitute% bonded% indebtedness% and% will% not% require%
approval%of%the%stockholders.%

(
D.(Incur,(Create(or(Increase(Bonded(Indebtedness((Section(38)(2(
o

power% of% the% Board% of% Directors% under% the% doctrine% of%
centralized% management% and% would% not% require%
stockholders%ratification.(
The% power% to% incur% and% create% indebtedness% under%
Section%40%of%the%Code%provides%that%an%encumbrance%of%
all% or% substantially% all% of% the% assets% of% the% corporation%

which%are%secured%by%mortgage%on%real%or%personal%property,%as%
distinguished% from% "debentures"% which% are% unsecured%
corporate%indebtedness.%%

be% released% before% the% corporation% can% increase% its%


authorized%capital%stocks.%

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

would%require%stockholders%ratification.(
1. Nature(of(a(Bond(3(

of%capital%stock.%

Ordinarily,%the%incurring,%creating%or%increasing%of%indebtedness%
really% does% not% go% into% or% amend% the% corporate% contractual%
relationship%between%and%among%the%members%of%the%corporate%
family.% However,% when% it% comes% to% bonded% indebtedness,%
Section% 38% imposes% the% same% procedural% requisites% as% the%
increase% or% decrease% of% capital% stock,% since% they% create% special%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3

%SEC% Opinion,% 29% April% 1987,% XXI% SEC% QUARTERLY% BULLETIN% 21F22% (No.% 3,% Sept.%
1987).% See! also% SEC% Opinion,% 6% April% 1990,% XXIV% SEC% QUARTERLY% BULLETIN% 28F29%
(No.%3,%Sept.%1990).%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
burdens% on% the% corporation,% such% as% the% need% to% provide% for% a%
sinking%fund%to%answer%for%the%maturity%value%of%the%bonds%and%
the%creation%of%first%liens%of%important%assets%of%the%corporation.(
Usually% bonded% indebtedness% involve% very% large% amounts% and%
the% burdens% created% on% the% operations% of% the% corporation%
usually%covers%a%long%period%of%time.%

The%rationale%for%the%rather%strict%requirements%under%the%Code%
for%the%incurring,%creating%or%increasing%of%bonded%indebtedness%
is%to%ensure%that%not%only%the%board%of%directors%alone%can%bind%
the% corporation% to% such% burdensome% affairs,% but% that% the%
qualified% concurrence% of% the% stockholders% or% members% should%
be%obtained.((((

Atty.%Hofilea%!%even%without%Section%38,%the%2/3%requirement%
would%still%be%necessary%because%incurring%bonded%indebtedness%

is%burdensome.(
3. Appraisal(Right(

No% appraisal% right% is% granted% to% dissenting% stockholders% when%


the% corporation% either% validly% incurs,% creates% or% increases%
bonded%indebtedness%since,%the%granting%of%such%appraisal%right%
under% such% circumstances% would% drain% the% corporation% of%
financial%resources%contrary%to%the%purpose%for%which%the%power%
is% exercise% to% raise% funds% for% corporate% affairs.% Also,% the%
incurring,% creation% or% increasing% of% bonded% indebtedness% does%
not%really%go%into%the%original%intent%or%corporate%relationship%of%
the%stockholders%or%members%with%the%corporation.%Even%when%
such% indebtedness% is% not% bonded% under% the% principles% of% the%
trust% fund% doctrine,% corporate% creditors% have% priority% over% the%
assets%of%the%corporation;%therefore,%adding%the%feature%of%being%
a% bonded% indebtedness% did% not% really% take% anything% from% the%

position%of%the%stockholders%or%members%that%they%would%have%
had%if%the%indebtedness%were%not%a%bonded%indebtedness.(
(
E.(Sell(or(Dispose(of(Assets((Section(40)(
(
Section(40.(Sale(or(other(disposition(of(assets.(
Subject(to(the(provisions(of(existing(laws(on(illegal(combinations(and(
monopolies,( a( corporation( may,( by( a( majority( vote( of( its( board( of(
directors( or( trustees,( sell,( lease,( exchange,( mortgage,( pledge( or(
otherwise(dispose(of(all(or(substantially(all(of(its(property(and(assets,(
including( its( goodwill,( upon( such( terms( and( conditions( and( for( such(
consideration,( which( may( be( money,( stocks,( bonds( or( other(
instruments( for( the( payment( of( money( or( other( property( or(
consideration,( as( its( board( of( directors( or( trustees( may( deem(
expedient,( when( authorized( by( the( vote( of( the( stockholders(
representing(at(least(twoYthirds((2/3)(of(the(outstanding(capital(stock,(
or( in( case( of( nonYstock( corporation,( by( the( vote( of( at( least( to( twoY
thirds( (2/3)( of( the( members,( in( a( stockholder's( or( member's( meeting(
duly(called(for(the(purpose.(Written(notice(of(the(proposed(action(and(
of( the( time( and( place( of( the( meeting( shall( be( addressed( to( each(
stockholder( or( member( at( his( place( of( residence( as( shown( on( the(
books( of( the( corporation( and( deposited( to( the( addressee( in( the( post(
office( with( postage( prepaid,( or( served( personally:( Provided,( That( any(
dissenting( stockholder( may( exercise( his( appraisal( right( under( the(
conditions(provided(in(this(Code.(
(
A( sale( or( other( disposition( shall( be( deemed( to( cover( substantially( all(
the(corporate(property(and(assets(if(thereby(the(corporation(would(be(
rendered( incapable( of( continuing( the( business( or( accomplishing( the(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
purpose(for(which(it(was(incorporated.(
(
After(such(authorization(or(approval(by(the(stockholders(or(members,(
the(board(of(directors(or(trustees(may,(nevertheless,(in(its(discretion,(
abandon( such( sale,( lease,( exchange,( mortgage,( pledge( or( other(

Consequently,% nowhere% is% the% consent% of% the% State% required% or%
referred% to% under% Section% 40% when% the% corporation% sells% or%
disposes%of%all%or%substantially%all%of%its%assets.%
2. Nature(of(Transactions(Covered(2(

disposition(of(property(and(assets,(subject(to(the(rights(of(third(parties(
under(any(contract(relating(thereto,(without(further(action(or(approval(
by(the(stockholders(or(members.(
(
Nothing( in( this( section( is( intended( to( restrict( the( power( of( any(
corporation,( without( the( authorization( by( the( stockholders( or(
members,( to( sell,( lease,( exchange,( mortgage,( pledge( or( otherwise(

between%the%corporation%and%the%stockholders,%other%than%as%if%
the% corporation% were% again% at% the% starting% point% of% it% business%
life.% The% reason% why% a% stockholders'% ratification% is% required%
when%the%board%sells,%disposes%or%encumbers%all%or%substantially%
all%of%the%corporate%assets%is%that%it%recognizes%the%stockholders%

right%to%the%nature%and%status%of%the%corporate%business,%as%well%
as% future% developments% proceeding% therefrom,% when% they% put%
their% investments% into% the% corporation.% When% the% corporation,%
through% its% board,% attempts% to% alter% or% dispose% of% such% level,%
even% when% the% corporation% ends% up% with% the% same% value%
covering% the% cash% or% other% form% of% consideration% received% for%
the% sale% or% disposition,% it% must% get% the% confirmation% of% the%

dispose(of(any(of(its(property(and(assets(if(the(same(is(necessary(in(the(
usual( and( regular( course( of( business( of( said( corporation( or( if( the(
proceeds( of( the( sale( or( other( disposition( of( such( property( and( assets(
be(appropriated(for(the(conduct(of(its(remaining(business.(
(
In( nonYstock( corporations( where( there( are( no( members( with( voting(
rights,( the( vote( of( at( least( a( majority( of( the( trustees( in( office( will( be(

stockholders.%
o Stockholders% have% a% common% law% proprietary% or%
beneficial% interests% on% the% corporate% business%
enterprise,% and% any% sale,% transfer,% disposition,% or%
encumbrance% thereof% would% be% void% if% effected% by% the%
Board% of% Directors% without% the% appropriate%
stockholders%approval.%

sufficient( authorization( for( the( corporation( to( enter( into( any(


transaction(authorized(by(this(section.((28(1/2a)(
(
1. Nature(of(Power(1(

Theoretically,% there% is% no% change% in% the% basic% relationship%

In% other% words,% the% exercise% of% such% a% power% really% affects% the%
business%enterprise%level%of%corporate%setFup,%an%area%much%left%
by%the%State%to%the%judgment%of%the%managers,%and%does%not%in%
any%way%affect%or%alter%the%juridical%entity%granted%by%the%State.%

The% property% of% the% corporation% is% not% the% property% of% the%
stockholders%or%members,%and%as%such,%may%not%be%sold%without%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
express% authority% from% the% Board% of% Directors.( Litonjua( v.(
Eternit(Corp.,(490(SCRA(204((2006).(
3. Transactions(NOT(Covered(by(Ratificatory(Vote(Requirements(1(

remaining% business,% since% the% sale% or% disposition% of% "all"% assets%
or%property%means%there%is%no%remaining%business%to%conduct.2%

Section%40(4):(

substantially%all%assets%and%property%of%a%corporation%as%one%by%
which% the% corporation% would% be% rendered% incapable% of%
continuing%the%business%or%accomplishing%the%purpose%for%which%
it% was% incorporated% % any% sale% or% disposition% short% of% this% will%
not% need% stockholder% ratification,% and% may% be% pursued% by% the%
majority%vote%of%the%Board%of%Directors.%Strategic( Alliance( Dev.(
Corp.(v.(Radstock(Securities(Ltd.,(607(SCRA(413((2009).(

a. If% it% is% necessary% in% the% usual% and% regular% course% of%
business%of%such%corporation;%or%%
b. If% the% proceeds% of% the% sale% or% other% disposition% of% such%
property%and%assets%be%appropriated%for%the%conduct%of%
its%remaining%business.%

There%is%a%clear%distinction%between%the%assets%of%a%corporation%
and% its% business% enterprise% (which% is% also% termed% as% the% going%
concern% in% other% disciplines),% which% the% author% would% equate%
as% the% capability% to% earn% profit% from% the% business% activity.%
When% the% law% therefore% says% all% or% substantially% all% of% the%

assets,%it%means%that%what%is%being%sold%or%encumbered%is%the%
business%enterprise,%because%even%if%most%assets%remain%after%
the% transaction,% the% ability% to% earn% profit% may% no% longer% be%
present.%
4. Sale(or(Disposition(of(All(Corporate(Assets(or(Property(

Such% a% sale,% disposition% or% encumbrance% cannot% be% covered% by%


the%exemption%provided%in%Section%40%where%no%stockholders'%or%
members'% approval% is% necessary% because% the% sale% of% all% of% the%
assets%or%property%of%a%business%can%never%be%"in%the%usual%and%
regular% course% of% business% of% such% corporation,"% nor% can% it% be%
argued%that%the%proceeds%of%the%sale%or%other%disposition%of%such%
property% and% assets% be% appropriated% for% the% conduct% of% its%

The% Corporation% Code% defines% a% sale% or% disposition% of%

(
Strategic(Alliance(Dev.(Corp.(v.(Radstock(Securities(Ltd.,(
(
Facts:( The% Construction% Development% Corporation% of% the% Philippines%
(CDCP)% had% a% 30Fyear% franchise% to% construct,% operate% and% maintain% toll%
facilities% in% the% North% and% South% Luzon% Tollways.% Basay% Mining%
Corporation% (an% affiliate% of% CDCP)% obtained% loans% from% Marubeni%
Corporation%of%Japan%amounting%to%P10%billion,%which%CDCP%guaranteed%
solidarily.% Thereafter,% CDCP% changed% its% corporate% name% to% PNCC% to%
reflect%the%governments%(90.3%)%shareholding%in%the%corporation.%
%
The% money% owed% Marubeni% remained% unpaid% and% unacknowledged% for%
20%years.%But%in%October%2000,%PNCC%recognized%this%financial%obligation%
to%Marubeni.%Barely%3%months%after,%Marubeni%assigned%its%entire%credit%
to%Radstock%Corporation%for%less%than%P100%million,%who%in%turn%sought%
to% collect% from% PNCC.% Eventually,% Radstock% and% PNCC% entered% into% the%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
5. Sale(or(Disposition(of(Substantially(All(of(the(Corporate(Assets(
or(Property(

compromise% agreement% whereby% PNCC% shall% assign% to% a% third% party%


assignee%(designated%by%Radstock)%all%its%rights%and%interests%in%specified%
real% properties% (amounting% to% P6Billion% F% reduced% obligation)% provided%
the% assignee% shall% be% duly% qualified% to% own% real% properties% in% the%
Philippines.% PNCC% shall% also% assign% to% Radstock% 20%% of% the% outstanding%

to% cover% substantially% all% the% corporate% property% and% assets,% if%
thereby% the% corporation% would% be% rendered% incapable% of% (a)%
continuing% the% business% or% (b)% accomplishing% the% purposes% for%
which% it% was% incorporated.% Such% a% sale% or% disposition% must% be%
understood%as%valid%only%if%it%does%not%prejudice%the%creditors%of%
the% assignor,% which% necessarily% implies% that% the% assignee%
assumes%the%debts%of%the%assignor.%Caltex( (Phils.),( Inc.( v.( PNOC(

capital% stock% of% PNCC,% and% 6%% share% in% the% gross% toll% revenue% of% the%
Manila%North%Tollways%Corporation%from%2008F2035.%
(
Issue:(Whether%or%not%the%compromise%agreement%is%valid.%
(
Held:(NO.%The%assignment%of%6%%revenues%and%outstanding%capital%stock%
is%not%allowed%because%the%franchise%of%PNCC%has%already%expired%and%all%

Shipping(and(Transport(Corp.,(498(SCRA(400((2006).(

its%assets%turned%over%to%the%government.%Therefore,%the%revenues%and%
stock%capital%belong%to%the%government.%There%can%be%no%disbursement%
of% public% funds% without% appropriation% by% congress.% Public% bidding% is%
required% to% dispose% of% governmental% property.% Mere% assignments% are%
prohibited.% PNCC% must% follow% preference% of% credit.% PNCC% has% other%
creditors,% among% them% the% national% government% which% should% be% paid%
first,% and% other% creditors% who% have% final% and% executory% judgements%

The% test% on% whether% a% sale% or% disposition% or% encumbrance% is%
substantial%is%a%qualitative,%rather%than%a%quantitative%test.1(
o This% means% that% sale% of% one% piece% of% machinery,% if% it% is%

against%PNCC.%The%loan%from%Marubeni%is%unsecured%and%should%be%one%
of% the% last% to% be% paid.% So% the% compromise% agreement% effectively%
satisfying% the% unsecured% loan% to% Marubeni% before% the% preferred%
creditors%is%invalid.%
(
Doctrine:( See% above.% Also,% see% Legal% Effect% on% Assignee% Even% When%
Contracts% Entered% into% With% the% Requisites% Stockholders% or% Members%
Approval.%
(

The% disposition% of% the% assets% of% a% corporation% shall% be% deemed%

essential% in% the% continuation% of% the% business,% amounts%


to%sale%of%substantially%all%assets.%(
" Approval% of% qualified% majority% of% the%
outstanding%capital%stock%is%needed(
Sale%of%several%parcels%of%land,%on%the%other%hand,%if%not%
disruptive% of% the% corporations% business% is% not% a%
substantial%sale%of%all%corporation%assets.%(
"

A%mere%board%resolution%would%be%sufficient.(

Sale% by% Board% of% Trustees% of% the% only% corporate% property%
without% compliance% with% Section% 40% of% Corporation% Code%
requiring% ratification% of% members% representing% at% least% twoF
thirds% of% the% membership,% would% make% the% sale% null% and% void.%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Islamic( Directorate( v.( Court( of( Appeals,( 272( SCRA( 454( (1997);(
Pea%v.%CA,%193%SCRA%717%(1991).(
6. Lease(or(Encumbrance(of(All(of(Substantially(All(of(the(Assets1(

corporate%creditors%and%the%amount%and%nature%of%their%claims,%
giving% of% notice% of% the% sale,% and% applying% the% proceeds% of% the%
sale%proportionately%to%the%payment%of%the%listed%obligations.%

When%a%corporation%decides%to%lease%all%or%substantially%all%of%its%

assets,%then%it%would%fall%within%the%ambit%of%Section%40,%because%
in%effect%the%corporation%can%no%longer%pursue%whatever%line%of%
business% it% has% by% having% contracted% away% the% use% of% the%
business%enterprise%to%a%lessee%!%basically%they%have%nothing%to%
use%for%the%business.(

requirements% renders% the% transaction% void% and% fraudulent,%


irrespective%of%the%intentions%of%the%parties%to%the%transaction.3%
8. Consequences(of(Contracts(Entered(Into(Without(the(Requisite(
Stockholders(Approval(

Section%40(3)%

When%a%corporation%decides%to%encumber%all%or%substantially%all%

Entering% into% the% sale,% disposition% or% encumbrance% of% all% or%

of% its% assets,% it% continues% to% retain% ownership% and% possession%
thereof%and%still%be%in%a%position%to%pursue%the%lines%of%business%
for% which% the% assets% have% been% devoted% to.% The% reason% why%
ratification%by%stockholders%is%necessary:(

substantially% all% of% the% assets% of% the% corporation% should% be%
treated% as% being% within% the% governing% doctrine% of% ultra% vires%
contracts% of% the% third% type% (i.e.,% those% entered% into% by%
unauthorized%officers%or%representatives%of%the%corporation)%and%
should%be%construed%and%disposed%under%the%doctrine%prevailing%
on%such%ultra%vires%contracts.%!%Such%contract%would%be%void.%
9. Legal( Effect( on( Assignee( Even( When( Contracts( Entered( into(
With(the(Requisites(Stockholders(or(Members(Approval(4(

The% encumbrance% of% all% or% substantially% all% assets% has%


the% potential% of% disrupting% the% pursuit% of% the% business%
especially%if%foreclosure%happens%(i.e.%dispossession).(
o Such%encumbrance%would%fall%within%the%same%category%
of% incurring% or% creating% bonded% indebtedness% under%
Section%38.(
7. Bulk(Sales(Law(
o

Aside%from%the%requirements%under%Section%40,%the%sale%of%all%or%
substantially%all%of%the%corporate%assets%or%property%may%require%
compliance%with%the%Bulk%Sales%Law,2%when%the%transaction%falls%
within%the%classification%of%the%Law%as%"sale%in%bulk"%and%would%
require% the% seller% to% execute% a% sworn% statement% listing% the%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%
2
%Act%No.%3952,%as%amended%by%Rep.%Act%No.%111.%

Under% the% Bulk% Sales% Law,% failure% to% comply% with% its%

General( Rule:( When% you% sell% assets,% you% simply% sell% it,% and% the%
liability%stays%with%you.(

Exception:( Unless%the%buyer/assignee%assumes%your%obligations%
concerning%the%asset.(

Actions%made%pursuant%to%Section%40%would%constitute%a%species%
of% business% enterprise% and% the% legal% effect% is% to% make% the%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3

!For!a!more!substantive!discussions!on!the!applicability!of!the!Bulk!Sales!Law,!
see%Chapter%16,%VILLANUEVA,%LAW%ON%SALES,%Rex%Book%Store,%%(1998%ed.).%
4
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
assignee% liable% for% the% obligations% arising% from% the% business%
enterprise.(

Strategic% v.% Radstock% !% the% Court% stated% that% the% transfer% can%

only% happen% if% the% transferee% assumes% liability% for% all% the%
obligations.%This%is%because,%the%transfer%was%essentially%done%in%
fraud% of% creditors% (including% the% government).% This% case% is% a%
different%animal%all%together.(
10. Appraisal(Right(1(

The% appraisal% right% is% accorded% to% dissenting% stockholders% as% a%


matter% of% equity% and% fairness% since% they% should% be% allowed% to%
plough%their%investments%into%ventures%they%feel%they%could%get%
a%better%return%rather%than%with%a%corporation%that%is%no%longer%
capable%of%pursuing%the%business.%
%

duly(called(for(the(purpose.(Written(notice(of(the(proposed(investment(
and( the( time( and( place( of( the( meeting( shall( be( addressed( to( each(
stockholder( or( member( at( his( place( of( residence( as( shown( on( the(
books( of( the( corporation( and( deposited( to( the( addressee( in( the( post(
office( with( postage( prepaid,( or( served( personally:( Provided,( That( any(
dissenting( stockholder( shall( have( appraisal( right( as( provided( in( this(
Code:( Provided,( however,( That( where( the( investment( by( the(
corporation(is(reasonably(necessary(to(accomplish(its(primary(purpose(
as( stated( in( the( articles( of( incorporation,( the( approval( of( the(
stockholders(or(members(shall(not(be(necessary.((17(1/2a)(
(
1. Rational(of(Rule(

F.(Invest(Corporate(Funds(for(NonYPrimary(Purpose(Endeavor((Section(
42)(
(

Section(42.(Power(to(invest(corporate(funds(in(another(corporation(or(
business(or(for(any(other(purpose.(
Subject(to(the(provisions(of(this(Code,(a(private(corporation(may(invest(
its(funds(in(any(other(corporation(or(business(or(for(any(purpose(other(
than( the( primary( purpose( for( which( it( was( organized( when( approved(
by(a(majority(of(the(board(of(directors(or(trustees(and(ratified(by(the(
stockholders(representing(at(least(twoYthirds((2/3)(of(the(outstanding(
capital(stock,(or(by(at(least(two(thirds((2/3)(of(the(members(in(the(case(
of( nonYstock( corporations,( at( a( stockholder's( or( member's( meeting(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Whenever% the% corporation% seeks% to% engage% into% a% secondary%


purpose% allowed% under% its% articles% of% incorporation,% although%
intra% vires,% it% must% seek% the% approval% of% the% stockholders% or%
members%of%the%corporation.%
The% law% therefore% presumes% rather% strongly% that% when%
stockholders%invest,%or%members%join,%a%corporation,%it%is%
with% the% primary% expectation% that% the% corporation,%
through%its%board,%will%only%pursue%the%primary%purpose%
indicated% in% the% articles% of% incorporation,% and% if% the%
board% feels% that% it% is% propitious% to% pursue% a% secondary%
purpose,%then%it%would%do%so%only%if%the%stockholders%or%

members% have% had% a% chance% to% evaluate% and% decide%


upon% such% diversion% of% corporate% funds% from% the%
primary%business%of%the%corporation.%
2. Coverage(of(Funds(

The% SEC% has% ruled% that% the% term% funds% under% Section% 42%
includes%any%corporate%property%to%be%used%in%the%furtherance%of%

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the%business,%and%consequently%when%property%is%devoted%in%any%
business%other%that%pursuit%of%the%primary%purpose%for%which%the%
corporation% was% incorporated,% it% would% need% the% ratificatory%
vote% of% twoFthirds% (2/3)% of% the% outstanding% capital% stock% of% the%
corporation.1%
3. Investments( That( Should( Be( Considered( Within( Primary(

without% need% of% obtaining% stockholders'% approval;% much% less%


should%such%investments%trigger%any%appraisal%right%on%the%part%
of%dissenting%stockholders.%

manufactures% the% jute% bags% used% in% packing% sugar% falls% within%
the% implied% powers% of% the% sugar% central% as% part% of% its% primary%
purpose%and%does%not%need%ratification%by%the%stockholders.%De(
la(Rama(v.(MaVao(Sugar(Central(Co.,(27(SCRA(247((1969).(
(

Purpose(2(

Section%42%expressly%provides%that%where%the%investment%by%the%
corporation% is% reasonably% necessary% to% accomplish% its% primary%
purpose%as%stated%in%the%articles%of%incorporation,%the%approval%
of% the% stockholders% or% members% shall% not% be% necessary,% since%
the% matter% lies% clearly% within% the% business% discretion% or%
judgment%of%the%board%of%directors%of%the%corporation.%%
o There% are% certain% investments% of% the% corporation% that%
would%be%deemed%consistent%with%the%primary%purpose%
by%virtue%of%the%essence%of%the%corporation%as%a%business%
enterprise.%%

All% corporations,% whatever% may% be% their% primary% purposes,% are%


deemed%to%have%the%power%to%invest%corporate%funds%in%another%
corporation% or% business,% as% a% means% of% obtaining% the% best%
returns%of%their%investible%funds.%
Examples:(

A% fishing% company,% through% its% board,% should% be% allowed% to%


place% say% its% investible% fund% of% P100,000.00% in% PLDT% or% San%
Miguel%commercial%papers%or%even%perhaps%their%shares,%if%they%
offer% the% best% return% at% that% point% in% time% for% the% corporation,%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%XXIX%SEC%QUARTERLY%BULLETIN%2%(No.%2,%June%1995).%%
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%
2

Investment%by%a%sugar%central%in%the%equity%of%a%corporation%that%

De(la(Rama(v.(MaVao(Sugar(Central(Co.(
(
Facts:( De% La% Rama% and% 3% other% minority% stockholders% of% MaFAo% Sugar%
Central%filed%a%derivative%suit%against%the%MaFAo%Sugar%Central%Co.,%Inc.,%
and%Amado%Araneta%and%3%other%directors.%De%La%Rama%claims%that%the%
directors% made% an% illegal% investment% in% Phil.% Fibers% Processing% Co.,% Inc.%
He%contends%that%since%the%investment%was%made%NOT%in%pursuance%of%
the%corporate%purpose%and%without%the%requisite%authority%of%2/3%of%the%
stockholders,%then%the%investment%was%thus%illegal%for%being%in%violation%
of%Section%17F1/2%of%the%Corporation%Law.%
%
Araneta% claims% that% the% investment% was% not% illegal% as% it% was%
subsequently% ratified% by% the% Board% of% Directors% in% a% resolution.% Also%
since% the% company% was% engaged% in% the% manufacture% of% sugar% bags,% it%
was% thus% perfectly% legitimate% for% MaFAo% Sugar% either% to% manufacture%
sugar% bags% or% invest% in% another% corporation% engaged% in% said%
manufacture.%
%
Issue:( Whether% or% not% the% affirmative% vote% of% the% stockholders%
representing%2/3%of%the%voting%power%is%necessary%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
Held:( NO.% The% court% held% that% the% affirmative% vote% of% the% stockholders%
representing%2/3%of%the%voting%power%is%not%necessary.%
(
Doctrine:( The%corporation%code%allows%a%corporation%to%invest%its%funds%

in% another% corporation% for% any% other% purpose% other% than% the% main%
purpose.%%

Provided%that%the%board%has%been%authorized%by%affirmative%vote%
of%the%stockholders%representing%2/3%of%the%voting%power.%%

BUT%if%the%investment%is%made%in%a%corporation%whose%business%
is%important%to%the%investing%corporation%and%would%aid%it%in%its%
purpose,%then%to%require%authority%of%the%stockholders%would%be%
to%unduly%curtail%the%power%of%the%board%of%directors.%%

incorporation.%%

BUT% when% the% purchase% of% shares% of% another% corporation% is%
done% solely% for% investment% and% not% to% accomplish% the% purpose%
of%its%incorporation,%the%vote%of%approval%of%the%stockholders%is%
necessary.%

The%nonFobtaining%of%the%ratificatory%vote%of%the%stockholders%or%

members%under%Section%42%of%the%Code%should%be%construed%to%
be%within%the%realm%of%ultra%vires%contracts%of%the%second%type,%
having%been%entered%into%by%representatives%of%the%corporation%
not%duly%authorized.%
6. Confirmation( of( the( Business( Enterprise( Level( of(
Relationship(

4. Investments(Outside(of(Secondary(Purposes(1(

Under% such% terms,% the% ratificatory% vote% of% stockholders% or%


members%to%legally%allow%a%corporation%to%invest%funds%outside%
of% its% primary% purpose% (and% those% which% are% necessary% or%

incidental%to%the%exercise%of%such%purpose)%would%be%limited%to%
pursuing%the%secondary%purposes%of%the%corporation.%
5. Consequences(of(NonYObtaining(of(Ratificatory(Vote(2(

a% corporation% may% exercise% such% other% powers% as% may%


be% essential% or% necessary% to% carry% out% its% purpose% or%
purposes%"as%stated%in%its%articles%of%incorporation."%%
Section% 45% provides% expressly% that% no% corporation% shall%
possess% or% exercise% any% corporate% power% except% those%
conferred%by%the%Corporation%Code,%or%by%its%articles%of%

If%one%where%to%limit%the%review%to%the%wordings%of%Section%42,%
the%answer%would%seem%to%be%in%the%affirmative.%%

The%provisions%of%Section%42%of%the%Corporation%Code%recognize%

However,% the% terms% of% Section% 42% are% deemed% to% be%
circumscribed% by% the% provisions% of% Sections% 36% and% 45% of% the%
Corporation%Code.%%
o Section% 36,% after% enumerating% express% powers% of%

the%legal%standing%of%stockholders%or%members%of%ever%corporate%
setFup% on% matters% that% affect% the% business% enterprise,% as% it%
grants%them%standing%to%vote%on%matters,%and%does%not%leave%the%
crucial% decision% of% whether% or% not% to% invest% corporate% funds% in%

corporations,% provides% an% allFencompassing% clause% that%

nonFprimary% business% enterprise% within% the% sole% business%


discretion%of%the%Board.(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
G.(Declare(Dividends((Section(43)(
(

declared%to%creditors%as%part%of%the%settlement%of%debts.%Nielson(
&(Co.(v.(Lepanto(Consolidated(Mining(Co.,(26(SCRA(540((1968).%

Section(43.(Power(to(declare(dividends.((
The( board( of( directors( of( a( stock( corporation( may( declare( dividends(

out( of( the( unrestricted( retained( earnings( which( shall( be( payable( in(
cash,( in( property,( or( in( stock( to( all( stockholders( on( the( basis( of(
outstanding( stock( held( by( them:( Provided,( That( any( cash( dividends(
due(on(delinquent(stock(shall(first(be(applied(to(the(unpaid(balance(on(
the( subscription( plus( costs( and( expenses,( while( stock( dividends( shall(
be( withheld( from( the( delinquent( stockholder( until( his( unpaid(
subscription( is( fully( paid:( Provided,( further,( That( no( stock( dividend(

shall(be(issued(without(the(approval(of(stockholders(representing(not(
less(than(twoYthirds((2/3)(of(the(outstanding(capital(stock(at(a(regular(
or(special(meeting(duly(called(for(the(purpose.((16a)(
(
Stock( corporations( are( prohibited( from( retaining( surplus( profits( in(
excess( of( one( hundred( (100%)( percent( of( their( paidYin( capital( stock,(
except:((1)(when(justified(by(definite(corporate(expansion(projects(or(

programs( approved( by( the( board( of( directors;( or( (2)( when( the(
corporation(is(prohibited(under(any(loan(agreement(with(any(financial(
institution( or( creditor,( whether( local( or( foreign,( from( declaring(
dividends(without(its/his(consent,(and(such(consent(has(not(yet(been(
secured;( or( (3)( when( it( can( be( clearly( shown( that( such( retention( is(
necessary( under( special( circumstances( obtaining( in( the( corporation,(
such( as( when( there( is( need( for( special( reserve( for( probable(
contingencies.((n)(

Dividends%from%retained%earnings%can%only%be%declared%to%those%
who% are% stockholders% of% the% corporation;% dividends% cannot% be%

Stock% dividend% is% the% amount% that% the% corporation% transfers%


from% its% surplus% profit% account% to% its% capital% account.% It% is% the%
same%amount%that%can%loosely%be%termed%as%the%trust%fund%of%
the%corporation.%NTC(v.(CA,(311(SCRA(508((1999).(
When%the%Board%distributes,%it%is%based%on%the%number%of%shares%
and% to% all% stockholders.% The% Board% cannot% choose% who% will%
receive%or%not.(
o However,% in% cases% where% the% stockholder% has% not% fully%
paid%for%his%share,%his%cash%dividends%will%first%be%applied%
to% your% unpaid% subscription% (which% you% should% have%
paid%according%to%your%contract).(
(SEC%Circular%11,%s.2003)%Unrestricted%Retained%Earnings%!%not%
allocated%for%any%project%or%debt%of%the%corporation.(

Kinds(of(Dividends(
*Rights%to%dividends%may%be%affected%due%to%various%types%of%shares%
Cash(

Property(

Stock(

All%products%of%your%investments%
Board%Approval%is%sufficient%to%execute%

Stockholders%
approval%is%required%

No%meeting%is%required%

Meeting%is%required%
for%approval%

Issued%in%cash%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Treasury%shares%which% New%shares%of%stocks%
have%been%reissued%as% issued%from%unissued%
dividends%are%actually% shares%
property%dividends%

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Only%upon%declaration%of%the%board%will%a%
stockholder%have%a%right%to%claim%their%cash%
or%property%dividends.%

corporation,% such% as% when% there% is% need% for% special%


reserve%for%probable%contingencies.3%

of% Corporations,% where% the% financial% statements% of% the%


corporation% show% surplus% profits% in% excess% of% 100%% of% paidFup%
capital,%it%shall%explain%by%footnotes%why%the%same%has%not%been%
declared%as%dividends;%if%the%explanation%is%not%satisfactory,%the%
SEC% shall% direct% the% corporation% to% distribute% the% excess% as%
dividends.4%%

(
1. Retention(of(Surplus(Profit((

Section% 43% prohibits% stock% corporations% from% retaining% surplus%


profits%in%excess%of%oneFhundred%percent%(100%)%of%their%paidFup%
capital%stock,1%except%in%the%following%situations:%
a. When%justified%by%definite%corporate%expansion%projects%
or%programs%approved%by%the%board%of%directors;2%
i. Definite% !% Mere% possibility% of% expansion% is%
insufficient%to%withhold%surplus%profit.%
b. When% the% corporation% is% prohibited% under% any% loan%
agreement% with% any% financial% institution% or% creditor,%
whether% local% or% foreign,% from% declaring% dividends%
without% its/his% consent,% and% such% consent% has% not% yet%

The% power% granted% to% stockholders% to% demand% from% the% Board%
the%declaration%of%dividends%under%Section%43%is%one%of%the%few%
instances% under% the% Code% where% the% stockholders% themselves%
exercise%a%primary%power,%instead%of%the%usual%ratificatory%vote%
on%actions%taken%primarily%by%the%board%of%directors.%

2. Report(to(SEC(

been%secured;%or%
c. When% it% can% be% clearly% shown% that% such% retention% is%
necessary% under% special% circumstances% obtaining% in% the%

Any% declaration% of% dividends,% whether% cash% or% stock,% shall% be%
reported% to% the% SEC% within% fifteen% (15)% days% from% the% date% of%
declaration.% For% corporations% whose% shares% or% securities% are%

listed%in%the%stock%exchange%or%registered%and%licensed%under%the%
Revised%Securities%Act%(now%the%Securities%Regulation%Code),%the%
report%shall%be%filed%with%the%SEC%before%or%simultaneously%with%
the% release% or% publication% of% the% notice% of% declaration% of%
dividends%to%stockholders.5%(
3. Restrictions(on(Banks(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Even%under%the%old%Corporation%Law,%the%SEC%had%issued%the%Rules%Governing%
the% Distribution% of% Excess% Profits% of% Corporations% (1973),% which% provides% that%
"All% corporations% which% have% surplus% profits% in% excess% of% necessary%
requirements%for%capital%expansion%and%reserves%shall%declare%and%distribute%the%
excess%profits%as%dividends%to%stockholders.%(Section%1)%
2
%SEC% RULES% GOVERNING%THE% DISTRIBUTION%OF% EXCESS% PROFITS%OF% CORPORATIONS%provides%
that%the%amounts%appropriated%for%such%purpose%shall%be%segregated%from%the%
free%surplus;%and%that%upon%completion%of%the%expansion%program,%the%reserve%
established%shall%be%declared%as%stock%dividends.%

Under%the%SEC%Rules%Governing%the%Distribution%of%Excess%Profits%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3

%SEC% RULES% GOVERNING%THE% DISTRIBUTION%OF% EXCESS% PROFITS%OF% CORPORATIONS%includes%


as% justification% for% nonFdeclaration% of% dividends% when% the% same% is% consistent%
with%policy%or%requirements%of%a%government%office.%
4
%Section%2%thereof.%
5
%Section% 3,% SEC% RULES% GOVERNING% THE% DISTRIBUTION% OF% EXCESS% PROFITS% OF%
CORPORATIONS%(1973)%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))
!

Under%Section%57%of%the%General%Banking%Law%of%2000,1%no%bank%
or% quasiFbank% shall% declare% dividends% greater% than% its%
accumulated% net% profits% then% on% hand% deducting% therefrom% its%
losses% and% bad% debts.% Neither% shall% the% bank% or% quasiFbank%
declare%dividends,%if%at%the%time%of%declaration:%
a. Its% clearing% account% with% the% Bangko% Sentral% is%
overdrawn;%%
b. It% is% deficient% in% the% required% liquidity% floor% for%
government% deposits% for% five% % (5)% or% more% consecutive%
days;%
c. It% does% not% comply% with% the% liquidity% standards/ratios%
prescribed% by% the% Bangko% Sentral% for% purposes% of%
determining%funds%available%for%dividend%declaration;%or%
d. It% has% committed% a% major% violation% as% may% be%
determined%by%the%Bangko%Sentral.%%

%
H.( Management( Contracts( (Section( 44):( Why( the( difference( in( rule(
between(entity(and(individual?(
(
Section(44.(Power(to(enter(into(management(contract.(
No( corporation( shall( conclude( a( management( contract( with( another(
corporation( unless( such( contract( shall( have( been( approved( by( the(
board(of(directors(and(by(stockholders(owning(at(least(the(majority(of(

the( board( of( directors( of( the( managed( corporation,( then( the(
management( contract( must( be( approved( by( the( stockholders( of( the(
managed( corporation( owning( at( least( twoYthirds( (2/3)( of( the( total(
outstanding( capital( stock( entitled( to( vote,( or( by( at( least( twoYthirds(
(2/3)( of( the( members( in( the( case( of( a( nonYstock( corporation.( No(
management( contract( shall( be( entered( into( for( a( period( longer( than(
five(years(for(any(one(term.(
(
The( provisions( of( the( next( preceding( paragraph( shall( apply( to( any(
contract( whereby( a( corporation( undertakes( to( manage( or( operate( all(
or( substantially( all( of( the( business( of( another( corporation,( whether(
such( contracts( are( called( service( contracts,( operating( agreements( or(
otherwise:( Provided,( however,( That( such( service( contracts( or(
operating( agreements( which( relate( to( the( exploration,( development,(
exploitation(or(utilization(of(natural(resources(may(be(entered(into(for(
such(periods(as(may(be(provided(by(the(pertinent(laws(or(regulations.(
(n)(
(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
%Rep.%Act%8791.%%

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

the(same(interest(of(both(the(managing(and(the(managed(corporations(
own( or( control( more( than( oneYthird( (1/3)( of( the( total( outstanding(
capital( stock( entitled( to( vote( of( the( managing( corporation;( or( (2)(
where( a( majority( of( the( members( of( the( board( of( directors( of( the(
managing( corporation( also( constitute( a( majority( of( the( members( of(

the(outstanding(capital(stock,(or(by(at(least(a(majority(of(the(members(
in(the(case(of(a(nonYstock(corporation,(of(both(the(managing(and(the(
managed( corporation,( at( a( meeting( duly( called( for( the( purpose:(
Provided,( That( (1)( where( a( stockholder( or( stockholders( representing(
1

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Atty.%Hofilea%!%While%this%provision%provides%substantial%basis%

for% a% corporations% management% of% another,% the% board% of% the%


managed% corporation% must% not% abdicate% their% power%
completely.%At%the%end%of%the%day,%they%must%still%call%the%shots.(
1. Coverage(of(Management(Contract((Section(44(2))(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

A%management%contract%is%not%the%same%as%an%agency%contract,%
and% therefore% is% not% revocable% at% will.% Nielson( &( Co.,( Inc.( v.(

Lepanto( Consolidated( Mining,( 26( SCRA( 540( (1968);( Ricafort( v.(


Moya,(195(SCRA(247((1991).(
2. Rationale(for(Ratification(Requirements1(

On( Part( of( the( Managed( Corporation:( Such% a% management%

contractual%understanding%with%the%stockholders%of%such%
managing%corporation.%
3. Ratification( Requirements( When( There( is( Common( Control( of(
Involved(Corporations((Section(44(1))(
4. Cases(Not(Covered(by(Section(44(2(

contract%is%a%deviation%from%the%principle%under%Section%23%that%
the% corporate% affairs% shall% be% managed% by% the% board% of%
directors,% and% thereby% a% departure% from% such% an% arrangement%
would% require% the% approval% of% the% stockholders% under% the%
principle% that% it% would% vary% the% contractual% corporate%
arrangements,%by%allowing%basically%an%outsider%to%involve%itself%
in%the%management%of%corporate%affairs.%

would% devote% their% time% and% resources% for% the% affairs% of% the%
corporation,% and% the% entering% into% the% management% contract%
whereby% the% board,% as% the% direct% agents% of% the% managing%
corporation,% would% be% devoting% their% time% and% resources%
towards% the% operations% of% another% corporation,% would% be% a%
deviation% from% such% a% contractual% relationship,% and% thereby%
would% require% the% confirmation% of% the% stockholders% of% the%

It% would% seem% from% the% express% language% of% Section% 44,% that%
when% it% comes% to% a% management% contract% entered% into% by% the%
managed% corporation% under% the% definition% of% Section% 44,% not%
with% another% corporation% but% with% a% partnership% or% an%
individual,%the%same%would%not%be%covered%by%and%thereby%need%
not%comply%with%the%ratificatory%requirements%of%Section%44.%

On( Part( of( the( Managing( Corporation:( The% rationale% for%


ratificatory%measures%on%the%part%of%the%managing%corporation%is%
that% the% management% arrangement% is% a% deviation% from% the%
principle% also% that% the% board% of% directors% in% the% managing%
corporation% assumed% office% with% the% understanding% that% they%

Exception:( Under% these% principles,% the% ratificatory%


procedure% should% not% therefore% be% applicable% to% a%
corporation% that% is% organized% primarily% as% a%
management% company,% and% its% entering% into% a%
management% contract% is% clearly% within% the% primary%
purpose%of%the%corporation%and%in%accordance%with%the%

(
I.(Purchase(Own(Shares((Section(41)(

They%become%treasury%shares.%

Requisites:%
o
o

Legal%purpose%
Out%of%unrestricted%earnings%

(
III.(Implied(Powers(

managing%corporation.%

Examples:(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

water,%such%corporation%cannot%engage%in%the%business%of%land%
transportation,% which% is% an% entirely% different% line% of% business,%
and,%for%which%reason,%may%not%acquire%any%certificate%of%public%
convenience% to% operate% a% taxicab% service.( Luneta( Motor( Co.( v.(
A.D.(Santos,(Inc.,(5(SCRA(809((1962).(

A% corporation% whose% primary% purpose% is% to% generate% electric%


power% has% no% authority% to% undertake% stevedoring% services% to%
unload%coal%into%its%pier%since%it%is%not%reasonably%necessary%for%
the% operation% of% its% power% plant.% NPC( v.( Vera,( 170( SCRA( 721(
(1989).(

dulyForganized% corporation,% unless% specifically% revoked% by%


another%law.%Umale(v.(ASB(Realty(Corp.,(652(SCRA(215((2011).(

When% the% articles% expressly% provide% that% the% purpose% of% the%
corporation% was% to% engage% in% the% transportation% of% person% by%

act,% for% it% as% for% securing% a% loan% to% finance% the% activities% of% the%
corporation,%hence,%not%an%ultra%vires%act.%Atrium(Management(
Corp.(v.(Court(of(Appeals,(353(SCRA(23((2001).(
(
V.(Other(Powers((Section(36)(
%
A.(Sell(Land(and(Other(Properties(

A%corporation%organized%to%engage%as%a%lending%investor%cannot%
engage%in%pawnbroker.%Philipinas(Loan(Co.(v.(SEC,(356(SCRA(193(
(2001).(

A% mining% company% has% no% power% to% engage% in% real% estate%

An% officer% who% is% authorized% to% purchase% the% stock% of% another%
corporation%has%implied%power%to%perform%all%other%obligations%
arising%therefrom%such%as%payment%of%the%shares%of%stock.%InterV
Asia(Investments(Industries(v.(Court(of(Appeals,(403(SCRA(452(
(2003).(

%
B.(Borrow(Funds(

ordinary% course% of% business% usages% and% practices% of% the%

As% a% creature% of% the% law,% the% powers% and% attributes% of% a%
corporation% are% those% set% out,% expressly% or% implied,% in% the% law.%
Among% the% general% powers% granted% by% law% to% a% corporation% is%
the% power% to% sue% in% its% own% name.% This% power% is% granted% to% a%

The%power%to%borrow%money%is%one%of%those%cases%where%even%a%
special%power%of%attorney%is%required%under%Article%1878%of%Civil%
Code.% There% is% invariably% a% need% of% an% enabling% act% of% the%
corporation% to% be% approved% by% its% Board% of% Directors.% The%
argument%that%the%obtaining%of%loan%was%in%accordance%with%the%

%
IV.(Incidental(Powers(

When% the% corporations% primary% purpose% is% to% market,%


distribute,% 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.% Articles% 1874% and% 1878% of% Civil% Code% requires% that%
when%land%is%sold%through%an%agent,%the%agents%authority%must%
be%in%writing,%otherwise%the%sale%is%void.%San( Juan( Structural( v.(
CA,(296(SCRA(631((1998).1(

development.% Heirs( of( Antonio( Pael( v.( Court( of( Appeals,( 372(
SCRA(587((2001).(

The%act%of%issuing%checks%is%within%the%ambit%of%a%valid%corporate%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%AF%Realty%&%Dev.,%Inc.%v.%Dieselman%Freight%Services%Co.,%373%SCRA%385%(2002);%
Firme% v.% Bukal% Enterprises% and% Dev.% Corp.,% 414% SCRA% 190% (2003);% Cosco%
Philippines%Shipping,%Inc.%v.%Kemper%Insurance%Company,%670%SCRA%343%(2012).%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporation%is%devoid%of%merit%because%the%prevailing%practice%in%
the%corporation%was%to%explicitly%authorize%an%officer%to%contract%
loans%in%behalf%of%the%corporation.%China(Banking(Corp.(v.(Court(
of(Appeals,(270(SCRA(503((1997).(

shopping% is% necessarya% certification% not% signed% by% a% duly%


authorized% person% renders% the% petition% subject% to% dismissal.%
Gonzales(v.(Climax(Mining(Ltd.,(452(SCRA(607((2005);2%such%as%
the% administrator% or% project% manager,% Esteban,( Jr.( v.( Vda.( de(
Onorio,(360(SCRA(230((2001);%or%the%General%Manager,%Central(
Cooperative(Exchange(Inc.(v.(Enciso,(162(SCRA(706((1988).(

%
C.(Power(to(Sue(and(Be(Sued(

Under%Section%36%in%relation%to%Section%23%of%Corporation%Code,%
where% a% corporation% is% an% injured% party,% its% power% to% sue% is%
lodged%with%its%Board%of%Directors.%A%minority%stockholder%who%
is%a%member%of%the%Board%has%no%such%power%or%authority%to%sue%

on% the% corporations% behalf.% Tam( Wing( Tak( v.( Makasiar,( 350(
SCRA(475((2001).1(
1. Power(to(Bind(the(Corporation(in(a(Suit(

complaint.% Median( Container( Corp.( v.( Metropolitan( Bank( and(


Trust( Co.,( 561( SCRA( 622( (2008);% the% submission% in% the% motion%
for%reconsideration%of%the%authority%to%sign%the%verification%and%
certification% constitutes% substantial% compliance% with% the%
procedural% requirements.% Asean( Pacific( Planners( v.( City( of(
Urdaneta,(566(SCRA(219((2008).(

When% the% power% to% sue% is% delegated% by% the% byFlaws% to% a%
particular%officer,%such%officer%may%appoint%counsel%to%represent%
the% corporation% in% a% preFtrial% hearing% without% need% of% a% formal%
board%resolution.%Citibank,(N.A.(v.(Chua,(220(SCRA(75((1993).(

Court.% Cunanan( v.( Jumping( Jap( Trading( Corp.,( 586( SCRA( 620(
(2009).(

If%the%petitioner%is%a%corporation,%a%board%resolution%authorizing%
a% corporate% officer% to% execute% the% certification% against% forum%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Shipside%Inc.%v.%Court%of%Appeals,%352%SCRA%334%(2001);%SSS%v.%COA,%384%SCRA%
548% (2002);% United% Paragon% Mining% Corp.% v.% Court% of% Appeals,% 497% SCRA% 638%
(2006);% Mediserv,% Inc.% v.% Court% of% Appeals,% 617% SCRA% 284% (2010);% Cebu% Bionic%
Builders%Supply,%Inc.%v.%DBP,%635%SCRA%13%(2010);%Ellice%AgroFIndustrial%Corp.%v.%
Young,%686%SCRA%51%(2012).%

When% a% corporate% officers% has% been% granted% express% power% by%


the%Board%of%Directors%to%institute%a%suit,%the%same%is%considered%
broad%enough%to%include%the%power%of%said%corporate%officer%to%
execute% the% verification% and% certification% against% forum%
shopping% required% in% initiatory% pleadings% under% the% Rules% of%

For%counsel%to%sign%the%certification%for%the%corporation,%he%must%

specifically%be%authorized%by%the%Board%of%Directors.%BPI(Leasing(
Corp.(v.(CA,(416(SCRA(4((2003);(Mariveles(Shipyard(Corp.(v.(CA,(
415(SCRA(573((2003).(
2. Certificate(of(NonYForum(Shopping:(

Nonetheless,% such% lack% of% authority% may% be% cured:% even% if% the%
counsel% executed% the% verification% and% certificate% of% nonFforum%
shopping% before% the% board% authorized% him,% the% passing% of% the%
board%resolution%of%authorization%before%the%actual%filing%of%the%

%Also%DBP%v.%Court%of%Appeals,%440%SCRA%200%(2004);%Public%Estates%Authority%v.%
Uy,% 372% SCRA% 180% (2001);% Philippine% Airlines,% Inc.% v.% Flight% Attendance% and%
Stewards% Association% of% the% Philippines% (FASAP),% 479% SCRA% 605% (2006);% Metro%
Drug% Distribution,% Inc.% v.% Narcisco,% 495% SCRA% 286% (2006);% Cagayan% Valley% Drug%
Corp.%v.%Commissioner%of%Internal%Revenue,%545%SCRA%10%(2008)%Mediserv,%Inc.%
v.% Court% of% Appeals,% 617% SCRA% 284% (2010);% Cosco% Philippines% Shipping,% Inc.% v.%
Kemper%Insurance%Company,%670%SCRA%343%(2012).%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

certification% against% nonFforum% shopping% in% behalf% of% the%


corporation% without% the% benefit% of% a% board% resolution.% South(
Cotabato( Communications( Corp.( v.( Sto.( Tomas,( 638( SCRA( 566(
(2011).(
3. Service(of(Summons(on(Corporations(

rule% that% allows% service% of% summons% upon% an% agent50% of% the%
corporation.% E.B.( Villarosa( &( Partners( Co.,( Ltd.( v.( Benito,( 312(
SCRA(65((1999).(
%

A% President% of% a% corporation,% among% other% enumerated%


corporate%officers%and%employees,%can%sign%the%verification%and%

To%sue%and%be%sued%(Additional%Notes)%
A% de% facto% corporation% may% also% sue% and% be% sued,% and% their%
status%as%de%facto%cannot%be%assailed%collaterally%unless%in%a%case%
duly%submitted%for%that%purpose.%

General(Rule:(The%rule%that%the%power%of%the%corporation%to%sue%

Section%11,%Rule%14%of%the%1997%Rules%of%Civil%Procedure%uses%the%
term% general% manager% and% unlike% the% old% provision% in% the%
Rules% of% Court,% it% does% not% include% the% term% agent.%
Consequently,% the% enumeration% of% persons% to% whom% summons%
may% be% served% is% restricted,% limited% and% exclusive% following%
the%rule%on%statutory%construction%expressio%unios%est%exclusion%
alterius.% Therefore,% the% earlier% cases% that% uphold% service% of%

and%be%sued%in%any%court%is%lodged%with%the%Board%of%Directors%
that%exercise%its%corporate%powers,%is%not%wellFestablished.%%

Even% if% the% counsel% executed% the% verification% and% certificate% of%
nonFforum% shopping% before% the% board% authorized% him,% the%
passing% of% the% board% resolution% of% authorization% before% the%
actual% filing% of% the% complaint,% or% the% submission% in% the% motion%
for%reconsideration%of%the%authority%to%sign%the%verification%and%
certification% constitutes% substantial% compliance% with% the%
procedure%requirements.9%

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Kanlaon%Construction%Enterprises%Co.,%Inc.%v.%NLRC,%279%SCRA%337%(1997).%
%Gesulgon%v.%NLRC,%219%SCRA%561%(1993).%
3
%Golden% Country% Farms,% Inc.% v.% Sanvar% Development% Corp.,% 214% SCRA% 295%
(1992);%G%&%G%Trading%Corp.%v.%Court%of%Appeals,%158%SCRA%466%(1988).%
4
!Summit& Trading& and& Dev.& Corp.& v.& Avendao,& 135& SCRA& 397& (1985);& also&
Vlason%Enterprises%Corp.%v.%Court%of%Appeals,%310%SCRA%26%(1999).%
5
%Republic%v.%Ker%&%Co.,%Ltd.,%18%SCRA%207%(1966).%
6
%Villa%Rey%Transit,%Inc.%v.%Far%East%Motor%Corp.,%81%SCRA%298%(1978).%
7
%Far%Corporation%v.%Francisco,%146%SCRA%197%(1986).%

Exception:( The% only% exception% to% such% rule% is% when% the%

circumstances% allow% the% filing% by% a% relatorFstockholder% of% a%


derivative% suit% in% behalf% of% the% corporation% without% prior%
approval%of%the%Board%of%Directors%or%Trustees.8%
Example:%

summons% upon% a% construction% project% manager; 1 %a%


corporations% assistant% manager; 2 %ordinary% clerk% of% a%
corporation; 3 %private% secretary% of% corporate% executives; 4%
retained% counsel; 5%officials% who% had% charge% or% control% of% the%
operations% of% the% corporation,% like% the% assistant% general%
manager;6%or%the%corporations%Chief%Finance%and%Administrative%
Officer;7%no%longer%apply%since%they%were%decided%under%the%old%

%
D.(Power(to(Hire(Employees(and(Appoint(Agents(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%
9
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

profits,%and%would%constitute%a%breach%by%the%Board%of%
Directors%of%its%fiduciary%duties%to%the%stockholders.1%

Except%where%the%authority%of%employing%servants%and%agents%is%
expressly%vested%in%the%board%of%directors%or%trustees,%an%officer%
or% agent% who% has% general% control% and% management% of% the%
corporations%business,%or%a%specific%part%thereof,% may%bind%the%
corporation%by%the%employment%of%such%agents%and%employees%
as%are%usual%and%necessary%in%the%conduct%of%such%business.%But%
the% contracts% of% employment% must% be% reasonable.% Yu( Chuck( v.(
Kong(Li(Po,(46(Phil.(608((1924).(

%
E.(Provide(Gratuity(Pay(for(Employees((Section(36[10])(

Doctrine%of%Corporate%Social%Responsibility%2%

Providing% gratuity% pay% for% employees% is% an% express% power% of% a%
corporation% under% the% Corporation% Code,% and% cannot% be%
considered%to%be%ultra%vires%to%avoid%any%liability%arising%from%the%
issuance% of% resolution% granting% such% gratuity% pay.% Lopez( Realty(

The%limitation:%Reasonable%!%it%depends%
o

v.(Fontecha,(247(SCRA(183,(192((1995).(

remain% with% the% corporation,% and% thereby% increase% their%


productivity% and% avoid% wastage% occurring% through% unnecessary%
high%turnFover%of%personnel.(

Doctrine%of%Maximization%of%Profits%
o
o

Definitely% this% cannot% be% justified% as% beneficial% for% the%


corporation%because%you%are%parting%with%property.%
Essentially,% every% donation% made% by% the% corporation%
would% contravene% the% doctrine% of% maximization% of%

The% amount% should% not% be% so% big% of% an% amount% such%
that% it% infringes% the% capacity% to% conduct% business% and%
the%amount%necessary%to%pay%back%creditors.%
If% donations% constitute% merely% a% wastage% or% have% no%
reasonable%means%of%enhancing%the%business%enterprise%
(e.g.% goodwill),% then% they% would% be% unreasonable%
donations%and%are%ultra%vires.3%

The% underlying% rationale% for% the% express% power% of% corporation%


to% grant% gratuities% is% that% they% engender% loyalty% among% the%
corporations% human% resources% and% grants% them% motivation% to%

%
F.(Power(to(Make(Donations((Section(36[9])(

Corporations% being% creatures% of% law% and% receiving% the%


protection%of%the%State%as%well%as%profiting%from%society%
must%bear%certain%nonFprofit%and%social%responsibilities.%
Under% this% theory,% donations% and% other% contributions%
made% by% the% Board% of% Directors% would% not% constitute%
ultra%vires%acts.%

Donations%cannot%be%made%in%aid%of%a%political%party.%
o

Atty.% Hofilea% !%The% Omnibus% Election% Code% amended%


the% provision% of% the% Corporation% Code,% and% states% that%
donations%can%be%made%to%political%candidates.%

(
G.(Enter(Into(a(Partnership(or(Joint(Venture:(Tuason(&(Co.(v.(Bolanos,(
95(Phil.(106((1954);(SEC(Opinion,(dated(29(February(1980.(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%
2
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%
3
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
Tuason(&(Co.(v.(Bolanos(
(
Facts:( J.M.% Tuason% &% Co.% brought% an% action% for% the% recovery% of%
possession%of%real%property%against%Bolanos.%Bolanos%alleges%ownership%

(
Doctrine:( The% true% rule% is% that% though% a% corporation% has% no% power% to%
enter%into%a%partnership,%it%may%nevertheless%enter%into%a%joint%venture%
with% another% where% the% nature% of% that% venture% is% in% line% with% the%
business%authorized%by%its%charter.%

of% the% land% by% prescription.% The% case% was% ruled% in% favor% of% Tuason%
(prescription%does%not%run%against%registered%property).%
%
On%appeal,%Bolanos%alleges,%among%others,%that%the%complaint%by%Tuason%
should% have% been% dismissed% for% not% having% been% brought% by% the% real%
party% in% interest.% This% is% because% the% action% is% brought% in% behalf% of% JM%
Tuason%&%Co.%Inc.%by%Gregorio%Araneta%Inc.,%its%managing%partner.(

why% a% corporation% may% become% a% coFventurer% or% partner% in% a%


joint%venture%arrangement,%it%would%seem%that%the%policy%behind%
the%prohibition%on%why%a%corporation%cannot%be%made%a%partner%
do% not% apply% in% a% joint% venture% arrangement.% Being% for% a%
particular%project%or%undertaking,%when%the%board%of%directors%of%
a% corporation% evaluate% the% risks% and% responsibilities% involved,%
they% can% more% or% less% exercise% their% own% business% judgment% is%

(
Issue:( Whether% or% not% the% case% should% have% been% dismissed% on% the%
ground%that%the%case%was%not%brought%by%the%proper%party%in%interest%
(
Held:( NO.% What% Section% 2,% Rule% 2% of% the% Rules% of% Court% provide% is% that%
the% action% be% brought% in% the% name% of,% but% not% necessarily% by% the% real%
party% in% interest.% While% the% complaint% states% that% the% plaintiff% is%
represented% herein% by% its% Managing% Partner% Gregorio% Araneta,% Inc.,%
another% corporation,% there% is% nothing% against% one% corporation% being%
represented%by%another%person,%natural%or%juridical,%in%a%suit%in%court.%
%
The% contention% that% Gregorio% Araneta,% Inc.% cannot% act% as% managing%
partner%for%plaintiff%on%the%theory%that%it%is%illegal%for%two%corporations%to%
enter%into%a%partnership%is%without%merit.%There%is%nothing%in%the%record%
to%indicate%that%the%venture%in%which%plaintiff%is%represented%by%Gregorio%
Araneta,%Inc.%as%its%managing%partner%is%not%in%line%with%the%corporate%
business%of%either%of%them.%

A% joint% venture% is% essentially% a% partnership% arrangement,%


although% of% a% special% type,% since% it% pertains% to% a% particular%
project%or%undertaking.1%Although%Tuason%does%not%elaborate%on%

determining% the% extent% by% which% the% corporation% would% be%


involved% in% the% project% and% the% likely% liabilities% to% be% incurred.%
Unlike% in% an% ordinarily% partnership% arrangement% which% may%
expose% the% corporation% to% any% and% various% liabilities% and% risks%
which% cannot% be% evaluated% and% anticipated% by% the% board,% the%
situation% therefore% in% a% joint% venture% arrangement,% allows% the%
board%to%fully%bind%the%corporation%to%matters%essentially%within%
the%boards%business%appreciation%and%anticipation.2!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%BAUTISTA,%supra,!at%p.%50.%In%Torres!v.!Court!of!Appeals,%278%SCRA%793,%86%SCAD%
812% (1997),% the% Supreme% Court% held% unequivocally% that% a% joint% venture%
agreement% for% the% development% and% sale% of% a% subdivision% project% would%
constitute%a%partnership%pursuant%to%the%elements%thereof%under%Article%1767%of%
the%Civil%Code%that%defines%when%a%partnership%exists.%
2
%Villanueva,%C.%L.,%&%VillanuevaFTiansay,%T.%S.%(2013).%Philippine%Corporate%Law.%
(2013%ed.).%Manila,%Philippines:%Rex%Book%Store.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(

exercise(of(the(powers(so(conferred.((n)(

The% prevailing% rule% in% the% United% States% is% that% "unless% it% is%

expressly%authorized%by%statute%or%charter,%a%corporation%cannot%
ordinarily% enter% into% partnerships% with% other% corporations% or%
with%individuals,%for,%in%entering%into%a%partnership,%the%identity%
of% the% corporation% is% lost% or% merged% with% that% of% another% and%
the% direction% of% the% affairs% is% placed% in% other% hands% than% those%
provided% by% law% of% its% creationA% corporation% can% act% only%
through%its%duly%authorized%officers%and%agents%and%is%not%bound%
by%the%acts%of%anyone%else,%while%in%a%partnership%each%member%

binds% the% firm% when% acting% within% the% scope% of% the%
partnership."1%

The%doctrine%is%grounded%on%the%theory%that%the%stockholders%of%
a% corporation% are% entitled,% in% the% absence% of% any% notice% to% the%

and%therefore%beyond%the%power%conferred%upon%it%by%law.%The%
term% ultra% vires% is% distinguished% from% an% illegal% act% for% the%
former% is% merely% voidable% which% may% be% enforced% by%
performance,% ratification,% or% estoppel,% while% the% latter% is% void%
and%cannot%be%validated.%Atrium(Management(Corp.(v.(CA,(353(
SCRA(23((2001).(
2. Second(Type(Ultra(Vires:%Those(which(have(been(executed(on(
behalf( of( the( corporation( without( proper( authority( from( the(

contrary% in% the% articles% of% incorporation,% to% assume% that% their%
directors% will% conduct% the% corporate% business% without% sharing%
that%duty%and%responsibility%with%others.2%
(
VI.(ULTRA(VIRES(DOCTRINE(
(
A.(Types(of(Ultra(Vires(Acts((Section(45)(
(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1
2

on% it% by% the% Corporation% Code,% its% charter,% and% those% that% are%
implied% or% incidental% to% its% existence.% In% turn,% a% corporation%
exercises%said%powers%through%its%Board%of%Directors%and%/or%its%
duly% authorized% officers% and% agents.% Monfort( Hermanos(
Agricultural(Dev.(Corp.(v.(Monfort(III,(434(SCRA(27((2004).(
1. First(Type(Ultra(Vires:%Those(which(are(outside(of(the(express,(
implied(and(incidental(powers(of(the(corporation.(

%FLETCHER%CYC.%CORPORATIONS%(Perm.%Ed.)%2520.%

%BAUTISTA,%TREATISE%ON%PHILIPPINE%PARTNERSHIP%LAW%(1978%Ed.),%at%p.%9.%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

An%ultra%vires%act%is%one%committed%outside%the%object%for%which%
a%corporation%is%created%as%defined%by%the%law%of%its%organization%

Board(of(Directors.(

Section(45.(Ultra(vires(acts(of(corporations.((
No(corporation(under(this(Code(shall(possess(or(exercise(any(corporate(
powers( except( those( conferred( by( this( Code( or( by( its( articles( of(
incorporation( and( except( such( as( are( necessary( or( incidental( to( the(

A% corporation% has% no% power% except% those% expressly% conferred%

When% the% President% enters% into% speculative% contracts% without%


prior% board% approval,% and% without% subsequent% Board%
ratification,%nor%were%the%transactions%included%in%the%reports%of%
the% corporation,% such% contracts% do% not% bind% the% corporation.% It%
must% be% pointed% out% that% the% Board% of% Directors,% not% the%
President,% exercises% corporate% powers.% Safic( Alcan( &( Cie( v.(
Imperial(Vegetable(Oil(Co.,(Inc.,(355(SCRA(559((2001).(
Example:(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Contracts% or% acts% of% a% corporation% must% be% made% either% by% the%
Board% of% Directors% or% by% a% corporate% agent% duly% authorized% by%

the% Board% % absent% such% valid% delegation/% authorization,% the%


rule%is%that%the%declaration%of%an%individual%directors%relating%to%
the% affairs% of% the% corporation,% but% not% in% the% course% of,% or%
connected% with% the% performance% of% authorized% duties% of% such%
director,%are%held%not%binding%on%the%corporation.%Manila(Metal(
Container(Corp.(v.(PNB,(511(SCRA(444((2006).(
3. Third(Type(Ultra(Vires:(Those(which(are(per(se(contrary(to(law,(
morals(and(public(policy.(
Example:(

Although%the%arrangement%between%the%two%mining%companies%
was%prohibited%under%the%terms%of%the%old%Corporation%Law,%the%
Supreme%Court%did%not%declare%the%nullity%of%the%agreements%on%
the% ground% that% only% private% rights% and% interests,% as%
distinguished% from% public% interests,% were% involved% in% the% case.%
Harden( v.( Benguet( Consolidated( Mining( Co.,( 58( Phil.( 140(
(1933).%
%

%
Harden,% a% stockholder% of% Balatoc,% as% well% as% other% stockholders% filed% a%
case%against%Benguet%and%Balatoc%praying%that%the%contract%be%declared%
unlawful,% and% subsequently% annulled,% and% that% the% shares% of% stock%
issued% to% Benguet% be% obliterated.% They% based% their% complaint% on% a%
provision% in% the% then% Corporation% Law% (adopted% from% the% Act% of%
Congress% of% 1916)% which% states% that% it% shall% be% unlawful% for% any%
member%of%a%corporation%engaged%in%agriculture%or%mining%(...)%to%be%in%
any%wise%interested%in%any%other%corporation%engaged%in%agriculture%or%in%
mining.%
(
Issue:(Whether%or%not%the%contract%should%be%annulled%for%illegality.%
(
Held:( NO.% The% provision% was% enacted% based% on% public% policy% which%
dictates% the% need% to% regulate% mining% rights.% The% penalties% imposed% in%
what%is%now%section%190%(A)%of%the%Corporation%Law%for%the%violation%of%
the%prohibition%in%question%are%of%such%nature%that%they%can%be%enforced%
only% by% a% criminal% prosecution% or% by% an% action% of% quo% warranto.% But%
these% proceedings% can% be% maintained% only% by% the% AttorneyFGeneral% in%

(
Facts:( Benguet% Consolidated,% a% sociedad% anonima,% and% Balatoc% Mining%
Co.,%a%corporation,%were%engaged%in%the%business%of%mining%gold.%During%
its%early%years,%Balatoc%was%underdeveloped%so%it%entered%into%a%contract%
with%Benguet%Consolidated%wherein%Benguet%will%erect%power%plants%and%
develop% a% milling% plant% for% Balatoc.% In% return,% Balatoc% gave% Benguet%
shares%with%a%par%value%of%P600K.%The%contract%was%a%result%of%a%general%

representation% of% the% Government.% Moreover,% Benguet% Company% has%


committed%no%civil%wrong%against%the%plaintiffs.%In%this%case,%Harden%has%
no%legal%standing.%
(
Doctrine:( Even%where%corporate%contracts%are%illegal%per%se,%when%only%
public% or% government% policy% is% at% stake% and% no% private% wrong% is%
committed,%the%courts%will%leave%the%parties%as%they%are,%in%accordance%
with%their%original%contractual%expectations.%

stockholders% meeting% held% by% Balatoc.% The% project% soon% after% turned%
out%well,%with%Benguet%profiting%from%their%shares.%

%
B.(General(Judicial(Attitude(Towards(the(Ultra(Vires(Doctrine(

Harden(v.(Benguet(Consolidated(Mining(Co.(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

The%plea%of%ultra%vires%will%not%be%allowed%to%prevail,%whether%
interposed%for%or%against%a%corporation,%when%it%will%not%advance%

donation% of% 4,000% shares% of% stock% as% originally% planned% into% a%
renunciation%in%favor%of%the%children%of%all%the%companys%right,%
title,% and% interest% as% beneficiary% in% and% to% the% proceeds% of% the%
life%insurance%policies%subject%to%the%express%condition%that%said%
proceeds% should% be% retained% as% a% loan% drawing% interest% at% 5%%

justice%but,%on%the%contrary,%will%accomplish%a%legal%wrong%to%the%
prejudice%of%another%who%acted%in%good%faith.%Zomer(Dev.(Corp.(
v.(Intl(Exchange(Bank,(581(SCRA(115((2009).(
%
C.(Ratification(of(Ultra(Vires(Acts:(

Acts%done%by%the%Board%of%Directors%which%are%ultra%vires%cannot%
be% setFaside% if% the% acts% have% been% ratified% by% the% stockholders.%
Pirovano(v.(De(la(Rama(Steamship(Co.,(Inc.,(96(Phil.(335((1954).(

(
Pirovano(v.(De(la(Rama(Steamship(Co.,(Inc(
(
Facts:( The% heirs% of% Enrico% Pirovano% filed% before% CFI% of% Rizal% an% action%
seeking%to%enforce%some%board%resolutions%which%gives%his%children%the%
proceeds% of% the% insurance% policies% taken% on% the% life% of% the% deceased.%
Pirovano,%former%president%of%steamship%corporation,%was%said%to%have%
contributed% greatly% to% progress% of% the% company% by% raising% its% paidFup%
capital%from%P240K%to%P15.5M.%A%few%years%before%he%died%in%the%hands%
of% the% Japanese,% the% company% insured% the% life% of% Pirovano% in% various%
insurance%companies%for%P1M.%

The% first% series% of% resolutions% was% issued% wherein% a% sum% of%
P400k%convertible%to%4k%shares%of%stock%at%par%shall%be%set%aside%
for% his% heirs.% This% was% later% changed% because,% it% was% found% by%
the% sister% of% Estefania% de% la% Rama,% Lourdes,% that% in% computing%
the% actual% value% of% the% stocks,% the% widow% of% Pirovano% % as%
guardian% of% the% children% % would% have% twice% as% much% voting%
power%as%her%other%4%sisters.%%

The% board% adopted% a% resolution% changing% the% form% of% the%

per%annum%and%shall%be%payable%after%the%company%shall%have%
first%settled%in%full%the%balance%of%its%present%remaining%bonded%
indebtedness%to%NDC.%Estefania%as%guardian%of%the%children%then%
acted%this%donation.%%
After%a%few%years%the%stockholders%formally%ratified%the%donation%stated%
in%the%resolutions.%%
%
The%president%of%the%corporation,%Sergio%Osmena%filed%an%inquiry%before%
SEC%alleging%that%said%donation%was%void%because%the%corporation%acted%
beyond% its% scope% of% powers% because% a% corporation% cant% dispose% of% his%
assets%by%gift.%
%
Issue:(Whether%or%not%the%donation%is%valid%and%enforceable.%
(
Held:( YES.% The% resolution% is% not% an% ultraFvires% act% on% the% part% of% the%
corporation.%The%corporation%was%given%broad%and%unlimited%powers%to%
carry% out% the% purpose% for% which% it% was% organized% which% includes% the%
power% to% (1)% invest% and% deal% with% corporate% money% not% immediately%
required% in% such% manner% as% from% time% to% time% may% be% determined% (2)%
aid% in% any% other% manner% to% any% person,% association% or% corporation% of%
which% any% obligation% is% held% by% this% corporation.% The% donation%
undoubtedly%comes%within%the%scope%of%this%broad%power.%
%
The% grant% or% donation% is% question% is% remunerative% in% nature% and% was%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
given% in% consideration% of% the% services% rendered% by% the% heirs% father% or%
the%corporation.%The%donation%has%already%been%perfected%such%that%the%
corporation% could% no% longer% rescind% it.% It% was% embodied% in% a% Board%
Resolution.%Representatives%of%the%corporation%and%even%its%creditors%as%
the% NDC% have% given% their% concurrence.% The% donation% was% a% corporate%
act% carried% out% by% the% corporation% not% only% with% the% sanction% of% the%
Board%of%Directors%but%also%of%its%stockholders.%The%donation%hasreached%
a% stage% of% perfection% which% is% valid% and% binding% upon% the% corporation%
and%cannot%be%rescinded%unless%there%exists%legal%grounds%for%doing%so.%
(
Doctrine:(Said%donation%even%if%ultra%vires%is%not%void%and%if%voidable,%its%
infirmity% has% been% cured% by% ratification% and% subsequent% acts% of% the%
corporation.% The% corporation% is% now% estopped% or% prevented% from%
contesting%the%validity%of%the%donation.%To%allow%the%corporation%to%undo%
what%it%has%done%would%be%most%unfair%and%contravene%the%wellFsettled%
doctrine%that%the%defense%of%ultra%vires%cannot%be%set%up%or%availed%of%in%
any%completed%transaction.%
%

Ratification%can%be%both%express%and%implied.(

Even% when% a% particular% corporate% act% does% not% fall% within% the%
express% or% implied% powers% of% the% corporation,% nevertheless% it%
will% not% be% set% aside% when,% not% being% malum% prohibitum,% the%
corporation,%through%its%senior%officers%or%its%Board%of%Directors,%
are%estopped%from%questioning%the%legality%of%such%act,%contract%
or% transaction.% Carlos( v.( Mindoro( Sugar( Co.,( 57( Phil.( 343(
(1932).1(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

%Republic% v.% Acoje% Mining% Co.,% 3% SCRA% 361% (1963);% Crisologo% Jose% v.% Court% of%
Appeals,%177%SCRA%594%(1989).%

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Acts% done% in% excess% of% corporate% officers% scope% of%


authority% cannot% bind% the% corporation.% However,% when%
subsequently% a% compromise% agreement% was% on% behalf%
of% the% corporation% being% represented% by% its% President%
acting%pursuant%to%a%Board%of%Directors%resolution,%such%
constituted% as% a% confirmatory% act% signifying% ratification%
of% all% prior% acts% of% its% officers.% NPC( v.( AlonzoVLegasto,(
443(SCRA(342((2004).(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

DIRECTORS,*TRUSTEES*AND*OFFICERS*
!
Board!of!Directors!is!the!body!which:!!
1. Exercises!all!powers!provided!for!under!the!Corporation!Code;!!
2. Conducts!all!business!of!the!corporation;!!
3. Controls!and!holds!all!property!of!the!corporation.!!
Its! members! have! been! characterized! as! trustees! or! directors! clothed!
with! a! fiduciary! character.! It! is! clearly! separate! and! distinct! from! the!
corporate!entity!itself.!Hornilla(v.(Salunat,(405(SCRA(220((2003).(

corporation* of* which* he* is* a* director* shall* thereby* cease* to* be* a*
director.* Trustees* of* nonTstock* corporations* must* be* members*
thereof.* A* majority* of* the* directors* or* trustees* of* all* corporations*
organized*under*this*Code*must*be*residents*of*the*Philippines.*
*

Doctrine!of!Centralized!Management1(
o General* Rule:* The! corporations! consent! is! that! of! its!
Board!of!Directors.(
o

Atty.!Hofilea!!!There!must!be!a!minimum!of!five!(5)!directors!
and!a!maximum!of!fifteen!(15).!

*
I.* DOCTRINE* OF* CENTRALIZED* MANAGEMENT:* Powers* of* Board* of*
Directors*(Section*23)*

*
Section*23.*The*board*of*directors*or*trustees.*
Unless* otherwise* provided* in* this* Code,* the* corporate* powers* of* all*
corporations* formed* under* this* Code* shall* be* exercised,* all* business*
conducted* and* all* property* of* such* corporations* controlled* and* held*
by* the* board* of* directors* or* trustees* to* be* elected* from* among* the*
holders* of* stocks,* or* where* there* is* no* stock,* from* among* the*
members* of* the* corporation,* who* shall* hold* office* for* one* (1)* year*
until*their*successors*are*elected*and*qualified.*
*
Every*director*must*own*at*least*one*(1)*share*of*the*capital*stock*of*
the*corporation*of*which*he*is*a*director,*which*share*shall*stand*in*his*
name*on*the*books*of*the*corporation.*Any*director*who*ceases*to*be*
the* owner* of* at* least* one* (1)* share* of* the* capital* stock* of* the*

Exception:( Specified! instances! in! the! Corporation! Code!


where!the!particular!exercise!of!the!corporate!power!by!
the!Board,!in!order!to!be!binding!and!effective,!requires!
the! consent! or! ratification! of! the! stockholders! or!
members,!and!also!on!the!part!of!the!State.(
Right*of*Appraisal:*It!should!be!noted!that!although!for!
efficiency! of! running! of! corporate! affairs! the! rule! of!
majority!has!been!adopted!in!the!case!of!stockholders!
and! members,! the! Corporation! Code! still! recognizes!
that!in!certain!instances!a!dissenting!stockholder!whose!
contractual! expectation! has! either! been! frustrated! or!
altered!by!the!decision!of!the!majority,!should!be!given!
the! right! not! have! to! stay! within! the! confines! of! the!
corporate! contractual! relationship.! In! such! instances,!
the! dissenting! stockholder! is! granted! an! option! to!

withdraw!from!such!relationship,!by!the!exercise!of!the!
right!of!appraisal.(
Courts* Attitude* Towards* the* Boards* Exercise* of*
Power:*The!Board!of!a!corporation!has!sole!authority!to!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
determine! policy! and! conduct! the! ordinary! business! of!
the!corporation!within!the!scope!of!its!charter.!As!long!
as! the! board! acts! honestly! and! the! contract! does! not!
defraud! or! abuse! the! rights! of! the! minority,! the! courts!
will! not! interfere! in! their! judgments! and! transactions.!
The! minority! members! of! the! board! and! the! minority!

stockholders! cannot! come! to! court! upon! allegations! of!


want!of!judgment!or!lack!of!efficiency!on!the!part!of!the!
majority!and!change!the!course!of!the!administration!of!
corporate!affairs.(

!Yu!Chuck!v.!Kong!Li!Po,!46!Phil.!608,!614!(1924);!Gamboa!v.!Victoriano,!90!
SCRA! 40! (1979);! Reyes! v.! RCPI! Employees! Credit! Union,! Inc.,! 499! SCRA! 319!
(2006);! Yasuma! v.! Heirs! of! Cecilio! S.! De! Villa,! 499! SCRA! 466! (2006);! Raniel! v.!
Jochico,! 517! SCRA! 221! (2007);! Republic! v.! Coalbrine! International,! 617! SCRA!
491!(2010).!
2
!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

Atty.!Hofilea!!!The!one!share!required!to!be!held!by!a!director!
is!a!qualifying!share!and!in!practice!is!ignorable.!

*
A.*Rationale*for*Centralized*Management*Doctrine:*

The! raison! detre! behind! the! conferment! of! corporate! powers!


on!the!Board!of!Directors!is!not!lost!on!the!Court!!indeed,!the!
concentration! in! the! Board! of! the! powers! of! control! of!
corporate! business! and! appointment! of! corporate! officers! and!
managers! is! necessary! for! efficiency! in! any! large! organization.!
Stockholders! are! too! numerous,! scattered! and! unfamiliar! with!
the! business! of! a! corporation! to! conduct! its! business! directly.!
And!so!the!plan!of!corporate!organization!is!for!the!stockholders!

Just! as! a! natural! person! may! authorize! another! to! do! certain!
acts!in!his!behalf,!so!may!the!Board!of!Directors!validly!delegate!
some!of!its!functions!to!individual!officers!or!agents!appointed!
by!it.!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

or!connected!with!the!performance!of!authorized!duties!
of! such! director,! are! held! not! binding! on! the!
corporation.!!

Section! 23! expressly! provides! that! the! corporate! powers! of! all!
corporations! shall! be! exercised! by! the! Board! of! Directors.!
Manila(Metal(Container(Corp.(v.(PNB,(511(SCRA(444((2006).1(
o The! source! of! power! of! the! Board! of! Directors! is!
primarily! and! directly! vested! by! law;! it! is! not! a!
delegated!power!from!the!stockholders!or!members!of!
the!corporation.2!

Thus,! contracts! or! acts! of! a! corporation! must! be! made!


either!by!the!Board!of!Directors!or!by!a!corporate!agent!
duly!authorized!by!the!board.!!
Absent! such! valid! delegation/authorization,! the! rule! is!
that!the!declarations!of!an!individual!director!relating!to!
the!affairs!of!the!corporation,!but!not!in!the!course!of,!

to! choose! the! directors! who! shall! control! and! supervise! the!
conduct!of!corporate!business.(Filipinas(Port(Services(v.(Go,(518(
SCRA(453((2007).(
(
Filipinas(Port(Services(v.(Go(
*
Facts:* Filports! Board! of! Directors! (herein! respondents)! enacted! a!
resolution! creating! six! new! positions.! People! were! elected! into! said! 6!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
offices! and! given! a! monthly! salary.! They! also! increased! the! salaries! of!
the!Chairman!and!other!officers.!Eliodoro!Cruz!(previous!board!director)!
wrote!a!letter!to!the!Board!questioning!these!decisions,!saying!that!the!
Board! was! not! authorized! to! do! so! by! the! companys! byWlaws! as!
required!by!Section!35!of!the!Corporation!Code.!

management!of!the!corporations!regular!business!affairs,!unless!more!
extensive!power!is!expressly!conferred.*
(

powers! and! transact! its! business! through! the! instrumentalities!


of! its! Board! of! Directors,! and! through! its! officers! and! agents,!
when!authorized!by!resolution!or!by!its!byWlaws.!(
Examples:(

*
Issue:* Whether! or! not! the! Board! of! Directors! had! the! power! to! create!
the!assailed!positions!
*
Held:* YES.! While! the! byWlaws! do! not! expressly! provide! for! the! boards!
authority!to!create!an!executive!committee,!the!Court!cannot!deem!that!
the! positions! created! automatically! formed! an! executive! committee.!

The! executive! committee! referred! to! in! Sec.! 35! means! a! committee!
that! has! equal! powers! with! the! board! and! must! be! distinguished! from!
other! committees! that! can! be! created! and! controlled! by! the! board.! In!
this! case,! the! positions! created! are! ordinary! positions! were! created! in!
accordance!with!the!regular!business!of!Filport;!thus,!it!is!entirely!within!
the! boards! power! to! create! them! and! provide! remuneration! therefor.!
Plus,! Cruz! himself! moved! to! create! the! positions! of! AVPS! for! Finance,!
Operations,! and! Administration! during! his! incumbency! as! Filport!
president.!
*
Doctrine:* As! per! Section! 23! of! the! Corporation! Code,! the! corporate!
powers!of!all!corporations!formed!under!the!code!shall!be!exercised!by!
the! board,! and! all! property! owned! and! business! conducted! by! the!
corporation!shall!also!be!held!and!controlled!by!the!board.!The!board!is!
the! sole! authority! to! determine! policies,! enter! into! contracts,! and!

A! corporation! is! an! artificial! being! and! can! only! exercise! its!

Consequently,! when! legal! counsel! was! clothed! with!


authority!through!formal!board!resolution,!his!acts!bind!
the! corporation! which! must! be! held! bound! the!
actuations!of!its!counsel!of!record.!De(Liano(v.(Court(of(
Appeals,(370(SCRA(349((2001).(
The!physical!acts!of!the!corporation,!like!the!signing!of!
documents,! can! be! performed! only! by! natural! persons!
duly!authorized!for!the!purpose!by!corporate!byWlaws!or!
by! a! special! act! of! the! board! of! directors.! Firme( v.(
Bukal(Enterprises(and(Dev.(Corp.,(414(SCRA(190((2003);(
Shipside(Inc.(v.(Court(of(Appeals,(352(SCRA(334((2001).(

!
B.*Theories*on*Source*of*Board*Power*
1. Theory* of* Original* Power* ! * The! source! of! the! power! of! the!
Board! comes! directly! from! the! law,! and! the! Board! is! originally!

conduct!the!ordinary!business!of!the!corporation!within!the!scope!of!its!
charter.! However,! the! authority! of! the! board! is! restricted! to! the!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

and!directly!granted!corporate!power!as!the!embodiment!of!the!
corporation.!This!theory!has!no!democratic!notions!but!actually!
is!more!akin!to!the!principles!of!autocracy.*
a. Accordingly! there! is! little! for! the! stockholders! to! do!
beyond! electing! directors,! making! byWlaws! and!
exercising! certain! other! special! powers! defined! by! law.!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
These! notions! are! in! accordance! with! the! mandate! of!
Section!23!of!the!Corporation!Code.*
b. Under!the!theory!of!original!power,!the!Board!is!vested!
with! the! legal! or! naked! title! to! the! properties! and!
business!enterprise!of!the!corporation,!being!viewed!as!
a! medium! or! the! corpus,! with! the! stockholders! being!
considered!as!the!beneficiaries,!and!thereby!a!fiduciary!
relationship! established! between! the! Board! as! the!
trustee,!and!the!stockholders!as!the!beneficiaries.*
c. Atty.! Hofilea! !! the! Board! of! Directors! visWWvis! the!
stockholders!have!a!fiduciary/trust!relationship.(
2. Theory* of* Delegated* Power* ! * the! authority! exercised! by! the!
Board! is! viewed! as! delegated! to! them! by! stockholders.! Under!
such! theory,! the! source! of! primary! theory! can! override! the!
decisions!of!its!delegates.*
a. Such* theory! promotes! the! notion! of! agency! in! the!
corporate! setWup,! where! the! real! sources! of! power! are!
the! stockholders! or! members,! and! the! representatives!
thereof! would! be! the! Board.! It! is! also! consistent! with!
notions! in! Property! Law! that! as! a! general! rule,! the!

(
Angeles(v.(Santos(
(
Facts:! A! complaint! was! instituted! by! Angeles,! de! Lara,! Bernabe,! as!
stockholders!and!member!of!the$minority$of$the$Board$of$Directors,$for$
and$ in$ behalf$ of$ the$ corporation,$ Paraaque$ Rice$ Mill,$ Inc.,$ against$
Santos,!Mayuga,!Pascual,!and!Rodriguez!who!constitute!the!majority!of!
the! Board! of! Directors.! Generally,! the! allegations! consists! of! denial! of!
Santos! as! president! of! the! Corporation! to! give! access! to! the!
corporations!books!which!was!then!necessary!because!(1)!de!Lara!was!
conducting! an! investigation,! (2)! such! books! should! have! been! in! the!
hands!of!the!treasurer!(Bernabe)!and!not!the!president,!and!(3)!that!the!
defendants!had!been!disposing!of!the!assets!of!the!corporation!without!
authority! from! the! Board.! The! court! issued! an! ex! parte! order! of!
receivership!appointing!Melchor!de!Lara!as!receiver!but!the!defendants!
objected!claiming!that!the!Court!had$no$jurisdiction$over$the$Paraaque$

Delegated*Powers*Coming*from*the*Stockholders:!The!Board!of!

Rice!Mill,!Inc.,!because!it!had!not!been!include!as!party!defendant!in!this!
case!and!that,!therefore!the!court!could!not!properly!appoint!a!receiver!
of!the!corporation!pendente!lite.!
*
Issue:*Whether!or!not!the!trial!court!was!without!jurisdiction!to!appoint!
a!receiver!and!should!have!dismissed!the!case!
!
Held:* NO.! That% the% action% was% properly% instituted% by% the% plaintiff% as%

Directors! is! a! creation! of! the! stockholders! and! controls! and!


directs! the! affairs! of! the! corporation! by! delegation! of! the!

stockholders+ for+ and+ in+ behalf+ of+ the+ corporation+ Paraaque+ Rice+ Mill,+
Inc.!and!the!lower!court!committed!no!reveiwable!error!in!appointing!a!

owners! exercise! ultimate! power! and! disposition! over!


the! subject! matter! to! which! he! holds! title.! The!
stockholders! or! members! are! the! real! owners! of! the!
corporation,! and! to! them! the! corporate! powers! must!
belong,! and! that! the! Board! of! Directors! or! Trustees!
merely!act!as!their!agents!or!representatives.*

stockholders.! By! drawing! themselves! the! powers! of! the!


corporation,! they! occupy! positions! of! trusteeship! in! relation! to!
the!stockholders.!Angeles(v.(Santos,(64(Phil.(697((1937).(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
receiver!of!the!corporation!pendente!lite.!
*
Doctrine:! Where! a! majority! of! the! board! of! directors! wastes! or!
dissipates! the! funds! of! the! corporation! or! fraudulently! disposes! of! its!
properties,!or!performs!ultra!vires!acts,!the!court,!in!the!exercise!of!its!

constitute! the! board! of! trustees.! During! the! annual! members! meeting!
held! on! April! 6,! 1998,! there! were! only! eleven! (11)! living! memberW
trustees,! as! four! (4)! had! already! died.! Out! of! the! eleven,! seven! (7)!
attended! the! meeting! through! their! respective! proxies.! The! meeting!
was!convened!and!chaired!by!Atty.!Sabino!Padilla!Jr.!over!the!objection!

equity! jurisdiction,! and! upon! showing! that! intraWcorporate! remedy! is!


unavailing,! will! entertain! a! suit! filed! by! the! minority! members! of! the!
board! of! directors,! for! and! in! behalf! of! the! corporation,! to! prevent!
waste!and!dissipation!and!the!commission!of!illegal!acts!and!otherwise!
redress!the!injuries!of!the!minority!stockholders!against!the!wrongdoing!
of!the!majority.(

of!Atty.!Antonio!C.!Pacis,!who!argued!that!there!was!no!quorum.!In!the!
meeting,! Petitioners! Ernesto! Tanchi,! Edwin! Ngo,! Virginia! Khoo,! and!
Judith!Tan!were!voted!to!replace!the!four!deceased!memberWtrustees.!
*
Issue:*Whether!or!not!the!meeting!was!null!and!void!for!lack!of!quorum!
*
Held:* NO.! ! Under! Section! 52! of! the! Corporation! Code,! the! majority! of!

One! of! the! most! important! rights! of! a! qualified! shareholder! or!
member!is!the!right!to!vote!for!the!directors!or!trustees!who!are!
to! manage! the! corporate! affairs.! The! right! to! choose! the!
persons!who!will!direct,!manage!and!operate!the!corporation!is!
significant,! because! it! is! the! main! way! in! which! a! stockholder!
can!have!a!voice!in!the!management!of!corporate!affairs,!or!in!
which! a! member! in! a! nonstock! corporation! can! have! a! say! on!
how! the! purposes! and! goals! of! the! corporation! may! be!
achieved.! Once! the! directors! or! trustees! are! elected,! the!
stockholders! or! members! relinquish! corporate! powers! to! the!
board! in! accordance! with! law.! Tan( v.( Sycip,( 499( SCRA( 216(
(2006).(

(
Tan(v.(Sycip(
(
Facts:* Grace! Christian! High! School! (GCHS)! is! a! nonstock,! nonWprofit!
educational! corporation! with! fifteen! (15)! regular! members,! who! also!

the! members! representing! the! actual! number! of! voting! rights,! not! the!
number! or! numerical! constant! that! may! originally! be! specified! in! the!
articles!of!incorporation,!constitutes!the!quorum.!Under!the!ByWLaws!of!
GCHS,! membership! in! the! corporation! shall,! among! others,! be!
terminated! by! the! death! of! the! member.! The! dead! members! who! are!
dropped!from!the!membership!roster!in!the!manner!and!for!the!cause!
provided! for! in! the! ByWLaws! of! GCHS! are! not! to! be! counted! in!
determining! the! requisite! vote! in! corporate! matters! or! the! requisite!
quorum! for! the! annual! members! meeting.! With! 11! remaining!
members,!the!quorum!in!the!present!case!should!be!6.!Therefore,!there!
being! a! quorum,! the! annual! members! meeting,! conducted! with! six!
members!present,!was!valid!(as!to!other!resolutions).!
!
HOWEVER,!the!election!of!the!four!trustees!cannot!be!legally!upheld!
for! the! obvious! reason! that! it! was! held! in! an! annual! meeting! of! the!
members! (where! a! majority! of! the! Board! were! present),! not! of! the!
board! of! trustees.! We! cannot! ignore! the! GCHS! bylaw! provision,! which!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
specifically! prescribes! that! vacancies! in! the! board! must! be! filled! up! by!
the!remaining!trustees!who!must!sit!as!a!board!in!order!to!validly!elect!
the!new!ones.!
*
Doctrine:* Membership! in! and! all! rights! arising! from! a! nonWstock!

*
The* directors* or* trustees* and* officers* to* be* elected* shall* perform* the*
duties* enjoined* on* them* by* law* and* the* byTlaws* of* the* corporation.*
Unless* the* articles* of* incorporation* or* the* byTlaws* provide* for* a*
greater*majority,*a*majority*of*the*number*of*directors*or*trustees*as*

corporation! are! personal! and! nonWtransferable,! unless! the! articles! of!


incorporation! or! the! bylaws! of! the! corporation! provide! otherwise.! The!
determination! of! whether! or! not! dead! members! are! entitled! to!
exercise! their! voting! rights! (through! their! executor! or! administrator)!
depends!on!the!articles!of!incorporation!or!bylaws.(

fixed*in*the*articles*of*incorporation*shall*constitute*a*quorum*for*the*
transaction* of* corporate* business,* and* every* decision* of* at* least* a*
majority* of* the* directors* or* trustees* present* at* a* meeting* at* which*
there* is* a* quorum* shall* be* valid* as* a* corporate* act,* except* for* the*
election*of*officers*which*shall*require*the*vote*of*a*majority*of*all*the*
members*of*the*board.*
*

Atty.!Hofilea!!!if!you!push!the!point!that!the!directors!are!the!
agents!of!the!stockholders,!there!may!be!complications!because!
in!agency,!the!principal!can!override!the!agent.!However,!in!the!
case! of! corporations,! the! stockholders! (principal)! are! not!
allowed! to! overrule! or! supplant! the! decisions! of! the! Board! of!

Directors* or* trustees* cannot* attend* or* vote* by* proxy* at* board*
meetings.*
*

Directors!(agent).*

also!be!the!treasurer.!This!was!laid!down!via!a!SEC!rule!and!not!
found!in!the!Corporation!Code.(

*
C.*Board*Must*Act*As*a*Body*(Section*25)*
*

Section*25.*Corporate*officers,*quorum.*
Immediately* after* their* election,* the* directors* of* a* corporation* must*
formally* organize* by* the* election* of* a* president,* who* shall* be* a*
director,* a* treasurer* who* may* or* may* not* be* a* director,* a* secretary*
who*shall*be*a*resident*and*citizen*of*the*Philippines,*and*such*other*
officers* as* may* be* provided* for* in* the* byTlaws.* Any* two* (2)* or* more*
positions*may*be*held*concurrently*by*the*same*person,*except*that*no*
one*shall*act*as*president*and*secretary*or*as*president*and*treasurer*
at*the*same*time.*

Atty.!Hofilea!!!the!secretary!as!a!matter!of!policy!should!not!

General*Rule:*The!grant!of!corporate!power!is!to!the!board!as!a!
body,! and! not! to! the! individual! members.! The! corporation! can!
be!bound!only!by!the!collective(act!of!the!board.!
o The! rationale! for! this! rule! is! the! public! policy,! that! it!
makes!better!management!practice!for!the!board!to!sit!
down,! to! discuss! corporate! affairs,! and! decide! on! the!
basis!of!their!consensus.1!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!The!SEC!has!opined!that!directors!and!trustees!can!only!exercise!their!power!
as! a! board,! not! individually.! They! shall! meet! and! counsel! each! other! and! any!
determination! affecting! the! corporation! shall! be! arrived! at! only! after!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Exception:* A! corporation! can! be! bound! even! by! the! act! of! its!
officers,! but! always! because! of! the! act! or! default! of,! or! as! an!

implied!authority!coming!from!the!Board.!
1. Directors* or* Trustees* Cannot* Act* Individually* to* Bind* the*
Corporation*

corporation,! especially! when! the! byWlaws! specifically! provided!


that! the! acts! entered! into! can! only! be! done! by! the! Board! of!
Directors.!Ramirez(v.(Orientalist(Co.,(38(Phil.(634((1918).(
o The!implication!is!clear!in!reference!to!outsiders!dealing!
with! the! corporation,! that! not! all! corporate! actions!
need!formal!board!approval.!The!board!need!not!come!
together!and!act!as!a!body!to!perform!a!corporate!act.!
In!many!cases!no!act!is!required!of!the!members!of!the!

Contracts! or! acts! of! corporation! must! be! made! either! by! the!

Board! of! Directors! or! by! a! corporate! agent! duly! authorized! by!
the! Board.! Absent! such! valid! delegation,! the! rule! is! that! the!
declaration!of!an!individual!director!relating!to!the!affairs!of!the!
corporation,! but! not! in! the! course! of,! or! connected! with! the!
performance!of!authorized!duties!of!such!director,!are!held!not!
binding!on!the!corporation.1*
2. Ratification*by*the*Board*does*not*need*formal*meeting*

board! in! order! to! bind! the! corporation;! the! fact! that!
they! know! of! a! particular! corporate! transaction! or!
contract,!and!they!stayed!silent!about!it,!or!worse,!they!
allowed! the! corporation! to! gain! by! the! transaction! or!
contract,!would!already!bind!the!corporation.2!

A!corporation,!through!its!Board!of!Directors,!should!act!in!the!
manner! and! within! the! formalities! prescribed! by! its! charter! or!
by! the! general! law.! Thus,! directors! must! act! as! a! body! in! a!
meeting! called! pursuant,! otherwise,! any! action! taken! therein!
may!be!questioned!by!any!objecting!director!or!shareholder.!Be!

Between!the!act!of!the!Board!as!a!body!affirming!informally!the!
perfection! of! a! contract! entered! into! in! behalf! of! the!
corporation! by! a! senior! officer,! and! the! subsequent! formal!
board! resolution! rejecting! the! same! contract,! the! former! must!
prevail! under! the! doctrine! of! estoppel.! Acua& v.& Batac&
Producers(Cooperative(Marketing(Assn.,(20(SCRA(526([1967]).(

that!as!it!may,!jurisprudence!tells!us!that!an!action!of!the!Board!
of! Directors! during! a! meeting,! which! was! illegal! for! lack! of!
notice,! may! be! ratified! either! expressly,! by! the! action! of! the!
directors! in! subsequent! legal! meeting,! or! impliedly,! by! the!
corporation's! subsequent! course! of! conduct.! Lopez( Realty( v.(
Fontecha,(247(SCRA(183((1995).(

Exercise!of!the!powers!of!the!Board!of!Directors!may!either!be!
express!and!formal!through!the!adoption!of!a!board!resolution!
in!a!meeting!called!for!the!purpose,!or!it!may!be!implied!where!
the! Board! collectively! and! knowingly! allows! the! President! to!
enter!into!important!contracts!in!the!pursuit!of!the!business!of!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
consultation! at! a! meeting! of! the! board! attended! by! at! least! a! quorum.! SEC!
Opinion,!10!March!1972,!SEC!FOLIO!1960W1976,!at!p.!526.!
1
!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

A!DirectorWTreasurer!has!no!power!to!bind!the!company!even!in!
transactions! that! are! pursuant! to! the! primary! purpose! its!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the! corporation.! Board( of( Liquidators( v.( Heirs( of( Maximo( M.(
Kalaw,(20(SCRA(987((1967).(
(

2. Ratification!from!the!board!
!
3. Directors*or*Trustees*cannot*bind*the*Board*in*a*Stockholders*
or*Members*Meeting*

Board(of(Liquidators(v.(Heirs(of(Maximo(M.(Kalaw(
(

See(Tan(v.(Sycip,(499(SCRA(216((2006).(
4. Directors* or* Trustees* Cannot* Attend* or* Act* by* Proxy* or*
Alternate1*

Facts:* National! Coconut! Corporation! (NACOCO)! through! its! Kalaw!


entered! into! several! contracts! involving! copra! trading! activities! which!
became! unprofitable.! NACOCO! suffered! losses! NACOCO! herein! alleges!
that!under!the!byWlaws!of!the!corporation,!the!general!manager!only!has!
the! power! to! perform! or! execute! on! behalf! of! the! corporation! upon!
prior!approval!of!the!Board!all!contracts!necessary!and!essential!to!the!
proper!accomplishment!for!which!the!Corporation!was!organized.!
!
Issue:* Whether! or! not! Kalaw! and! the! rest! of! the! board! were! guilty!
negligence!and!bad!faith!and/or!breach!of!trust!for!having!entered!into!
the!unprofitable!contracts!
*
Held:* NO.! Under! the! circumstances,! Kalaws! acts! were! valid! corporate!
acts.!Evidence!shows!that!it!was!the!practice!of!the!corporation!to!allow!
its!general!manager!to!negotiate!contracts,!in!its!copra!trading!for!and!
in!NACOCOs!behalf,!without!prior!board!approval.!The!Court!ruled!that!
if! the! byWlaws! were! to! be! literally! followed,! the! board! should! give! its!
stamp!of!prior!approval!on!all!corporate!contracts.!But![in!this!case]!the!
board!itself,!by!its!acts!and!through!acquiescence,!practically!laid!aside!
the!byWlaw!requirement!of!prior!approval!
*
Doctrine:!There!are!2!ways!by!which!corporate!actions!may!come!about!
through!its!Board!of!Directors:!
1. The!board!may!empower!or!authorize!the!act!or!contract!

On!account!of!their!responsibility!to!the!corporation,!and!by!the!
fact! that! they! were! elected! into! the! Board! based! on! their!
personal! qualifications,! business! acumen! and! background,!
directors!or!trustees!cannot!validly!act!by!proxy.*

The! SEC! has! ruled! that! alternate! directors! are! not! allowed! by!
law,!since!directors!are!required!to!exercise!their!judgment!and!
discretion! in! running! the! affairs! of! the! corporation! and! cannot!
be! substituted! by! others! because! their! position! is! one! of! trust!
and!confidence.2*

*
D.* Effects* of* Bogus* Board:!The!acts!or!contracts!effected!by!a!bogus!
board!would!be!void!pursuant!to!Article!1318!of!Civil!Code3!because!of!
the!lack!of!consent.!Islamic(Directorate(of(the(Philippines(v.(Court(of(
Appeals,(272(SCRA(454((1997).(
!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!SEC! Opinions,! dated! 27! May! 1970! and! 25! April! 2985,! addressed! to!
Polyphosphates,!Inc.!
3
!Article!1318.!There!is!no!contract!unless!the!following!requisites!concur:!
(1)!Consent!of!the!contracting!parties;!
(2)!Object!certain!which!is!the!subject!matter!of!the!contract;!
(3)!Cause!of!the!obligation!which!is!established.!(1261)!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
E.*Executive*Committee*(Section*35)*
*

General* Rule:* The! Board! can! overrule! the! decisions! of! an!
executive!committee.(

Section*35.*Executive*committee.*
The* byTlaws* of* a* corporation* may* create* an* executive* committee,*
composed* of* not* less* than* three* members* of* the* board,* to* be*

Exception:* UNLESS,! such! contract! has! been! executed! by! the!


third! party! involved,! or! rights! have! already! vested! on! third!
parties.(

appointed*by*the*board.*Said*committee*may*act,*by*majority*vote*of*
all*its*members,*on*such*specific*matters*within*the*competence*of*the*
board,*as*may*be*delegated*to*it*in*the*byTlaws*or*on*a*majority*vote*
of* the* board,* except* with* respect* to:* (1)* approval* of* any* action* for*
which* shareholders'* approval* is* also* required;* (2)* the* filing* of*
vacancies*in*the*board;*(3)*the*amendment*or*repeal*of*byTlaws*or*the*
adoption* of* new* byTlaws;* (4)* the* amendment* or* repeal* of* any*

!
II.*BUSINESS*JUDGMENT*RULE:*

resolution*of*the*board*which*by*its*express*terms*is*not*so*amendable*
or* repealable;* and* (5)* a* distribution* of* cash* dividends* to* the*
shareholders.*
*

Ultimate!power!must!remain!with!the!Board!of!Directors,!and!it!

It!is!within!the!power!of!the!Board!of!Directors!to!authorize!any!
person! or! committee! to! undertake! corporate! acts.! The! board!
has! power! to! constitute! even! an! executive! committee,! even!
when!no!such!committee!is!provided!for!in!the!articles!and!byW
laws!of!the!corporation.!Filipinas( Port( Services,( Inc.( v.( Go,( 518(
SCRA(453((2007).(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

Business*Judgment*Rule*! *The!corporate!principle!recognizing!
corporate! power! and! competence! to! be! lodged! primarily! with!
the!Board!of!Directors.(

Established!is!the!principle!that!when!a!resolution!is!passed!in!
good!faith!by!the!board!of!directors,!it!is!valid!and!binding,!and!
whether!or!not!it!will!cause!losses!or!decrease!the!profits!of!the!
central,!the!court!has!no!authority!to!review!them,"!adding!that!
"[i]t! is! a! wellWknown! rule! of! law! that! questions! of! policy! or!
management! are! left! solely! to! the! honest! decision! of! officers!
and! directors! of! a! corporation,! and! the! court! is! without!
authority! to! substitute! its! judgment! [for! that]! of! the! board! of!
directors;!the!board!is!the!business!manager!of!the!corporation,!
and!so!long!as!it!acts!in!good!faith!its!orders!are!not!reviewable!
by! the! courts."( Montelibano( v.( Bacolod^Murcia( Miling( Co.,( 5(
SCRA(36((1962).((

would!be!against!corporate!principle!to!empower!the!Executive!
Committee! with! authority! that! the! Board! itself! cannot!
countermand.1(

(
Montelibano(v.(Bacolod^Murcia(Miling(Co.,(Inc.(
(
Facts:* The! BacolodWMurica! Milling! entered! into! Milling! Contracts! with!
Montelibano!and!Gonzaga!&!Co.!(planters).!The!contract!provided!that!
the!resulting!product!should!be!divided!in!the!ratio!of!45%!for!the!mill!
and! 55%! for! the! planters.! This! was! amended! to! give! the! planters! an!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
increased!participation!of!60%.!Years!later,!Bacolod!denied!the!5%!share!
increase! of! Petitioner! citing! that! it! had! no! consideration,! thus! its!
considered!a!donation!!a!ultra!vires!act.!
*
Issue:* Whether! or! not! the! Resolution! is! valid! and! binding! on! the!

the! corporation! their! management! prerogatives/control! on!


business!matters!over!to!the!state.!PSE(v.(Court(of(Appeals,(281(
SCRA(232((1997).(
*
PSE(v.(Court(of(Appeals(

corporation!and!the!planters!
*
Held:* YES.! The! amended! contract! has! the! same! consideration! as! the!
main! contract! at! it! was! just! attached! to! the! latter.! there! is! no! rational!
explanation! for! the! company's! assenting! to! the! further! concessions!
asked! by! the! planters! before! the! contracts! were! signed,! except! as!
further! inducement! for! the! planters! to! agree! to! the! extension! of! the!

(
Facts:* Puerto! Azul! Land! Inc.! (PALI),! a! domestic! real! estate! corporation,!
made! an! application! to! the! SEC! for! the! purpose! of! having! its! stocks!
listed!in!order!for!it!to!be!sold!in!the!public.!A!year!after!a!permit!to!sell!
was! granted,! heirs! of! the! former! President! Marcos! claimed! that!
President!Marcos!was!the!legal!owner!of!certain!properties!forming!part!
of!the!Puerto!Azul!Beach!Hotel!Complex!which!PALI!claims!to!be!among!

contract!period,!to!allow!the!company!now!to!retract!such!concessions!
would! be! to! sanction! a! fraud! upon! the! planters! who! relied! on! such!
additional!stipulations.!As!the!resolution!in!question!was!passed!in!good!
faith! by! the! board! of! directors,! it! is! valid! and! binding,! and! whether! or!
not!it!will!cause!losses!or!decrease!the!profits!of!the!central,!the!court!
has!no!authority!to!review!them.!Such!is!not!an!ultra!vires!act.!
*

its!assets.!The!PSE,!taking!into!consideration!these!claims,!rejected!the!
application!for!listing.!In!response,!PALI!sought!the!decision!of!the!SEC!
which! then! reversed! the! decision! of! the! PSE! and! ordered! the! latter! to!
list!the!PALI!stocks.!
!
Issue:*Whether!or!not!the!SEC!acted!arbitrarily!in!reversing!the!decision!
of!the!PSE!and!ordering!the!listing!of!PALI!stocks!

Doctrine:*The!court!also!reiterated!the!rule!that!questions!of!policy!or!of!
management! are! left! solely! to! the! honest! decision! of! officers! and!
directors! of! a! corporation,! and! the! court! is! without! authority! to!
substitute!its!judgment!with!that!of!the!Board!of!Directors;!the!board!is!
the!business!manager!of!the!corporation,!and!so!long!as!it!acts!in!good!
faith!its!orders!are!nor!reviewable!by!the!courts.!

*
Held:* YES.! The! PSE! is! engaged! in! a! business! imbued! with! high! public!
interest! and! is! under! the! control! and! supervision! of! the! SEC.! Though!
under! such! control! and! supervision! by! the! SEC,! the! PSE! cannot! be!
questioned! on! matters! of! internal! management,! policies,! and!
administration! in! the! absence! of! bad! faith.! In! fact,! in! the! decision!
rendered! by! the! board! of! the! PSE,! was! found! of! good! standing! by! the!
court.! PSE! was! correct! in! denying! the! listing! of! the! PALI! stocks! since!

Theoretical! Basis! for! the! Business! Judgment! Rule:! The!


recognition! of! the! corporation! merely! as! an! association! of!
individuals!who!thereby!do!not!give!up!through!the!medium!of!

there! were! various! allegations! against! the! listing.! Taking! all! these! into!
consideration,! the! PSE! deemed! that! PALI! stocks! are! not! for! the! best!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
interest! of! the! investing! public! and! will! deteriorate! the! high! standards!
and!goodwill!upheld!by!the!PSE.!
*
Doctrine:*Questions!of!policy!and!of!management!are!left!to!the!honest!
decision! of! the! officers! and! directors! of! a! corporation,! and! the! courts!

citing(VILLANUEVA,(PHILIPPINE(CORPORATE(LAW((1998(ed),(p.(
288.(
(

are!without!authority!to!substitute!their!judgment!for!the!judgment!of!
the! board! of! directors.! The! board! is! the! business! manager! of! the!
corporation,! and! so! long! as! it! acts! in! good! faith,! its! orders! are!
reviewable!by!the!courts.*

Facts:* The! Tiu! family! members! are! the! owners! of! First! Landlink! Asia!
Development!Corporation!(FLADC).!One!of!the!corporations!projects!is!
the! construction! of! Masagana! Citimall! in! Pasay! City.! However,! due! to!
financial! difficulties! (they! were! indebted! to! PNB! for! P190! million),! the!
Tius! feared! that! the! construction! would! not! be! finished.! So! to! prevent!
the! foreclosure! of! the! mortgage! on! the! two! lots! where! the! mall! was!
being! built,! they! invited! the! Ongs! to! invest! in! FLADC.! The! two! parties!

*
A.* BJR* First* Branch:* Resolutions! approved,! contracts! and! transactions!
entered! into,! by! the! Board! of! Directors! within! the! powers! of! the!
corporation!cannot!be!reversed!by!the!Courts,!not!even!on!the!behest!
of!the!stockholders!of!the!corporation.1!

The! Board! of! Directors! is! the! business! manager! of! the!
corporation,! and! so! long! as! it! acts! in! good! faith,! its! orders! are!
not! reviewable! by! the! courts.! Estacio( v.( Pampanga( I( Electric(
Cooperative,(Inc.,(596(SCRA(542((2009).(

Questions! of! policy! and! management! are! left! to! the! honest!
decision! of! the! officers! and! directors! of! a! corporation,! and! the!
courts!are!without!authority!to!substitute!their!judgment!for!the!
judgment! of! the! board! of! directors.! Cua,( Jr.( v.( Tan,( 607( SCRA(
645((2009).(

No!court!can,!as!an!integral!part!of!resolving!the!issues!between!
squabbling! stockholders,! order! the! corporation! to! undertake!
certain! corporate! acts,! since! it! would! be! in! violation! of! the!
business! judgment! rule.! Ong( Yong( v.( Tiu,( 401( SCRA( 1( (2003),(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

Ong(Yong(v.(Tiu(
(

entered!into!a!Presubscription!Agreement!whereby!each!of!them!would!
hold!1,000,000!shares!each!and!be!entitled!to!nominate!certain!officers.!
The! Tius! contributed! a! building! and! two! lots,! while! the! Ongs!
contributed!P100M.!
!
Two! years! later,! the! Tuis! filed! for! rescission! of! the! Presubscription!
Agremement! because! the! Ongs! refused! to! issue! them! their! shares! of!
stock! and! from! assuming! positions! of! VP! and! Treasurer! to! which! they!
were! entitled! to! nominate.! The! Ongs! contended! that! they! could! not!
issue! the! new! shares! to! the! Tius! because! the! latter! did! not! pay! the!
capital! gains! tax! and! the! documentary! stamp! tax! of! the! lots.! And!
because! of! this,! the! SEC! would! not! approve! the! valuation! of! the!
property! contribution! of! the! Tius.! The! Court! of! Appeals! ordered!
liquidation! of! FLADC! to! enforce! rescission! of! the! contract! which! was!
granted!only!to!prevent!squabbles!and!numerous!litigations!between!
the!parties.!
*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Issue:*Whether!or!not!the!Court!of!Appeals!erred!in!ordering!liquidation!
*
Held:*YES.!The!Tius!also!argued!that!the!rescission!would!not!result!into!
liquidation! because! their! case! is! actually! a! petition! to! decrease! the!
capital! stock.! As! provided! in! Section! 122! of! the! Corporation! Code,!

2. When! he! is! guilty! of! gross! negligence! or! bad! faith! in! directing!
the!affairs!of!the!corporation;3!
3. When!he!acquires!any!personal!or!pecuniary!interest!in!conflict!
with!his!duty!as!such!directors.4!

distribution!of!any!of!its!assets!or!property!is!permitted!only!after!lawful!
dissolution! and! payment! of! all! debts! and! liabilities.! An! exception! is! by!
decrease!of!capital!stock.!So!the!Tius!claim!that!they!do!not!violate!the!
liquidation! procedures! under! the! law.! They! were! asking! the! court! to!
compel! FLADC! to! file! a! petition! with! SEC! to! approve! the! decrease! in!
capital! stock.! The! Supreme! Court! ruled! that! it! has! no! right! to! intrude!
into!the!internal!affairs!of!the!corporation!so!it!cannot!compel!FLADC!to!

corporate! officers! may! be! held! personally! liable! for! corporate!


acts,! provide! also! the! three! (3)! instances! when! courts! are!
authorized! to! supplant! the! decision! of! the! board,! which! is!
deemed! to! be! biased! and! may! prove! detrimental! to! the!
corporation.!

Examples:(

file! the! petition.! Decreasing! a! corporations! authorized! capital! stock! is!


an!amendment!of!the!Articles!of!Incorporation,!a!decision!that!only!the!
stockholders!and!the!directors!can!make.!!
*
Doctrine:*See!above.(

Exceptions:(

1. When! the! director! willfully! and! knowingly! vote! for! patently!


unlawful!acts!of!the!corporation;2!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!Section!31,!Corporation!Code.!!

If!the!cause!of!the!losses!is!merely!error!in!business!judgment,!
not! amounting! to! bad! faith! or! negligence,! directors! and/or!
officers! are! not! liable.! For! them! to! be! held! accountable,! the!
mismanagement!and!the!resulting!losses!on!account!thereof!are!
not! the! only! matters! to! be! proven;! it! is! likewise! necessary! to!
show! that! the! directors! and/or! officers! acted! in! bad! faith! and!
with!malice!in!doing!the!assailed!acts.!Bad!faith!does!not!simply!
connote! bad! judgment! or! negligence;! it! imports! a! dishonest!

such! business! judgment! cannot! be! held! personally! liable! for! the!
consequences! of! such! acts.! However,! when! the! directors! or! trustees!
violate!their!duties,!they!can!be!held!personally!liable.!This!is!consistent!
with!the!Law!on!Agency.1!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Directors! and! officers! who! purport! to! act! for! the! corporation,!
keep!within!the!lawful!scope!of!their!authority!and!act!in!good!
faith,!do!not!become!liable,!whether!civilly!or!otherwise,!for!the!
consequences!of!their!acts,!which!are!properly!attributed!to!the!
corporation! alone.! Benguet( Electric( Cooperative,( Inc.( v.( NLRC,(
209(SCRA(55((1992).(

(
B.*BJR*Second*Branch:*General*Rule:*Directors!and!officers!acting!within!

The!aboveWenumerated!exceptions!when!directors,!trustees!and!

purpose! or! some! moral! obliquity! and! conscious! doing! of! a!


wrong,! a! breach! of! a! known! duty! through! some! motive! or!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3
4

!Ibid.!!
!Sections!31!and!34,!Corporation!Code.!!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
interest!or!illWwill!partaking!of!the!nature!of!fraud.!Filipinas(Port(
Services,(Inc.(v.(Go,(518(SCRA(453((2007).(
!
III.* COUNTERTVEILING* DOCTRINES* TO* PROTECT* CORPORATE*
CONTRACTS*

The!doctrine!of!estoppel!or!ratification!(as!well!as!the!doctrine!
of!apparent!authority),!is!premised!on!a!reliance!in!good!faith!
by! a! third! party! that! the! representative! of! the! corporation! has!
proper! authority! as! generally! derived! from! law,! corporate! byW
laws,! or! authorization! from! the! board,! either! expressly! or!
impliedly! by! habit,! custom,! acquiescence! in! the! general! course!
of! business.! The! nature! of! the! transaction! and! the!
circumstances! under! which! the! transaction! is! pursued! are!
looked!into!by!the!courts!to!determine!the!proper!application!of!
the!estoppel!doctrine.1(

*
A.*Theory*of*Estoppel*or*Ratification*

The!principle!of!estoppel!precludes!a!corporation!and!its!Board!
of!Directors!from!denying!the!validity!of!the!transaction!entered!
into!by!its!officer!with!a!third!party!who!in!good!faith,!relied!on!
the!authority!of!the!former!as!manager!to!act!on!behalf!of!the!
corporation.! Lipat( v.( Pacific( Banking( Corp.,( 402( SCRA( 339(
(2003).(

(
Lipat(v.(Pacific(Banking(Corp.(
(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

Facts:* Spouses! Lipat! (Alfredo! and! Estelita)! owns! Belas! Export! Trading!
(BET),! a! single! proprietorship! engaged! in! garment! manufacturing! in!
Quezon!City.!The!Lipats!also!owned!the!Mystical!Fashions!in!the!United!
States,! which! sells! goods! imported! from! the! Philippines! through! BET.!
Estelita! designated! her! daughter,! Teresita,! to! manage! BET! in! the!
Philippines! while! she! was! managing! Mystical! Fashions! in! the! United!
States.!
!
In!order!to!facilitate!the!convenient!operation!of!BET,!Estelita!executed!
a! special! power! of! attorney! appointing! Teresita! as! her! attorneyWinWfact!
to!obtain!loans.!By!virtue!of!this!SPA,!Teresita!obtained!a!sizeable!loan!
from! Pacific! Bank.! Three! months! after! the! loan,! BET! was! incorporated!
into! a! family! corporation! named! Belas! Export! Corporation! (BEC),!
engaged!in!the!same!business!and!utilized!the!same!properties.!The!loan!
was!restructured!in!the!name!of!BEC!and!secured!with!Lipats!property.!
!
BEC! defaulted,! and! the! bank! foreclosed! on! the! real! mortgage! and!
Eugenio! Trinidad! was! the! highest! bidder.! The! spouses! Lipat! claim! that!
the! loan! obtained! by! Teresita! were! ultra! vires! acts! because! they! were!
executed! without! the! requisite! board! resolution! of! the! Board! of!
Directors! of! BEC.! Pacific! Bank! and! Trinidad! alleged! in! common! that!
petitioners!Lipat!cannot!evade!payments!because!they!and!the!BEC!are!
one! and! the! same,! the! latter! being! a! family! corporation.! ! Respondent!
Trinidad!further!claimed!that!he!was!a!buyer!in!good!faith!and!for!value!
and! that! petitioners! are! estopped! from! denying! BECs! existence! after!
holding!themselves!out!as!a!corporation.!
*
Issue:*Whether!or!not!petitioners!are!estopped!from!asserting!that!the!
acts!were!ultra!vires!for!not!being!supported!by!Board!Resolutions.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
*
Held:* YES.! Firstly,! it! could! not! have! been! possible! for! BEC! to! release! a!
board!resolution!no!business!or!stockholders!meetings!were!conducted!
nor!were!there!election!of!officers!held!since!its!incorporation.!!In!fact,!
not!a!single!board!resolution!was!passed!by!the!corporate!board!and!it!

byWlaws,!or!relevant!provisions!of!law,!yet,!just!as!a!natural!person!may!
authorize!another!to!do!certain!acts!for!and!on!his!behalf,!the!board!of!
directors! may! validly! delegate! some! of! its! functions! and! powers! to!
officers,! committees,! or! agents.! ! The! authority! of! such! individuals! to!
bind! the! corporation! is! generally! derived! from! law,! corporate! byWlaws,!

was!Estelita!Lipat!and/or!Teresita!Lipat!who!decided!business!matters.!
!
Secondly,! the! principle! of! estoppel! precludes! petitioners! from! denying!
the!validity!of!the!transactions!entered!into!by!Teresita!Lipat!with!Pacific!
Bank,! who! in! good! faith,! relied! on! the! authority! of! the! former! as!
manager!to!act!on!behalf!of!petitioner!Estelita!Lipat!and!both!BET!and!
BEC.!Teresita!Lipat!had!dealt!with!Pacific!Bank!on!the!mortgage!contract!

or!authorization!from!the!board,!either!expressly!or!impliedly!by!habit,!
custom,! or! acquiescence! in! the! general! course! of! business.! Apparent!
authority,! is! derived! not! merely! from! practice.! ! Its! existence! may! be!
ascertained! through! (1)! the! general! manner! in! which! the! corporation!
holds! out! an! officer! or! agent! as! having! the! power! to! act! or,! in! other!
words,! the! apparent! authority! to! act! in! general,! with! which! it! clothes!
him;! or! (2)! the! acquiescence! in! his! acts! of! a! particular! nature,! with!

by! virtue! of! a! special! power! of! attorney! executed! by! Estelita! Lipat.!!
Recall!that!Teresita!Lipat!acted!as!the!manager!of!both!BEC!and!BET!and!
had! been! deciding! business! matters! in! the! absence! of! Estelita! Lipat.!!
Further,! the! export! bills! secured! by! BEC! were! for! the! benefit! of!
Mystical! Fashion! owned! by! Estelita! Lipat.! Hence,! Pacific! Bank! cannot!
be!faulted!for!relying!on!the!same!authority!granted!to!Teresita!Lipat!by!
Estelita! Lipat! by! virtue! of! a! special! power! of! attorney.! ! It! is! a! familiar!

actual!or!constructive!knowledge!thereof,!whether!within!or!beyond!the!
scope!of!his!ordinary!powers.!
(

doctrine! that! if! a! corporation! knowingly! permits! one! of! its! officers! or!
any! other! agent! to! act! within! the! scope! of! an! apparent! authority,! it!
holds! him! out! to! the! public! as! possessing! the! power! to! do! those! acts;!
thus,!the!corporation!will,!as!against!anyone!who!has!in!good!faith!dealt!
with! it! through! such! agent,! be! estopped! from! denying! the! agents!
authority.!
*
Doctrine:* While! the! power! and! responsibility! to! decide! whether! the!
corporation!should!enter!into!a!contract!that!will!bind!the!corporation!is!
lodged!in!its!board!of!directors,!subject!to!the!articles!of!incorporation,!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

In!order!to!ratify!the!unauthorized!act!of!an!agent!and!make!it!
binding!on!the!corporation,!it!must!be!shown!that!the!governing!
body! or! officer! authorized! to! ratify! had! full! and! complete!
knowledge! of! all! the! material! facts! connected! with! the!
transaction! to! which! it! relates.! Ratification! can! never! be! made!
on! the! part! of! the! corporation! by! the! same! person! who!
wrongfully! assume! the! power! to! make! the! contract,! but! the!
ratification! must! be! by! the! officer! or! governing! body! having!
authority!to!make!such!contract.!Vicente( v.( Geraldez,( 52( SCRA(
210((1973).(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

representative.1(
o The! admission! by! counsel! on! behalf! of! the! corporation!
of!the!latters!culpability!for!personal!loans!obtained!by!
its!corporate!officers!cannot!be!given!legal!effect!when!
the! admission! was! without! any! enabling! act! or!
attendant! ratification! of! corporate! act,! as! would!
authorize!or!even!ratify!such!admission.!In!the!absence!
of! such! ratification! or! authority,! such! admission! does!

not! bind! the! corporation.! Aguenza( v.( Metropolitan(


Bank(and(Trust(Co.,(271(SCRA(1((1997).(
Acts! done! in! excess! of! corporate! officers! scope! of!
authority! cannot! bind! the! corporation.! However,! when!
subsequently! a! compromise! agreement! was! on! behalf!
of! the! corporation! being! represented! by! its! President!
acting!pursuant!to!a!Board!of!Directors!resolution,!such!
constituted! as! a! confirmatory! act! signifying! ratification!
of! all! prior! acts! of! its! officers.!National( Power( Corp.( v.(
Alonzo^Legasto,(443(SCRA(342((2004).(

!
B.*Doctrine*of*Laches*or*Stale*Demands*

The! principle! of! laches! or! stale! demands! provides! that! the!
failure! or! neglect,! for! an! unreasonable! and! unexplained! length!
of! time,! to! do! that! which! by! exercising! due! diligence! could! or!
should!have!been!done!earlier,!or!the!negligence!or!omission!to!
assert!a!right!within!a!reasonable!time,!warrants!a!presumption!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

that! the! party! entitled! to! assert! it! either! has! abandoned! it! or!
declined! to! assert! it.! Rovels( Enterprises,( Inc.( v.( Ocampo,( 391(
SCRA(176((2002).(

The!ratificatory!act!that!would!bind!the!corporation!would!have!
to! come! from! the! Board! of! Directors! or! a! properly! authorized!

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

*
C.*Doctrine*of*Apparent*Authority:*Article*1883,*Civil*Code.*

If!a!corporation!intentionally!or!negligently!clothes!its!officers!or!
agents!with!apparent!power!to!perform!acts,!it!will!be!estopped!
to! deny! such! apparent! authority! is! real,! as! to! innocent! third!
persons! dealing! in! good! faith! with! such! officers! or! agents.!
Francisco(v.(GSIS,(7(SCRA(577((1963).2!
o

The!Doctrine!of!Apparent!Authority!must!proceed!from!
the!nature!of!the!position!held!by!the!corporate!officer!
in! question! in! that! he! represents! the! will! of! the!
corporation!through!the!Board!of!Directors.3!

!
Francisco(v.(GSIS(
(
Facts:*Trinidad!J.!Francisco,!in!consideration!of!a!loan,!mortgaged!parcel!
of! land! with! 21! bungalows! known! as! VicWMari! Compound.! In! January!
1959,! GSIS! extrajudicially! foreclosed! the! mortgage! on! the! ground! that!
up! to! that! date! the! Francisco! was! in! arrears! on! her! monthly!
installments.! On! the! same! date,! Atty.! Vicente! Franciscos! (father! of!
Trinidad)!request!was!approved!by!the!GSIS!board!which!was!sent!in!the!
form! of! a! telegram! with! the! signature! of! Rodolfo! Andal,! general!
manager! of! GSIS.! The! defendant! received! the! said! amount! however! it!
did!not,!take!over!the!administration!of!the!compound!as!agreed!upon.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!United!Coconut!Planters!Bank!v.!Planters!Products,!Inc.,!672!SCRA!285!(2012).!
!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
3

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Thus,! the! Franciscos! continued! to! administer! the! same,! but! remitting!
the! proceeds! to! the! GSIS.! Subsequently,! letters! were! sent! asking! the!
plaintiff! for! a! proposal! for! the! payment! of! her! indebtedness,! since! the!
oneWyear! period! for! redemption! had! expired.! In! reply,! Atty.! Francisco!
protested!against!this,!saying!that!they!have!already!accepted!his!offer!

1. The! acts! of! the! purported! corporate! officer! or! agent! justifying!
belief!in!the!agency!by!the!principal!corporation.!
2. Knowledge!thereof!by!the!principal!corporation!(i.e.!its!Board!of!
Directors)!which!is!sought!to!be!held;!and!
3. Reliance! thereon! by! the! principal! corporation! (i.e.! its! Board! of!
Directors)!consistent!with!ordinary!care!and!prudence.!

and! that! he! has! already! commenced! his! part! on! the! terms! of! his!
contract.!
*
Issue:**Whether!or!not!the!compromise!made!is!binding!upon!defendant!
corporation.!
*
Held:* YES.! The! compromise! made! through! the! telegrams! is! binding.!

Under! Article! 1910! of! the! New! Civil! Code,2!acts! done! by! such!
officers! beyond! the! scope! of! their! authority! cannot! bind! the!
corporation! unless! it! has! ratified! such! acts! expressly! or! tacitly,!
or!is!estopped!from!denying!themThus,!contracts!entered!into!
by! corporate! officers! beyond! the! scope! of! authority! are!
unenforceable! against! the! corporation! unless! ratified! by! the!

There!was!apparent!authority!!that!of!the!GM,!Andal.!Even!assuming!
there! was! a! mistake! in! the! telegram,! GSIS! notified! the! Franciscos! too!
late! ! and! only! after! having! received! several! remittances.! There! was!
also!notice!to!the!GSIS,!because!Vicente!attached!the!disputed!telegram!
in! replying! to! that! which! was! sent! by! GSIS.! Notice! to! an! officer! with!
regard! to! matters! within! his! authority! is! tantamount! to! notice! to! the!
corporation.!There!was!thus!implied!ratification.!
*
Doctrine:* Persons! transacting! with! corporations! need! not! disbelieve!
every!act!of!its!officers,!especially!those!regular!on!their!face.!They!are!
entitled!to!rely!upon!external!manifestations!of!corporate!consent.!And!
if!a!corporation!knowingly!permits!its!officers!to!do!acts!with!apparent!
authority,!it!is!estopped!from!denying!such!authority.!

For! the! Doctrine! of! Apparent! Authority! to! apply,! the! party!
invoking!the!same!must!prove!the!following:1!

Corporation.! Woodchild( Holdings,( Inc.( v.( Roxas( Electric(


Constructions(Co.,(Inc.,(436(SCRA(235((2004).(
o Atty.! Hofilea! !! what! was! unique! here,! which! the!
presidents! action! was! not! binding,! is! that! there! was! a!
limit! to! the! authority! of! the! president! to! sell! in!
connection!with!the!land.!(
(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Woodchild! Holdings,! Inc.! v.! Roxas! Electric! Constructions! Co.,! Inc.,! 436! SCRA!
235! (2004)! as! cited! in! Villanueva,! C.! L.,! &! VillanuevaWTiansay,! T.! S.! (2013).!
Philippine!Corporate!Law.!(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!Article!1910.!!
The! principal! must! comply! with! all! the! obligations! which! the! agent! may! have!
contracted!within!the!scope!of!his!authority.!
!
As!for!any!obligation!wherein!the!agent!has!exceeded!his!power,!the!principal!is!
not!bound!except!when!he!ratifies!it!expressly!or!tacitly.!(1727)!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Woodchild(Holdings,(Inc.(v.(Roxas(Electric(Constructions(Co.,(Inc.(
(
Facts:* Roxas! Electric! and! Construction! Company! Inc! (RECCI)! owned! 2!
parcels! of! land,! Lot! B1! and! Lot! B2.! RECCIs! Board! of! Directors! issued! a!
resolution! authorizing! the! corporation! through! its! President,! Roberto!
Roxas,! to! sell! B2! and! to! sign! and! execute! the! necessary! documents.!
Roxas! sold! B2! to! Woodchild! Holdings! Inc! (WHI)! through! its! President,!
Jonathan! Dy.! In! the! Deed! of! Absolute! Sale,! Roxas! also! granted! WHI! a!
right!of!way!over!B1!and!an!option!to!purchase!certain!portions!thereof!
in! case! the! need! arose! as! earlier! requested! by! WHI.! After! Roxas! died,!
WHI!demanded!that!RECCI!sell!a!portion!of!B1!but!it!refused!claiming!it!
never!authorized!Roxas!to!do!so.!

*
Doctrine:* For! an! act! of! the! principal! to! be! considered! as! an! implied!
ratification! of! an! unauthorized! act! of! an! agent,! such! act! must! be!
inconsistent! with! any! other! hypothesis! than! that! he! approved! and!
intended!to!adopt!what!had!been!done!in!his!name.!

a!particular!act,!ratification!of!that!act!must!also!be!in!writing.(
(

*
Issue:* Whether!or!not!RECCI!is!estopped!from!claiming!that!Roxas!had!
not!authority!to!sell!B1.!
*
Held:*NO.!For!the!principle!of!apparent!authority!to!apply,!the!WHI!was!
burdened!to!prove!the!following:!(a)!the!acts!of!RECCI!justifying!belief!in!
the! agency! by! the! WHI;! (b)! knowledge! by! RECCI! which! is! sought! to! be!
held;!and,!(c)!reliance!thereon!by!WHI!consistent!with!ordinary!care!and!
prudence.!!
!
The!apparent!power!of!an!agent!is!to!be!determined!by!the!acts!of!the!
principal! and! not! by! the! acts! of! the! agent.! There! is! no! evidence! of!
specific! acts! made! by! the! RECCI! showing! or! indicating! that! it! had! full!
knowledge! of! any! representations! made! by! Roxas! to! WHI! that! it! had!
authorized! Roxas! to! grant! WHI! an! option! to! buy! B1,! or! to! create! a!
burden! or! lien! thereon.! There! is! no! implied! ratification! when! RECCI!
received!the!P5M!purchase!price!for!B2.!

Ratification!is!based!on!waiver!(intentional!relinquishment!of!a!
known! right).! Ratification! cannot! be! inferred! from! acts! that! a!
principal! has! a! right! to! do! independently! of! the! unauthorized!
act!of!the!agent.!If!writing!is!required!to!grant!an!authority!to!do!

The!general!rule!remains!that,!in!the!absence!of!authority!from!
the! Board! of! Directors,! no! person,! not! even! its! officers,! can!
validly! bind! a! corporation.! If! a! corporation,! however,!
consciously! lets! one! of! its! officers,! or! any! other! agent,! to! act!
within! the! scope! of! an! apparent! authority,! it! will! be! estopped!
from!denying!such!officers!authorityUnmistakably,!the!Courts!
directive!in!Yao!Ka!Sin!Trading!is!that!a!corporation!should!first!
prove! by! clear! evidence! that! its! corporate! officer! is! not! in! fact!
authorized! to! act! on! its! behalf! before! the! burden! of! evidence!
shifts!to!the!other!party!to!prove,!by!previous!specific!acts,!that!
an! officer! was! clothes! by! the! corporation! with! apparent!
authority.! Westmont( Bank( v.( Inland( Construction( and( Dev.(
Corp.,(582(SCRA(230((2009).!

!
Westmont(Bank(v.(Inland(Construction(and(Dev.(Corp.(
(
Facts:*Inland!Construction!and!Development!Corp.!executed!real!estate!
mortgages!over!its!3!properties!and!3!promissory!notes!for!the!loans!it!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
obtained!from!Westmont!Bank.!A!Deed!of!Assignment,!Conveyance!and!
Release! was! executed! by! Aranda! (President! of! Inland)! wherein! he!
assigns! all! his! rights! and! interest! in! HanilWGonzalez! Corp! in! favour! of!
Abrantes.! In! the! deed,! the! obligations! of! Inland! (including! that! with!
Westmont! Bank)! shall! be! transferred! to! Abrantes.! Westmont! Banks!

Account!officer,!Calo,!signed!for!its!conformity!to!the!deed.!Inland!then!
filed! a! complaint! for! injunction! in! the! Regional! Trial! against! Westmont!
Bank!when!the!latter!foreclosed!the!properties!mortgaged!by!Inland.!In!
their! Answer,! the! bank! claimed! that! it! had! no! knowledge! of! such!
assignment!of!obligation!and!did!not!conform!to!it.*
*
Issue:* Whether! or! not! Westmont! Bank! is! bound! by! the! deed! of!

Assignment!
*
Held:*YES.!Calo!(signee!in!the!deed!of!assignment)!was!the!one!assigned!
to!transact!on!behalf!of!the!Bank!with!respect!to!the!loan!transactions!
with!Inland.!Because!of!this,!it!is!presumed!that!he!had!the!authority!to!
sign!for!the!bank!in!the!Deed!of!Assignment.!The!Court!stated!that!if!a!
corporation!consciously!lets!one!of!its!officers,!or!any!other!agent,!to!act!

If!a!corporation!knowingly!permits!one!of!its!officers!to!
act! within! the! scope! of! an! apparent! authority,! it! holds!
him! out! to! the! public! as! possessing! the! power! to! do!
those!acts,!the!corporation!will,!as!against!anyone!who!
has! in! good! faith! dealt! with! it! through! such! agent,! be!
estopped! from! denying! the! agents! authority.! Soler( v.(
Court( of( Appeals,( 358( SCRA( 57( (2001);( Rural( Bank( of(
Milaor((Camarines(Sur)(v.(Ocfemia,(325(SCRA(99((2000)(
The! authority! of! a! corporate! officer! dealing! with! third!
persons! may! be! actual! or! apparent! .! .! .! the! principal! is!
liable! for! the! obligations! contracted! by! the! agent.! The!
agents!apparent!representation!yields!to!the!principal's!
true! representation! and! the! contract! is! considered! as!
entered! into! between! the! principal! and! the! third!
person.! First( Philippine( Intl( Bank( v.( Court( of( Appeals,(
252(SCRA(259((1996).(

Victim! Standing! for! doctrine! to! apply! !! the! doctrine! of!


apparent! authority! cannot! apply! to! benefit! a! party! who! deals!
with! the! corporation! aware! of! the! corporate! representatives!
lack!of!authority.1(
o Apparent!authority!is!determined!only!by!the!acts!of!the!
principal!and!not!by!the!acts!of!the!agent.!There!can!be!
no! apparent! authority! of! an! agent! without! acts! or!
conduct! on! the! part! of! the! principal;! such! acts! must!

within! the! scope! of! an! apparent! authority! it! will! be! estopped! from!
denying! such! officers! authority.! The! burden! of! proof! is! set! upon! the!
Corporation.!In!this!case!the!Bank!failed!to!discharge!its!primary!burden!
of!proving!that!Calo!was!not!authorized!to!bind!it.!
*
Doctrine:* The!Court!stated!that!if!a!corporation!consciously!lets!one!of!
its! officers,! or! any! other! agent,! to! act! within! the! scope! of! an! apparent!
authority!it!will!be!estopped!from!denying!such!officers!authority.!The!

have! been! known! and! relied! upon! in! good! faith! as! a!
result!of!the!exercise!of!reasonable!prudence!by!a!third!
party! as! claimant! and! such! acts! or! conduct! must! have!

burden!of!proof!is!set!upon!the!Corporation.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

produced! a! change! of! position! to! the! third! partys!


detriment.(
Persons! who! deal! with! corporate! agents! within!
circumstances! showing! that! the! agents! are! acting! in!
excess! of! corporate! authority,! may! not! hold! the!
corporation! liable.! Traders( Royal( Bank( v.( Court( of(

transaction! of! discounting! the! checks! involving! the! same!


personalities! wherein! any! enabling! resolution! from! the! Board!
was! dispensed! with! and! yet! the! bank! was! able! to! collect! from!
the! corporation.! Nyco( Sales( Corp.( v.( BA( Finance( Corp.,( 200(
SCRA(637((1991).(

Appeals,(269(SCRA(601((1997).(

Foundation,(Inc.,(v.(Court(of(Appeals,(421(SCRA(328((2004).(

A! verbal! promise! given! by! the! Chairman! and! President! of! the!
company!to!the!general!manager!and!chief!operating!officer!to!
give! the! latter! unlimited! sick! leave! and! vacation! leave! benefits!
and! its! cash! conversion! upon! his! retirement! or! resignation,!
when!not!an!integral!part!of!the!companys!rules!and!policies,!is!
not!binding!on!the!company!when!it!is!without!the!approval!of!
the! Board! of! Directors.! Kwok( v.( Philippine( Carpet(
Manufacturing(Corp.,(457(SCRA(465((2005).(

When! an! officer! in! a! banking! corporation! arrange! a! credit! line!


agreement!and!forwards!the!same!to!the!legal!department!at!its!
head!officer,!and!the!bank!did!no!disaffirm!the!contract,!then!it!
is!bound!by!it.!Premier(Dev.(Bank(v.(Court(of(Appeals,(427(SCRA(
686((2004).(

President! ostensible! and! apparent! authority! to! inter! alia! deal!


with! the! respondent! Bank,! and! therefore! the! foundation! is!
estopped! from! questioning! the! Presidents! authority! to! obtain!
the! subject! loans! from! the! respondent! Bank.! Lapulapu(

Apparent*authority*may*be*ascertained*through!(1)!the!general!
manner! in! which! the! corporation! holds! out! an! officer! or! agent!
as! having! the! power! to! act,! or,! in! other! words! the! apparent!
authority!to!act!in!general!with!which!is!clothes!them;!or!(2)!the!
acquiescence! in! his! acts! of! a! particular! nature,! with! actual! or!
constructive!knowledge!thereof,!within!or!beyond!the!scope!of!
his! ordinary! powers.! Inter^Asia( Investment( Industries( v.( Court(
of(Appeals,(403(SCRA(452((2003).(
Examples:*

Per! its! Secretarys! Certificate,! the! foundation! had! given! its!

The! acceptance! of! the! offer! to! purchase! by! the! clerk! of! the!

A! corporation! cannot! disown! its! Presidents! act! of! applying! to!


the!bank!for!credit!accommodation,!simply!on!the!ground!that!it!
never!authorized!the!President!by!the!lack!of!any!formal!board!
resolution.! The! following! placed! the! corporation! and! its! Board!

branch! of! the! bank,! and! the! representation! that! the! manager!
had! already! approved! the! sale! (which! in! fact! was! not! true),!
cannot! bind! the! bank! to! the! contract! of! sale,! it! being! obvious!
that! such! a! clerk! is! not! among! the! bank! officers! upon! whom!
putative! authority! may! be! reposed! by! a! third! party.! There! is,!

of!Directors!in!estoppel!in!pais:!Firstly,!the!byWlaws!provides!for!
the!powers!of!the!President,!which!includes,!executing!contracts!
and! agreements,! borrowing! money,! signing,! indorsing! and!
delivering! checks;! secondly,! there! were! already! previous!

thus,! no! legal! basis! to! bind! the! bank! into! any! valid! contract! of!
sale! with! the! buyers,! given! the! absolute! absence! of! any!
approval!or!consent!by!any!responsible!officer!of!the!bank.!DBP(
v.(Ong,(460(SCRA(170((2005).(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Rationale* for* the* Doctrine* of* Apparent* Authority:! Naturally,!


the!third!person!has!little!or!no!information!as!to!what!occurs!in!
corporate! meeting;! and! he! must! necessarily! rely! upon! the!
external! manifestations! of! corporate! consent.! The! integrity! of!
commercial!transactions!can!only!be!maintained!by!holding!the!
corporation!strictly!to!the!liability!fixed!upon!it!by!its!agents!in!
accordance! with! law.! What! transpires! in! the! corporate! board!
room! is! entirely! an! internal! matter.! Hence,! petitioner! may! not!
impute! negligence! on! the! part! of! the! respondents! in! failing! to!
find!out!the!scope!of!Atty.!Solutas!authority.!Indeed,!the!public!
has!the!right!to!rely!on!the!trustworthiness!of!bank!officers!and!
their! acts.! Associated( Bank( v.( Pronstroller,( 558( SCRA( 113(
(2008).(

(
Associated(Bank(v.(Pronstroller(
(
Facts:* The! Spouses! Vaca! executed! a! Real! Estate! Mortgage! in! favor! of!
Associated!Bank!over!their!parcel!of!residential!land!in!Green!Meadows!
Subdivision.! Eventually,! the! property! was! foreclosed! and! sold! at! public!
auction!with!Associated!Bank!as!the!highest!bidder.!However,!the!Vacas!
commenced! an! action! for! the! nullification! of! the! real! estate! mortgage!
and! the! foreclosure! sale.! Pending! its! resolution! in! the! Supreme! Court,!
Associated!Bank!negotiated!with!the!Spouses!Pronstroller!through!Atty.!
Jose! Soluta,! the! banks! Vice! President! and! member! of! its! Board! of!
Directors.! Letter! agreements! were! executed! whereby! the! Spouses!
Pronstrollers! would! give! a! downpayment! (first! letter! agreement),! and!
then!given!an!extension!to!pay!the!balance!which!would!be!given!upon!
delivery!of!the!property!subsequent!to!the!resolution!of!the!Vaca!case!
with!such!property!being!free!from!occupants!(embodied!in!the!second!

letter! agreement).! Later,! the! bank! reorganised! its! management! and!


Atty.! Dayday! replaced! Atty.! Soluta.! Atty.! Dayday! informed! Spouses!
Pronstroller! that! their! deposit! would! be! forfeited! because! the! second!
letter!agreement!was!a!mistake!because!Atty.!Soluta!had!no!authority!to!
give!an!extension.!
*
Issue:* Whether! or! not! Associated! Bank! is! bound! by! the! LetterW
Agreement! signed! by! Atty.! Soluta! under! the! doctrine! of! apparent!
authority.!
*
Held:* YES.! Undoubtedly,! the! Associated! Bank! had! previously! allowed!
Atty.!Soluta!to!enter!into!the!first!agreement!without!a!board!resolution!
expressly! authorizing! him;! thus,! it! had! clothed! him! with! apparent!
authority!to!modify!the!same!via!the!second!letterWagreement.!It!is!not!
the! quantity! of! similar! acts! which! establishes! apparent! authority,! but!
the! vesting! of! a! corporate! officer! with! the! power! to! bind! the!
corporation.!
*
Doctrine:* The! doctrine! of! apparent! authority,! with! special! reference!
to! banks,! had! long! been! recognized! in! this! jurisdiction.! Apparent!
authority! is! derived! not! merely! from! practice.! Its! existence! may! be!
ascertained! through! 1)! the! general! manner! in! which! the! corporation!
holds! out! an! officer! or! agent! as! having! the! power! to! act,! or! in! other!
words,! the! apparent! authority! to! act! in! general,! with! which! it! clothes!
him;!or!2)!the!acquiescence!in!his!acts!of!a!particular!nature,!with!actual!
or! constructive! knowledge! thereof,! within! or! beyond! the! scope! of! his!
ordinary!powers.!
(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Atty.!Hofilea!!!the!byWlaws!do!not!always!have!all!the!details!
of! the! officers! but! it! is! a! good! place! to! start! to! determine!

whether!the!officer!you!are!dealing!with!has!authority!or!not!to!
deal!with!you!regarding!the!matter.!Absent!this,!you!can!ask!the!
company! to! provide! you! with! a! Board! Resolution! authorizing! a!
particular!person!to!deal!with!you!and!under!what!limitations.!
!
IV.*Qualifications*of*Directors/Trustees*(Sections*23*and*27)*
*

law!requires!is!that!he!has!legal!title!to!the!share.!Under!the!old!
Corporation! Law! it! was! required! that! every! director! must! own!
"in!his!own!right"!at!least!one!share!of!the!capital!stock!of!the!
corporation.! Under! the! present! Section! 23! of! the! Corporation!
Code,!it!requires!only!that!the!share!of!a!director!"shall!stand!in!
his!name!on!the!books!of!the!corporation."1!

Section*23.*The*board*of*directors*or*trustees.*
Unless* otherwise* provided* in* this* Code,* the* corporate* powers* of* all*
corporations* formed* under* this* Code* shall* be* exercised,* all* business*
conducted* and* all* property* of* such* corporations* controlled* and* held*
by* the* board* of* directors* or* trustees* to* be* elected* from* among* the*
holders* of* stocks,* or* where* there* is* no* stock,* from* among* the*
members* of* the* corporation,* who* shall* hold* office* for* one* (1)* year*
until*their*successors*are*elected*and*qualified.*
*
Every*director*must*own*at*least*one*(1)*share*of*the*capital*stock*of*
the*corporation*of*which*he*is*a*director,*which*share*shall*stand*in*his*
name*on*the*books*of*the*corporation.*Any*director*who*ceases*to*be*
the* owner* of* at* least* one* (1)* share* of* the* capital* stock* of* the*
corporation* of* which* he* is* a* director* shall* thereby* cease* to* be* a*
director.* Trustees* of* nonTstock* corporations* must* be* members*
thereof.* A* majority* of* the* directors* or* trustees* of* all* corporations*
organized*under*this*Code*must*be*residents*of*the*Philippines.*

The!fact!that!a!director!is!only!holding!the!share!as!a!nominee!of!
another!person!does!not!disqualify!him!as!a!director.!What!the!

The!1Wshare!requirement!is!a!continuing!requirement!

2. Rules*on*Additional*Qualifications*and*Disqualifications*

The! qualifications! provided! for! in! the! law! are! only! minimum!
qualifications;!additional!qualifications!and!disqualifications!can!
be!provided!for!but!only!by!proper!provisions!in!the!byWlaws!of!
the!corporation.!Gokongwei,(Jr.(v.(SEC,(89(SCRA(336((1979).(
o Atty.! Hofilea! !! other! qualifications! may! be! found!
from! the! laws! (e.g.! Philippine! resident,! possess! legal!
capacity).! As! a! general! rule,! citizenship! is! not! a!
requirement!to!be!a!director!of!a!corporation.!However,!
it!may!be!a!requirement!in!cases!directors!of!corporate!
public!utilities!operating!on!a!franchise.(

(
Gokongwei,(Jr.(v.(Securities(and(Exchange(Commission(
*
Facts:!John!Gokongwei,!a!stockholder!of!San!Miguel!Corporation!(and!a!
president! and! stockholder! of! Robina! Corp.! and! Consolidated! Foods!
Corp.,!a!competitor!of!SMC,!in!various!areas,!such!as!Instant!Coffee,!Ice!

*
1. Qualifications*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Cream,! Poultry! and! Hog! Feeds! and! many! more),! filed! a! petition! for!
declaration!of!nullity!of!amended!byWlaws,!cancellation!of!certificate!of!
filing! of! the! amendedWby! laws,! injunction! and! damages! against! the!
majority!of!the!members!of!the!Board!of!Directors!of!the!SMC!based!on!
the!following!grounds:!

directors! is! expressly! conferred! by! law.! Every! corporation! has! the!
inherent! power! to! adopt! byWlaws! for! its! internal! government,! and! to!
regulate!the!conduct!and!prescribe!the!rights!and!duties!of!its!members!
towards! itself! and! among! themselves! in! reference! to! the! management!
of! its! affairs.! And! under! section! 21! of! the! Corporation! Law,! a!

Corporations! have! no! inherent! power! to! disqualify! a!


stockholder!from!being!elected!as!director!depriving!him!of!his!
vested!right!because!he!is!an!officer!of!a!competitor!company.!

corporation!may!prescribe!in!its!byWlaws!the!qualifications,!duties!and!
compensation!of!directors,!officers!and!employees!...!(

The! corporation! has! been! investing! corporate! funds! in! other!

A!director!must!own!at!least!one!share!of!stock.!Pea% v.% Court(


of(Appeals,(193(SCRA(717((1991).1(

corporations!and!business!outside!of!the!primary!purpose!of!the!
corporation!

*
Issue:* Whether! or! not! the! corporation! has! the! power! to! disqualify! a!

The!law!does!not!require!that!a!ViceWPresident!be!a!stockholder.!
Baguio(v.(Court(of(Appeals,(226(SCRA(366((1993).!

Beneficial!ownership!under!VTA!no!longer!qualifies.!Lee(v.(Court(
of(Appeals,(205(SCRA(752((1992).(

competitor!from!being!elected!to!the!board!of!directors!as!a!reasonable!
exercise!of!corporate!authority!
*
Held:*YES.!Any!corporation!may!amend!its!articles!of!incorporation!by!a!
vote! or! written! assent! of! the! stockholders! representing! at! least! 2/3! of!
the! subscribed! capital! stock! of! the! corporation.! It! cannot! be! said! that!
prior!to!this,!Gokongwei!has!a!vested!right!to!vote!and!be!voted!for!in!
the! face! of! the! fact! that! the! law! at! the! time! such! right! as! stockholder!
was!acquired!contained!the!prescription!that!the!corporate!charter!and!
the!byWlaw!shall!be!subject!to!amendment,!alteration!and!modification.!
Every! person! who! buys! a! stock! with! a! corporation! impliedly! contracts!
that!the!will!of!the!majority!shall!govern!in!all!matters!within!the!limits!
of! the! act! of! incorporation! and! lawfully! enacted! byWlaws! and! not!
forbidden!by!law.!
*
Doctrine:! The! authority! of! a! corporation! to! prescribe! qualifications! of!

(
Lee(v.(Court(of(Appeals(
(
Facts:* Herein! petitioners! were! served! summons! in! accordance! with! a!
third!party!complaint!filed!against!Alfa!Integrated!Textile!Mills!of!which!
Lee! and! Lacdao! was! president! and! vice! president! respectively.! They!
claim! that! the! summons! for! Alfa! was! erroneously! served! upon! them!
considering! that! the! management! of! Alfa! had! been! transferred! to!
Development! Bank! of! the! Philippines.! They! claim! that! the! voting! trust!
agreement!between!Alfa!and!DBP!vests!all!management!and!control!of!
Alfa! to! the! DBP.! DBP! claimed! that! it! was! not! authorized! to! receive!
summons!on!behalf!of!Alfa!since!DBP!had!not!taken!over!the!company!
which!has!a!separate!and!distinct!corporate!personality!and!existence.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Also!Detective!&!Protective!Bureau,!Inc.!v.!Cloribel,!26!SCRA!255!(1969).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
!
Issue:* Whether! or! not! the! execution! of! the! voting! trust! agreement! by!
Lee! and! Lacdao! whereby! all! their! shares! to! the! corporation! have! been!
transferred!to!the!trustee!deprives!the!stockholder!of!their!positions!as!
directors!of!the!corporation.!

director,! what! is! material! is! the! legal! title! to,! not! beneficial! ownership!
of,!the!stock!as!appearing!on!the!books!of!the!corporation.(
(
3. Rule*on*Corporate*Stockholders1*

*
Held:* YES.! Lee! and! Lacdao,! by! virtue! of! the! voting! trust! agreement!
executed! in! 1981! disposed! of! all! their! shares! through! assignment! and!
delivery! in! favor! of! DBP,! as! trustee.! Consequently,! Lee! and! Lacdao!
ceased! to! own! at! least! one! outstanding! share! in! their! names! on! the!
books!of!Alfa!as!required!under!Section!23!of!the!new!Corporation!code.!
They! also! ceased! to! have! anything! to! do! with! the! management! of! the!

corporation! cannot! attend! personally! board! meetings! of! the!


corporation!wherein!it!is!elected!as!a!director,!but!only!through!
representative! or! a! proxy,! which! would! contravene! the!
established! rule! that! a! director! may! not! be! represented! by! a!
proxy!at!a!meeting!of!the!board.2*

enterprise,! they! ceased! to! be! directors.! Hence,! the! transfer! of! their!
shares! to! the! DBP! created! vacancies! in! their! respective! positions! as!
directors!of!Alfa.!In!the!absence!of!a!showing!that!DBP!had!caused!to!be!
transferred! in! their! names! one! share! of! stock! for! the! purpose! of!
qualifying!as!directors!of!Alfa,!Lee!and!Lacdao!could!no!longer!deemed!
to!retain!their!status!as!officers!of!Alfa.!Hence,!the!service!of!summons!
to!Alfa!through!Lee!and!Lacbao!was!invalid.!
*
Doctrine:* A! voting! trust! agreement! results! in! the! separation! of! the!
voting! rights! of! a! stockholder! from! his! other! rights.! This! may! create! a!
dichotomy! between! the! equitable! or! beneficial! ownership! of! the!
corporate!shares!of!a!stockholder,!on!the!one!hand,! and!the!legal!title!
thereto!on!the!other.!With!the!omission!of!the!phrase!"in!his!own!right"!
[in!the!new!corporation!code]!the!election!of!trustees!and!other!persons!
who! in! fact! are! not! the! beneficial! owners! of! the! shares! registered! in!
their! names! on! the! books! of! the! corporation! becomes! formally!
legalized.!Hence,!this!is!a!clear!indication!that!in!order!to!be!eligible!as!a!

In! cases! of! corporate! stockholders! or! corporate! members! of! a!


corporation,! such! entities! cannot! be! qualified! to! be! elected! as!
such!to!the!board!of!the!corporation.!A!corporation!cannot!act!
by!itself!but!only!through!its!officers!and!agents,!and!as!such!a!

In! the! case! of! corporate! stockholders! or! corporate! members,!


their! representation! in! the! board! can! be! achieved! by! making!
their! individual! representatives! trustees! of! the! shares! or!
membership,! which! would! then! make! them! stockholders! or!
members! of! record,! and! thereby! qualified! to! be! elected! to! the!
board,! but! at! the! same! time! maintaining! legal! responsibility! of!
trustees!to!the!corporate!stockholder!or!members.!

4. Disqualifications*
*
Section*27.*Disqualification*of*directors,*trustees*or*officers.*
No* person* convicted* by* final* judgment* of* an* offense* punishable* by*
imprisonment*for*a*period*exceeding*six*(6)*years,*or*a*violation*of*this*
Code*committed*within*five*(5)*years*prior*to*the*date*of*his*election*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!Section!26,!Corporation!Code.!!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
or* appointment,* shall* qualify* as* a* director,* trustee* or* officer* of* any*
corporation.*
**

Punishable! by! imprisonment! or! a! period! exceeding! 6! years:!


regardless! of! your! actual! sentence,! so! long! as! the! crime! was!
punishable! by! a! period! exceeding! 6! years,! you! will! be!
disqualified!once!convicted.*

Conviction!of!a!violation!of!the!Corporation!Code:!since!it!is!only!
the! Court! who! can! determine! if! you! have! violated! the! Code,!
then! you! probably! need! to! have! been! convicted! of! such!
violation!in!order!to!be!considered!disqualified.*

*
V.*Election*of*Directors*and*Trustees**
*
A.*Directors*(Sections*24*and*26)*
*
Section*24.*Election*of*directors*or*trustees.*
At*all*elections*of*directors*or*trustees,*there*must*be*present,*either*
in*person*or*by*representative*authorized*to*act*by*written*proxy,*the*

number* of* directors* to* be* elected* multiplied* by* the* number* of* his*
shares* shall* equal,* or* he* may* distribute* them* on* the* same* principle*
among*as*many*candidates*as*he*shall*see*fit:*Provided,*That*the*total*
number* of* votes* cast* by* him* shall* not* exceed* the* number* of* shares*
owned*by*him*as*shown*in*the*books*of*the*corporation*multiplied*by*
the*whole*number*of*directors*to*be*elected:*Provided,*however,*That*
no* delinquent* stock* shall* be* voted.* Unless* otherwise* provided* in* the*
articles* of* incorporation* or* in* the* byTlaws,* members* of* corporations*
which* have* no* capital* stock* may* cast* as* many* votes* as* there* are*
trustees* to* be* elected* but* may* not* cast* more* than* one* vote* for* one*
candidate.* Candidates* receiving* the* highest* number* of* votes* shall* be*
declared*elected.*Any*meeting*of*the*stockholders*or*members*called*
for*an*election*may*adjourn*from*day*to*day*or*from*time*to*time*but*
not*sine*die*or*indefinitely*if,*for*any*reason,*no*election*is*held,*or*if*
there*not*present*or*represented*by*proxy,*at*the*meeting,*the*owners*
of*a*majority*of*the*outstanding*capital*stock,*or*if*there*be*no*capital*
stock,*a*majority*of*the*member*entitled*to*vote.*
*

owners*of*a*majority*of*the*outstanding*capital*stock,*or*if*there*be*no*
capital*stock,*a*majority*of*the*members*entitled*to*vote.*The*election*
must*be*by*ballot*if*requested*by*any*voting*stockholder*or*member.*
In*stock*corporations,*every*stockholder*entitled*to*vote*shall*have*the*
right* to* vote* in* person* or* by* proxy* the* number* of* shares* of* stock*
standing,* at* the* time* fixed* in* the* byTlaws,* in* his* own* name* on* the*
stock*books*of*the*corporation,*or*where*the*byTlaws*are*silent,*at*the*
time* of* the* election;* and* said* stockholder* may* vote* such* number* of*
shares*for*as*many*persons*as*there*are*directors*to*be*elected*or*he*
may*cumulate*said*shares*and*give*one*candidate*as*many*votes*as*the*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Entitle!to!Vote!!!Do!you!include!in!counting,!for!purposes!of!
a!majority!present!in!a!meeting,!those!delinquent!stockholders?!
Does!this!phrase!apply!to!stock!corporations?*

By! ballot! !! it! is! not! necessary! that! a! majority! of! the!
stockholders!agree!that!the!election!be!by!ballot.!So!long!as!one!
(any)! shareholder! requests! for! the! election! to! be! conducted!
by!ballot,!then!such!should!be!done.*

Atty.! Hofilea! !! the! number! of! seats! for! directors! must! be!
maintained.!It!cannot!be!altered!beyond!that!prescribed!by!the!
articles! of! incorporation.! However,! in! reality,! if! no! one! objects!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
then! the! stockholders! can! choose! to! just! fill! some! of! the! seats!
and!not!all.*
1. Cumulative*Voting1*

Cumulative! voting! !! is! a! voting! procedure! wherein! a!


stockholder!is!allowed!to!concentrate!his!votes!and!give!
one!candidate!as!many!votes!as!the!number!of!directors!
to! be! elected! multiplied! by! the! number! of! his! shares!
shall!equal.!
Straight! voting! !! allows! a! simple! majority! of! the!
shareholders! to! elect! the! entire! board! of! directors!
leaving!the!minority!shareholders!unrepresented.!Under!
straight! voting,! each! shareholder! simply! votes! the!
number!of!shares!he!owns!for!each!director!nominated.!

Section! 24! of! the! Corporation! Code! expressly! provides! for!


cumulative! voting! in! the! election! of! the! directors! of! stock!
corporations.! The! provisions! for! cumulative! voting! are!
mandatory.!

The!policy!of!cumulative!voting!is!to!allow!minority!stockholders!
the!capacity!to!be!able!to!elect!representatives!to!the!board!of!
directors.2!!
o No! exception! is! provided! for! in! Section! 24! so! that! the!
articles!may!not!provide!for!restriction!or!suppression!of!
the!principle!of!cumulative!voting!in!stock!corporations.!!

represents!all!interest!groups!in!the!corporate!setting.**
2. Report*on*Election*of*Directors,*Trustees*and*Officers*
*
Section*26.*Report*of*election*of*directors,*trustees*and*officers.*
Within*thirty*(30)*days*after*the*election*of*the*directors,*trustees*and*
officers* of* the* corporation,* the* secretary,* or* any* other* officer* of* the*
corporation,*shall*submit*to*the*Securities*and*Exchange*Commission,*
the*names,*nationalities*and*residences*of*the*directors,*trustees,*and*
officers* elected.* Should* a* director,* trustee* or* officer* die,* resign* or* in*
any* manner* cease* to* hold* office,* his* heirs* in* case* of* his* death,* the*
secretary,* or* any* other* officer* of* the* corporation,* or* the* director,*
trustee* or* officer* himself,* shall* immediately* report* such* fact* to* the*
Securities*and*Exchange*Commission.*
*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
2
!Glazer,! Glazer,! &! Grofman,! Cumulative! Voting! In! Corporate! Elections:!
Introducing!Strategy!into!the!Equation,!35!S.!CAROLINA!L.!REV.!295!(1934).!

Cumulative! voting! is! reckoned! to! be! equitable! since! it! allows!
stockholders!the!opportunity!for!representation!on!the!board!of!
directors! in! proportion! to! their! holdings.! Such! minority!
representation!is!believed!not!to!interfere!with!the!principle!of!
majority! rule! since! the! number! of! directors! elected! by! each!
group!will!vary!with!its!proportion!of!ownership.!!
o On!the!other!hand,!the!system!of!cumulative!voting!has!
been! criticized! by! other! sectors! because! in! tends! to!
partisan! representation! in! the! board,! which! is!
inconsistent! with! the! notion! that! a! director! properly!

Cumulative!Voting!v.!Straight!Voting!
o

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! provisions! of! Section! 26! of! the! Corporation! Code! are!
deemed! to! be! mandatory! and! jurisdictional.! And! the!
determination!of!who!are!the!legal!directors!and!officers!of!the!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporation! is! conditioned! upon! the! reports! submitted! to! the!
SEC!pursuant!to!said!section.1!

Since!under!Section!26!of!the!Corporation!Code!all!corporations!
are! mandated! to! submit! a! formal! report! to! the! SEC! on! the!
changes!in!their!directors!and!officers,!then!only!those!directors!
and! officers! appearing! in! such! report! (General! Information!
Sheet)! to! the! SEC! are! deemed! legally! constituted! to! bind! the!
corporation,! especially! in! the! bringing! of! suits! in! behalf! of! the!
corporation.! Premium( Marble( Resources( v.( Court( of( Appeals,(
264(SCRA(11((1996).(

(
Premium(Marble(Resources(v.(Court(of(Appeals(
(
Facts:!The!case!began!when!Premium!Marble!Resources!Inc.,!assisted!by!
Atty.! Arnulfo! Dumadag! as! counsel,! filed! an! action! for! damages! against!
International! Corporate! Bank.! Later,! the! same! corporation,! i.e.,!
Premium,! but! this! time! represented! by! Siguion! Reyna,! Montecillio! and!
Ongsiako!Law!Office!as!counsel,!filed!a!motion!to!dismiss!the!action!of!
petitioners! on! the! ground! that! the! filing! of! the! case! was! without!
authority! from! its! duly! constituted! board! of! directors! as! shown! by! the!
excerpt!of!the!minutes!of!the!Premiums!board!of!directors!meeting.!In!
its! opposition! to! the! motion! to! dismiss,! Premium! thru! Atty.! Dumadag!
contended! that! the! persons! who! signed! the! board! resolution! namely!
Belen,! Jr.,! Nograles! &! Reyes,! are! not! directors! of! the! corporation! and!
were! allegedly! former! officers! and! stockholders! of! Premium! who! were!
dismissed! for! various! irregularities! and! fraudulent! acts;! that! Siguion!

Reyna! Law! office! is! the! lawyer! of! Belen! and! Nograles! and! not! of!
Premium!and!that!the!Articles!of!Incorporation!of!Premium!shows!that!
Belen,!Nograles!and!Reyes!are!not!majority!stockholders.!
!
Issue:*Whether!or!not!the!filing!of!the!case!for!damages!against!private!
respondent! bank! (International! Corporate! Bank)! was! authorized! by! a!
duly!constituted!Board!of!Directors!of!the!petitioner!corporation*
*
Held:* NO.! The! Minutes! of! the! Meeting! of! the! Board! on! April! 1,! 1982!
states!that!the!newly!elected!officers!for!the!year!1982!were!Oscar!Gan,!
Mario!Zavalla,!Aderito!Yujuico!and!Rodolfo!Millare,!petitioner!however,!
failed!to!show!proof!that!this!election!was!reported!to!the!SEC.!In!fact,!
the! last! entry! in! their! General! Information! Sheet! with! the! SEC,! as! of!
1986!appears!to!be!the!set!of!officers!elected!in!March!1981.!The!claim,!
therefore,!of!petitioners!as!represented!by!Atty.!Dumadag,!that!Zaballa,!
et! al.,! are! the! incumbent! officers! of! Premium! has! not! been! fully!
substantiated.!Hence,!the!court!agrees!with!the!finding!of!the!Court!of!
Appeals,! that! in! the! absence! of! any! board! resolution! from! its! board! of!
directors!the![sic]!authority!to!act!for!and!in!behalf!of!the!corporation,!
the!present!action!must!necessarily!fail.!The!power!of!the!corporation!to!
sue!and!be!sued!in!any!court!is!lodged!with!the!board!of!directors!that!
exercises!its!corporate!powers.!!
*
Doctrine:*By!the!express!mandate!of!the!Corporation!Code!(Section!26),!
all!corporations!duly!organized!pursuant!thereto!are!required!to!submit!
within! the! period! therein! stated! (30! days)! to! the! Securities! and!
Exchange! Commission! the! names,! nationalities! and! residences! of! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

directors,!trustees!and!officer!selected.!!

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

The! underlying! policy! of! the! Corporation! Code! is! that! the!
business! and! affairs! of! a! corporation! must! be! governed! by! a!
board!of!directors!whose!members!have!stood!for!election,!and!
who! have! actually! been! elected! by! the! stockholders,! on! an!
annual! basis.! Only! in! that! way! can! the! directors! continued!
accountability! to! the! shareholders,! and! the! legitimacy! of! their!
decisions! that! bind! the! corporations! stockholders,! be! assured.!
The!shareholder!vote!is!critical!to!the!theory!that!legitimizes!the!
exercise! of! power! by! the! directors! or! officers! over! properties!
that!they!do!not!own.!Valle( Verde( Country( Club,( Inc.( v.( Africa,(
598(SCRA(202((2009).(

(
Valle(Verde(Country(Club,(Inc.(v.(Africa(
(
Facts:! The! Valle! Verde! Country! Club! (VVCC)! has! a! 9Wmember! Board! of!
Directors.! From! 1997! to! 2001,! the! requisite! quorum! for! holding! of! the!
stockholders!meeting!could!not!be!obtained!so!the!directors!continued!
to!serve!in!holdWover!capacity.!In!1998,!two!directors!resigned!and!were!
replaced.! Africa! questions! the! election! of! the! two! directors! with! the!
Securities! and! Exchange! Commission! for! allegedly! being! in!
contravention! of! Section! 29! of! the! Corporation! Code! which! states! that!
all! vacancies! that! occur! other! than! by! removal! by! the! stockholders! or!
expiration!of!term!may!be!filled!by!the!vote!of!at!least!a!majority!of!the!
remaining! directors! (if! still! constituting! a! quorum).! However! if! the!
vacancy!was!caused!by!either!removal!by!the!stockholders!or!expiration!
of! term,! then! it! must! be! filled! by! a! vote! of! the! stockholders.! Anyone!
who! would! fill! the! vacancy! prior! to! such! will! only! serve! for! the!
unexpired! term.! Africa! points! out! that! since! Makalintals! term! had!
already!expired!with!the!lapse!of!the!oneWyear!term!provided!in!Section!

23,! there! is! no! more! unexpired! term! during! which! Ramirez! could!
serve.!VVCC!on!the!other!hand!alleges!that!a!members!term!shall!be!for!
one! year! and! until! his! successor! is! elected! and! qualified;! otherwise!
stated,!a!members!term!expires!only!when!his!successor!to!the!Board!is!
elected!and!qualified.!
*
Issue:*Whether!or!not!the!remaining!directors!of!a!corporations!Board,!
still!constituting!a!quorum,!can!elect!another!director!to!fill!in!a!vacancy!
caused!by!the!resignation!of!a!holdWover!director!
*
Held:*NO.!Makalintals!term!of!office!began!in!1996!and!expired!in!1997,!
but,!by!virtue!of!the!holdover!doctrine!in!Section!23!of!the!Corporation!
Code,!he!continued!to!hold!office!until!his!resignation!on!November!10,!
1998.!This!holdover!period,!however,!is!not!to!be!considered!as!part!of!
his! term,! which,! as! declared,! had! already! expired.! His! resignation! as! a!
holdover!director!did!not!change!the!nature!of!the!vacancy!(i.e.!vacancy!
by!expiration!of!term!of!director);!the!vacancy!due!to!the!expiration!of!
Makalintals! term! had! been! created! long! before! his! resignation.! As!
correctly!pointed!out!by!the!RTC,!when!remaining!members!of!the!VVCC!
Board! elected! Ramirez! to! replace! Makalintal,! there! was! no! more!
unexpired!term!to!speak!of,!as!Makalintals!oneWyear!term!had!already!
expired.! Pursuant! to! law,! the! authority! to! fill! in! the! vacancy! caused! by!
Makalintals!leaving!lies!with!the!VVCCs!stockholders,!not!the!remaining!
members!of!its!board!of!directors.!
*
Doctrine:*It!also!bears!noting!that!the!vacancy!referred!to!in!Section!29!
contemplates! a! vacancy! occurring! within! the! directors! term! of! office.!
When!a!vacancy!is!created!by!the!expiration!of!a!term,!logically,!there!is!
no!more!unexpired!term!to!speak!of.!Hence,!Section!29!declares!that!it!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
shall!be!the!corporations!stockholders!who!shall!possess!the!authority!
to!fill!in!a!vacancy!caused!by!the!expiration!of!a!members!term.(
(

Corporations! are! required! under! Section! 26! of! the! Corporation!


Code! to! submit! to! the! SEC! within! thirty! (30)! days! after! the!
election! the! names,! nationalities,! and! residences! of! the!
directors,! trustees! and! officers! of! the! Corporation.! In! order! to!
keep! stockholders! and! the! public! transacting! business! with!
domestic! corporation! properly! informed! of! their! organization!
operational! status,! the! SEC! has! issued! the! rule! requiring! the!
filing! of! the! General! Information! Sheet.! Monfort( Hermanos(
Agricultural(Dev.(Corp.(v.(Monfort(III,(434(SCRA(27((2004).(

When!the!names!of!some!of!the!directors!who!signed!the!board!
resolution! does! not! appear! in! the! General! Information! Sheet!
filed! with! the! SEC,! then! there! is! doubt! whether! they! were!
indeed!duly!elected!members!of!the!Board!legally!constituted!to!
bring! suit! in! behalf! of! the! Corporation.! Monfort( Hermanos(
Agricultural(Dev.(Corp.(v.(Monfort(III,(434(SCRA(27((2004).(

!
B.*CUMULATIVE*VOTING*(Section*24)*

more* than* fifteen* (15)* in* number* as* may* be* fixed* in* their* articles* of*
incorporation* or* byTlaws,* shall,* as* soon* as* organized,* so* classify*
themselves*that*the*term*of*office*of*oneT*third*(1/3)*of*their*number*
shall* expire* every* year;* and* subsequent* elections* of* trustees*
comprising* oneTthird* (1/3)* of* the* board* of* trustees* shall* be* held*
annually*and*trustees*so*elected*shall* have*a*term*of*three*(3)*years.*
Trustees* thereafter* elected* to* fill* vacancies* occurring* before* the*
expiration*of*a*particular*term*shall*hold*office*only*for*the*unexpired*
period.*
*
No* person* shall* be* elected* as* trustee* unless* he* is* a* member* of* the*
corporation.*
*
Unless* otherwise* provided* in* the* articles* of* incorporation* or* the* byT
laws,*officers*of*a*nonTstock*corporation*may*be*directly*elected*by*the*
members.*(n)*
*
Section*138.*Designation*of*governing*boards.*
The* provisions* of* specific* provisions* of* this* Code* to* the* contrary*

Cumulative(Voting(in(Corporate(Elections:(Introducing(Strategy(
in(the(Equation,(35(South(Carolina(L.(Rev.(295(

notwithstanding,*nonTstock*or*special*corporations*may,*through*their*
articles* of* incorporation* or* their* byTlaws,* designate* their* governing*
boards*by*any*name*other*than*as*board*of*trustees.*(n)*

See!previous!sections.(

*
C.*Trustee*(Sections*92*and*138)*
*
Section*92.*Election*and*term*of*trustees.*
Unless* otherwise* provided* in* the* articles* of* incorporation* or* the* byT
laws,* the* board* of* trustees* of* nonTstock* corporations,* which* may* be*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

In! nonWstock! corporations,! the! default! rule! in! the! election! of!
trustees! is! straight! voting.! Unlike! the! mandatory! rule! for!
cumulative! voting! for! stock! corporations,! in! nonWstock!
corporations,!it!is!possible!to!provide!for!other!types!of!voting!in!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
either! the! articles! of! incorporation! or! the! byWlaws! of! the!
corporation.1!

*
VI.*Vacancy*in*Board*(Section*29)*
*

Code,!in!cases!where!the!vacancy!in!the!corporations!board!of!
directors! is! caused! not! only! by! the! expiration! of! a! members!
term,! the! successor! so! elected! to! fill! in! a! vacancy! shall! be!
elected! only! for! the! unexpired! term! of! his! predecessors! in!
office.! The! law! has! authorized! the! remaining! members! of! the!
board!to!fill!in!a!vacancy!only!in!specified!instances,!so!as!not!to!
retard!or!impair!the!corporations!operations;!yet,!in!recognition!
of!the!stockholders!right!to!elect!the!members!of!the!board,!it!

Section*29.*Vacancies*in*the*office*of*director*or*trustee.*
Any*vacancy*occurring*in*the*board*of*directors*or*trustees*other*than*
by*removal*by*the*stockholders*or*members*or*by*expiration*of*term,*
may* be* filled* by* the* vote* of* at* least* a* majority* of* the* remaining*
directors* or* trustees,* if* still* constituting* a* quorum;* otherwise,* said*
vacancies* must* be* filled* by* the* stockholders* in* a* regular* or* special*
meeting*called*for*that*purpose.*A*director*or*trustee*so*elected*to*fill*

limited!the!period!during!which!the!successor!shall!serve!only!to!
the! unexpired! term! of! his! predecessor! in! office.! Valle( Verde(
Country(Club,(Inc.(v.(Africa,(598(SCRA(202((2009).(

a* vacancy* shall* be* elected* only* or* the* unexpired* term* of* his*
predecessor*in*office.*
*
A* directorship* or* trusteeship* to* be* filled* by* reason* of* an* increase* in*
the*number*of*directors*or*trustees*shall*be*filled*only*by*an*election*
at* a* regular* or* at* a* special* meeting* of* stockholders* or* members* duly*
called*for*the*purpose,*or*in*the*same*meeting*authorizing*the*increase*
of*directors*or*trustees*if*so*stated*in*the*notice*of*the*meeting.*
*

The! theory! of! delegated! power! of! the! board! of! directors!
similarly! explains! why,! under! Section! 29! of! the! Corporation!

Any!position!in!the!board!to!be!filled!by!reason!of!an!increase!in!
the! number! of! directors! or! trustees! shall! be! filled! only! by! an!
election! at! a! regular! or! at! a! special! meeting! of! stockholders! or!
members! duly! called! for! the! purpose,! or! in! the! same! meeting!
authorizing! the! increase! of! directors! or! trustees! if! so! stated! in!
the!notice!of!the!meeting.2!

!
VII.*Term*of*Office,*HoldTover*Principle*

A!byWlaw!provision!or!company!practice!of!giving!a!stockholder!a!
permanent!seat!in!the!Board!would!be!against!the!provision!of!

Sections!28!and!29!of!Corporation!Code!which!requires!member!
of!the!board!of!corporations!to!be!elected.!Grace(Christian(High(
School(v.(Court(of(Appeals,(281(SCRA(133((1997).(

HoldWover! !! a! situation! that! arises! when! no! successor! is!


cleared! due! to! valid! and! justifiable! reason,! and! the! incumbent!
holds! over! and! continues! to! function! until! another! officer! is!
chosen!and!qualified.3(
o

A! holdWover! situation! does! not! disqualify! an! incumbent!


officer!from!seeking!another!term!in!office.(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

!Section!39,!Corporation!Code.!
!SEC!Opinion!No.!06W18,!20!March!2006!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

In!the!event!no!new!board!is!elected!and!qualified!after!
the! original! oneWyear! term! of! the! board! of! directors,!
then!under!the!holdWover!principle,!the!existing!board,!if!
still! constituting! a! quorum,! is! still! a! legitimate! board!
with!full!authority!to!bind!the!corporation.1(
Directors! may! lawfully! fill! vacancies! occurring! in! the!

corporations! stockholders.! That! a! director! continues! to! serve!


after! one! year! from! his! election! (i.e.,! on! a! holdover! capacity),!
cannot! be! considered! as! extending! his! term.! This! holdover!
period,! however,! is! not! to! be! considered! as! part! of! his! term,!
which,! as! declared,! had! already! expired.! Valle( Verde( Country(
Club,(Inc.(v.(Africa,(598(SCRA(202((2009).(

board,! and! such! officials,! as! well! as! the! original!


directors,! holdWover! until! qualification! of! their!
successors.! Government( v.( El( Hogar( Filipino,( 50( Phil.(
399((1927).(

1. NonTPermanency*of*Board*Seat*

The!remedy!is!quo!warranto!to!question!the!legality!and!proper!

of!the!board!of!corporations!to!be!elected.!Grace(Christian(High(
School(v.(Court(of(Appeals,(281(SCRA(133((1997).(

qualification! of! persons! elected! to! the! board.! Ponce( v.(


Encarnacion,(94(Phil.(81((1953).(

that!a!vacancy!occurring!in!the!board!of!directors!caused!by!the!
expiration! of! a! members! term! shall! be! filled! by! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

The! remaining! members! of! a! corporations! board! of! directors!


cannot!elect!another!director!to!fill!in!a!vacancy!caused!by!the!
resignation! of! a! holdWover! director.! The! holdover! period! is! not!
part!of!the!term!of!office!of!a!member!of!the!board!of!directors.!
Consequently,! when! during! the! holdover! period,! a! director!
resigns!from!the!board,!the!vacancy!can!only!be!filledWup!by!the!
stockholders,! since! there! is! no! term! left! to! fillWup! pursuant! to!
the!provisions!of!Section!29!of!the!Corporation!which!mandates!

!The! Corporation! Code! does! not! require! the! taking! of! an! oath! of! office! to!
qualify! the! elected! directors! and! officers.! Election! alone! does! not! make! the!
person!elected,!a!director!but!there!must!be!an!acceptance,!either!express!or!
implied,! although! he! is! rebuttably! presumed! to! accept! upon! notification,! or!
enters! upon! the! duties! of! an! office! after! his! election! or! appointment.! SEC!
Opinion,!21!January!1986,!XX!SEC!QUARTERLY!BULLETIN!(Nos.!1!&!2,!March!&!June,!
1986).!!!

A!byWlaw!provision!or!company!practice!of!giving!a!stockholder!a!
permanent!seat!in!the!Board!would!be!against!the!provision!of!
Sections!28!and!29!of!Corporation!Code!which!requires!member!

The! mandatory! requirements! for! an! annual! election! of! the!


Board!of!Directors!is!an!aspect!of!good!corporate!governance,!in!
that! it! subjects! the! directors! to! a! periodic! review! of! the!
performance!of!their!duties!and!responsibilities,!thereby!making!
them! more! responsive! to! the! interests! of! the! stockholders!
whose! mandate! they! must! win! annually.! Valle( Verde( Country(
Club,(Inc.(v.(Africa,(598(SCRA(202((2009).(

*
VIII.*Removal*of*Directors*or*Trustees*(Section*28)*
*
Section*28.*Removal*of*directors*or*trustees.*
Any* director* or* trustee* of* a* corporation* may* be* removed* from* office*
by* a* vote* of* the* stockholders* holding* or* representing* at* least* twoT*
thirds*(2/3)*of*the*outstanding*capital*stock,*or*if*the*corporation*be*a*
nonTstock* corporation,* by* a* vote* of* at* least* twoTthirds* (2/3)* of* the*
members* entitled* to* vote:* Provided,* That* such* removal* shall* take*
place* either* at* a* regular* meeting* of* the* corporation* or* at* a* special*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
meeting* called* for* the* purpose,* and* in* either* case,* after* previous*
notice*to*stockholders*or*members*of*the*corporation*of*the*intention*
to* propose* such* removal* at* the* meeting.* A* special* meeting* of* the*
stockholders*or*members*of*a*corporation*for*the*purpose*of*removal*
of* directors* or* trustees,* or* any* of* them,* must* be* called* by* the*

if!there!is!a!2/3!vote.(

secretary* on* order* of* the* president* or* on* the* written* demand* of* the*
stockholders* representing* or* holding* at* least* a* majority* of* the*
outstanding* capital* stock,* or,* if* it* be* a* nonTstock* corporation,* on* the*
written*demand*of*a*majority*of*the*members*entitled*to*vote.*Should*
the* secretary* fail* or* refuse* to* call* the* special* meeting* upon* such*
demand*or*fail*or*refuse*to*give*the*notice,*or*if*there*is*no*secretary,*
the*call*for*the*meeting*may*be*addressed*directly*to*the*stockholders*

Only! stockholders! or! members! have! the! power! to! remove! the!
directors!or!trustees!elected!by!them,!as!laid!down!in!Section!28!
of! Corporation! Code.! Raniel( v.( Jochico,( 517( SCRA( 221,( 230(
(2007).(
o It! is! implied! in! Section! 28! that! since! the! power! to!
remove! directors! is! vested! with! the! stockholders,! then!
such!power!cannot!be!exercised!by!the!Board,!whether!
that!be!pursuant!to!a!resolution!passed!by!the!Board!or!
even! when! such! power! of! removal! is! granted! to! the!
Board! by! provisions! in! the! articles! of! incorporation!
and/or!byWlaws!of!the!corporation.!Such!provision!in!the!

articles!or!byWlaws!is!null!and!void!for!being!contrary!to!
law!and!public!policy.1(
3. What*Constitutes*Cause*as*Basis*for*Removal?*

Code.*
*
1. Removal*of*Directors*and*Trustees*

General* Rule:* Any! director! may! be! removed! from! office! by! a!
vote!of!the!stockholders!holding!or!representing!twoWthird!(2/3)!
of!the!outstanding!capital!stock.!(
o When!removal!is!for!cause,!the!2/3!vote!is!the!minimum!
to!remove!a!director.(
o When! removal! is! without! cause,! the! 2/3! vote! is! also!
enough!to!remove!a!director.(

A! stockholders! meeting! called! for! the! removal! of! a! director! is!


valid!only!when!called!by!at!least!twoW!thirds!of!the!outstanding!
capital!stock.!Roxas(v.(De(la(Rosa,(49(Phil.(609((1926).(

2. Board*Has*No*Power*to*Discipline*or*Remove*One*of*Their*Own*

or*members*by*any*stockholder*or*member*of*the*corporation*signing*
the*demand.*Notice*of*the*time*and*place*of*such*meeting,*as*well*as*
of*the*intention*to*propose*such*removal,*must*be*given*by*publication*
or*by*written*notice*prescribed*in*this*Code.*Removal*may*be*with*or*
without*cause:*Provided,*That*removal*without*cause*may*not*be*used*
to* deprive* minority* stockholders* or* members* of* the* right* of*
representation*to*which*they*may*be*entitled*under*Section*24*of*this*

Exception:*When!the!director!is!elected!by!the!minority!through!
cumulative!voting,!he!may!not!be!removed!without!cause!even!

The!Corporation!Code!does!not!define!the!cause!that!can!be!a!
legal!basis!for!removal!of!a!member!of!the!Board.!What!is!clear!
is! that! for! cause! goes! into! the! three! duties! of! a! director! and!
officer!!loyalty,!obedience!and!diligence.*

The!provisions!under!Section!28!are!mandatory!(i.e.!notice)!and!
failure! to! comply! with! the! procedure,! even! if! the! removal!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
resolution! was! approved! by! at! least! 2/3! of! the! outstanding!
capital!stock,!would!make!such!removal!void.1*
*
IX.*Directors*or*Trustees*Meetings*(Sections*49,*53,*54*and*92)*
*
Section*49.*Kinds*of*meetings.*
Meetings* of* directors,* trustees,* stockholders,* or* members* may* be*
regular*or*special.*(n)*
*
Section*53.*Regular*and*special*meetings*of*directors*or*trustees.*
Regular* meetings* of* the* board* of* directors* or* trustees* of* every*
corporation* shall* be* held* monthly,* unless* the* byTlaws* provide*

The* president*shall*preside*at*all*meetings* of*the*directors*or*trustee*


as*well*as*of*the*stockholders*or*members,*unless*the*byTlaws*provide*
otherwise.*(n)*
*
A.*Requisites*for*a*Valid*Board*Meeting*
1. Meeting* of* the* directors* or* trustees* duly* assembled* as* a*
board,*at*the*place,*time*and*manner*provided*in*the*byTlaws;*

board!meeting!by!proxy.2!

otherwise.*
*
Special*meetings*of*the*board*of*directors*or*trustees*may*be*held*at*
any*time*upon*the*call*of*the*president*or*as*provided*in*the*byTlaws.*
*
Meetings* of* directors* or* trustees* of* corporations* may* be* held*
anywhere*in*or*outside*of*the*Philippines,*unless*the*byTlaws*provide*
otherwise.*Notice*of*regular*or*special*meetings*stating*the*date,*time*
and*place*of*the*meeting*must*be*sent*to*every*director*or*trustee*at*
least* one* (1)* day* prior* to* the* scheduled* meeting,* unless* otherwise*
provided* by* the* byTlaws.* A* director* or* trustee* may* waive* this*
requirement,*either*expressly*or*impliedly.*(n)*
*
Section*54.*Who*shall*preside*at*meetings.*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

A! director! or! trustee! cannot! attend! nor! be! represented! in! a!


SEC! Memorandum! Circular! No.! 15,! series! of! 2001,! pursuant! to!
the! terms! of! the! Code! of! Commerce,! embodies! the! guidelines!
for!the!conduct!of!teleconferencing!and!videoconferencing!(i.e.,!
conferences! or! meetings! through! electronic! medium! or!
telecommunications! where! the! participants! who! are! not!
physically!present!are!located!at!different!local!or!international!
places)!of!board!of!directors,!providing!for!safeguards!to!ensure!
the! integrity! of! the! meeting,! the! proper! recording! of! the!
minutes!thereof!and!the!safekeeping!of!the!electronic!recording!
mechanism!as!part!of!the!records!of!the!corporation.3!

SEC!held!that!a!trustee!may!now!be!allowed!to!vote!through!the!
internet,! provided! that! the! internet! medium! to! be! used! is! akin!
to! or! similar! to! the! one! being! used! in! videoconferencing! or!
teleconferencing,!where!a!participant!can!see!or!hear!the!actual!
proceedings! of! a! board! meeting! and! actively! participate! in! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!SEC! Opinion,! 7! February! 1994,! XXVIII! SEC! Quarterly! Bulletin! 4! (No.! 3,! March!
1994)!
3
!Likewise,! Section! 15! of! the! General! Banking! Law! of! 2000! provides! that! the!
meeting!of!the!board!of!directors!of!banks!may!be!conducted!through!modern!
technologies! such! as,! but! not! limited! to,! teleconferencing! and!
videoconferencing.!!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
deliberation! of! the! Board;! but! that! a! trustee! may! not! validly!
vote!by!email!along,!which!was!deemed!an!inadequate!medium!
because! a! userWparticipants! role! in! such! case! is! passive!
considering! that! his! access! to! the! entire! proceedings! is! limited!
to!the!information!in!print!transmitted!through!the!internet.1!

meetings.! Dead! members! shall! not! be! counted.! Tan( v.( Sycip,(
499(SCRA(216((2006).(

and! counted! on! the! basis! of! the! outstanding! capital! stock,! as!
defined! by! Section! 137! of! the! Corporation! Code.! Tan( v.( Sycip,(
499(SCRA(216((2006).(

The!SEC!has!opined!that!the!Corporation!Code!does!not!confer!

upon! any! stockholder! the! right! to! attend! board! meeting! and!
that! the! allowance! of! stockholders! to! attend! board! meeting! is!
upon!the!discretion!of!the!board!itself.2*
2. Presence*of*the*required*quorum;*and*
3. Decision* of* the* majority* of* the* quorum* or,* in* other* cases,* a*
majority*of*the*entire*board.*
!
B.*Quorum*

The!quorum!in!the!meeting!of!the!Board!shall!be!the!presence!
of!a!majority!of!the!number!of!directors!as!fixed!in!the!articles!
of!incorporation.!The!required!vote!to!pass!a!resolution!shall!be!
a!majority!vote!of!the!directors!present!at!such!meeting!where!
quorum!is!achieved.3(

When! the! principle! for! determining! quorum! for! stock!


corporations! is! applied! by! analogy! to! nonWstock! corporations,!
only!those!who!are!actual!members!with!voting!rights!should!be!
counted.!Tan(v.(Sycip,(499(SCRA(216((2006).!

!
C.* Abstention:! In! a! board! meeting,! an! abstention! is! presumed! to! be!
counted! as! an! affirmative! vote! insofar! as! it! may! be! construed! as! an!
acquiescence! in! the! action! of! those! who! voted! affirmatively;! but! such!
presumption,! being! merely! prima! facie! would! not! hold! in! the! face! of!
clear!evidence!to!the!contrary.!Lopez(v.(Ericta,(45(SCRA(539((1972).(
!
D.*Minutes*of*Meetings*

For!stock!corporations,!the!quorum!referred!to!in!Section!52!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! signing! of! the! minutes! by! all! the! members! of! the! board! is!
not! requiredthere! is! no! provision! in! the! Corporation! Code!
that!requires!that!the!minutes!of!the!meeting!should!be!signed!
by!all!the!members!of!the!board.!The!signature!of!the!corporate!
secretary! gives! the! minutes! of! the! meting! probative! value! and!
credibility.!People(v.(Dumlao,(580(SCRA(409((2009).(

of!the!Corporation!Code!is!based!on!the!number!of!outstanding!
voting! stocks.! For! nonWstock! corporations,! only! those! who! are!
actual,! living! members! with! voting! rights! shall! be! counted! in!
determining! the! existence! of! a! quorum! during! members!
!SEC! Opinion! No.! 26,! addressed! to! Ms.! Jaycel! E.! Sato;! SEC! Opinion! No.! 27,!
series!of!2003,!addressed!to!Mr.!Arthur!Mar!O.!Alivio.!
2
!SEC! Opinion,! 21! January! 1992,! XXVI! SEC! QUARTERLY! BULLETIN! 6! (No.! 2,! June!
1992).!
3
!Villanueva,!C.!L.,!&!VillanuevaWTiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

In! stock! corporations,! the! presence! of! a! quorum! is! ascertained!

The!entries!contained!in!the!minutes!are!prima!facie!evidence!of!
what! actually! took! place! during! the! meeting,! pursuant! to!
Section!44,!Rule!130!of!the!Revised!Rule!on!Evidence.!People(v.(
Dumlao,(580(SCRA(409((2009).(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

resolution!is!a!formal!action!by!a!corporate!board!of!directors!or!
other! corporate! body! authorizing! a! particular! act,! transaction,!
or! appointment,! while,! on! the! other! hand,! minutes! are! a! brief!
statement! not! only! of! what! transpired! at! a! meeting,! usually! of!
stockholders/members! or! directors/trustees,! but! also! at! a!
meeting! of! an! executive! committee.! People( v.( Dumlao,( 580(
SCRA(409((2009).(
!
X.*COMPENSATION*OF*DIRECTORS*(Section*30)*
*
Section*30.*Compensation*of*directors.*
In* the* absence* of* any* provision* in* the* byTlaws* fixing* their*
compensation,* the* directors* shall* not* receive* any* compensation,* as*
such* directors,* except* for* reasonable* pre* diems:* Provided,* however,*
That*any*such*compensation*other*than*per*diems*may*be*granted*to*
directors* by* the* vote* of* the* stockholders* representing* at* least* a*
majority* of* the* outstanding* capital* stock* at* a* regular* or* special*
stockholders'*meeting.*In*no*case*shall*the*total*yearly*compensation*
of* directors,* as* such* directors,* exceed* ten* (10%)* percent* of* the* net*
income* before* income* tax* of* the* corporation* during* the* preceding*
year.*

Western(Institute(of(Technology,(Inc.(v.(Salas(
(
Facts:*The!Salas!family!are!the!majority!and!controlling!members!of!the!
Board! of! Trustees! of! the! Western! Institute! of! Technology,! a! stock!
corporation!engaged!in!the!operation,!among!others,!of!an!educational!
institution.! The! Villasis! (minority! stock! holders! of! the! corporation)!
contest!the!resolution!passed!by!the!Board!of!Directors!which!increased!
the! officers! of! the! officers! of! the! corporation.! Such! resolution! was!
supposedly!passed!in!accordance!with!the!amended!byWlaws!of!the!WIT!
on!compensation!of!all!officers!of!the!corporation.!
*
Issue:*Whether!or!not!such!grant!of!compensation!is!in!violation!of!the!
proscription!against!such!under!Section!30!of!the!Corporation!Code.!
*

Functions* of* Directors* and* Trustees* v.* Functions* of* Officers:*


Directors! and! trustees! are! not! entitled! to! salary! or! other!
compensation!when!they!perform!nothing!more!than!the!usual!

Held:*NO.!The!proscription,!however,!against!granting!compensation!to!
director/trustees! of! a! corporation! is! not! a! sweeping! rule.! Worthy! of!
note!is!the!clear!phraseology!of!Section!30!which!state:!"[T]he!directors!
shall!not!receive!any!compensation,!as!such!directors."!The!implication!
is!that!members!of!the!board!may!receive!compensation,!in!addition!to!
reasonable!per!diems,!when!they!render!services!to!the!corporation!in!a!
capacity!other!than!as!directors/trustees.!Herein,!resolution!48,!s.!1986!
granted! monthly! compensation! to! Salas,! et.! al.! not! in! their! capacity! as!

and!ordinary!duties!of!their!office,!founded!on!the!presumption!
that!directors!and!trustees!render!service!gratuitously,!and!that!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

the! return! upon! their! shares! adequately! furnishes! the! motives!


for! service,! without! compensation.! But! they! can! receive!
remunerations!for!executive!officer!position.!Western( Institute(
of(Technology,(Inc.(v.(Salas,(278(SCRA(216((1997).1(
(

Resolution*versus*Minutes*of*Meetings:!A!resolution!is!distinct!
and! different! from! the! minutes! of! the! meetinga! board!

!Singson!v.!Commission!on!Audit,!627!SCRA!36!(2010).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
members! of! the! board,! but! rather! as! officers! of! the! corporation,! more!
particularly! as! Chairman,! ViceWChairman,! Treasurer! and! Secretary! of!
Western!Institute!of!Technology.!Clearly,!therefore,!the!prohibition!with!
respect! to! granting! compensation! to! corporate! directors/trustees! as!
such!under!Section!30!is!not!violated!in!this!particular!case.!

*
Doctrine:* Directors!or!trustees,!as!the!case!may!be,!are!not!entitled!to!
salary! or! other! compensation! when! they! perform! nothing! more! than!
the!usual!and!ordinary!duties!of!their!office.!This!rule!is!founded!upon!a!
presumption! that! directors/trustees! render! service! gratuitously,! and!
that!the!return!upon!their!shares!adequately!furnishes!the!motives!for!
service,! without! compensation.! Under! Section! 30! of! the! Corporation!
Code,!there!are!only!two!(2)!ways!by!which!members!of!the!board!can!
be! granted! compensation! apart! from! reasonable! per! diems:! (1)! when!
there! is! a! provision! in! the! byWlaws! fixing! their! compensation;! and! (2)!
when! the! stockholders! representing! a! majority! of! the! outstanding!
capital!stock!at!a!regular!or!special!stockholders'!meeting!agree!to!give!
it!to!them.*

Relationship*between*Directors*and*Stockholders*
A!director!when!he!sits!on!the!Board!is!required!to!act!
in!independence!from!those!who!elected!him.!*
" In! this! sense,! the! director! is! not! a! mere!
representative!or!agent!of!the!stockholder*

The! director! is! an! agent! of! the!

corporation!NOT!of!the!stockholder.*
There!is!a!trust!relationship!(fiduciary)*

Relationship*between*Directors/Officers*and*the*Corporation*
o
o

Directors!act!in!representation!of!the!Corporation.*
As! such,! the! directors! must! act! for! the! interest! of! the!
corporation.*

*
A.*Directors*as*Fiduciaries*

PreTCorporation* Code:* Palting( v.( San( Jose( Petroleum,( Inc.,( 18(


SCRA(924.(

Palting(v.(San(Jose(Petroleum,(Inc.(

General* Rule:* The! Courts! of! law! will! not! meddle! into! business!
determination,!one!of!which!is!salary!scale!of!people.*

(
Facts:* San! Jose! Petroleum,! Inc.! (SJ! PETROLEUM),! a! corporation!

Exception:*When!the!amount!becomes!huge!and!unreasonable,!

organized! and! existing! in! the! Republic! of! Panama,! applied! and! was!
granted! by! the! Securities! and! Exchange! Commission! license! to! sell! 2M!
(later!increased!to!5M)!shares!of!capital!stock.!SJ!Petroleum!claims!that!
the! proceeds! of! the! sale! will! be! used! to! finance! the! operations! of! San!
Jose!Oil!Corporation!which!has!14!petroleum!exploration!concessions!in!
various!provinces.!Palting!and!other!prospective!investors!filed!with!the!
SEC! an! opposition! to! said! registration! on! the! ground! that! the! tieWup!

the!courts!may!come!in!and!suspend!the!enforcement!of!the!byW
law!provision.*
o Generally,! dividends! and! compensation! policies!
represent!areas!of!conflicts!of!interests!and!these!are!an!
exception!to!the!business!judgment!rule.*
*
XI.*FIDUCIARY*DUTIES*OF*DIRECTORS*AND*OFFICERS*

between!SJ!Petroleum,!a!Panamanian!corporation!and!SJ!Oil,!a!domestic!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporation! violates! the! Constitution,! the! Corporation! Law! and! the!
Petroleum!Act!of!1949.!In!its!answer,!SJ!Petroleum!stated!that!it!was!a!
business! enterprise! enjoying! parity! rights,! with! respect! to! mineral!
resources! in! the! Philippines,! which! may! be! exercised! pursuant! to! the!
LaurelWLangley!Agreement,!through!a!medium,!the!SJ!Oil.!

citizens! by! virtue! of! the! Parity! Agreement.! Said! US! citizens! can! either!
directly!or!indirectly!own!or!control!the!business!enterprise.(

*
Issue:* Whether! or! not! the! tieWup! between! the! respondent! San! Jose!
Petroleum,! a! foreign! corporation,! and! San! Jose! Oil! Company,! Inc.,! a!
domestic!mining!corporation,!is!violative!of!the!Constitution,!the!LaurelW!
Langley! Agreement,! the! Petroleum! Act! of! 1949,! and! the! Corporation!
Law.!
*

Held:*YES.!SJ!Petroleum!is!not!accorded!with!Parity!Rights,!which!would!
have!allowed!the!Company!to!interest!in!mining.!
1. It!is!not!owned!or!controlled!directly!by!US!citizens!because!it!is!
owned!and!controlled!by!Panamanian!corporation;!
2. It!is!not!indirectly!owned!and!controlled!by!US!citizens!because!
the!controlling!corporation!is!in!turn!owned!by!two!Venezuelan!
corporations;!
3. Although! the! two! Venezuelan! corporations! claim! to! be! owned!
by!stockholders!residing!in!the!US,!there!is!no!showing!that!said!
stockholders!were!US!citizens;!
4. The! word! indirectly! should! not! be! unduly! stretched! in!
application.!
*
Doctrine:* Our! Constitution! provides! that,! the! exploitation! of! natural!
resources! shall! be! limited! to! citizens! of! the! Philippines! or! to!
corporations! or! associations! at! least! 60%! of! the! capital! of! which! is!
owned!by!such!citizens.!However,!this!right!was!earlier!extended!to!US!

Nature* of* Duties* of* Directors* and* Officers:* Prime( White(


Cement(Corp.(v.(IAC,(220(SCRA(103((1993).(
Prime(White(Cement(Corp.(v.(Intermediate(Appellate(Court(

(
Facts:* Prime! White! Cement! Corp! (PWCC)! thru! its! President! and!
Chairman! of! the! Board! entered! into! a! dealership! agreement! with!
Alejandro! Te,! making! him! the! exclusive! dealer! and/or! distributor! of!
PWCCs! cement! products! in! the! entire! Mindanao! area! for! 5! years.! The!
agreement! is! that! the! price! of! cement! per! bag! (P9.70)! is! fixed! for! the!
entire!5Wyear!period,!and!that!Te!must!sell!20,000!bags!per!month.!
!
Later,!PWCC!through!its!corporate!secretary!informed!Te!that!the!board!
of!directors!decided!to!impose!limitations!on!their!agreement,!including!
limiting! the! period! of! the! dealership! (3! months),! decreasing! allocation!
(8,000!bags)!and!increasing!the!price!per!bag!(P13.30).!Te!demanded!the!
enforcement!of!the!original!dealership!agreement!but!PWCC!refused!to!
comply.!The!latter!even!entered!into!an!exclusive!dealership!agreement!
with!Napoleon!Co!for!the!marketing!of!the!cement!in!Mindanao,!hence!
this!suit.!
*
Issue:! Whether! or! not! the! "dealership! agreement"! referred! by! the!
President!and!Chairman!of!the!Board!of!PWCC!is!a!valid!and!enforceable!
contract.!
*
Held:*NO.!The!general!rules!provided!by!the!Corporate!Law!(in!force!at!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the!time!of!the!case)!as!well!as!the!present!Corporation!Code!!whereby!
the!corporate!powers!are!exercised!by!the!Board!of!Directors!and!may!
be!delegated!to!its!president!or!officers!!cannot!apply!with!the!case!on!
hand,! since! the! said! rules! pertain! to! dealings! with! 3rd! persons! (i.e.!
person! outside! the! corporation).! In! this! case,! Te! was! not! only! an!
ordinary! stockholder! of! PWCC,! but! was! a! member! of! the! Board! of!
Directors!and!Auditor!of!the!corporation.!He!is!what!is!often!referred!to!
as!a!selfWdealing!director.!!
!
Granting! arguendo! that! the! dealership! agreement! involved! here!
would!be!valid!and!enforceable!if!entered!into!with!a!person!other!than!
a!director!or!officer!of!the!corporation,!the!fact!that!the!other!party!to!

his! own! advantage! and! benefit.! As! corporate! managers,! directors! are!
committed!to!seek!the!maximum!amount!of!profits!for!the!corporation.!!

void!or!voidable.!If!the!contract!is!fair!and!reasonable!under!the!
circumstances,!it!may!be!ratified!by!the!stockholders!provided!a!
full!disclosure!of!his!adverse!interest!is!made.!

such,!he!owes!a!duty!of!loyalty!to!his!corporation.!In!case!his!interests!
conflict! with! those! of! the! corporation,! he! cannot! sacrifice! the! latter! to!

Section!32!of!the!Corporation!Code!provides!the!general!rule!as!
well! as! the! exception! on! dealings! of! directors,! trustees! or!
officers! with! the! corporation.! Although! the! old! Corp! Law! does!
not! contain! a! similar! provision,! the! said! provision! incorporates!
wellWsettled!principles!in!corporate!law.!

the! contract! was! a! Director! and! Auditor! of! the! petitioner! corporation!
changes! the! whole! situation.! The! contract! was! neither! fair! nor!
reasonable.!Based!on!the!original!agreement!that!provided!a!flat!rate!of!
P9.70! per! bag! for! 5Wyears,! respondent! Te! must! have! knowledge! that!
within! that! period,! there! would! be! a! considerable! rise! in! the! price! of!
white!cement.!As!director,!respondent!Tes!bounden!duty!was!to!act!in!
such!manner!as!not!to!unduly!prejudice!PWCC.!However,!it!is!quite!clear!
that! he! was! guilty! of! disloyalty! to! the! corporation,! that! he! was!
attempting! in! effect,! to! enrich! himself! at! the! expense! of! the!
corporation.! Furthermore,! there! is! no! showing! that! the! stockholders!
ratified!the!dealership!agreement!or!that!they!were!fully!aware!of!its!
provisions.! The! contract! was! therefore! not! valid! and! this! Court! cannot!
allow!him!to!reap!the!fruits!of!his!disloyalty.!
*
Doctrine:* A! director! of! a! corporation! holds! a! position! of! trust! and! as!

A!director's!contract!with!his!corporation!is!not!in!all!instances!

In!Philippine!jurisdiction,!the!members!of!the!Board!of!Directors!
have!a!threeWfold!duty:!duty!of!obedience,!duty!of!diligence,!and!
the! duty! of! loyalty.! Accordingly,! the! members! of! the! board! of!
directors! (1)! shall! direct! the! affairs! of! the! corporation! only! in!
accordance! with! the! purpose! for! which! it! was! organized;! (2)!
shall! not! willfully! and! knowingly! vote! for! or! assent! to! patently!
unlawful!acts!of!the!corporation!or!act!in!bad!faith!or!with!gross!
negligence! in! directing! the! affairs! of! the! corporation;! and! (3)!
shall! not! acquire! any! personal! or! pecuniary! interest! in! conflict!
with!their!duty!as!such!directors!or!trustees.!Strategic( Alliance(
Dev.( Corp.( v.( Radstock( Securities( Ltd.,( 607( SCRA( 413( (2009),(
citing(VILLANUEVA,(PHILIPPINE(CORPORATE(LAW,(2001,(p.(318.!

!
Strategic(Alliance(Dev.(Corp.(v.(Radstock(Securities(Ltd.(
(
Facts:* The! Construction! Development! Corporation! of! the! Philippines!
(CDCP)! had! a! 30Wyear! franchise! to! construct,! operate! and! maintain! toll!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
facilities! in! the! North! and! South! Luzon! Tollways.! Basay! Mining!
Corporation! (an! affiliate! of! CDCP)! obtained! loans! from! Marubeni!
Corporation!of!Japan!amounting!to!P10!billion,!which!CDCP!guaranteed!
solidarily.! Thereafter,! CDCP! changed! its! corporate! name! to! PNCC! to!
reflect!the!governments!(90.3%)!shareholding!in!the!corporation.!

!
Second.! The! PNCC! Board! admitted! liability! for! the! Marubeni! loans!
despite! PNCCs! total! liabilities! far! exceeding! its! assets.! ! There! is! no!
dispute!that!the!Marubeni!loans,!once!recognized,!would!wipe!out!the!
assets! of! PNCC,! virtually! emptying! the! coffers! of! the! PNCC.! While!

!
The! money! owed! Marubeni! remained! unpaid! and! unacknowledged! for!
20!years.!But!in!October!2000,!PNCC!recognized!this!financial!obligation!
to!Marubeni.!Barely!3!months!after,!Marubeni!assigned!its!entire!credit!
to!Radstock!Corporation!for!less!than!P100!million,!who!in!turn!sought!
to! collect! from! PNCC.! Eventually,! Radstock! and! PNCC! entered! into! the!
compromise! agreement! whereby! PNCC! shall! assign! to! a! third! party!

PNCC! insists! that! it! remains! financially! viable,! the! figures! in! the! COA!
Audit!Reports!tell!otherwise.!
!
Third.!!In!a!debilitating!selfWinflicted!injury,!the!PNCC!Board!revived!what!
appeared! to! have! been! a! dead! claim! by! abandoning! one! of! PNCCs!
strong! defenses,! which! is! the! prescription! of! the! action! to! collect! the!
Marubeni!loans.!In!this!case,!Basay!Mining!obtained!the!Marubeni!loans!

assignee!(designated!by!Radstock)!all!its!rights!and!interests!in!specified!
real! properties! (amounting! to! P6Billion! W! reduced! obligation)! provided!
the! assignee! shall! be! duly! qualified! to! own! real! properties! in! the!
Philippines.! PNCC! shall! also! assign! to! Radstock! 20%! of! the! outstanding!
capital! stock! of! PNCC,! and! 6%! share! in! the! gross! toll! revenue! of! the!
Manila!North!Tollways!Corporation!from!2008W2035.!
*

sometime! between! 1978! and! 1981.! ! While! Radstock! claims! that!


numerous!demand!letters!were!sent!to!PNCC,!based!on!the!records,!the!
extrajudicial!demands!to!pay!the!loans!appear!to!have!been!made!only!
in!1984!and!1986.!Meanwhile,!the!written!acknowledgment!of!the!debt,!
in!the!form!of!Board!Resolution!No.!BDW092W2000,!was!issued!only!on!20!
October!2000.!The!PNCC!Board!admitted!liability!for!the!Marubeni!loans!
despite!the!fact!that!the!same!might!no!longer!be!judicially!collectible.!

Issue:* Whether! or! not! the! PNCC! Board! Acted! in! Bad! Faith! and! with!
Gross!Negligence!in!Directing!the!Affairs!of!PNCC*
*
Held:* YES.! The! PNCC! Board! blatantly! violated! its! duty! of! diligence! as! it!
miserably!failed!to!act!in!good!faith!in!handling!the!affairs!of!PNCC.!!
!
First.!For!almost!two!decades,!the!PNCC!Board!had!consistently!refused!
to! admit! liability! for! the! Marubeni! loans! because! of! the! absence! of! a!

!
Fourth.! The! basis! for! the! admission! of! liability! for! the! Marubeni! loans,!
which! was! an! opinion! of! the! Feria! Law! Office,! was! not! even! shown! to!
the!PNCC!Board.!Atty.!Raymundo!Francisco,!the!Asset!Privatization!Trust!
trustee!overseeing!the!proposed!privatization!of!PNCC!at!the!time,!was!
responsible! for! recommending! to! the! PNCC! Board! the! admission! of!
PNCCs! liability! for! the! Marubeni! loans.! ! Atty.! Francisco! based! his!
recommendation! solely! on! a! mere! alleged! opinion! of! the! Feria! Law!

PNCC! Board! resolution! authorizing! the! issuance! of! the! letters! of!
guarantee.!

Office!W!which!he!did!not!show!to!the!board.!The!PNCC!Board!admitted!
liability! for! the! P10.743! billion! Marubeni! loans! without! seeing,! reading!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
charter! or! by! the! general! law.! Lopez( Realty,( Inc.( v.( Fontecha,(
247(SCRA(183((1995)(

or! discussing! the! Feria! opinion! which! was! the! sole! basis! for! its!
admission! of! liability.! Such! act! surely! goes! against! ordinary! human!
nature,! and! amounts! to! gross! negligence! and! utter! bad! faith,! even!
bordering! on! fraud,! on! the! part! of! the! PNCC! Board! in! directing! the!
affairs! of! the! corporation.! Owing! loyalty! to! PNCC! and! its! stockholders,!

!
C.*Duty*of*Diligence*(Section*31)*
*

the! PNCC! Board! should! have! exercised! utmost! care! and! diligence! in!
admitting! a! gargantuan! debt! that! would! certainly! force! PNCC! into!
insolvency,! a! debt! that! previous! PNCC! Boards! in! the! last! two! decades!
consistently! refused! to! admit.! The! PNCC! Board! knew! that! PNCC,! as! a!
government! owned! and! controlled! corporation! (GOCC),! must! rely!
exclusively!on!the!opinion!of!the!Office!of!the!Government!Corporate!
Counsel!(OGCC),!which!they!did!not!abide!by.!

Section*31.*Liability*of*directors,*trustees*or*officers.*
Directors*or*trustees*who*willfully*and*knowingly*vote*for*or*assent*to*
patently* unlawful* acts* of* the* corporation* or* who* are* guilty* of* gross*
negligence* or* bad* faith* in* directing* the* affairs* of* the* corporation* or*
acquire*any*personal*or*pecuniary*interest*in*conflict*with*their*duty*as*
such* directors* or* trustees* shall* be* liable* jointly* and* severally* for* all*
damages* resulting* therefrom* suffered* by* the* corporation,* its*

!
The!act!of!the!PNCC!Board!in!issuing!Board!Resolution!No.!BDW092W2000!
expressly! admitting! liability! for! the! Marubeni! loans! demonstrates! the!
PNCC! Boards! gross! and! willful! disregard! of! the! requisite! care! and!
diligence! in! managing! the! affairs! of! PNCC,! amounting! to! bad! faith! and!
resulting! in! grave! and! irreparable! injury! to! PNCC! and! its! stockholders.!
This! reckless! and! treacherous! move! on! the! part! of! the! PNCC! Board!

stockholders*or*members*and*other*persons.*
*
When*a*director,*trustee*or*officer*attempts*to*acquire*or*acquires,*in*
violation*of*his*duty,*any*interest*adverse*to*the*corporation*in*respect*
of* any* matter* which* has* been* reposed* in* him* in* confidence,* as* to*
which*equity*imposes*a*disability*upon*him*to*deal*in*his*own*behalf,*
he*shall*be*liable*as*a*trustee*for*the*corporation*and*must*account*for*

clearly!constitutes!a!serious!breach!of!its!fiduciary!duty!to!PNCC!and!its!
stockholders,! rendering! the! members! of! the! PNCC! Board! liable! under!
Section!31!of!the!Corporation!Code.!
*
Doctrine:*See!above.!

the*profits*which*otherwise*would*have*accrued*to*the*corporation.*
*

!
B.*Duty*of*Obedience*

A!corporation,!through!its!Board!of!Directors,!should!act!in!the!
manner! and! within! the! formalities,! if! any,! prescribed! by! its!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Duty!of!Diligence!!!The!directors!must!act!with!due!diligence!in!
all!the!times!that!it!would!bind!the!corporation.(

Exception!to!the!Business!Judgment!Rule:(
o Knowingly!and!willfully!vote!!!This!is!the!default!idea!
about!a!directors!vote,!but!it!may!be!overturned.(
o Patently! unlawful! !! Where! the! directors! made! a!
decision! without! knowledge! that! the! act! was! unlawful,!
they! are! protected! from! being! personally! liable.!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
However,! where! a! person! with! reasonable! sense! is!
supposed!to!know!that!the!act!is!unlawful,!the!directors!
wont!be!protected.(

The! directors! of! the! corporation! shall! be! personally! liable! to!
reimburse! the! corporation! for! the! amounts! of! dividends!
wrongfully!declared!and!paid!to!stockholders,!when!they!failed!
to!consider!that!the!recorded!retained!earnings!in!the!books!of!
the! corporation! was! illusory! considering! the! various! accounts!
receivables!that!had!to!be!written!off!as!uncollectible.!Steinberg(
v.(Velasco,(52(Phil.(953((1929).(

(
Steinberg(v.(Velasco(
(
Facts:*Steinberg!(plaintiff)!was!the!receiver!of!Sibugey!Trading!Company,!
while! Velasco! et.! al! (defendants)! were! the! members! of! the! Board! of!
Directors.! In! 1922,! the! Board! of! Directors! of! Sibugey! authorized! the!
purchase! of,! and! purchased,! 330! shares! of! the! capital! stock! of! the!
corporation! at! the! price! of! P3,300,! and! that! at! the! time! the! purchase,!
the!corporation!was!indebted!in!the!sum!of!P13,807.50,!and!that,!it!had!
accounts! receivable! in! the! sum! of! P19,126.02.! In! the! same! year,! a!
resolution!to!distribute!dividends!amounting!to!P3,000!was!approved!by!
the! board.! In! 1923,! the! petition! was! filed! for! its! dissolution! upon! the!
ground! that! it! was! insolvent,! its! accounts! payable! amounted! to!

and!grossly!ignorant,!and!therefore!should!pay!for!the!losses!
*
Held:*YES.!It!appears!that!the!dividends!were!made!in!installments!so!as!
not!to!affect!the!financial!condition!of!the!corporation.!In!other!words,!
that!the!corporation!did!not!then!have!an!actual!bona!fide!surplus!from!
which! the! dividends! could! be! paid.! As! stated,! the! authorized! capital!
stock! was! P20,000! divided! into! 2,000! shares! of! the! par! value! of! P10!
each,! which! only! P10,030! was! subscribed! and! paid.! Deducting! the!
P3,300!paid!for!the!purchase!of!the!stock,!there!would!be!left!P7,000!of!
paid!up!stock,!from!which!deduct!P3,000!paid!in!dividends,!there!would!
be!left!P4,000!only.!In!this!situation,!it!is!apparent!the!directors!did!not!
act! in! good! faith! or! that! they! were! grossly! ignorant! of! their! duties.! As!
such,!they!are!liable!to!pay.!
*
Doctrine:* Creditors! of! a! corporation! have! the! right! to! assume! that! so!
long!as!there!are!outstanding!debts!and!liabilities,!the!board!of!directors!
will!not!use!the!assets!of!the!corporation!to!purchase!its!own!stock,!and!
that!it!will!not!declare!dividends!to!stockholders!when!the!corporation!
is!insolvent.!

P9,241.19,! and! its! accounts! receivable! P12,512.47.! Stienberg! now!


alleges,!this!was!all,!wrongfully!done!and!in!bad!faith,!and!to!the!injury!
and!fraud!of!its!creditors.!He!now!prays!that!Velasco!et.!al.!pay!the!sums!
of!money!wrongfully!given!to!them!with!interest!and!cost.!
*
Issue:* Whether! or! not! the! board! of! directors! did! not! act! in! good! faith!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

General* Duty* to* Exercise* Reasonable* Care.! The! directors! of! a!


corporation! are! bound! to! care! for! its! property! and! manage! its!
affairs!in!good!faith,!and!for!a!violation!of!these!duties!resulting!
they! will! be! liable! for! damages! cause,! and! that! if! they! act!
beyond! their! power,! and! the! corporation! losses,! or! dispose! of!
its! property! without! authority,! they! will! be! required! to! make!
good!the!loss!out!of!their!private!estates.!

Want* of* Knowledge,* Skill,* or* Competency.!If!directors!commit!


an! error! of! judgment! through! mere! recklessness! or! want! of!
ordinary! prudence! or! skill,! they! may! be! held! liable! for! the!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
consequences.! A! director! is! bound! not! only! to! exercise! proper!
care! and! diligence,! but! ordinary! skill! and! judgment.! As! he! is!
bound!to!exercise!ordinary!skill!and!judgment,!he!cannot!set!up!
that!he!did!not!possess!them.*

Issue:* Whether! or! not! the! directors! neglected! their! duty! by! accepting!
the!cashiers!statement!of!liabilities!and!failing!to!inspect!the!depositors!
ledger!
*
Held:* NO.! The! Court! held! that! the! directors! should! not! be! held!

The! President! being! closer! to! the! operations! of! the! bank! on! a!
dayWtoWday! basis! is! more! liable! for! breach! of! diligence! when!
compared!to!directors!who!must!act!on!the!basis!of!reports!and!

answerable! for! taking! the! cashiers! statement! of! liabilities! to! be! as!
correct!as!the!statement!of!assets!always!was.!The!directors!confidence!
seemed! warranted! by! the! semiWannual! examinations! and! they! were!
encouraged! in! their! belief! that! all! was! well! by! the! president,! whose!
responsibility!and!knowledge!were!greater!than!theirs.!Dresser,!on!the!
other! hand,! was! daily! at! the! bank,! he! had! the! deposit! ledger! in! his!
hands,! and! he! had! hints! and! warning! regarding! the! theft! from! other!

representations! to! them! during! board! meetings.! Bates( v.(


Dresser,(251(U.S.(524,(64(L.(Ed.(388,(40(S.(Ct.(247([1919).(
(
Bates(v.(Dresser(
(
Facts:* Dresser! was! the! president! and! executive! officer,! a! large!
stockholder,! of! the! National! City! Bank! of! Cambridge.! Earl! was! the!
cashier! and! Coleman! was! the! banks! bookkeeper.! An! auditor! reported!
that! the! daily! balance! book! was! very! much! behind,! that! it! was!
impossible! to! prove! the! deposits! and! that! a! competent! bookkeeper!
should!be!employed.!Coleman!kept!the!deposit!ledger!and!this!was!the!
work! that! fell! into! his! hands.! Coleman! then! acted! as! paying! and!
receiving! teller,! in! addition! to! his! other! duty.! Later,! Coleman! began! a!
series!of!thefts!which!he!effectively!hid!from!the!Board!of!Directors!who!
attributed! the! decline! of! monthly! deposits! to! competition! with! rival!
banks.! The! banks! semiWannual! examinations! by! national! bank!
examiners!found!nothing!that!would!raise!suspicion.!The!directors!also!
relied!on!the!cashier!since!he!was!an!honest!man.!However,!if!only!Earl!
had! opened! the! envelopes! that! came! from! the! clearinghouse,! he!
wouldve!discovered!the!fraud.!
*

employees! of! the! bank.! In! accepting! the! presidency,! Dresser! must! be!
taken! to! have! contemplated! responsibility! for! losses! to! the! bank,! if!
chargeable! to! his! fault.! Those! that! happened! was! chargeable! to! his!
fault,! after! he! had! warnings! that! should! have! led! to! steps! that! would!
have!made!the!fraud!impossible.!
*
Doctrine:* The! directors! were! not! bound! by! virtue! of! the! office!
gratuitously! assumed! by! them! to! call! in! the! passbooks! and! compare!
them! with! the! ledger,! and! until! the! event! showed! the! possibility! they!
hardly!could!have!seen!that!their!failure!to!look!at!the!ledger!opened!a!
way!to!fraud.(
(

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Although! directors! have! the! protection! of! the! business!


judgment!rule!against!personal!liability!for!decisions!that!cause!
damage! to! the! corporation,! such! protection! is! available! only!
when! they! act! or! decide! based! on! an! informed! judgment! and!
not! merely! accept! the! representations!and!reports! of! the! CEO.!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Smith( v.( Van( Gorkam,( 488( A.2d( 858,( Supreme( Court( of(
Delaware,(1985).!
!
Smith(v.(Van(Gorkam(
(

duty!by!their!failure!to!inform!themselves!of!all!information!reasonably!
available! to! them! and! relevant! to! their! decision! to! recommend! the!
merger.!Van!Gorkom!breached!his!duty!to!care!by!offering!$55!a!share!
because,! the! record! is! devoid! of! any! competent! evidence! that! $55!
represented!the!per!share!intrinsic!value!of!the!Company.!The!business!

Facts:* Trans! Union! was! suffering! a! tax! credit! problem! prompting! Van!
Gorkom! to! sell! his! shares! but! eventually! negotiated! to! involve! all! the!
stocks! of! Trans! Union.! A! corporation! called! Marmon! was! attempting! a!
leverage!buyWout!of!Trans!Union.!Van!Gorkom!proposed!a!price!of!$55!a!
share.!Van!Gorkom!and!his!CFO!didnt!bother!to!do!any!research!to!see!
how! much! the! company! was! actually! worth.! He! didnt! even! inform!
Trans! Unions! legal! department! about! the! transaction.! Later,! it! was!

judgment!rule!was!not!a!defense!because!the!directors!and!Van!Gorkom!
didnt!use!any!business!judgment!when!they!came!to!their!decision.!
*
Doctrine:*In!order!to!hide!behind!the!business!judgment!rule,!you!have!
to!show!that!you!made!an!informed!decision!based!on!some!principle!of!
business.!

found!that!the!value!of!$55!was!only!about!60%!of!what!the!company!
was!worth.!!Van!Gorkom!called!an!emergency!meeting!of!the!board!of!
directors,! proposed! the! merger,! and! the! directors! gave! preliminary!
approval.! In! the! meeting,! Van! Gorkom! did! not! disclose! that! there! was!
no!basis!for!the!$55!price!and!that!there!had!been!objections!by!Trans!
Union! management! regarding! the! merger.! Neither! did! he! provide! the!
directors!with!copies!of!the!merger!agreement.!The!directors!eventually!

decision,! the! directors! of! a! corporation! acted! on! an! informed!


basis,! in! good! faith! and! in! the! honest! belief! that! the! action!
taken! was! in! the! best! interests! of! the! company.! ...Thus,! the!
party!attacking!a!board!decision!as!uninformed!must!rebut!the!

recommended! that! the! shareholders! approve! the! merger! even! though!


they!did!not!really!learn!if!the!terms!of!the!merger!were!a!good!deal!for!
the!company.!The!Appellate!Court!found!that!the!directors!were!grossly!
negligent!because!they!approved!the!merger!without!substantial!inquiry!
or!any!expert!advice.!Therefore!they!breached!their!duty!to!care.*
*
Issue:* Whether! or! not! the! actions! of! Van! Gorkom! and! the! board! is!
protected!by!the!Business!Judgement!Rule!Doctrine.!

The! rule! itself! is! a! presumption! that! in! making! a! business!

presumption!that!its!business!judgment!was!an!informed!one.!
Under! the! business! judgment! rule! there! is! no! protection! for!
directors! who! have! made! an! unintelligent! or! unadvised!
judgment.! Basically,! the! actual! decision! is! not! so! important,!
what! the! courts! will! look! to! is! whether! there! was! an! adequate!
decisionWmaking!process.!
!

*
Held:* NO.! The! Court! found! that! the! directors! breached! their! fiduciary!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

For!wrongdoing!to!make!a!director!personally!liable!for!debts!of!
the! corporation,! the! wrongdoing! approved! or! assented! to! by!
the! director! must! be! a! patently! unlawful! act.! Mere! failure! to!
comply! with! the! notice! requirement! of! labor! laws! on! company!
closure! or! dismissal! of! employees! does! not! amount! to! a!
patently!unlawful!act.!Patently!unlawful!acts!are!those!declared!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
unlawful!by!law!which!imposes!penalties!for!commission!of!such!
unlawful! acts.! There! must! be! a! law! declaring! the! act! unlawful!
and!penalizing!the!act.!Carag(v.(NLRC,(520(SCRA(28((2007);(Dy^
Dumalasa(v.(Fernandez,(593(SCRA(656((2009).(

Holding! a! corporate! officer! personally! liable! for! directing! the!


corporate!affairs!with!gross!negligence!or!in!bad!faith!does!not!
amount!to!an!application!of!the!doctrine!of!piercing!the!veil!of!
corporate! fiction,! for! such! personal! liability! is! imposed! directly!
under! Section! 31! to! directors! and! officers! of! corporation! who!
are! guilty! of! violating! their! duty! of! diligence.! Sanchez( v.(
Republic,(603(SCRA(229((2009).(

!
D.*Duty*of*Loyalty*(Sections*31*to*34)*
*
Section* 32.* Dealings* of* directors,* trustees* or* officers* with* the*
corporation.*
A* contract* of* the* corporation* with* one* or* more* of* its* directors* or*
trustees* or* officers* is* voidable,* at* the* option* of* such* corporation,*
unless*all*the*following*conditions*are*present:*
*
1.*That*the*presence*of*such*director*or*trustee*in*the*board*meeting*in*
which* the* contract* was* approved* was* not* necessary* to* constitute* a*
quorum*for*such*meeting;*
*
2.*That*the*vote*of*such*director*or*trustee*was*not*necessary*for*the*
approval*of*the*contract;*
*
3.* That* the* contract* is* fair* and* reasonable* under* the* circumstances;*
and*

*
4.* That* in* case* of* an* officer,* the* contract* has* been* previously*
authorized*by*the*board*of*directors.*
*
Where* any* of* the* first* two* conditions* set* forth* in* the* preceding*
paragraph* is* absent,* in* the* case* of* a* contract* with* a* director* or*
trustee,*such*contract*may*be*ratified*by*the*vote*of*the*stockholders*
representing*at*least*twoTthirds*(2/3)*of*the*outstanding*capital*stock*
or*of*at*least*twoTthirds*(2/3)*of*the*members*in*a*meeting*called*for*
the* purpose:* Provided,* That* full* disclosure* of* the* adverse* interest* of*
the*directors*or*trustees*involved*is*made*at*such*meeting:*Provided,*
however,* That* the* contract* is* fair* and* reasonable* under* the*
circumstances.*
*
Section* 33.* Contracts* between* corporations* with* interlocking*
directors.*
Except* in* cases* of* fraud,* and* provided* the* contract* is* fair* and*
reasonable*under*the*circumstances,*a*contract*between*two*or*more*
corporations* having* interlocking* directors* shall* not* be* invalidated* on*
that* ground* alone:* Provided,* That* if* the* interest* of* the* interlocking*
director*in*one*corporation*is*substantial*and*his*interest*in*the*other*
corporation* or* corporations* is* merely* nominal,* he* shall* be* subject* to*
the* provisions* of* the* preceding* section* insofar* as* the* latter*
corporation*or*corporations*are*concerned.*
*
Stockholdings* exceeding* twenty* (20%)* percent* of* the* outstanding*
capital* stock* shall* be* considered* substantial* for* purposes* of*
interlocking*directors.*
*

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Section*34.*Disloyalty*of*a*director.*
Where*a*director,*by*virtue*of*his*office,*acquires*for*himself*a*business*
opportunity* which* should* belong* to* the* corporation,* thereby*
obtaining*profits*to*the*prejudice*of*such*corporation,*he*must*account*
to*the*latter*for*all*such*profits*by*refunding*the*same,*unless*his*act*

Facts:*John!Gokongwei,!a!stockholder!of!San!Miguel!Corporation!(and!a!
president! and! stockholder! of! Robina! Corp.! and! Consolidated! Foods!
Corp.,!a!competitor!of!SMC,!in!various!areas,!such!as!Instant!Coffee,!Ice!
Cream,! Poultry! and! Hog! Feeds! and! many! more),! filed! a! petition! for!
declaration!of!nullity!of!amended!byWlaws,!cancellation!of!certificate!of!

has*been*ratified*by*a*vote*of*the*stockholders*owning*or*representing*
at* least* twoTthirds* (2/3)* of* the* outstanding* capital* stock.* This*
provision* shall* be* applicable,* notwithstanding* the* fact* that* the*
director*risked*his*own*funds*in*the*venture.*

filing! of! the! amendedWby! laws,! injunction! and! damages! against! the!
majority!of!the!members!of!the!Board!of!Directors!of!the!SMC!based!on!
the!following!grounds:!

It!is!well!established!that!corporate!officers!are!not!permitted!to!
use! their! position! of! trust! and! confidence! to! further! their!
private! interests.! The! doctrine! of! corporate! opportunity! is!
precisely!recognition!by!the!courts!that!the!fiduciary!standards!
could! not! be! upheld! where! the! fiduciary! was! acting! for! two!
entities! with! competing! interest.! The! doctrine! rest!
fundamentally!on!the!unfairness,!in!particular!circumstances,!of!
an!officer!or!director!taking!advantage!of!an!opportunity!for!his!
personal!profit!when!the!interest!of!the!corporation!justly!calls!
for!protection.!Gokongwei(v.(SEC,(89(SCRA(336((1979).(

(
Gokongwei(v.(SEC(
(

stockholder!from!being!elected!as!director!depriving!him!of!his!
vested!right!because!he!is!an!officer!of!a!competitor!company.!

Duty! of! Loyalty! !! the! directors! must! act! primarily! for! the!

interest! of! the! corporation.! The! directors! may! pursue! personal!


endeavors! provided! these! do! not! conflict! with! the! interest! of!
the!corporation.*
1. Doctrine*of*Corporate*Opportunity.*
2. Using*Inside*Information*

Corporations! have! no! inherent! power! to! disqualify! a!

The! corporation! has! been! investing! corporate! funds! in! other!


corporations!and!business!outside!of!the!primary!purpose!of!the!

corporation!
!
Issue:! Whether! or! not! the! corporation! has! the! power! to! disqualify! a!
competitor!from!being!elected!to!the!board!of!directors!as!a!reasonable!
exercise!of!corporate!authority!
*
Held:* YES.! It! is! well! established! that! corporate! officers! "are! not!
permitted!to!use!their!position!of!trust!and!confidence!to!further!their!
private! interests."! It! is! not! denied! that! a! member! of! the! Board! of!
Directors! of! the! San! Miguel! Corporation! has! access! to! sensitive! and!
highly! confidential! information,! such! as:! (a)! marketing! strategies! and!
pricing! structure;! (b)! budget! for! expansion! and! diversification;! (c)!
research! and! development;! and! (d)! sources! of! funding,! availability! of!
personnel,!proposals!of!mergers!or!tieWups!with!other!firms.!!
!
It!is!obviously!to!prevent!the!creation!of!an!opportunity!for!an!officer!or!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
director!of!San!Miguel!Corporation,!who!is!also!the!officer!or!owner!of!a!
competing!corporation,!from!taking!advantage!of!the!information!which!
he!acquires!as!director!to!promote!his!individual!or!corporate!interests!
to!the!prejudice!of!San!Miguel!Corporation!and!its!stockholders,!that!the!
questioned!amendment!of!the!byWlaws!was!made.!Certainly,!where!two!
corporations! are! competitive! in! a! substantial! sense,! it! would! seem!
improbable,! if! not! impossible,! for! the! director,! if! he! were! to! discharge!
effectively!his!duty,!to!satisfy!his!loyalty!to!both!corporations!and!place!
the!performance!of!his!corporation!duties!above!his!personal!concerns.*
*
Doctrine:*See!above.(
(

When!a!directorWmajority!stockholder,!who!is!the!administrator!
of! corporate! affairs! directly! negotiating! the! sale! of! corporate!
landholdings! to! the! Government! at! great! prices,! purchases! the!
stocks! of! a! shareholder! without! informing! the! latter! of! the! onW
going!negotiations,!such!director!is!deemed!to!have!fraudulently!
acquired!the!shareholdings!by!way!of!deceit!practiced!by!means!
of! concealing! his! knowledge! of! important! corporate! affairs.!
Strong(v.(Repide,(41(Phil.(947((1909).(

Doctrine! of! corporate! opportunity! applies! to! confidential!


employees!of!the!corporation.!cf.(Sing(Juco(v.(Llorente,(43(Phil.(
589((1922).(

!
E.*Duty*to*Creditors*and*Outsiders*

Under! the! trust! fund! doctrine,! it! would! be! a! violation! of! the!
right!of!creditors!to!allow!the!return!to!the!stockholders!of!any!
portion! of! their! capital! or! declare! dividends! outside! of! the!
unrestricted! retained! earnings.! Also! upon! insolvency! of! the!

corporation,!the!Board!of!Directors!are!duty!bound!to!hold!the!
assets! of! the! corporation! primarily! for! the! payment! of! the!
creditors.!Mead(v.(McCullough,(21(Phil.(95((1911).(
(
Mead(v.(McCullough(
(
Facts:*The!complaint!contains!three!causes!of!action!one!of!which!is!for!
the!value!of!the!personal!effects!alleged!to!have!been!left!by!Mead!and!
sold!by!the!defendants.!The!parties!organized!the!Philippine!Engineering!
&!Construction!Co.!(PECC)!by!giving!$2000!Mexican!currency!cash!each,!
except!for!Mead!who!contributed!property.!Mead!was!also!the!general!
manager! until! he! resigned! to! accept! employment! with! the! Canton! &!
Shanghai!Railway!Co.!
!
Several! contracts! entered! by! Mead! as! general! manager! failed,!
specifically!a!wrecking!contract!with!the!navy.!Because!of!these!failures,!
the! board! voted! to! sell! all! the! rights! and! interests! of! PECC! to! the!
wrecking! contract! in! favor! of! McCullough! (along! with! some! of! Meads!
personal! effects).! McCullough! then! incorporated! a! new! company,!
Manila!Salvage!Association,!and!transferred!all!his!rights!and!interests!to!
the!contract!to!MSA.!Mead!alleges!that!these!were!done!in!bad!faith.!
!
Issue:*Whether!or!not!the!sale!or!transfer!to!McCullough!of!the!assets!of!
said! corporation! was! done! within! the! laws! and! powers! of! the!
corporation.!
*
Held:* YES.! A! private! corporation,! which! owes! no! special! duty! to! the!
public! and! which! has! not! been! given! the! right! of! eminent! domain,! has!
absolute!right!and!power!as!against!the!whole!world!except!the!state,!to!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
sell! and! dispose! of! all! of! its! property.! A! transaction! done! in! good! faith!
which! achieves! substantial! justice! cannot! be! disturbed! based! on! mere!
suspicions.!!
*
Doctrine:*Generally!speaking,!the!voice!of!a!majority!of!the!stockholders!
is!the!law!of!the!corporation,!but!there!are!exceptions!to!this!rule.!There!
must! necessarily! be! a! limit! upon! the! power! of! the! majority.! Without!
such! a! limit! the! will! of! the! majority! would! be! absolute! and! irresistible!
and!might!easily!degenerate!into!an!arbitrary!tyranny.!Notwithstanding!
these! limitations! upon! the! power! of! the! majority! of! the! stockholders,!
their! (the! majoritys)! resolutions,! when! passed! in! good! faith! and! for! a!
just!cause,!deserve!careful!consideration!and!are!generally!binding!upon!

directors! resulting! in! the! prejudice! to! one! of! the! corporation,!
has!no!application!to!cases!where!fraud!is!alleged!to!have!been!
committed!to!third!parties.!DBP(v.(Court(of(Appeals,(363(SCRA(
307((2001).(
*
H.* SEC* Revised* Code* of* Corporate* Governance* (SEC* Memorandum.*
Circular*No.*6,*s.*2009)*

companies!who!actually!offer!you!nothing!since!nothing!
is!backing!them!up.*

the!minority.(

(
F.*Corporate*Dealings*with*Directors*and*Officers*(Section*32)*

dealings! by! directors/trustees! and! officers! merely! incorporate!


wellWestablished! principles! in! Corporate! Law.! A! director! who!
enters! into! a! distributorship! agreement! with! the! corporation!
would! make! the! contract! voidable! at! the! option! of! the!
corporation! especially! when! the! terms! are! disadvantageous! to!
the!corporation.!The!director!cannot!claim!the!same!doctrine!as!
an! outsider! dealing! in! good! faith! with! the! corporation.! Prime(
!
G.* Contracts* Between* Corporations* with* Interlocking* Directors*
(Section*33)*

SEC! Revised! Code! of! Corporate! Governance! !! applies! to!


specific! corporations! whose! securities! are! registered! in! the!
stock! exchange;! they! are! large! companies! with! a! lot! of! public!
shareholders.*
o The!SEC!hopes!to!protect!the!public!from!possible!fraud!
that! large! companies! may! commit! in! the! process! of!
gathering!investments.*
o These! large! companies! must! have! at! least! two!
independent!directors!able!to!police!the!activities!of!the!

The! provisions! of! Section! 32! of! the! Corporation! Code! on! selfW

White(Cement(Corp.(v.(IAC,(220(SCRA(103((1993).(

Securities!Regulation!Code!was!issued!pursuance!to!a!mandate!
of!the!SEC.*
o Blue! Sky! Law! !! To! secure! you! from! being! misled! by!

corporation! (not! merely! a! puppet! of! the! shareholders)!


and!must!be!very!transparent.*
*
XII.*CORPORATE*OFFICERS*

The! rule! under! Section! 33! of! Corporation! Code! allowing!


annulment!of!contracts!between!corporations!with!interlocking!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! general! principles! of! agency! govern! the! relation! between!


the!corporation!and!its!officers!or!agents,!subject!to!the!articles!
of!incorporation,!byWlaws,!or!relevant!provisions!of!law!!when!
authorized,!their!acts!bind!the!corporation,!otherwise,!their!acts!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
cannot!bind!it.!Yasuma(v.(Heirs(of(Cecilio(S.(De(Villa,(499(SCRA(
466((2006);(Litonjua(v.(Eternit(Corp.,(490(SCRA(204((2006).(
!
A.*Powers*of*Corporate*Officers:*

Just! as! a! natural! person! may! authorize! another! to! do! certain!
acts! for! and! on! his! behalf,! the! Board! of! Directors! may! validly!
delegate! some! of! its! functions! and! powers! to! officers,!
committees! or! agents! ! the! authority! of! such! individuals! to!
bind! the! corporation! is! generally! derived! from! law,! corporate!
byWlaws! or! authorization! from! the! board,! either! expressly! or!
impliedly! by! habit,! custom! or! acquiescence! in! the! general!
course! of! business.! Cebu( Mactan( Members( Center( Inc.( v.(
Tsukahara,(593(SCRA(172((2009).!While!it!is!a!general!rule!that,!
in! the! absence! of! authority! from! the! board! of! directors,! no!
person,!not!even!its!officers,!can!validly!bind!a!corporation,!the!
Board!may!validly!delegate!some!of!its!functions!and!powers!to!
its! officers,! committee! and! agents.! Associated( Bank( v.(
Pronstroller,(558(SCRA(113((2008).1(
(

Associated(Bank(v.(Pronstroller(
(
Facts:* The! Spouses! Vaca! executed! a! Real! Estate! Mortgage! in! favor! of!
Associated!Bank!over!their!parcel!of!residential!land!in!Green!Meadows!
Subdivision.! Eventually,! the! property! was! foreclosed! and! sold! at! public!
auction!with!Associated!Bank!as!the!highest!bidder.!However,!the!Vacas!
commenced! an! action! for! the! nullification! of! the! real! estate! mortgage!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Yu! Chuck! v.! Kong! Li! Po,! 46! Phil.! 608,! 614! (1924);! Cebu! Mactan! Members!
Center!Inc.!v.!Tsukahara,!593!SCRA!172!(2009).!

and! the! foreclosure! sale.! Pending! its! resolution! in! the! Supreme! Court,!
Associated!Bank!negotiated!with!the!Spouses!Pronstroller!through!Atty.!
Jose! Soluta,! the! banks! Vice! President! and! member! of! its! Board! of!
Directors.! Letter! agreements! were! executed! whereby! the! Spouses!
Pronstrollers! would! give! a! downpayment! (first! letter! agreement),! and!
then!given!an!extension!to!pay!the!balance!which!would!be!given!upon!
delivery!of!the!property!subsequent!to!the!resolution!of!the!Vaca!case!
with!such!property!being!free!from!occupants!(embodied!in!the!second!
letter! agreement).! Later,! the! bank! reorganized! its! management! and!
Atty.! Dayday! replaced! Atty.! Soluta.! Atty.! Dayday! informed! Spouses!
Pronstroller! that! their! deposit! would! be! forfeited! because! the! second!
letter!agreement!was!a!mistake!because!Atty.!Soluta!had!no!authority!to!
give!an!extension.!
*
Issue:* Whether! or! not! Associated! Bank! is! bound! by! the! LetterW
Agreement! signed! by! Atty.! Soluta! under! the! doctrine! of! apparent!
authority.!
*
Held:* YES.! Undoubtedly,! the! Associated! Bank! had! previously! allowed!
Atty.!Soluta!to!enter!into!the!first!agreement!without!a!board!resolution!
expressly! authorizing! him;! thus,! it! had! clothed! him! with! apparent!
authority!to!modify!the!same!via!the!second!letterWagreement.!It!is!not!
the! quantity! of! similar! acts! which! establishes! apparent! authority,! but!
the! vesting! of! a! corporate! officer! with! the! power! to! bind! the!
corporation.!
*
Doctrine:*The!general!rule!is!that,!in!the!absence!of!authority!from!the!
board! of! directors,! no! person,! not! even! its! officers,! can! validly! bind! a!
corporation.! The! power! and! responsibility! to! decide! whether! the!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
bind! the! corporation,! unless! it! has! ratified! such! acts! or! is!
estopped! from! disclaiming! them.! Reyes( v.( RCPI( Employees(
Credit(Union,(Inc.,(499(SCRA(319((2006).(

corporation!should!enter!into!a!contract!that!will!bind!the!corporation!is!
lodged!in!the!board!of!directors.!However,!just!as!a!natural!person!may!
authorize! another! to! do! certain! acts! for! and! on! his! behalf,! the! board!
may! validly! delegate! some! of! its! functions! and! powers! to! officers,!
committees!and!agents.(

in! writing.! Contracts! entered! into! by! a! corporate! officer! or!


obligations! or! prestations! assumed! by! such! officer! for! and! in!
behalf! of! such! corporation! are! binding! on! the! said! corporation!
only!if!such!officer!acted!within!the!scope!of!his!authority!or!if!
such!officer!exceeded!the!limits!of!his!authority,!the!corporation!
has! ratified! such! contracts! or! obligations.! Kwok( v.( Philippine(

While! the! Court! agrees! that! those! who! belong! to! the! upper!
corporate! echelons! would! have! more! privileges,! it! cannot! be!
presume! the! existence! of! such! privileges! or! benefitshe! who!
claims!the!same!is!burdened!to!prove!not!only!the!existence!of!
such! benefits! but! also! that! he! is! entitled! to! the! same.!Kwok( v.(
Philippine(Carpet(Manufacturing(Corp.,(457(SCRA(465((2005).(

An! officers! power! as! an! agent! of! the! corporation! must! be!
sought!from!the!statute,!charter,!the!byWlaws!or!in!a!delegation!
of! authority! to! such! officer,! from! the! acts! of! the! board! of!
directors!formally!expressed!or!implied!from!a!habit!or!custom!
of! doing! business.! Vicente( v.( Geraldez,( 52( SCRA( 210( (1973);(
Boyer^Roxas(v.(Court(of(Appeals,(211(SCRA(470((1992).!

Carpet(Manufacturing(Corp.,(457(SCRA(465((2005).(
2. President.*Peoples(Aircargo(v.(Court(of(Appeals,(297(SCRA(170(
(1998).(

Even! though! a! judgment,! decree! or! order! is! addressed! to! the!

corporation! only,! the! officers! as! well! as! the! corporation! itself,!
may!be!punished!for!contempt!for!disobedience!to!its!terms,!at!
least! if! they! knowingly! disobey! the! courts! mandate,! since! a!
lawful!judicial!command!to!a!corporation!is!in!effect!a!command!
to!the!officers.!Heirs(of(Trinidad(de(Leon(Vda.(De(Roxas(v.(Court(
of(Appeals,(422(SCRA(101((2004).(
1. Rule*on*Corporate*Officers*Power*to*Bind*Corporation*

As!a!general!rule,!the!acts!of!corporate!officers!within!the!scope!
of! their! authority! are! binding! on! the! corporation,! but! when!
these! officers! exceeded! their! authority,! their! actions! cannot!

Doctrine*of*Apparent*Authority:!Corporate!policies!need!not!be!

Requisites:!Member!of!the!Board!of!Directors!and!must!possess!
at!least!one!share(

*
Peoples*Aircargo*v.*Court*of*Appeals*
(
Facts:*Peoples!Aircargo!is!a!domestic!corporation,!which!was!organized!
in! the! middle! of! 1986! to! operate! a! customs! bonded! warehouse.! ! To!
obtain! a! license! for! the! corporation! from! the! Bureau! of! Customs,!
Antonio! Punsalan! Jr.,! the! corporation! president,! solicited! a! proposal!
from! Stefano! Sano! (who! was! preferred! because! of! his! membership! in!
the!task!force!supervising!the!transition!of!the!bureau!from!the!Marcos!
to! the! Aquino! Government)! for! a! feasibility! study.! This! constituted! the!
First! Contract! for! which! Sano! was! paid! for.! On! December! 1086,! a!
Second! Contract,! this! time! for! consultancy! services,! was! made! upon!
Punsalans! request.! The! consultancy! services! included! an! Operations!
Manual!and!Seminar/Workshop!for!the!employees!of!Peoples!Aircargo.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Sano!was!not!paid!for!the!2nd!contract!so!he!filed!a!collection!case.!By!
this! time,! Punsalan! had! sold! his! shares! and! resigned! as! president.!
Peoples! Aircargo! denied! that! Sano! conducted! Consultancy! services.! It!
alleged!that!the!contract!entered!into!between!Sano!and!Punsalan!was!
without!authority.*

acts,!and!thus,!the!corporation!will,!as!against!anyone!who!has!
in!good!faith!dealt!with!it!through!such!agent,!be!estopped!from!
denying!the!agents!authority.!
*

*
Issue:*Whether!or!not!Punsalan,!as!president,!has!apparent!authority!to!
enter!into!the!second!contract!that!could!bind!the!corporation*
*
Held:! YES.! Since! the! corporation! had! previously! allowed! Punsalan! to!
enter! into! the! first! contract! with! Sano! without! a! board! resolution!
expressly! authorizing! him,! thus,! it! had! clothed! its! president! with!
apparent! authority! to! execute! the! Second! Contract.! Furthermore,!
private! respondent! prepared! an! operations! manual! and! conducted! a!
seminar! for! the! employees! of! petitioner! in! accordance! with! their!
contract.!Petitioner!accepted!the!operations!manual,!submitted!it!to!the!
Bureau! of! Customs! and! allowed! the! seminar! for! its! employees.! As! a!
result!of!this,!petitioner!was!given!by!the!Bureau!of!Customs!a!license!to!
operate!a!bonded!warehouse.!Even!if!the!Second!Contract!was!outside!
the! usual! powers! of! the! president,! petitioners! ratification! of! said!
contract!and!acceptance!of!benefits!have!made!it!binding,!nonetheless.!
*
Doctrine:* Contracts! entered! into! by! a! corporate! president! without!
express!prior!board!approval!bind!the!corporation,!when!such!officers!
apparent!authority!is!established!and!when!these!contracts!are!ratified!
by!the!corporation.!

If! a! corporation! knowingly! permits! one! of! its! officers,! or! any!
other!agent,!to!act!within!the!scope!of!an!apparent!authority,!it!
holds!him!out!to!the!public!as!possessing!the!power!to!do!those!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

It! is! the! Board! of! Directors,! not! the! President,! that! exercises!
corporate! powers.! It! must! be! emphasized! that! the! basis! for!
agency!is!representation!and!a!person!dealing!with!an!agent!is!
put!upon!inquiry!and!must!discover!upon!his!peril!the!authority!
of! the! agent.! Safic( Alcan( &( Cie( v.( Imperial( Vegetable( Oil( Co.,(
Inc.,(355(SCRA(559((2001).!

A! corporation! may! not! distance! itself! from! the! acts! of! a! senior!
officer:! "the! dual! roles! of! Romulo! F.! Sugay! should! not! be!
allowed!to!confuse!the!facts."!R.F.(Sugay(v.(Reyes,(12(SCRA(700(
(1961).(

The! President! is! considered! as! the! corporations! agent,! and! as!
such,! his! knowledge! of! the! repeal! of! a! resolution! in! another!
juridical! person! in! which! his! corporation! has! an! interest,! is!
ascribed! to! his! principal! under! the! theory! of! imputed!
knowledge.! Rovels( Enterprises,( Inc.( v.( Ocampo,( 392( SCRA( 176(
(2002).(

The! President! of! the! corporation! which! becomes! liable! for! the!

accident! caused! by! its! truck! driver! cannot! be! held! solidarily!
liable!for!the!judgment!obligation!arising!from!quasiWdelict,!since!
the! fact! alone! of! being! President! is! not! sufficient! to! hold! him!
solidarily! liable! for! the! liabilities! adjudged! against! the!
corporation! and! its! employee.!Secosa( v.( Heirs( of( Erwin( Suarez(
Fancisco,(433(SCRA(273((2004).(
3. Corporate*Secretary*

Requisite:!Resident!and!citizen!of!the!Philippines(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

The!corporate!secretary!can!be!a!member!of!the!Board!
of!Directors!since!there!is!no!prohibition!for!such.(

In! the! absence! of! provisions! to! the! contrary,! the! corporate!

4. Corporate*Treasurer*

Requirement:!May!or!may!not!be!a!director(

A!corporate!treasurers!function!have!generally!been!described!
as! to! receive! and! keeps! funds! of! the! corporation,! and! to!
disburse! them! in! accordance! with! the! authority! given! him! by!
the! board! or! the! properly! authorized! officers.! Unless! duly!

secretary!is!the!custodian!of!corporate!records!!he!keeps!the!
stock! and! transfer! book! and! makes! proper! and! necessary!
entries! therein.! It! is! his! duty! and! obligation! to! register! valid!
transfers! of! stock! in! the! books! of! the! corporation;! and! in! the!
event! he! refuses! to! comply! with! such! duty,! the! transferorW
stockholder! may! rightfully! bring! suit! to! compel! performance.!
Torres,(Jr.(v.(Court(of(Appeals,(278(SCRA(793((1997).(

Although! the! corporate! secretarys! duty! to! record! transfers! of!


stock!is!ministerial,!he!cannot!be!compelled!to!do!so!when!the!
transferees!title!to!said!shares!has!no!prima!facie!validity!or!is!
uncertain.!More!specifically,!a!pledgor,!prior!to!foreclosure!and!
sale,!does!not!acquire!ownership!rights!over!the!pledged!shares!
and! thus! cannot! compel! the! corporate! secretary! to! record! his!
alleged! ownership! of! such! shares! on! the! basis! merely! of! the!
contract!of!pledge.!Mandamus!will!not!issue!to!establish!a!right,!
but! only! to! enforce! one! that! is! already! established.! Lim( Tay( v.(
Court(of(Appeals,(293(SCRA(634((1998);(TCL(Sales(Corp.(v.(Court(
of(Appeals,(349(SCRA(35((2001).(

A!sale!that!fails!to!comply!with!Section!40!of!Corporation!Code,!
cannot!be!invalidated!when!the!buyer!relies!upon!a!Secretarys!
Certificate! confirming! authority.! A! secretarys! certificate! which!
is! regular! on! its! face! can! be! relied! upon! by! a! third! party! who!
does!not!have!to!investigate!the!truths!of!the!facts!contained!in!
such! certification;! otherwise! business! transactions! of!
corporations! would! become! tortuously! slow! and! unnecessarily!
hampered.!Esguerra(v.(Court(of(Appeals,(267(SCRA(380((1997).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

authorized,! a! treasurer,! whose! power! are! limited,! cannot! bind!


the!corporation!in!a!sale!of!its!assets,!which!obviously!is!foreign!
to!a!corporate!treasurers!function.!San(Juan(Structural(v.(Court(
of(Appeals,(296(SCRA(631,(645((1998).(

A! corporate! treasurer! whose! negligence! in! signing! a!

confirmation!letter!for!rediscounting!of!crossed!checks,!knowing!
fully!well!that!the!checks!were!strictly!endorsed!for!deposit!only!
to!the!payees!account!and!not!to!be!further!negotiated,!may!be!
personally! liable! for! the! damaged! caused! the! corporation.!
Atrium( Management( Corp.( v.( Court( of( Appeals,( 353( SCRA( 23(
(2001).(
5. Manager*

Although!a!branch!manager!of!a!bank,!within!his!field!and!as!to!
third! persons,! is! the! general! agent! and! is! in! general! charge! of!
the! corporation,! with! apparent! authority! commensurate! with!
the! ordinary! business! entrusted! him! and! the! usual! course! and!
conduct!thereof,!yet!the!power!to!modify!contracts!of!the!bank!
remains! generally! with! the! board! of! directors.! Being! a! branch!
manager!alone!is!insufficient!to!support!the!conclusion!that!he!
has! been! clothed! with! apparent! authority! to! verbally! alter!
terms! of! the! banks! written! contract,! such! as! the! mortgage!
contract.! Banate( v.( Philippine( Countryside( Rural( Bank( (Liloan,(
Cebu),(Inc.,(625(SCRA(21((2010).(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
!
B.*POWER*OF*THE*BOARD*TO*APPOINT*AND*TERMINATE*CORPORATE*
OFFICERS**

The!law!does!not!expressly!indicate!a!limit!over!the!term!of!the!

corporate!officers.!But!it!seems!they!should!serve!for!a!term!of!
one!year!so!that!the!next!set!of!directors!will!not!be!precluded!
from!appointing!a!new!set!of!corporate!officers.*
1. Who*Is*a*Corporate*Officer?*(Section*25)*

Corporate!officers!in!the!context!of!P.D.!No.!902WA!are!those!
officers!of!the!corporation!who!are!given!that!character!by!the!
Corporation! Code! or! by! the! corporations! byWlaws.! Gurrea( v.(
Lezama,(103(Phil.(553((1958).1(

(
Gurrea(v.(Lezama(
(
Facts:*Gurrea!sought!to!have!Resolution!No.!65!of!the!Board!of!Directors!
of!the!La!Paz!Ice!Plant!and!Cold!Storage!Co.,!Inc.,!removing!him!from!his!
position! of! manager! of! said! corporation! declared! null! and! void! and! to!
recover! damages! incident! thereto.! The! action! is! predicated! on! the!
ground! that! said! resolution! was! adopted! in! contravention! of! the!
provisions!of!the!byWlaws!of!the!corporation,!of!the!Corporation!Law!and!
of! the! understanding,! intention! and! agreement! reached! among! its!
stockholders.!
*
Issue:* Whether! or! not! Gurrea! was! properly! removed! from! his! position!
as!manager!of!La!Paz!Ice!Plant!by!a!mere!resolution.!

*
Held:* YES.! Guerras! position! was! only! created! by! the! officers.! The! by!
laws!did!not!provide!for!the!creation!of!his!position.!Therefore,!he!may!
not!be!considered!as!an!officer!and!the!manner!of!removal!provided!
for!in!the!by!laws!shall!not!be!made!applicable!to!him.!He!may!thus!be!
removed!by!a!mere!resolution!by!the!officers!of!the!corporation.!
!
The!byWlaws!of!the!instant!corporation!in!turn!provide!that!in!the!board!
of!directors!there!shall!be!a!president,!a!viceWpresident,!a!secretary!and!
a!treasurer.!These!are!the!only!ones!mentioned!therein!as!officers!of!the!
corporation.!The!manager!is!not!included.!The!byWlaws!provide!that!the!
officers! of! the! corporation! may! be! removed! or! suspended! by! the!
affirmative!vote!of!2/3!of!the!corporation.!The!conclusion!is!inescapable!
that! Guerra! can! be! suspended! or! removed! by! said! board! of! directors!
under! such! terms! as! it! may! see! fit! and! not! as! provided! for! in! the! byW
laws,! without! the! 2/3! vote! of! the! stockholders,! as! required! when! an!
officer!is!to!be!removed.!
*
Doctrine:* One!distinction!between!officers!and!agents!of!a!corporation!
lies!in!the!manner!of!their!creation.!An!officer!is!created!by!the!charter!
of! the! corporation,! and! the! officer! is! elected! by! the! directors! or! the!
stockholders.! An! agency! is! usually! created! by! the! officers,! or! one! or!
more! of! them,! and! the! agent! is! appointed! by! the! same! authority.! It! is!
clear! that! the! two! terms! officers! and! agents! are! by! no! means!
interchangeable.(
(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Garcia! v.! Eastern! Telecommunications! Philippines,! 585! SCRA! 450! (2009);!


WQPP!Marketing!Communications,!Inc.!v.!Galera,!616!SCRA!422!(2010).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The!position!of!Executive!Secretary,!which!is!provided!for!in!the!
Societys!byWlaws,!is!an!officer!position.!Since!the!appointment!
of! the! incumbent! did! not! contain! a! fixed! term,! the! implication!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
was!that!the!appointee!held!the!appointment!at!the!pleasure!of!
the! Board! of! Directors,! such! that! when! the! Board! opted! to!
replace! the! incumbent,! technically! there! was! no! removal! but!
only! an! expiration! of! the! term! and! there! was! no! need! of! prior!
notice,!due!hearing!or!sufficient!grounds!before!the!incumbent!
could! be! separated! from! office.! Mita( Pardo( de( Tavera( v.(
1

Tuberculosis(Society,(112(SCRA(243((1982). (
(
Mita(Pardo(de(Tavera(v.(Tuberculosis(Society(
(
Facts:**Dr.!Buktaw,!then!executive!secretary!of!the!Board!of!Directors!of!
the! Philippine! Tuberculosis! Society! (Society)! retired.! Dr.! Mita! Pardo! de!
Tavera! was! appointed! as! his! replacement.! President! Canizares! sent! an!
appointment!letter.!The!letter!of!appointment,!however,!didnt!include!
a! fixed! term.! Subsequently,! de! Tavera! was! removed! from! her! post!
without! telling! her! the! cause.! One! of! the! defendants,! Alberto! Romulo!
was! appointed! to! her! position! with! a! vote! of! 7(affirm)W2(abstain)W
1(objection).!The!defendants!claimed!denying!that!plaintiff!was!illegally!
removed! from! her! position! as! Executive! Secretary! and! averring! that!

*
Held:* NO.! Although! the! minutes! of! the! organizational! meeting! show!
that! the! Chairman! mentioned! the! need! of! appointing! a! permanent!
Executive! Secretary,! such! statement! alone! cannot! characterize! the!
appointment!of!petitioner!without!a!contract!of!employment!definitely!
fixing!her!term!because!of! the! specific! provision! of! Section! 7.02! of! the!
Code! of! ByWLaws! that:! The! Executive! Secretary! shall! hold! office! at! the!
pleasure! of! the! Board! of! Directors,! unless! their! term! of! employment!
shall! have! been! fixed! in! their! contract! of! employment.! Besides! the!
word! permanent! could! have! been! used! to! distinguish! the!
appointment!from!acting!capacity.!
*
Doctrine:*See!above.(
(

Management! of! the! corporation! who! also! determines! the!


compensation! to! be! paid! such! employees.! Corporate! officers,!
on!the!other!hand,!are!elected!or!appointed!by!the!directors!or!
stockholders,!and!are!those!who!are!given!that!character!either!
by!the!Corporation!Code!or!by!the!corporations!byWlaws.!Gomez(
v.(PNOC(Dev.(and(Management(Corp.,(606(SCRA(187((2009).2(
o A! mere! manager! not! so! named! in! the! byWlaws! does! is!

under!the!Societys!byWlaws,!said!position!is!held!at!the!pleasure!of!the!
Board! of! Directors! and! when! the! pleasure! is! exercised,! it! only! means!
that! the! incumbent! has! to! vacate! the! same! because! her! term! has!
expired.!
*
Issue:*Whether!or!not!de!Tavera!was!illegally!dismissed*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!PSBA% v.% Leao,% 127% SCRA% 778% (1984);% Dy% v.% NLRC,% 145% SCRA% 211% (1986);%
Visayan! v.! NLRC,! 196! SCRA! 410! (1991);! Easycall! Communications! Phils.,! Inc.! v.!
King,! 478! SCRA! 102! (2005);! Marc! II! Marketing,! Inc.! v.! Joson,! 662! SCRA! 35!
(2011);!Barba!v.!Liceo!de!Cagayan!University,!686!SCRA!648!(2012).!

Ordinary! company! employees! are! generally! employed! not! by!


action! of! the! directors! and! stockholders! but! by! that! of! the!

not!an!officer!of!the!corporation.!Pamplona( Plantation(
Company(v.(Acosta,(510(SCRA(249((2006).(
When! the! byWlaws! provide! for! the! position! of!
Superintendent/! Administrator,! it! is! clearly! a!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!Okol!v.!Slimmers!World!Intl,!608!SCRA!97!(2009).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporate! officer! position! and! issues! of! reinstatement!
would!be!within!the!jurisdiction!of!the!SEC!and!not!the!
NLRC.!Ongkingco(v.(NLRC,(270(SCRA(613((1997).!

Although! the! byWlaws! provide! expressly! that! the! Board! of!


Directors! shall! have! full! power! to! create! new! offices! and! to!
appoint!the!officers!thereto,!any!office!created,!and!any!officer!
appointed! pursuant! to! such! clause! does! not! become! a!
corporate! officer,! but! is! an! employee! and! the! determination!
of!the!rights!and!liabilities!relating!to!his!removal!are!within!the!
jurisdiction!of!the!NLRC;!they!do!not!constitute!intraWcorporate!
controversies.! A! different! interpretation! can! easily! leave! the!
way! open! for! the! Board! of! Directors! to! circumvent! the!
constitutionally! guaranteed! security! of! tenure! of! the! employee!
by!the!expedient!inclusion!in!the!ByWLaws!of!an!enabling!clause!
on!the!creation!of!just!any!corporate!officer!position.!(at!p.!27).!
The!rulings!in!Tabang!v.!NLRC,!266!SCRA!462!(1997),!and!Nacpil!
v.! International! Broadcasting! Corp.,! 379! SCRA! 653! (2002),!
should! no! longer! be! controlling.! Matling( Industrial( and(
Commercial(Corp.(v.(Coros,(633(SCRA(12((2010).1(

(
Matling(Industrial(and(Commercial(Corp.(v.(Coros(
(
Facts:* Ricardo! R.! Coros! is! the! Vice! President! for! Finance! and!
Administration! of! Matling! Industrial! and! Commercial! Corporation.!
However,!Matling!dismissed!him.!As!a!result,!Coros!filed!a!complaint!for!
illegal! suspension! and! illegal! dismissal! against! Matling! and! some! of! its!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Reiterated! in! Marc! II! Marketing,! Inc.! v.! Joson,! 662! SCRA! 35! (2011);! Barba! v.!
Liceo!de!Cagayan!University,!686!SCRA!648!(2012).!

corporate!officers!before!the!NLRC.!Matling,!et!al.!moved!to!dismiss!the!
petition.!They!claimed!that!SEC,!and!not!NLRC,!had!jurisdiction!over!the!
case,! the! matter! being! an! intraWcorporate! in! nature.! This! is! because!
Coros!was!also!a!member!of!the!corporations!Board!of!Directors!prior!
to!his!termination.!
*
Issue:* Whether! or! not! Coros,! as! Vice! President! for! Finance! and!
Administration,! was! a! corporate! office! of! Matling! Industrial! and!
Commercial!Corporation.!
*
Held:* NO.! The! position! of! Vice! President! for! Finance! and!
Administration! was! not! explicitly! written! in! the! byWlaws.! Coros! was!
appointed!Vice!President!by!Matlings!general!manager!and!not!by!the!
Board!of!Directors.!It!was!also!the!general!manager!who!determined!the!
amount! of! compensation! he! received.! Therefore,! Coros! is! merely! an!
employee!and!not!a!corporate!officer.!This!being!the!case,!NLRC!and!not!
SEC!has!jurisdiction!over!his!complaint!for!illegal!dismissal.!In!addition,!
there!is!no!relation!between!his!acquisition!of!his!status!as!stockholder!
or! Director! and! his! position! as! Vice! President! of! Finance! and!
Administration.! His! position! as! stockholder! or! Director! remained!
unaffected! by! his! dismissal! as! Vice! President.! This! is! not! an! intraW
corporate! controversy,! because! an! intraWcorporate! controversy! is! one,!
which!arises!between!a!stockholder!and!a!corporation.!
*
Doctrine:* A! position! must! be! expressly! mentioned! in! the! ByWlaws! in!
order! to! be! considered! as! a! corporate! office.! The! creation! of! an! office!
under! a! byWlaw! enabling! provision! is! not! enough! to! make! a! position! a!
corporate!office.!A!different!interpretation!can!easily!allow!the!Board!to!
circumvent! the! constitutional! guarantee! of! security! of! tenure! by!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
including! an! enabling! clause! on! the! creation! of! any! corporate! office! in!
the! byWlaws.! The! Board! may! create! appointive! positions! other! than!
those!expressly!mentioned!in!the!byWlaws.!However,!persons!occupying!
such! positions! are! not! considered! as! corporate! officers! within! the!
meaning!of!Section!25.(

cases!and!intraWcorporate!affairs!regarding!elections!and!appointments.!
*
Held:* NO.! It! is! the! SEC! who! has! jurisdiction! in! the! abovementioned!
cases.! The! Articles! of! Incorporation! of! MICC! expressly! states! that! de!
Rossis! position! as! Executive! ViceWPresident! was! considered! to! be! an!

officer!position.!
*
Doctrine:*The!SEC!has!the!jurisdiction!over!removal!of!corporate!officers!
as!well!as!intraWcorporate!affairs!regarding!election!and!appointment!of!
corporate!officers.(

2. Nature*of*Exercise*of*Power*to*Terminate*Officers*

An! officers! removal! is! a! corporate! act,! and! if! such! removal!
occasions! an! intraWcorporate! controversy,! its! nature! is! not!
altered!by!the!reason!or!wisdom,!or!lack!thereof,!with!which!the!
Board! of! Directors! might! have! in! taking! such! action.! Perforce,!
the!matter!would!come!within!the!area!of!corporate!affairs!and!
management,! and! such! a! corporate! controversy! would! call! for!
SEC! adjudicative! expertise! [now! RTC! Special! Commercial!
Courts],! not! that! of! NLRC.! De( Rossi( v.( NLRC,( 314( SCRA( 245(
(1999);( Okol( v.( Slimmers( World( International,( 608( SCRA( 97(

of!corporate!officers!is!an!officer!of!said!corporation!and!not!a!
mere! employee! ! being! a! corporate! officer,! his! removal! is!
deemed!to!be!an!intraWcorporate!dispute!cognizable!by!the!SEC!
and! not! by! the! Labor! Arbiter.! Garcia( v.( Eastern(

(2009).(
(
De(Rossi(v.(NLRC(
(
Facts:!Armando!de!Rossi!is!an!Italian!Citizen!and!was!the!Executive!ViceW
President! and! General! Manager! of! Matling! Industrial! and! Commercial!
Corp.! (MICC).! He! started! to! work! in! 1985! and! was! terminated! in! 1988!
for!failing!to!secure!his!employment!permit!and!grossly!mismanaged!the!
business!affairs!of!the!companyhe!allegedly!diverted!corporate!funds!
to!his!personal!use.!Aggrieved,!he!then!filed!a!case!against!MICC!in!the!
NLRC!for!illegal!dismissal.!
*
Issue:* Whether! or! not! the! NLRC! has! jurisdiction! over! illegal! dismissal!

One!who!is!included!in!the!byWlaws!of!a!corporation!in!its!roster!

Telecommunications(Philippines,(585(SCRA(450((2009).(
!
XIII.*LIABILITIES*OF*CORPORATE*OFFICERS*(Section*31)*

Mere! ownership! by! an! officer! (President)! of! majority! of! the!
equity!of!the!corporation!do!not!warrant!a!piercing!of!the!veil!of!
corporate! fiction! to! make! such! officer! personally! liable! for! the!
debts! of! the! corporation.! Palay,( Inc.( v.( Clave,( 124( SCRA( 638(
(1093).1(

(
Palay,(Inc.(v.(Clave(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Pabalan!v.!NLRC,!184!SCRA!495!(1990);!Sulo!ng!Bayan,!Inc.!v.!Araneta,!Inc.!Inc.,!
72!SCRA!347!(1976);!Mindanao!Motors!Lines,!Inc.!v.!CIR,!6!SCRA!710!(1962).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
(
Facts:* Palay,! Inc.,! through! its! President,! Albert! Onstott! executed! a!
Contract!to!Sell!a!parcel!of!land!to!Dumpit.!!Paragraph!6!of!the!contract!
provided!for!automatic!extrajudicial!rescission!upon!default!in!payment!
of! any! monthly! installment! after! the! lapse! of! 90! days! from! the!

petitioners! part.! They! had! literally! relied,! albeit! mistakenly,! on!


paragraph!6!of!its!contract!with!Dumpit!when!it!rescinded!the!contract!
to!sell!extrajudicially!and!had!sold!it!to!a!third!person.!Onstott!was!made!
liable! because! he! was! then! the! President! of! the! corporation.! No!
sufficient! proof! exists! on! record! that! said! petitioner! used! the!

expiration! of! the! grace! period! of! 1! month,! without! need! of! notice! and!
with! forfeiture! of! all! installments! paid.! Dumpit! paid! the! downpayment!
and!several!installments.!Almost!6!years!later,!Dumpit!wrote!Palay,!Inc.!
offering!to!update!all!his!overdue!accounts!with!interest,!and!seeking!its!
written! consent! to! the! assignment! of! his! rights! to! a! certain! Lourdes!
Dizon.! Palay,! Inc.! informed! him! that! his! Contract! to! Sell! had! long! been!
rescinded!pursuant!to!paragraph!6!of!the!contract,!and!that!the!lot!had!

corporation! to! defraud! private! respondent.! He! cannot! be! made!


personally! liable! just! because! he! appears! to! be! the! controlling!
stockholder.!
*
Doctrine:*The!veil!of!corporate!fiction!may!be!pierced!when!it!is!used!as!
a! shield! to! further! an! end! subversive! of! justice;! or! for! purposes! that!
could! not! have! been! intended! by! the! law! that! created! it;! or! to! defeat!

already! been! resold.! Dumpit! filed! a! letter! complaint! with! the! National!
Housing!Authority!(NHA)!for!reconveyance.!
*
Issue:* Whether! or! not! petitioners! may! be! held! liable! for! the! refund! of!
the!installment!payments!made!by!Dumpit.!
*
Held:* YES.! Rights! to! the! lot! should! be! restored! to! Dumpit! or! the! same!

public!convenience,!justify!wrong,!protect!fraud,!or!defend!crime;!or!to!
perpetuate!fraud!or!confuse!legitimate!issues;!or!to!circumvent!the!law!
or!perpetuate!deception;!or!as!an!alter!ego,!adjunct!or!business!conduit!
for!the!sole!benefit!of!the!stockholders.(

should! be! replaced! by! another! acceptable! lot.! However,! considering!


that! the! property! had! already! been! sold! to! a! third! person! and! there! is!
no! evidence! on! record! that! other! lots! are! still! available,! private!
respondent!is!entitled!to!the!refund!of!installments!paid!plus!interest!at!
the!legal!rate!of!12%!computed!from!the!date!of!the!institution!of!the!
action.!!
!
As!a!general!rule,!a!corporation!may!not!be!made!to!answer!for!acts!or!

are,!as!a!general!rule,!not!personally!liable!for!their!official!acts,!
because! a! corporation,! by! legal! fiction,! has! a! personality!
separate! and! distinct! from! its! officers,! stockholders! and!
members.!Price(v.(Innodata(Phils.,(Inc.,(567(SCRA(269((2008).1(

liabilities!of!its!stockholders!or!those!of!the!legal!entities!to!which!it!may!
be! connected! and! vice! versa.! There! were! no! badges! of! fraud! on!

!
A.*GENERAL*RULE:*Corporate*Officers*Not*Liable*for*Corporate*Debts*

Unless! they! have! exceeded! their! authority,! corporate! officers!

Corporate! officers! who! entered! into! and! signed! contracts! on!


behalf! of! the! corporation! in! their! official! capacities! cannot! be!
made!personally!liable!thereunder!in!the!absence!of!stipulation!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Republic!Planters!Bank!v.!Court!of!Appeals,!216!SCRA!738!(1992);!Lowe,!Inc.!v.!
Court! of! Appeals,! 596! SCRA! 140! (2009);! Marc! II! Marketing,! Inc.! v.! Joson,! 662!
SCRA!35!(2011);!St.!Tomas!v.!Salac,!685!SCRA!245!(2012).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
to! that! effect,! due! to! the! personality! of! the! corporation! being!
separate! and! distinct! from! the! persons! composing! it.! Western(
Agro( Industrial( Corp.( v.( Court( of( Appeals,( 188( SCRA( 709(
(1990).1!

wrongdoing! of! the! director! must! be! established! clearly! and!


convincingly.! Bad! faith! is! never! presumed.! Bad! faith! does! not!
connote! bad! judgment! or! negligence.! Bad! faith! imports! a!
dishonest!purpose.!Bad!faith!means![a]!breach!of!a!known!duty!
through! some! ill! motive! or! interest.! Bad! faith! partakes! of! the!
nature!of!fraud.!Carag!v.!NLRC,!520!SCRA!28!(2007).4!

Officers! of! a! corporation! may! become! liable! for! its! loans! when!
they!have!breached!their!duty!of!diligence!under!Section!31!of!
the!Corporation!Code.!Aratea(v.(Suico,(518(SCRA(501((2007);2!or!
when! they! have! contractually! made! themselves! personally!
liable!for!a!corporate!loan.!Prisma(Construction(&(Dev.(Corp.(v.(
Menchavez,(614(SCRA(590((2010).(

The! finding! of! solidary! liability! among! the! corporation,! its!


officers! and! directors! would! patently! be! baseless! when! the!
decision!contains!no!allegation,!finding!or!conclusion!regarding!
particular! acts! committed! by! said! officers! and! director! that!
show! them! to! have! been! individually! guilty! of! unmistakable!
malice,! bad! faith,! or! illWmotive! in! their! personal! dealings! with!

A! corporation! has! a! personality! separate! and! distinct! from! the!


persons! composing! or! representing! it;! hence,! personal! liability!
attaches! only! in! exceptional! cases,! such! as! when! the! director,!
trustee,! or! officer! is! guilty! of! bad! faith! or! gross! negligence! in!
directing! the! affairs! of! the! corporation.! Continental( Cement(
Corp.(v.(Asea(Brown(Boveri,(Inc.,(659(SCRA(137((2011).3(

To!hold!a!director!personally!liable!for!debts!of!the!corporation,!
and! thus! pierce! the! veil! of! corporate! fiction,! the! bad! faith! or!

third! parties.! When! corporate! officers! and! directors! are! sued!


merely! as! nominal! parties! in! their! official! capacities! as! such,!
they!cannot!be!held!liable!personal!for!the!judgment!rendered!
against!the!corporation.!NPC.(v.(Court(of(Appeals,(273(SCRA(419(
(1997).5(

Where!the!Chairman!&!President!has!made!himself!accountable!
in! the! promissory! note! in! his! personal! capacity! and! as!
authorized!by!the!Board!Resolution,!and!in!the!absence!of!any!
representation!on!the!part!of!corporation!that!the!obligation!is!
all!its!own!because!of!its!separate!corporate!identity,!we!see!no!
occasion! to! consider! piercing! the! corporate! veil! as! material! to!
the!case.!Prisma(Construction(&(Dev.(Corp.(v.(Menchavez,(614(
SCRA(590((2010).(

An!officerWstockholder!who!signs!in!behalf!of!the!corporation!to!
a! fraudulent! contract! cannot! claim! the! benefit! of! separate!
juridical! entity:! Thus,! being! a! party! to! a! simulated! contract! of!
management,! petitioner! Uy! cannot! be! permitted! to! escape!
liability! under! the! said! contract! by! using! the! corporate! entity!
theory.! This! is! one! instance! when! the! veil! of! corporate! entity!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Rustan!Pulp!&!Paper!Mills,!Inc.!v.!IAC,!214!SCRA!665!(1992);!Banque!Generale!
Belge!v.!Walter!Bull!and!Co.,!84!Phil.!164!(1949).!
2
!Singian,!Jr.!v.!Sandiganbayan,!478!SCRA!348!(2005)!
3
!Prisma!Construction!&!Dev.!Corp.!v.!Menchavez,!614!SCRA!590!(2010);!Urban!
Ban,!Inc.!v.!Pena,!659!SCRA!418!(2011).!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4

!EPG!Constructions!Co.!v.!CA,!210!SCRA!230!(1992).!
!Emilio! Cano! Enterprises,! Inc.! v.! CIR,! 13! SCRA! 291! (1965);! Arcilla! v.! Court! of!
Appeals,!215!SCRA!120!(1992).!
5

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
has! to! be! pierced! to! avoid! injustice! and! inequity.! Paradise(
Sauna(Massage(Corporation(v.(Ng,(181(SCRA(719((1990).(
B.*Rundown*on*Officers*Liabilities:*Tramat(Mercantile,(Inc.(v.(Court(of(
Appeals,(238(SCRA(14((1994).1(
(

personal!capacity.!Tramat!has!its!own!distinct!and!separate!personality.!
In! the! case! at! bench,! there! is! no! indication! that! petitioner! David! Ong!
could!be!held!personally!accountable!under!any!of!the!mentioned!cases!
(see!doctrine).!
*

Tramat(Mercantile,(Inc.(v.(Court(of(Appeals(
(
Facts:*Melchor!de!la!Cuesta!(doing!business!under!the!name!of!Farmers!
Machineries)!sold!a!tractor!to!Tramat!Mercantile.!David!Ong,!president!
and! manager! of! Tramat,! issued! a! check! for! payment.! In! turn,! Tramat!
sold!the!tractor!along!with!a!lawn!mower!to!MWSS.!The!latter!refused!
to! pay! when! it! learned! that! the! tractor! was! not! brand! new! and! there!

Doctrine:* Personal! liability! of! a! corporate! director,! trustee! or! officer!


along! (although! not! necessarily)! with! the! corporation! may! so! validly!
attach,!as!a!rule,!only!when:!
1. He!assents!!
a. To!a!patently!unlawful!act!of!the!corporation!
b. For!bad!faith,!or!gross!negligence!in!directing!its!affairs!!
c. For! conflict! of! interest,! resulting! in! damages! to! the!

were! hidden! defects.! Ong! then! issued! a! stop! payment! for! the! check!
issued!to!de!la!Cuesta!(it!seems!that!Ong!intended!to!pay!de!la!Cuesta!
with! the! proceeds! of! the! sale! to! MWSS).! Because! of! this,! de! la! Cuesta!
filed!an!action!for!recovery!of!the!P33,500!payment!as!well!as!P10,000!
as! attorney's! fees.! Ong! answered! that! de! la! Cuesta! had! no! cause! of!
action,!and!that!the!transaction!was!between!de!la!Cuesta!and!Tramat!
Mercantile,!not!Ong.*

corporation,!its!stockholders!or!other!persons!
2. He! consents! to! the! issuance! of! watered! stocks! or! who,! having!
knowledge! thereof,! does! not! forthwith! file! with! the! corporate!
secretary!his!written!objection!thereto;!
3. He! agrees! to! hold! himself! personally! and! solidarily! liable! with!
the!corporation;!
4. He!is!made,!by!a!specific!provision!of!law,!to!personally!answer!

*
Issue:*Whether!or!not!Ong!can!be!held!liable!in!his!personal!capacity.!
*
Held:* NO.! David! Ong! was! acting! as! an! officer! of! Tramat,! not! in! his!

for!his!corporate!action.!
(

corporate! debts,! a! corporate! officer! may! nevertheless! divest!


himself! of! this! protection! by! voluntarily! binding! himself! to! the!
payment! of! the! corporate! debts.! Toh( v.( Solid( Bank( Corp.,( 408(
SCRA(544((2003).(

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!MAM!Realty!v.!NLRC,!244!SCRA!797!(1995);!NFA!v.!Court!of!Appeals,!311!SCRA!
700!(1999);!Atrium!Management!Corp.!v.!Court!of!Appeals,!353!SCRA!23!(2001);!
Malayang! Samahan! ng! mga! Manggawgawa! sa! M.! Greenfield! v.! Ramos,! 357!
SCRA!77!(2001);!Powton!Conglomerate,!Inc.!v.!Agcolicol,!400!SCRA!523!(2003);!
H.L.!Carlos!Construction,!Inc.!v.!Marina!Properties!Corp.,!421!SCRA!428!(2004);!
McLeod!v.!NLRC,!512!SCRA!222!(2007).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

While! the! limited! liability! doctrine! is! intended! to! protect! the!
stockholder! by! immunizing! him! from! personal! liability! for! the!

The!corporate!representatives!signing!as!a!solidary!guarantee!as!
corporate! representative! did! not! undertake! to! guarantee!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
personally! the! payment! of! the! corporations! debt! embodied! in!
the! trust! receipts.! Debts! incurred! by! directors,! officers! and!
employees! acting! as! such! corporate! agents! are! not! theirs! but!
the! direct! liability! of! the! corporation! they! represent.! As! an!
exception,! directors! or! officers! are! personally! liable! for! the!
corporations! debt! if! they! so! contractually! agree! or! stipulate.!
Tupaz(IV(v.(Court(of(Appeals,(476(SCRA(398((2005).(

Bad!faith!does!not!arise!just!because!a!corporation!fails!to!pay!
its!obligation,!because!the!inability!to!pay!ones!obligation!is!not!
synonymous! with! fraudulent! intent! not! to! honor! the!
obligations.! In! order! to! piece! the! veil! of! corporate! fiction,! for!
reasons! of! negligence! by! the! director,! trustee! or! officer! in! the!
conduct!of!the!transactions!of!the!corporation,!such!negligence!
must!be!gross.!Magaling(v.(Ong,(562(SCRA(152((2008).(

Directors! or! trustees! who! willfully! or! knowingly! vote! for! or!
assent! to! patently! unlawful! acts! of! the! corporation! or! acquire!
any! pecuniary! interest! in! conflict! with! their! duty! as! such!
directors! or! trustees! shall! be! liable! jointly! and! severally! for! all!
damages!resulting!therefrom!suffered!by!the!corporation.!EDSA(
Shangri^La( Hotel( and( Resorts,( Inc.( v.( BF( Corp.,( 556( SCRA( 25(
(2008).(

*
C.*SPECIAL*PROVISIONS*IN*LABOR*LAWS:*

Since!a!corporate!employer!is!an!artificial!person,!it!must!have!
an!officer!who!can!be!presumed!to!be!the!employer,!being!the!
person! acting! in! the! interest! of! (the)! employer! as! defined! in!
Article! 283! of! the! Labor! Code.!A.C.( Ransom( Labor( Union^CCLU(
v.(NLRC,(142(SCRA(269((1986).(

A.C.(Ransom(Labor(Union^CCLU(v.(NLRC(
(
Facts:*On!June!6,!1961,!employees!of!AC!Ransom,!most!being!members!
of!the!AC!Ransom!Labor!Union,!went!on!strike.!The!said!strike!was!lifted!
on! June! 21! with! most! of! the! strikers! being! allowed! to! resume! their!
work.!However,!twenty!two!strikers!were!refused!reinstatement.!!
!
In! 1969,! the! Hernandez! family! (owners! of! AC! RANSOM)! organized!
another!corporation!under!the!name!of!Rosario!Industrial!Corporation.!
The!said!company!dealt!in!the!same!type!of!business!as!AC!Ransom.!!
!
In! 1972,! a! decision! to! reinstate! the! 22! strikers! was! rendered! by! the!
Court!of!Industrial!Relations.!!
!
In!1973,!RAMSOM!filed!an!application!for!clearance!to!close!and!cease!
operations!which!was!granted,!and!as!such!the!reinstatement!of!the!22!
strikers! has! been! precluded.! Because! of! this,! the! Union! subsequently!
asked!the!officers!of!Ransom!to!be!personally!liable!for!payment!of!the!
back!wages.!
*
Issue:* Whether! or! not! the! officers! of! the! corporation! should! be! held!
personally!liable!to!pay!for!the!back!wages.!
*
Held:* YES.!In!the!instant!case,!RANSOM,!in!foreseeing!the!possibility!or!
probability! of! payment! of! back! wages! to! the! 22! strikers,! organized!
ROSARIO! to! replace! RANSOM,! with! the! latter! to! be! eventually! phased!
out!if!the!22!strikers!win!their!case.!
Note:! The! record! does! not! clearly! identify! the! officer! or! officers! of!
RANSOM!directly!responsible!for!failure!to!pay!the!back!wages!of!the!22!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
and!bad!faith!in!terminating!their!employment.!AHS/Philippines(
v.(Court(of(Appeals,(257(SCRA(319((1996).2(

strikers.! In! the! absence! of! definite! proof! in! that! regard,! it! should! be!
presumed! that! the! responsible! officer! is! the! President! of! the!
corporation!who!can!be!deemed!the!chief!operation!officer!thereof.!
!
Doctrine:*Under!Article!212!(c)!of!the!Labor!Code,!Employee!includes!

illegally!dismissing!an!employee!should!be!held!personally!liable!
for!the!corporate!obligations!arising!from!such!act.!Maglutac(v.(
NLRC,( 189( SCRA( 767( (1990); 3 !and! for! the! separate! juridical!
personality! of! a! corporation! to! be! disregarded! as! to! make! the!
highest! corporate! officer! personally! liable! on! labor! claims,! the!
wrongdoing! must! be! clearly! and! convincingly! established.! Del(
Rosario(v.(NLRC,(187(SCRA(777((1990).(

any! person! acting! in! the! interest! of! an! employer,! directly! or! indirectly.!
Since!Ransom!is!an!artificial!person,!it!must!have!an!officer!who!can!be!
presumed!to!be!the!employer,!being!the!person!acting!in!the!interest!
of!the!employer!(Ransom).!
(
1. Overturning*the*A.C.*Ransom*Ruling:*

Article! 212(e)! of! the! Labor! Code,! by! itself,! does! not! make! a!
corporate! officer! personally! liable! for! the! debts! of! the!
corporation!because!Section!31!of!the!Corporation!Code!is!still!
the! governing! law! on! personal! liability! of! officers! for! the! debts!
of! the! corporation.! David( v.( National( Federation( of( Labor(
Corporate!officers!cannot!be!held!personally!liable!for!damages!
on! account! of! the! employees! dismissal! because! the! employer!
corporation! has! a! personality! separate! and! distinct! from! its!
officers!who!merely!acted!as!its!agents.!Malayang(Samahan(ng(
mga(Mangagagawa(sa(M.(Greenfields(v.(Ramos,(357(SCRA(77(
(2001).1(

Corporate!officers!are!not!personally!liable!for!money!claims!of!
discharged! employees! unless! they! acted! with! evident! malice!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!AMA!Computer!CollegeWEast!Rizal!v.!Ignacio,!590!SCRA!633,!659W660!(2009).!

A!corporation,!being!a!juridical!entity,!may!act!only!through!its!
directors,! officers! and! employees! and! obligations! incurred! by!
them,! acting! as! corporate! agents,! are! not! theirs! but! the! direct!
accountabilities! of! the! corporation! they! represent.! In! labor!
cases,! corporate! directors! and! officers! are! solidarily! liable! with!
the! corporation! for! the! termination! of! employment! of!
employees!done!with!malice!or!bad!faith.!Brent(Hospital,(Inc.(v.(
NLRC,(292(SCRA(304((1998).4(

Unions,(586(SCRA(100((2009).(

Only!the!responsible!officer!of!a!corporation!who!had!a!hand!in!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!Reiterated! in! Nicario! v.! NLRC,! 295! SCRA! 619! (1998);! Flight! Attendants! and!
Stewards! Association! of! the! Philippines! v.! Philippine! Airlines,! 559! SCRA! 252!
(2008);! M+W! Zander! Philippines,! Inc.! v.! Enriquez,! 588! SCRA! 590$ (2009);$ AMA$
Computer) CollegeWEast% Rizal% v.% Ignacio,% 590% SCRA% 633,% 659W660# (2009);# Lowe,#
Inc.% v.% Court% of% Appeals,% 596% SCRA% 140,% 155% (2009);% Peaflor% v.% Outdoor%
Clothing!Manufacturing!Corp.,!618!SCRA!208!(2010).!
3
!Reiterated! in! Gudez! v.! NLRC,! 183! SCRA! 644! (1990);! Chua! v.! NLRC,! 182! SCRA!
353!(1990);!Reahs!Corp.!v.!NLRC,!271!SCRA!247!(1997)!
4
!Culili! v.! Eastern! Telecommunications! Philippines,! Inc.,! 642! SCRA! 338! (2011);!
Grandteq!Industrial!Steel!Products,!Inc.!v.!Estrella,!646!SCRA!391!(2011);!Alert!
Security! and! Investigation! Agency,! Inc.! v.! Pasawilan,! 657! SCRA! 655! (2011);!
Lynvil!Fishing!Enterprises,!Inc.!v.!Ariola,!664!SCRA!679!(2012);!Blue!Sky!Trading!
Co.,!Inc.!v.!Blas,!667!SCRA!727!(2012).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

In! labor! cases,! corporate! directors! and! officers! are! solidarily!


liable! with! the! corporation! for! the! termination! of! employment!

of!corporate!employees!done!with!malice!or!in!bad!faith.!In!this!
case,! it! is! undisputed! that! the! corporate! officers! have! a! direct!
hand! in! the! illegal! dismissal! of! the! employees.! They! were! the!
one,! who! as! highWranking! officers! and! directors! of! the!
corporation,! signed! the! Board! Resolution! retrenching! the!
employees!on!the!feigned!ground!of!serious!business!losses!that!
had! no! basis! apart! from! an! unsigned! and! unaudited! Profit! and!
Loss! Statement! which,! to! repeat,! had! no! evidentiary! value!

laws.!Villanueva(v.(Adre,(172(SCRA(876((1989).(
A.C.! Ransom! doctrine! has! been! reiterated! subsequently! in!
Restuarante(Las(Conchas(v.(Llego,(314(SCRA(24((1999).1(

Since!a!corporation!is!an!artificial!person,!it!must!have!an!officer!

contemplated! by! the! Labor! code,! who! may! be! held! jointly! and!
severally! liable! for! the! obligation! of! the! corporation! to! its!
dismissed!employees.!NYK(International(Knitwear(Corp.(Phil.(v.(
NLRC,(397(SCRA(607((2003).!
4. Definitive*Overturning*of*A.C.*Ransom*Ruling:*

A.C.! Ransom! is! not! in! point! because! there! the! corporation!
actually! ceased! operations! after! the! decision! of! the! Court! was!
promulgated!against!it,!making!it!necessary!to!enforce!it!against!
its! former! president.! When! the! corporation! is! still! existing! and!
able!to!satisfy!the!judgment!in!favor!of!the!private!respondent,!
the! corporate! officers! cannot! be! held! personally! liable.! Lim( v.(
NLRC,(171(SCRA(328((1989).(

who! can! be! presumed! to! be! the! employer,! being! the! person!
acting!in!the!interest!of!the!employer!!the!corporation,!in!the!
technical! sense! only,! is! the! employer.! The! manager! of! the!
corporation! falls! within! the! meaning! of! an! employer! as!

whatsoever.!Uichico(v.(NLRC,(273(SCRA(35((1997).(
2. Limiting*the*A.C.*Ransom*Ruling*to*Insolvent*Corporation*

Under! the! Labor! Code,! in! the! case! of! corporations,! it! is! the!
president!who!responds!personally!for!violation!of!the!labor!pay!

It!is!settled!that!in!the!absence!of!malice,!bad!faith,!or!specific!
provisions! of! law,! a! stockholder! or! an! officer! of! a! corporation!
cannot! be! made! personally! liable! for! corporate! liabilities.!
McLeod(v.(NLRC,(512(SCRA(222((2007).2(

A.C.! Ransom! will! apply! only! where! the! persons! who! are! made!
personally! liable! for! the! employees! claims! are! stockholdersW
officers! of! employerWcorporation.! In! the! case! at! bar,! a! mere!
general! manager! while! admittedly! the! highest! ranking! local!
representative! of! the! corporation,! is! nevertheless! not! a!
stockholder!and!much!less!a!member!of!the!Board!of!Directors!

nor! an! officer! thereof.! De( Guzman( v.( NLRC,( 211( SCRA( 723(
(1992).(
3. Upholding*the*A.C.*Ransom*Ruling:*

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Reiterated!in!Carmelcraft!Corp.!v.!NLRC,!186!SCRA!393!(1990);!Valderrama!v.!
NLRC,!256!SCRA!466!(1996).!
2
!Citing!Land!Bank!of!the!Philippines!v.!Court!of!Appeals,!364!SCRA!375!(2001);!
BogoWMedellin! Sugarcane! Planters! Asso.,! Inc.! v.! NLRC,! 296! SCRA! 108! (1998);!
Complex! Electronics! Employees! Assn.! v.! NLRC,! 310! SCRA! 403! (1999);! Acesite!
Corp.!v.!NLRC,!449!SCRA!360!(2005);!CocaWCola!Bottlers!Phils.,!Inc.!v.!Daniel,!460!
SCRA! 494! (2005);! Suldao! v.! Cimech! System! Construction,! Inc.,! 506! SCRA! 256!
(2006);! Supreme! Steel! Pipe! Corp.! v.! Bardaje,! 522! SCRA! 155! (2007);! Culili! v.!
Eastern! Telecommunications! Philippines,! Inc.,! 642! SCRA! 338! (2011).! Grandteq!
Industrial!Steel!Products,!Inc.!v.!Estrella,!646!SCRA!391!(2011).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

Clearly,! in! A.C.! Ransom,! RANSOM,! through! its! President,!


organized! ROSARIO! to! evade! payment! of! backwages! to! the! 22!
strikers.! This! situation,! or! anything! similar! showing! malice! or!
bad!faith!on!the!part!of!Patricio,!does!not!obtain!in!the!present!
case.! [What! applies! therefore! is! the! ruling! [i]n! Santos! v.! NLRC,!
[254!SCRA!673!(1996)].!McLeod(v.(NLRC,(512(SCRA(222((2007).1(

It! was! clarified! in! Carag! v.! NLRC,! 520! SCRA! 28! (2007),! and!
McLeod!v.!NLRC,!512!SCRA!22!(2007),!that!Article!212(e)!of!the!
Labor! Code,! by! itself,! does! not! make! a! corporate! officer!
personally! liable! for! the! debts! of! the! corporationthe!
governing! law! on! personal! liability! of! directors! or! officers! for!
debts! of! the! corporation! is! still! Section! 31! of! the! Corporation!
Code.!Pantranco(Employees(Association((PEA^PTGWO)(v.(NLRC,(
581(SCRA(598((2009).2(

!
D.*Personal*Liability*of*Trustees*and*Officers*of*NonTStock*Corporation*

The!nonWstock!corporation!acted!in!clear!bad!faith!when!it!sent!
the!final!notice!to!a!member!under!the!pretense!they!believed!
him!to!be!still!alive,!when!in!fact!it!had!very!well!known!that!he!
had!already!died.!Valley(Golf(and(Country(Club,(Inc.(v.(Vda.(De(
Caram,(585(SCRA(218((2009).(

NonWstock! corporations! and! their! officers! are! not! exempt! from!


the! obligation! imposed! by! Articles! 19,! 20! and! 21! under! the!
Chapter!on!Human!Relations!of!the!Civil!Code,!which!provisions!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!Reiterated! in! H.R.! Carlos! Construction,! Inc.! v.! Marina! Properties! Corp.,! 421!
SCRA! 428! (2004);! Pamplona! Plantation! Company! v.! Acosta,! 510! SCRA! 249!
(2006);! Elcee! Farms,! Inc.! v.! NLRC,! 512! SCRA! 602! (2007);! Uy! v.! Villanueva,! 526!
SCRA!73!(2007).!
2
!Reiterated! in! David! v.! National! Federation! of! Labor! Unions,! 586! SCRA! 100!
(2009).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

enunciate!a!general!obligation!under!law!for!every!person!to!act!
fairly! and! in! good! faith! towards! one! another.! Valley( Golf( and(
Country(Club,(Inc.(v.(Vda.(De(Caram,(585(SCRA(218((2009).(

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

RIGHT&OF&STOCKHOLDERS&AND&MEMBERS&

!
I.&What&Does&Share&Represent?&

While!shares!of!stock!constitute!personal!property,!they!do!not!
represent!property!of!the!corporation![i.e.,!they!are!properties!
of! the! stockholders! who! own! them].! A! share! of! stock! only!
typifies! an! aliquot! part! of! the! corporations! property,! or! the!
right! to! share! in! its! proceeds! to! that! extent! when! distributed!
according!to!law!and!equity,!but!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! assets.!
The! stockholder! is! not! a! coAowner! of! corporate! property.!
Stockholders,of,F.,Guanson,and,Sons,,Inc.,v.,Register,of,Deeds,
of,Manila,,6,SCRA,373,(1962).!
o

!As! early! as! the! case! of! Fisher! v.! Trinidad,! the! Court!
already! declared! that! [t]he! distinction! between! the!
title!of!a!corporation,!and!the!interest!of!its!members!or!
stockholders! in! the! property! of! the! corporation,! is!
familiar! and! wellAsettled.! The! ownership! of! that!
property!is!in!the!corporation,!and!not!in!the!holders!of!
shares! of! its! stock.! The! interest! of! each! stockholder!
consists! in! the! right! to! a! proportionate! part! of! the!
profits! whenever! dividends! are! declared! by! the!
corporation,!during!its!existence,!under!its!charter,!and!
to!a!like!proportion!of!the!property!remaining,!upon!the!
termination! or! dissolution! of! the! corporation,! after!
payment! of! its! debts.! Mobilia, Products,, Inc., v.,
Umezawa,,452,SCRA,736,(2005).,

Atty.! Hofilea! !! Shares! of! stock! is! intangible! personal!


property! since! the! shares! represent! merely! an! interest!
in!the!company.,

The!registration!of!shares!in!a!stockholders!name,!the!issuance!
of! stock! certificates,! and! the! right! to! receive! dividends! which!
pertain! to! the! shares! are! all! rights! that! flow! from! ownership.!
Lim, Tay, v., Court, of, Appeals,, 293, SCRA, 634, (1998);, TCL, Sales,
Corp.,v.,Court,of,Appeals,,349,SCRA,35,(2001).,

&
A.&Sources&of&Shares:,
1. Shares! acquired! from! the! company! itself! !! these! are! shares!
that!are!sold!from!the!unissued!shares!of!the!company.!
2. Shares! acquired! from! a! stockholder! of! the! company! !! these!
are! shares! sold! by! a! stockholder! of! the! company! to! another!
person!who!may!or!may!not!be!an!existing!stockholder.!
!
II.&Preemptive&Rights&(Section&39)&
&
Section&39.&Power&to&deny&preQemptive&right.&
All&stockholders&of&a&stock&corporation&shall&enjoy&preQemptive&right&to&
subscribe& to& all& issues& or& disposition& of& shares& of& any& class,& in&
proportion& to& their& respective& shareholdings,& unless& such& right& is&
denied& by& the& articles& of& incorporation& or& an& amendment& thereto:&
Provided,&That&such&preQemptive&right&shall&not&extend&to&shares&to&be&
issued& in& compliance& with& laws& requiring& stock& offerings& or& minimum&
stock&ownership&by&the&public;&or&to&shares&to&be&issued&in&good&faith&
with&the&approval&of&the&stockholders&representing&twoQthirds&(2/3)&of&
the& outstanding& capital& stock,& in& exchange& for& property& needed& for&
corporate&purposes&or&in&payment&of&a&previously&contracted&debt.&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
&
A.&PreQemptive&rights&defined&

Atty.! Hofilea! !! Before! Mr.! X! can! become! a! member! of! the!


corporation,! the! existing! stockholders! must! first! be! allowed! to!
buy! whatever! stocks! the! company! desires! to! issue.! Where! not!
all!the!members!of!the!corporation!decide!not!to!invest!further,!
the!remainder!may!be!offered!to!Mr.!X.!
o The!recognition!of!the!preAemptive!right!is!intended!to!
protect! both! the! proprietary! and! voting! rights! of! a!
stockholder! in! a! corporation.! The! proportionate!

when! no! specific! grant! or! recognition! of! such! right! is! provided!
for!in!statutory!law.2!

PreAemptive! right! under! Section! 39! of! the! Corporation! Code!


refers! to! the! right! of! a! stockholder! of! a! stock! corporation! to!
subscribe! to! all! issues! or! disposition! of! shares! of! any! class,! in!
proportion! to! their! respective! shareholdings.! Although! it! can!
validly! be! withdrawn,! it! cannot! be! done! in! breach! of! fiduciary!
duties! such! as! to! perpetuate! control! over! the! corporation.!
Majority,Stockholders,of,Ruby,Industrial,Corp.,v.,Lim,,650,SCRA,
461,(2011).!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!SEC! Opinion,! 11! August! 1997,! XXXII! SEC! QUARTERLY! BULLETIN! 15! (No.! 2,! Dec.!
1997);!SEC!EAD!Memo,!dated!29!July!1997.!!

Atty.! Hofilea! !! Can! preAemptive! rights! be! taken! away?! YES.!


The! right! may! be! denied! by! the! articles! of! incorporation! or! by!
the!byAlaws.!

&
B.&Extent&of&Coverage&of&PreQemptive&Rights&

interests! of! a! stockholder! in! a! corporation! determines!


his! proportionate! power! to! vote! in! corporate! affairs!
when!the!law!gives!the!stockholders!a!right!to!affirm!or!
deny! board! actions.! The! proportionate! interest! of! the!
stockholder! to! the! outstanding! capital! stock! also!
determines! his! proportionate! share! in! the! dividends!
declared! by! the! corporation,! as! well! as! his!
proportionate! right! to! the! remaining! assets! of! the!
corporation!upon!dissolution!of!the!corporation.!1!!

The!preAemptive!rights!of!stockholders!in!a!corporation!are!not!
statutory! rights,! but! are! common! law! rights,! and! exist! even!

Under!the!current!provision!Section!39!of!the!Corporation!Code,!
the! preAemptive! right! of! stockholders! is! recognized! to! exist! to!
"all!issues!or!disposition!of!shares!of!any!class."!The!use!of!the!
terms! "issues! or! disposition"! clearly! provides! that! the! preA
emptive! right! should! now! be! available! even! to! issues! from! the!
existing! unsubscribed! portion! of! the! authorized! capital! stock!
when! the! board! decides! to! open! them! for! subscription,! and!
even! to! reAissuance! or! sale! of! treasury! shares! of! the!
corporation.3!

&
C.&Exceptions&to&PreQemptive&Rights&

3!exceptions!provided!in!Section!39:!(1)!debt,!(2)!in!compliance!
with! the! required! public! issuance,! and! (3)! shares! to! be! issued,!
with! approval! of! the! 2/3! of! the! stockholders,! in! exchange! for!
property!for!corporate!purposes.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2

!Villanueva,!C.!L.,!&!VillanuevaATiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!
3
!Villanueva,!C.!L.,!&!VillanuevaATiansay,!T.!S.!(2013).!Philippine!Corporate!Law.!
(2013!ed.).!Manila,!Philippines:!Rex!Book!Store.!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

The! SEC! has! ruled! that! a! majority! vote! of! stockholders!


waiving!the!preAemptive!right!in!a!meeting!called!for!the!
purpose! would! not! be! valid! and! binding! on! the!
individual! stockholders! since! the! preAemptive! right! is! a!
personal! right! of! a! stockholder,! and! accordingly,! the!
waiver!should!be!given!individually!by!the!stockholders!
concerned! or! he! may! authorize! somebody! to! execute!
the!same!for!and!in!his!behalf!by!way!of!a!special!power!
of!attorney.1!!

between&the&parties,&until&the&transfer&is&recorded&in&the&books&of&the&
corporation& showing& the& names& of& the& parties& to& the& transaction,& the&
date& of& the& transfer,& the& number& of& the& certificate& or& certificates& and&
the&number&of&shares&transferred.&
&
No& shares& of& stock& against& which& the& corporation& holds& any& unpaid&
claim&shall&be&transferable&in&the&books&of&the&corporation.&(35)&
&

Issue!v.!Disposition!
o
o

of! the! corporation! ! they! are! owned! by! the! stockholders! of!
record.!The!corporation!whose!shares!of!stock!are!the!subject!of!
transfer!transaction!(through!sale,!assignment,!donation,!or!any!
other!mode!of!conveyance)!need!not!be!a!part!to!transaction!to!
be! valid;! however,! to! bind! the! corporation! as! well! as! third!
parties,!it!is!necessary!that!the!transfer!is!recorded!in!the!books!
of! the! corporation.! Forest, Hills, Golf, &, Country, Club, v., Vertex,

Issue!!!refers!to!new!shares!issued!to!stockholders.!
Disposition!!!treasury!shares!owned!by!the!company!
may! be! disposed! by! the! company! by! selling! such! to!
the!stockholders.!

&
III.&Right&to&Transfer&or&Dispose&of&Shareholdings&(Section&63)&
&
Section&63.&Certificate&of&stock&and&transfer&of&shares.&
The&capital&stock&of&stock&corporations&shall&be&divided&into&shares&for&
which& certificates& signed& by& the& president& or& vice& president,&
countersigned&by&the&secretary&or&assistant&secretary,&and&sealed&with&
the&seal&of&the&corporation&shall&be&issued&in&accordance&with&the&byQ
laws.& Shares& of& stock& so& issued& are& personal& property& and& may& be&
transferred& by& delivery& of& the& certificate& or& certificates& endorsed& by&
the&owner&or&his&attorneyQinQfact&or&other&person&legally&authorized&to&
make& the& transfer.& No& transfer,& however,& shall& be& valid,& except& as&

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!SEC!Opinion,!6!Dec.!1994,!XXIX!SEC!QUARTERLY! BULLETIN!10!(No.!2,!June!1995);!
SEC! Opinion,! 12! Dec.! 1994,! XXIX! SEC! QUARTERLY! BULLETIN! 14! (No.2,! June! 1995);!
SEC!Opinion,!1!October!1981.!

Shares!of!stock!of!a!corporation!are!not!owned!or!are!the!assets!

Sales,and,Trading,,Inc.,,692,SCRA,706,(2013).,
&
A.&Restriction&on&Transfers:&

A! contractual! undertaking! on! restriction! of! transfer! of! shares!


that!has!a!reasonable!business!purpose!and!limited!in!coverage!
is!valid!and!binding.!Lambert,v.,Fox,,26,Phil.,588,(1914).!

!
Lambert,v.,Fox,
,
Facts:& John!R.!Edgar!&!Co!found!itself!in!such!condition!financially!that!
its! creditors,! including! Lambert! and! Fox,! agreed! to! take! over! the!
business,!incorporate!it!and!accept!stock!in!payment!of!their!respective!
credits.! Eventually,! Lambert! and! Fox! became! the! two! largest!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
terms! and! considerations! which! are! reasonable,! and!
only!when!the!corporation!or!the!other!stockholders!do!
not! or! fail! to! exercise! their! option,! is! the! offering!
stockholder! at! liberty! to! dispose! of! his! shares! to! third!
parties.!
" Before! you! can! sell! your! shares! you! must! offer!

stockholders!in!the!new!corporation,!John!R.!Edgar!&!Co.,!Incorporated.!
A! few! days! after! incorporation,! Lambert! and! Fox! entered! into! an!
agreement! where! they! mutually! agreed! not! to! sell,! transfer,! or!
otherwise!dispose!of!any!part!of!their!shareholdings!until!after!one!year!
from!the!date!of!the!agreement.!A!violation!thereof!would!be!liable!for!
breach! of! contract! and! damages.! Fox! sold! his! stock! to! one! of! the!
corporations!competitors,!E.C.!McCullough!&!Co.,
&
Issue:&Whether!or!not!Fox!is!liable.!
&
Held:&YES.!Fox!contends!that!the!stipulation!in!the!contract!suspending!
the!power!to!sell!the!stock!is!an!illegal!stipulation,!is!in!restraint!of!trade!
and!offends!public!policy.!The!Court!sees!otherwise.!The!suspension!of!
the! power! to! sell! has! a! beneficial! purpose,! results! in! the! protection! of!
the!corporation!as!well!as!of!the!individual!parties!to!the!contract,!and!is!
reasonable!as!to!the!length!of!time!of!the!suspension.!But!the!Court!also!
said!that!the!mentioned!doctrine!did!not!mean!to!cover!the!suspension!
of!the!right!of!alienation!of!stock,!limiting!ourselves!to!the!statements!
that!the!suspension!in!this!particular!case!is!legal!and!valid.!
&
Doctrine:&See!above.!Requisites!for!valid!restriction!on!transfer:!

Reasonableness!

TimeAboundedness!

Valid!and!Binding!

!
o

"Right! of! first! refusal"! !! which! would! provide! that! a!


stockholder! who! may! wish! to! sell! or! assign! his! shares!
must!first!offer!the!shares!to!the!corporation!or!to!the!
other! existing! stockholders! of! the! corporation,! under!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

them! first! to! the! corporation! or! existing!


shareholders!
Right! of! first! option"! !! grants! to! the! corporation! the!
right! to! buy! the! shares! at! a! fixed! price,! and! would! be!
valid!if!the!terms!and!consideration!are!reasonable.!
"BuyAback! agreement"! !! exists! in! situations! when!
shares! are! given! or! assigned! to! officers! or! employees!
under! the! condition! that! should! they! resign! or! be!
terminated! from! employment,! the! corporation! shall! be!
granted! the! right! to! buyAback! the! shares.! Such!
stipulations! are! valid! so! long! as! the! terms! and! the!
consideration!are!reasonable.!!!

Void!
o

"Right!of!prior!consent"!!!provision!would!require!that!
any!stockholder!who!may!wish!to!sell,!assign!or!dispose!
of!his!shares!in!the!corporation!may!do!so!only!when!he!
obtains! the! consent! of! the! board! of! directors! or! other!
stockholders! of! the! corporation.! Such! stipulations! are!
void! since! they! unduly! restrain! the! exercise! of! the!
stockholder!of!his!proprietary!interest!in!the!shares,!as!
illustrated! in! a! situation! where! a! stockholder! cannot!
dispose! of! his! shares! because! of! failure! to! obtain! such!
consent.!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
"

Before! you! can! sell! your! shares,! you! must! first!


get! the! approval! of! the! shareholders.! !! Atty.!
Hofilea!states!that!consent!rights!are!not!valid!
because! all! the! person,! whose! consent! you!
need,!has!to!do!is!dissent.!This!is!like!making!the!
share!nonAtransferable.!

If! the! provision! states! that! you! can! only! sell!


upon! the! approval! of! a! third! person! (who! may!
or! may! not! even! be! a! member! of! the!
corporation)!
An!absolute!prohibition!to!transfer!shares!!!even!when!
contained!in!the!articles!of!incorporation,!would!be!void!
since!it!would!violate!the!provision!of!Section!63!of!the!
"

Corporation! Code! which! treats! of! shares! of! stock! as!


personal! property! of! which! the! stockholder! has! the!
inherent!right!to!dispose!as!incident!of!his!ownership.1!!
1. RIGHT&OF&REFUSAL:&

The! indication! on! the! face! of! the! stock! certificate! that! it! is!
Nontransferable! alone! does! not! compel! the! corporation! to!
buy!back!the!shares!from!the!stockholder,!and!held!that!in!the!
absence! of! a! similar! contractual! obligation! and! of! a! legal!
provision! applicable! thereto,! it! is! logical! to! conclude! that! it!
would!be!unjust!and!unreasonable!to!compel!the!corporation!to!
comply!with!a!nonAexistent!or!imaginary!obligation.!Padgett,v.,

Padgett,v.,Babcock,&,Templeton,,Inc.,
,
Facts:&Padgett!was!an!employee!of!Babcock!&!Templeton,!Inc.!(BTI)!and!
bought!35!shares!of!the!corporation.!He!was!given!9!additional!shares!as!
Christmas! Bonuses.! The! Certificates! of! Stock! bore! the! words! NonA
transferable!on!their!faces.!Before!he!left!BTI,!Padgett!proposed!to!the!
President!that!BTI!buy!his!44!shares!at!par!value!plus!interest!or!that!he!
be!authorized!to!sell!them!to!other!people.,
&
Issue:&Whether!or!not!the!stocks!are!transferable.!
&
Held:& YES.! The! court! held! that! the! notation! be! held! null! and! void!
because! it! is! a! limitation! on! the! right! of! ownership! and! a! restraint! on!
trade.!
&
Doctrine:& Any! restriction! on! a! stockholders! right! to! dispose! of! his!
shares!must!be!construed!strictly.!Any!attempt!to!restrain!a!transfer!of!
shares!is!regarded!as!being!in!restraint!of!trade,!in!the!absence!of!a!valid!
lien! upon! its! shares,! and! except! to! the! extent! that! valid! restrictive!
regulations!and!agreements!exist!and!are!applicable.,
,

Babcock,&,Templeton,,Inc.,,59,Phil.,232,(1933).,
,

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!SEC! Opinion,! 20! February! 1995,! XXIX! SEC! QUARTERLY! BULLETIN! 4! (No.! 3,! Sept.!
1995).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Section! 63! contemplates! no! restriction! as! to! whom! the! stocks!
may!be!transferred.!It!does!not!suggest!that!any!discrimination!
may! be! created! by! the! corporation! in! favor! of,! or! against! a!
certain! purchaser.! The! owner! of! shares,! as! owner! of! personal!
property,! is! at! liberty,! under! said! section! to! dispose! them! in!
favor! of! whomever! he! pleases,! without! limitation! in! this!
respect,!than!the!general!provisions!of!law.!Fleishcher,v.,Botica,
Nolasco,,47,Phil.,583,(1925).,

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
,
Fleishcher,v.,Botica,Nolasco,
&
Facts:&Manuel!Gonzales!was!the!original!owner!of!five!shares!of!stock!of!
Botica!Nolasco!Inc.!Gonzales!assigned!and!delivered!said!five!shares!to!

be! transferred! as! therein! provided.! The! holder! of! shares,! as! owner! of!
personal!property,!is!at!liberty,!under!said!section,!to!dispose!of!them!in!
favor! of! whomsoever! he! pleases,! without! any! other! limitation! in! this!
respect,!than!the!general!provisions!of!law.,
,

Henry!Fleischer!to!repay!his!debt!to!the!latter.!Doctor!Miciano,!who!was!
the! secretaryAtreasurer! of! said! corporation,! offered! to! buy! from! Henry!
Fleischer,! on! behalf! of! the! corporation,! said! shares! of! stock! invoking!
Article! 12! of! the! byAlaws,! which! states! that! the! corporation! had! a!
preferential! right! to! buy! from! Manuel! Gonzalez! said! shares.! Fleischer!
refused.!Thereafter,!Fleischer!requested!Doctor!Miciano!to!register!said!
shares!in!his!name!but!the!latter!refused!to!do!so,!saying!that!it!would!
be!in!contravention!of!the!byAlaws!of!the!corporation.!
&
Issue:& Whether! or! not! Article! 12! of! the! byAlaws! of! the! Botica! Nolasco,!
Inc.,!is!in!conflict!with!the!provisions!of!the!Corporation!Law!(Act.!1459)!
&
Held:&YES.!Section!13,!paragraph!7!of!the!Corporation!Law,!empowers!a!
corporation!to!make!byAlaws,!not!inconsistent!with!any!existing!law,!for!
the!transferring!of!its!stock.!Section!35!of!the!same!specifically!provides!
that!the!shares!of!stock!are!personal!property!and!may!be!transferred!
by! delivery! of! the! certificate! indorsed! by! the! owner,! etc.! A! stock!
corporation! in! adopting! a! byAlaw! governing! transfer! of! shares! of! stock!
should!take!into!consideration!the!specific!provisions!of!Section!13!and!
35! of! The! Corporation! Law,! and! said! byAlaw! should! be! made! to!
harmonize!with!said!provisions.!It!should!not!be!inconsistent!therewith.!
&
Doctrine:&Section!35!defines!the!nature,!character!and!transferability!of!
shares!of!stock.!Under!said!section!they!are!personal!property!and!may!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! only! limitation! imposed! by! Section! 63! is! when! the!
corporation!holds!any!unpaid!claim!against!the!shares!intended!
to!be!transferred.!A!corporation,!either!by!its!board,!its!byAlaws,!
or! the! act! of! its! officers,! cannot! create! restrictions! in! stock!
transfers,!because!Restrictions!in!the!traffic!of!stock!must!have!
their! source! in! legislative! enactment,! as! the! corporation! itself!
cannot! create! such! impediment.! ByAlaws! are! intended! merely!
for!the!protection!of!the!corporation,!and!prescribe!relation,!not!
restriction;! they! are! always! subject! to! the! charter! of! the!
corporation.!Rural,Bank,of,Salinas,v.,CA,,210,SCRA,510,(1992).,

The!right!of!first!refusal!is!primarily!an!attribute!of!ownership.!
Conversely,!a!waiver!thereof!is!an!act!of!ownership.!To!allow!the!
PCGG!to!vote!the!sequestered!shares!for!this!purpose!would!be!
sanctioning! its! exercise! of! an! act! of! strict! ownership.! PCGG, v.,
SEC,,G.R.,No.,82188,,30,June,1988,(unrep.),

The!agreement!of!coAshareholders!to!mutually!grant!the!right!of!
first! refusal! to! each! other,! by! itself,! does! not! constitute! a!
violation! of! the! provisions! of! the! Constitution! limiting! land!
ownership! to! Filipinos! and! Filipino! corporations;! if! the! foreign!
shareholdings!of!a!landholding!corporation!exceed!40%,!it!is!not!
the! foreign! stockholders! ownership! of! the! shares! which! is!
adversely! affected! by! the! capacity! of! the! corporation! to! own!
landthat!is,!the!corporation!becomes!disqualified!to!own!land.!
This! finds! support! under! the! basic! corporate! law! principle! that!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the! corporation! and! its! stockholders! are! separate! juridical!
entities.! In! this! vein,! the! right! of! first! refusal! over! shares!
pertains!to!the!shareholders!whereas!the!capacity!to!own!land!
pertains!to!the!corporation.!J.G.,Summit,Holdings,,Inc.,v.,Court,
of,Appeals,,450,SCRA,169,(2005).!

to! preserve! and! protect! itself! by! excluding! competitors! or!


hostile! interests.! The! provision! is! made! obviously! to! prevent! a!
stockholder! from! creating! an! opportunity! to! take! advantage! of!
the! information! which! he! may! have! acquired! as! such! to!
promote! his! individual! interest! to! the! prejudice! of! the!
corporation! and! other! stockholders.! The! stockholders! have! a!

In!a!landholding!corporation!which!by!constitutional!mandate!is!

fiduciary! relation! with! their! corporation! for! the! collective!


benefit! of! the! stockholders.! Any! person! who! intends! to! buy!
stock! in! a! corporation! does! so! with! the! knowledge! that! its!
affairs! are! governed! by! the! articles! of! incorporation! and! byA
laws;! and! with! such! knowledge,! the! stockholder! may! be!
considered!to!have!consented!to!the!disqualification!to!engage!
in!the!same!line!of!business!and!thus,!it!cannot!be!said!that!the!

limited!to!40%!foreign!equity,!and!where!there!exists!a!right!of!
first! refusal! agreement! between! the! coAshareholders,! the! fact!
that!the!corporations!owns!land!cannot!deprive!stockholders!of!
their! right! of! first! refusal.! No! law! disqualifies! a! person! from!
purchasing!shares!in!a!landholding!corporation!even!if!the!latter!
will!exceed!the!allowed!foreign!equity,!what!the!law!disqualifies!
is!the!corporation!from!owning!land.!J.G.,Summit,Holdings,,Inc.,
v.,Court,of,Appeals,,450,SCRA,169,(2005).!
2. Restraint& of& Trade:! An! agreement! by! which! a! person! obliges!
himself!not!to!engage!in!competitive!trade!for!five!years!is!valid!
and! reasonable! and! not! an! undue! or! unreasonable! restraint! of!

stockholders!right!is!infringed.!2!

trade!and!is!obligatory!on!the!parties!who!voluntarily!enter!into!
such! agreement.! xOllendorf, v., Abrahamson,, 38, Phil., 585,
(1918).!

The!SEC,!as!a!matter!of!policy,!allows!restrictions!on!transfer!of!
shares! in! the! articles! of! incorporation! if! the! same! is! necessary!
and!convenient!to!the!attainment!of!the!objective!for!which!the!

competition!clause!may!be!properly!provided!for!as!a!condition!
for! being! a! stockholder! in! the! articles! of! incorporation! or! byA
laws!of!the!corporation.1!

company!was!incorporated,!unless!palpably!unreasonable!under!
the! circumstances.! The! underlying! test! as! to! whether! the!
restriction!are!valid!and!enforceable!is!whether!the!restriction!is!
sufficiently!reasonable!as!to!justify!the!restriction!overriding!the!
general! policy! against! restraint! on! alienation! of! personal!
property.! The! SEC! has! ruled! that! the! period! of! one! month! is!
deemed! reasonably! sufficient! for! the! existing! stockholder! of!

The!SEC!ruled!that!such!disqualification!provision!is!a!valid!and!

corporation! within! which! to! signify! their! desire! to! buy! the!

NonQCompetition& Clause:! The! SEC! has! opined! that! a! nonA

reasonable!exercise!of!corporate!authority!since!a!corporation,!
under! the! principle! of! selfApreservation,! has! the! inherent! right!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!SEC! Opinion,! 12! August! 1998,! XXXIII! SEC! QUARTERLY! BULLETIN! 14! (No.! 1,! June,!
1999).!

!SEC! Opinion,! 12! August! 1998,! XXXIII! SEC! QUARTERLY! BULLETIN! 14! (No.! 1,! June,!
1999).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
shares!of!stock!being!offered!for!sale!by!any!stockholder!before!
the!same!may!be!offered!to!third!parties.1!
&
B.&Remedy&If&Registration&Refused:&

Mandamus! will! not! lie! to! compel! the! corporate! secretary! to!
register!the!transfer!of!shares!in!the!corporate!books!when!the!
petitioner! is! not! the! registered! stockholder! nor! does! he! hold! a!
power!of!attorney!from!the!latter.!This!is!under!the!general!rule!
that! as! between! the! corporation! one! the! one! hand! and! its!
shareholders! on! other,! the! corporation! looks! only! to! its! books!
for!the!purpose!of!determining!who!its!shareholders!are,!so!that!
a! mere! indorsee! of! a! certificate! of! stock,! claiming! to! be! the!
owner,! will! not! necessarily! be! recognized! as! such! by! the!
corporation! and! its! officers,! in! absence! of! express! instructions!
of!the!registered!owner!to!make!such!transfer!to!the!indorsee,!
or! a! power! of! attorney! authorizing! such! transfer.! Hager, v.,
Bryan,,19,Phil.,138,(1911).2,

the! BryanALandon! Company! authorizing! him! to! make! demand! on! the!
secretary! of! the! Visayan! Electric! Company! to! make! the! transfer! which!
petitioner!seeks!to!have!made!through!the!medium!of!the!mandamus!of!
this!court.!
&
Issue:& Whether! or! not! a! writ! of! mandamus! will! lie! under! the!
circumstances!of!the!case!to!allow!the!transfer!of!shares.!
&
Held:&NO.!Petitioner!did!not!have!the!right!to!demand!the!transfer!since!
he! was! not! the! stockholder! of! record.! Furthermore,! even! the! BryanA
Landon! Company! did! not! demand! from! Visayan! Electric! Company! the!
transfer!of!said!shares.!Neither!did!it!give!by!way!of!a!special!power!of!
attorney! to! petitioner! the! authority! to! effect! such! a! transfer.! Hence,!
there! is! no! clear! and! legal! obligation! upon! the! respondent! that! will!
justify!the!issuance!of!a!writ!to!compel!the!latter!to!perform!a!transfer.!
&
Doctrine:&See!above.!
,

Hager,v.,Bryan,

1. Period&to&Enforce.&!Considering!that!the!law!does!not!prescribe!

&
Facts:& Hager! files! a! petition! for! mandamus! to! compel! the! company!
secretary! to! transfer! certain! shares! of! stock! of! the! Visayan! Electric!
Company!to!a!Mr.!Levering.!The!company!had!refused!to!do!so!because!

a! period! within! which! the! registration! of! purchase! of! shares!


should! be! effected,! the! action! to! enforce! the! right! does! not!
accrue!until!there!has!been!a!demand!and!a!refusal!concerning!
the! transfer.! Ponce& v.& Alsons& Cement& Corp.,& 393& SCRA& 602&
(2002).&
o When! all! the! requirements! have! been! complied! with,!
the! duty! of! the! corporate! secretary! to! record! the!

the! stocks! in! question! were! in! the! name! of! BryanALandon! Company.!
There! was! no! allegation! that! Hager! holds! any! power! of! attorney! from!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

transfer!in!the!books!of!the!corporation!is!ministerial.,

!SEC! Opinion,! 20! February! 1995,! XXIX! SEC! QUARTERLY! BULLETIN! 4! (No.! 3,!
September!1995).!!
2
!Rivera!v.!Florendo,!144!SCRA!643!(1986);!Ponce!v.!Alsons!Cement!Corp.,!393!
SCRA!602!(2002).!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

A!stipulation!on!the!stock!certificate!that!any!assignment!would!
not! be! binding! on! the! corporation! unless! registered! in! the!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
corporate! books! as! required! under! the! byAlaws! and! without!
providing! when! registration! should! be! made,! would! mean! that!
the!cause!of!action!and!the!determination!of!prescription!period!
would!begin!only!when!demand!for!registration!is!made!and!not!
at! the! time! of! the! assignment! of! the! certificate.! Won, v., Wack,
Wack,Golf,&,Country,Club,,104,Phil.,466,(1958).,

The!claim!for!damages!of!what!the!shares!could!have!sold!had!
the!demand!for!their!registration!in!the!name!of!the!buyer!been!
complied! with! is! deemed! to! be! speculative! damage! and! nonA
recoverable.! Batong, Buhay, Gold, Mines, v., CA,, 147, SCRA, 4,
(1987).,

!
Note&on&Sale&of&Shares:&

The! Corporate! Secretary! can! be! held! liable! for! recorded!


transfers!whose!tax!clearance!have!not!been!paid.!!

It!is!only!when!all!these!things!have!been!complied!that!you!can!
really!compel!the!corporate!secretary!to!record!your!transaction!
in!accordance!with!his!or!her!ministerial!function.!

!
Legal&Advice&for&the&transferee:&

&
Section&43.&Power&to&declare&dividends.&
The& board& of& directors& of& a& stock& corporation& may& declare& dividends&
out& of& the& unrestricted& retained& earnings& which& shall& be& payable& in&
cash,& in& property,& or& in& stock& to& all& stockholders& on& the& basis& of&
outstanding& stock& held& by& them:& Provided,& That& any& cash& dividends&
due&on&delinquent&stock&shall&first&be&applied&to&the&unpaid&balance&on&
the& subscription& plus& costs& and& expenses,& while& stock& dividends& shall&
be& withheld& from& the& delinquent& stockholder& until& his& unpaid&
subscription& is& fully& paid:& Provided,& further,& That& no& stock& dividend&
shall&be&issued&without&the&approval&of&stockholders&representing&not&
less&than&twoQthirds&(2/3)&of&the&outstanding&capital&stock&at&a&regular&
or&special&meeting&duly&called&for&the&purpose.&(16a)&
&
Stock& corporations& are& prohibited& from& retaining& surplus& profits& in&
excess& of& one& hundred& (100%)& percent& of& their& paidQin& capital& stock,&
except:&(1)&when&justified&by&definite&corporate&expansion&projects&or&
programs& approved& by& the& board& of& directors;& or& (2)& when& the&
corporation&is&prohibited&under&any&loan&agreement&with&any&financial&

transferee!will!be!entitled!to!the!transfer!of!dividends!which!the!
transferor! may! receive! from! the! corporation! during! the! period!
after!the!sale!but!before!the!name!of!the!transferee!is!recorded!
in!the!books!of!the!corporation.!

institution& or& creditor,& whether& local& or& foreign,& from& declaring&


dividends&without&its/his&consent,&and&such&consent&has&not&yet&been&
secured;& or& (3)& when& it& can& be& clearly& shown& that& such& retention& is&
necessary& under& special& circumstances& obtaining& in& the& corporation,&
such& as& when& there& is& need& for& special& reserve& for& probable&
contingencies.&(n)&

When! there! are! board! of! meetings,! you! can! ask! the! transferor!

&

To! get! a! declaration! of! trust! from! the! transferor! so! that! the!

to!give!you!a!proxy!who!will!vote!for!you!in!the!meeting.!
!
IV.&Rights&to&Dividends&(Section&43)&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

The! term! dividend! in! its! technical! sense! and! ordinary!


acceptation! is! that! part! of! portion! of! the! profits! of! the!
enterprise! which! the! corporation,! by! its! governing! agents,! sets!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
apart!for!ratable!division!among!the!holders!of!it!capital!stock
it!is!a!payment,!and!the!right!thereto!is!an!incident!of!ownership!
of!stock.!Cojuangco,v.,Sandiganbayn,,586,SCRA,790,(2009).!

Although! stock! certificates! grant! the! stockholder! the! right! to!


receive!quarterly!dividends!of!1%,!cumulative!and!participating,!
the! stockholders! do! not! become! entitled! to! the! payment!
thereof! as! a! matter! of! right! without! necessity! of! a! prior!
declaration! of! dividends.! Section! 43! of! Corporation! Code!
prohibits! the! issuance! of! any! stock! dividend! without! the!
approval!of!stockholders,!representing!not!less!than!twoAthirds!
(2/3)! of! the! outstanding! capital! stock,! which! underscores! the!
fact!that!payment!of!dividends!to!a!stockholder!is!not!a!matter!
of! right! but! a! matter! of! consensus.! Furthermore,! interest!
bearing! stocks,! on! which! the! corporation! agrees! absolutely! to!
pay! interest! before! dividends! are! paid! to! the! common!
stockholders,!is!legal!only!when!construed!as!requiring!payment!
of! interest! as! dividends! from! net! earnings! or! surplus! only.!
Republic,Planters,Bank,v.,Agana,,269,SCRA,1,(1997).,

When!the!Court!directed!that!a!total!of!111,415!shares!of!PLDT!
be!reconveyed!to!the!Republic!by!way!of!declaring!the!Republic!
to!be!the!rightful!owner!of!said!shares,!that!necessarily!included!

or& series& of& shares,& or& both,& any& of& which& classes& or& series& of& shares&
may&have&such&rights,&privileges&or&restrictions&as&may&be&stated&in&the&
articles&of&incorporation:&Provided,&That&no&share&may&be&deprived&of&
voting& rights& except& those& classified& and& issued& as& "preferred"& or&
"redeemable"& shares,& unless& otherwise& provided& in& this& Code:&
Provided,&further,&That&there&shall&always&be&a&class&or&series&of&shares&
which&have&complete&voting&rights.&Any&or&all&of&the&shares&or&series&of&
shares&may&have&a&par&value&or&have&no&par&value&as&may&be&provided&
for& in& the& articles& of& incorporation:& Provided,& however,& That& banks,&
trust& companies,& insurance& companies,& public& utilities,& and& building&
and& loan& associations& shall& not& be& permitted& to& issue& noQpar& value&
shares&of&stock.&
&
Preferred& shares& of& stock& issued& by& any& corporation& may& be& given&
preference&in&the&distribution&of&the&assets&of&the&corporation&in&case&
of& liquidation& and& in& the& distribution& of& dividends,& or& such& other&
preferences&as&may&be&stated&in&the&articles&of&incorporation&which&are&
not& violative& of& the& provisions& of& this& Code:& Provided,& That& preferred&
shares&of&stock&may&be&issued&only&with&a&stated&par&value.&The&board&

!
V.&Right&to&Vote&and&to&Attend&Meetings&(Sections&6&and&89)&
&

of&directors,&where&authorized&in&the&articles&of&incorporation,&may&fix&
the& terms& and& conditions& of& preferred& shares& of& stock& or& any& series&
thereof:& Provided,& That& such& terms& and& conditions& shall& be& effective&
upon&the&filing&of&a&certificate&thereof&with&the&Securities&and&Exchange&
Commission.&
&
Shares&of&capital&stock&issued&without&par&value&shall&be&deemed&fully&
paid& and& nonQassessable& and& the& holder& of& such& shares& shall& not& be&

Section&6.&Classification&of&shares.&
The&shares&of&stock&of&stock&corporations&may&be& divided&into&classes&

liable& to& the& corporation& or& to& its& creditors& in& respect& thereto:&
Provided;& That& shares& without& par& value& may& not& be& issued& for& a&

the!reconveyance!to!the!Republic!of!the!dividends!and!interest!
accruing! thereto.! Cojuangco, v., Sandiganbayn,, 586, SCRA, 790,
(2009).,

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
consideration& less& than& the& value& of& five& (P5.00)& pesos& per& share:&
Provided,& further,& That& the& entire& consideration& received& by& the&
corporation&for&its&noQpar&value&shares&shall&be&treated&as&capital&and&
shall&not&be&available&for&distribution&as&dividends.&
&

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

A&corporation&may,&furthermore,&classify&its&shares&for&the&purpose&of&
insuring&compliance&with&constitutional&or&legal&requirements.&
&
Except& as& otherwise& provided& in& the& articles& of& incorporation& and&
stated& in& the& certificate& of& stock,& each& share& shall& be& equal& in& all&
respects&to&every&other&share.&
&

&
Except&as&provided&in&the&immediately&preceding&paragraph,&the&vote&
necessary& to& approve& a& particular& corporate& act& as& provided& in& this&
Code&shall&be&deemed&to&refer&only&to&stocks&with&voting&rights.&
&
Section&89.&Right&to&vote.&
The& right& of& the& members& of& any& class& or& classes& to& vote& may& be&

Where& the& articles& of& incorporation& provide& for& nonQvoting& shares& in&
the& cases& allowed& by& this& Code,& the& holders& of& such& shares& shall&
nevertheless&be&entitled&to&vote&on&the&following&matters:&
&
1.&Amendment&of&the&articles&of&incorporation;&&
&
2.&Adoption&and&amendment&of&byQlaws;&

limited,&broadened&or&denied&to&the&extent&specified&in&the&articles&of&
incorporation&or&the&byQlaws.&Unless&so&limited,&broadened&or&denied,&
each&member,&regardless&of&class,&shall&be&entitled&to&one&vote.&
&
Unless& otherwise& provided& in& the& articles& of& incorporation& or& the& byQ
laws,&a&member&may&vote&by&proxy&in&accordance&with&the&provisions&
of&this&Code.&(n)&

&
3.&Sale,&lease,&exchange,&mortgage,&pledge&or&other&disposition&of&all&or&
substantially&all&of&the&corporate&property;&
&
4.&Incurring,&creating&or&increasing&bonded&indebtedness;&&
&
5.&Increase&or&decrease&of&capital&stock;&
&

&
Voting& by& mail& or& other& similar& means& by& members& of& nonQstock&
corporations& may& be& authorized& by& the& byQlaws& of& nonQstock&
corporations& with& the& approval& of,& and& under& such& conditions& which&
may&be&prescribed&by,&the&Securities&and&Exchange&Commission.&
&
A.&Who&has&the&right&to&vote&

6.& Merger& or& consolidation& of& the& corporation& with& another&


corporation&or&other&corporations;&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

General& Rule:& The! person! registered! in! the! books! of! the!
company!has!owner!of!the!shares!is!one!who!is!entitled!to!vote!
as!shareholder.,

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
o

Since!the!appointment!of!proxy!is!purely!personal,!and!
the! right! to! vote! is! inseparable! from! the! right! of!
ownership! of! stock! without! the! owners! consent,! and!
therefore!a!proxy!to!vote!stock,!to!be!valid,!must!have!
been!given!by!the!person!who!is!the!legal!owner!of!the!
stock!and!entitled!to!vote!the!same!at!the!time!it!is!to!

corporation!that!is!exercised!through!his!vote.!The!right!
to! vote! is! a! right! inherent! in! and! incidental! to! the!
ownership!of!corporate!stock,!and!as!such!is!a!property!
right.!Castillo,v.,Balinghasay,,440,SCRA,442,(2004).,

stockholder!has!a!right!to!participate!in!any!meeting,!and!in!the!
absence!of!fraud!the!action!of!the!stockholders!meeting!cannot!
be!collaterally!attacked!on!account!of!such!participation,!even!if!
it! be! shown! later! on! that! the! shares! had! been! previously! sold!
(but!not!recorded).!Price, and, Sulu, Dev., Co., v., Martin,, 58, Phil.,

be!voted. !

The!right!to!vote!is!inherent!in!and!incidental!to!the!ownership!
of!corporate!stocks.!It!is!settled!that!unissued!stocks!may!not!be!
voted! or! considered! in! determining! whether! a! quorum! is!
present! in! a! stockholders! meeting,! or! whether! a! requisite!
proportion! of! the! stock! of! the! corporation! is! voted! to! adopt! a!
certain! measure! or! act.! Only! stock! actually! issued! and!
outstanding! may! be! voted.! Under! Section! 6! of! the! Corporation!
Code,! each! share! of! stock! is! entitled! to! vote,! unless! otherwise!
provided!in!the!articles!of!incorporation!or!declared!delinquent!
under!Section!67!of!the!Code.!Neither!the!stockholders!nor!the!
corporation! can! vote! or! represent! shares! that! have! never!
passed! to! the! ownership! of! stockholders,! or,! having! so! passed,!
have!again!been!purchased!by!the!corporation.!These!shares!are!
not! to! be! taken! into! consideration! in! determining! majorities.!
When!the!law!speaks!of!a!given!proportion!of!the!stock,!it!must!
be! construed! to! mean! shares! that! have! passed! from! the!
corporation,!and!that!may!be!voted.!Tan,v.,Sycip,,499,SCRA,216,
(2006).,
o One! of! the! rights! of! a! stockholder! is! the! right! to!
participate! in! the! control! and! management! of! the!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!SEC! Opinion,! 3! December! 1993,! XXVIII! SEC! QUARTERLY! BULLETIN! 5! (No.! 2,! June!
1994).!!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Until!challenged!successfully!in!proper!proceedings,!a!registered!

707,(1933).,

The!sequestration!of!shares!does!not!entitle!the!government!to!
exercise! acts! of! ownership! over! the! shares;! even! sequestered!
shares! may! be! voted! upon! by! the! registered! stockholder.!
Cojuangco,Jr.,v.,Roxas,,195,SCRA,797,(1991).,
o The!right!to!vote!sequestered!shares!of!stock!registered!
in! the! names! of! private! individuals! or! entities! and!
alleged! to! have! been! acquired! with! illAgotten! wealth!
shall,! as! a! rule,! be! exercised! by! the! registered! owner.!
The! PCGG! may,! however,! be! granted! such! voting! right!
provided! it! can! (1)! show! prima! facie! evidence! that! the!
wealth! and/or! the! shares! are! indeed! illAgotten;! and! (2)!
demonstrate! imminent! danger! of! dissipation! of! the!
assets,!thus!necessitating!their!continued!sequestration!
and! voting! by! the! government! until! a! decision,! ruling!
with! finality! on! their! ownership,! is! promulgated! by! the!
proper! court.! Nevertheless,! the! foregoing! "twoAtiered"!
test!does!not!apply!when!the!funds!that!are!prima!facie!
public!in!character!or,!at!least,!are!affected!with!public!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
interest.! Inasmuch! as! the! subject! UCPB! shares! in! the!
present!case!were!undisputably!acquired!with!coco!levy!
funds! which! are! public! in! character,! then! the! right! to!
vote! them! shall! be! exercised! by! the! PCGG.! In! sum,! the!
"public! character"! test,! not! the! "twoAtiered"! one,!
applies.! Republic, v., COCOFED,, 372, SCRA, 462, (2001);,
Trans, Middle, East, (Phils), v., Sandiganbayan,, 490, SCRA,
455,(2006).,
&
B.&Instances&When&Stockholders&Entitled&to&Vote:&
1. Amendment!of!articles!of!incorporation!(Section&16)!
2. Election!of!directors!and!trustees!(Section&24)!
3. Investment!in!another!business!or!corporation!(Sections&36&and&
4.
5.
6.
7.
8.

42)&
Increase!and!Decrease!of!capital!stock!(Section&38)!
Incurring,!or!increasing!bonded!indebtedness!(Section&38)&
Sale,!disposition!or!encumbrance!of!all!or!substantially!all!of!the!
corporate!assets&(Section&40)&!
Declaration!of!stock!dividends!(Section&43).!
Management!contracts!(Section&44)!

necessary,&unless&there&is&a&written&proxy,&signed&by&all&the&coQowners,&
authorizing& one& or& some& of& them& or& any& other& person& to& vote& such&
share& or& shares:& Provided,& That& when& the& shares& are& owned& in& an&
"and/or"&capacity&by&the&holders&thereof,&any&one&of&the&joint&owners&
can&vote&said&shares&or&appoint&a&proxy&therefor.&(n)&
&
D.&Pledgor,&Mortgagors&and&Administrators&(Section&55)&
&
Section.&55.&Right&to&vote&of&pledgors,&mortgagors,&and&administrators.&
In& case& of& pledged& or& mortgaged& shares& in& stock& corporations,& the&
pledgor& or& mortgagor& shall& have& the& right& to& attend& and& vote& at&
meetings&of&stockholders,&unless&the&pledgee&or&mortgagee&is&expressly&
given& by& the& pledgor& or& mortgagor& such& right& in& writing& which& is&
recorded&on&the&appropriate&corporate&books.&(n)&
&
Executors,& administrators,& receivers,& and& other& legal& representatives&
duly& appointed& by& the& court& may& attend& and& vote& in& behalf& of& the&
stockholders&or&members&without&need&of&any&written&proxy.&(27a)&
&

9. Adoption,!amendment!and!repeal!of!byAlaws!(Section&48).&
10. Fixing!of!consideration!of!no!par!value!shares!(Section&62)&
11. Merger!and!consolidation!(Section&72)!

registered! stockholder! to! pay! his! loan.! Consequently,! without!


proper! foreclosure,! the! lender! cannot! demand! that! the! shares!
be! registered! in! his! name., Lim, Tay, v., Court, of, Appeals,, 293,
SCRA,634,(1998).,

&
C.&Joint&Ownership&(Section&56)&
&
Section&56.&Voting&in&case&of&joint&ownership&of&stock.&
In& case& of& shares& of& stock& owned& jointly& by& two& or& more& persons,& in&
order& to& vote& the& same,& the& consent& of& all& the& coQowners& shall& be&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

When! shares! are! pledged! by! means! of! endorsement! in! blank!
and! delivery! of! the! covering! certificates! to! a! loan,! the! pledgee!
does!not!become!the!owner!thereof!simply!by!the!failure!of!the!

Although! the! Rules! of! Court,! while! permitting! an! executor! or!
administrator! to! represent! or! to! bring! suits! on! behalf! of! the!
deceased,! do! not! prohibit! the! heirs! from! representing! the!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
deceased.!When!no!administrator!has!been!appointed,!there!is!
all! the! more! reason! to! recognize! the! heirs! as! the! proper!
representatives! of! the! deceased.! Gochan, v., Young,, 354, SCRA,
207,(2001).,

&
E.&Treasury&Share&No&Voting&Rights&(Section&57)&
&

or!the!bylaws.!Applying!Section!91!to!the!present!case,!
we!hold!that!dead!members!who!are!dropped!from!the!
membership! roster! in! the! manner! for! the! cause!
provided! for! in! the! ByALaw! of! GCHS! are! not! to! be!
counted! in! determining! the! requisite! vote! in! corporate!
matters! or! the! requisite! quorum! for! the! annual!
members! meeting.! With! 11! remaining! members,! the!

Section&57.&Voting&right&for&treasury&shares.&
Treasury& shares& shall& have& no& voting& right& as& long& as& such& shares&
remain&in&the&Treasury.&(n)&
&

Treasury!shares!cannot!be!voted!upon.!Tan, v., Sycip,, 499, SCRA,


216,(2006).,

quorum! in! the! present! case! should! be! 6.! therefore,!


there! being! a! quorum,! the! annual! members! meeting,!
conducted!with!six!members!present,!was!valid.!Tan, v.,
Sycip,,499,SCRA,216,(2006).,

&
F.&Voting&Rights&of&Members&

In! stock! corporation,! shareholders! may! generally! transfer! their!


shares.! Thus,! on! the! death! of! a! shareholder,! the! executor! or!
administrator! duly! appointed! by! the! Court! is! vested! with! the!
legal!title!to!the!stock!and!entitled!to!vote!it.!Until!a!settlement!
and!division!of!the!estate!is!effected,!the!stocks!of!the!decedent!

Under! the! ByALaws! of! GCHS,! membership! in! the!


corporation! shall,! among! others,! be! terminated! by! the!
death! of! the! member.! Section! 91! of! the! Corporation!
Code! further! provides! that! termination! extinguishes! all!
the! rights! of! a! member! of! the! corporation,! unless!
otherwise! provided! in! the! articles! of! the! incorporation!

&
G.&Conduct&of&Stockholders'&Meetings:&
1. Kinds&and&Requirements&of&Meetings&(Sections&49&and&50);&

are! held! by! the! administrator! or! executor.! On! the! other! hand,!
membership! in! and! all! rights! arising! from! a! nonstock!
corporation! are! personal! and! nonAtransferable,! unless! the!
articles! of! incorporation! or! the! bylaws! of! the! corporation!
provide! otherwise.! In! other! words,! the! determination! of!
whether! or! not! dead! members! are! entitled! to! exercise! their!
voting!rights!(through!their!executor!or!administrator)!depends!

&

on!those!articles!of!incorporation!or!byAlaws.!Tan, v., Sycip,, 499,


SCRA,216,(2006).,

on&a&date&fixed&in&the&byQlaws,&or&if&not&so&fixed,&on&any&date&in&April&of&
every& year& as& determined& by& the& board& of& directors& or& trustees:&

Section&49.&Kinds&of&meetings.&
Meetings& of& directors,& trustees,& stockholders,& or& members& may& be&
regular&or&special.&(n)&
&
Section&50.&Regular&and&special&meetings&of&stockholders&or&members.&
Regular& meetings& of& stockholders& or& members& shall& be& held& annually&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
Provided,& That& written& notice& of& regular& meetings& shall& be& sent& to& all&
stockholders&or&members&of&record&at&least&two&(2)&weeks&prior&to&the&
meeting,&unless&a&different&period&is&required&by&the&byQlaws.&
&
Special&meetings&of&stockholders&or&members&shall&be&held&at&any&time&

2. Place&and&Time&of&Meeting&(Sections&51&and&93);&
&
Section&51.&Place&and&time&of&meetings&of&stockholders&or&members.&
Stockholders'&or&members'&meetings,&whether&regular&or&special,&shall&
be& held& in& the& city& or& municipality& where& the& principal& office& of& the&

deemed& necessary& or& as& provided& in& the& byQlaws:& Provided,& however,&
That& at& least& one& (1)& week& written& notice& shall& be& sent& to& all&
stockholders&or&members,&unless&otherwise&provided&in&the&byQlaws.&
&
Notice& of& any& meeting& may& be& waived,& expressly& or& impliedly,& by& any&
stockholder&or&member.&
&

corporation& is& located,& and& if& practicable&in& the& principal& office&of&the&


corporation:& Provided,& That& Metro& Manila& shall,& for& purposes& of& this&
section,&be&considered&a&city&or&municipality.&
&
Notice&of&meetings&shall&be&in&writing,&and&the&time&and&place&thereof&
stated&therein.&
&

Whenever,& for& any& cause,& there& is& no& person& authorized& to& call& a&
meeting,&the&Secretaries&and&Exchange&Commission,&upon&petition&of&a&
stockholder& or& member& on& a& showing& of& good& cause& therefor,& may&
issue&an&order&to&the&petitioning&stockholder&or&member&directing&him&
to& call& a& meeting& of& the& corporation& by& giving& proper& notice& required&
by&this&Code&or&by&the&byQlaws.&The&petitioning&stockholder&or&member&
shall& preside& thereat& until& at& least& a& majority& of& the& stockholders& or&

All&proceedings&had&and&any&business&transacted&at&any&meeting&of&the&
stockholders& or& members,& if& within& the& powers& or& authority& of& the&
corporation,& shall& be& valid& even& if& the& meeting& be& improperly& held& or&
called,& provided& all& the& stockholders& or& members& of& the& corporation&
are&present&or&duly&represented&at&the&meeting.&(24&and&25)&
&
Section&93.&Place&of&meetings.&

members&present&have&been&chosen&one&of&their&number&as&presiding&
officer.&(24,&26)&

The&byQlaws&may&provide&that&the&members&of&a&nonQstock&corporation&
may& hold& their& regular& or& special& meetings& at& any& place& even& outside&
the& place& where& the& principal& office& of& the& corporation& is& located:&
Provided,& That& proper& notice& is& sent& to& all& members& indicating& the&
date,& time& and& place& of& the& meeting:& and& Provided,& further,& That& the&
place&of&meeting&shall&be&within&the&Philippines.&(n)&

&

Regular!Meetings&
o
o

Regular!meetings!may!(1)!be!provided!in!the!byAlaws!or!
(2)!scheduled!by!the!board!in!April.&
The! byAlaws! may! provide! for! more! than! one! meeting!
annually!!there!is!no!prohibition!to!this!effect.&

Special!Meetings&
o

Held!at!any!time!it!is!called.&

&
Stock&Corporation&
Principal!office!or!city!where!it!is!
located!

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

NonQStock&Corporation&
Any!place!in!the!Philippines,!even!
if!it!is!outside!the!city!or!place!of!

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
the!principal!office!
&
3. Quorum&(Section&52)&
&
Section&52.&Quorum&in&meetings.&
Unless& otherwise& provided& for& in& this& Code& or& in& the& byQ& laws,& a&
quorum&shall&consist&of&the&stockholders&representing&a&majority&of&the&
outstanding&capital&stock&or&a&majority&of&the&members&in&the&case&of&
nonQstock&corporations.&(n)&

Section&58.&Proxies.&
Stockholders& and& members& may& vote& in& person& or& by& proxy& in& all&
meetings&of&stockholders&or&members.&Proxies&shall&in&writing,&signed&
by&the&stockholder&or&member&and&filed&before&the&scheduled&meeting&
with&the&corporate&secretary.&Unless&otherwise&provided&in&the&proxy,&
it&shall&be&valid&only&for&the&meeting&for&which&it&is&intended.&No&proxy&
shall& be& valid& and& effective& for& a& period& longer& than& five& (5)& years& at&
any&one&time.&(n)&
&

&

proxies,!while!proxy& validation!concerns!the!validation!of!such!
secured! and! submitted! proxies.! It! is! possible! that! an! intraA
corporate! controversy! may! animate! a! disgruntled! shareholder!
to!complain!to!the!Securities!and!Exchange!Commission!(SEC)!a!
corporations! violations! of! SEC! rules! and! regulations,! but! that!
motive! alone! should! not! be! sufficient! to! deprive! the! SEC! of! its!

Quorum!is!based!on!the!totality!of!the!shares!which!have!been!
subscribed! and! issued! whether! it! be! founders! shares! or!
common!shares.!To!base!the!computation!of!quorum!solely!on!
the! obviously! deficient,! if! not! inaccurate! stock! and! transfer!
book,! and! completely! disregarding! the! issued! and! outstanding!
shares! indicated! in! the! articles! of! incorporation! would! work!
injustice!to!the!owners!and/or!successors!in!interest!of!the!said!
shares.!The!stock!and!transfer!book!cannot!be!used!as!the!sole!
basis! for! determining! the! quorum! as! it! does! not! reflect! the!
totality! of! shares! which! have! been! subscribed,! more! so! when!
the!articles!of!incorporation!show!a!significantly!larger!amount!
of! shares! issued! and! outstanding! as! compared! to! that! listed! in!
the! stock! and! transfer! book.! Lanuza, v., Court, of, Appeals,, 454,
SCRA,54,(2005).,

!
VI.&Contracts&and&Agreement&Affecting&Shareholdings&
&
A.&Proxy&(Section&58)&
&

)
NOTES)BY)RACHELLE)ANNE)GUTIERREZ)(UPDATED)APRIL)3,)2014))

Proxy& solicitation! involves! the! securing! and! submission! of!

investigatory! and! regulatory! powers,! especially! so! since! such!


powers!are!exercisable!on!a!motu!proprio!basis.!GSIS,v.,Court,of,
Appeals,,585,SCRA,679,(2009).,

Nature& of& Proxy& Relationship:& A! proxy! is! a! special! form! of!


agency! and! governed! by! the! Law! on! Agency.! Consequently,!
being!a!strictly!fiduciary!relation,!a!proxy!is!essentially!revocable!
in!nature;!and!any!attempt!or!stipulation!to!render!it!irrevocably!
would! be! to! no! avail.! Generally,! proxies,! even! those! with!
irrevocable! terms,! have! always! been! considered! as! revocable,!
unless!coupled!with!an!interest,!and!their!revocation!may!be!by!
formal!notice,!orally,!or!by!conduct!as!by!the!appearance!of!the!
stockholder! or! member! giving! the! proxy,! or! the! issuance! of! a!
subsequent!proxy,!or!the!sale!of!shares.&

CORPORATION)LAW)REVIEWER)(201332014))

)))ATTY.)JOSE)MARIA)G.)HOFILEA))

!
The!SEC!has!appropriately!observed!that!a!person!acting!
as!proxy!for!a!stockholder!is!in!the!eyes!of!the!law,!the!
latters!agent!and!as!such,!a!mere!fiduciary!who!has!the!
duty! of! acting! in! strict! accord! with! requirements! of! a!
fiduciary!relation;!and!that!accordingly,!the!proxy!holder!
must! act! in! accordance! with! the! instructions! given! to!

it! is! to! its! abrogated! jurisdictional! powers.! The! fact! that! the!
jurisdiction! of! the! regular! courts! under! Section! 5(c)! is! confined!
to! the! voting! on! election! of! officers,! and! not! on! all! matters!
which! may! be! voted! upon! by! stockholders,! elucidates! that! the!
power! of! the! Securities! and! Exchange! Commission! (SEC)! to!
regulate! proxies! remains! extant! and! could! very! well! be!

him/her! by! the! stockholder! and! any! violation! of! such!


fiduciary! duty! shall! be! governed! by! the! pertinent! laws!
on!Agency,!not!by!the!Corporation!Code.1&
1. Requisites&for&Valid&Proxy:&&&
a. The!proxy!shall!in!writing!
b. Signed!by!the!stockholder!or!member!
c. Filed! before! the! scheduled! meeting! with! the! corporate!

exercised! when! stockholders! vote! on! matters! other! than! the!


election! of! directors.! GSIS, v., Court, of, Appeals,, 585, SCRA, 679,
(2009).,

secretary.!!
2. Who& May& be& Appointed& Proxy:, Section! 58! of! the! Corporation!
Code! imposes! no! limitation! as! to! the! persons! who! may! be!
appointed!as!proxy!and!byAlaw!provisions!restricting!the!right!of!
a!stockholder!to!appoint!a!proxy!would!be!void.!However,!in!the!
case! of! nonAstock! corporation,! Section! 89! of! the! Corporation!
Code! the! articles! of! incorporation! or! byAlaws! may! restrict! the!
right! of! a! member! to! vote! by! proxy.! The! SEC! has! opined! that!
under!Section!89!the!right!of!members!to!vote!by!proxy!may!be!
denied! entirely! by! appropriate! provisions! in! the! articles! of!
incorporation!or!byAlaws!of!a!nonAstock!corporation.2!!!

The!SECs!power!to!pass!upon!the!validity!of!proxies!in!relation!
to!election!controversies!has!effectively!been!withdrawn,!tied!as!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1

!SEC!Opinion,!15!July!197,!XXXII!SEC!QUARTERLY!BULLETIN!4!(No.!2,!Dec.!1997).!
SEC!Opinion,!20!September!1994,!XXIX!SEC!QUARTERLY!BULLETIN!20!(No.1,!March!
1995).!!
2

&
B.&Voting&Trust&Agreements&(Section&59)&
&
Section&59.&Voting&trusts.&
One&or&more&stockholders&of&a&stock&corporation&may&create&a&voting&
trust&for&the&purpose&of&conferring&upon&a&trustee&or&trustees&the&right&
to& vote& and& other& rights& pertaining& to& the& shares& for& a& period& not&
exceeding& five& (5)& years& at& any& time:& Provided,& That& in& the& case& of& a&
voting& trust& specifically& required& as& a& condition& in& a& loan& agreement,&
said&voting&trust&may&be&for&a&period&exceeding&five&(5)&years&but&shall&
automatically& expire& upon& full& payment& of& the& loan.& A& voting& trust&
agreement& must& be& in& writing& and& notarized,& and& shall& specify& the&
terms&and&conditions&thereof.&A&certified&copy&of&such&agreement&shall&
be& filed& with& t