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Philippine Corporate Law o The Corporation is meant to serve the law.

How can a
corporation serve the law?
 Introduction to Corporate Law  How does the corporation best serve the law? By
o How it used to be 24 years ago (1986) serving the people that it serves.
 Considered a “technical” course, likened to Tax  To serve men for which the law for which the law
o The Setting today: is meant to serve
 Economic Growth/Financial Crisis o When there is a conflict between t
 Globalization  Tri-Level “Legal Relationships” in the Corporate Setting
 E-commerce and What Lies Ahead o Juridical Entity Level
o Used to be: Corporate Law was taught ahead of Partnership and  Views the relationship between State and the
taught in the same semester as Agency. corporation
o Basic principles in Agency and Partnership  When the issue is between the corporation, as the
 Agency creature of the State
 Partnership  It is the highest level in Corporation law itself
o History of Philippine Corporate Law o Intra-Corporate Contract Level
 The Spanish Code of Commerce  Views the relationship between and among the
 The Americans introduced American Constitutional Law members of “corporate family”
System, Administrative System, Commercial Law in order o “Extra-Corporate” Contract Level
to ensure that American merchants will be able to come  Views the relationship between corporation and
here to take advantage of the natural resources of the “outsiders”
country.  Outside of Corporation law, but it is at the heart
 The Corporation Law (Act 1459; 1 April 1906) of Corporation law
 Was weary of the size ad potency of Corporate Enterprises  Juridical Entity Law
 Contained prohibitory provisions on cross ownership of o Relationship between State and Corporation
corporations and of owning land  Covered by Section 2, Corporation Code
 Corporation Code (May, 1980)  Only defined the juridical entity level
 When the Corporation Code was enacted, it was already  Essentially Governed by Corporate Law Principles
10 years late in its provisions.  Animated by Contract Law Doctrines
 Of common law origin, why?  Under the aegis Constitutional Principles
o Many lawyers and judges have the Civil Code  The only thing that can undermine the
mentality. corporate law principle
o In common law countries, the main source of the law  Intra-Corporate Relationship
is not judges, but decisions of judges. (Cf. Art. 8, Civil o Between Corporation and its Agents (Directors and
Code) Officers)
o In a true civil law country, decisions are not  Governed by Corporate Law, Law on Agency and
published, because there is no system of precedence. Trust; and in some cases by Labor Law principles
o Does the term dura lex sed lex apply to common law? o Between Corporation and Shareholders/Members
o Do common law jurisdiction now have statutory rules?  Governed by Corporate Law, supplemented by
Codes? Yes, they do. Contract Law Doctrines
 In a common law society, what is the main source o Between and Among Stockholders/Members in
of the law? Decisions Common Venture
o By means by which man are able to achieve its goals  Governed by Corporate Law, supplemented by
are called “tools.” Contract Law Doctrines
 P.D. No. 902-A (1985)  Extra-Corporate Relationships
 Re-chartered the SEC o Between Corporation and its Employees
 Reversal of Trend: Securities Regulation Code  Governed by Labor Law, but limited cases by the
 Business Thesis of the Study of Corporate Law Business Judgment Rule of Corporate Law
o The “Corporation” Concept o Between Corporation and its Contract Creditors
 “… A Corporation is an artificial being created by operation of  Governed by Contract Law, particularly Mutuum
law, having the right of succession and the powers, attributes and Credit Transaction principles
and properties expressly authorized by law or incident to its o Between Corporation and Other Claimants
existence.” (Sec. 2, Corporation Code) o Governed by Quasi-Delicts or Torts principles and
 when the law goes out of its way to define something, it is principles of Human Relationship
jurisdictional o These are areas outside the corporate family.
 Attributes of Corporation o Corporate Law is always subservient to Civil Law.
 Juridical Person: A corporation is an artificial being  Tri-Level “Existence” in the Corporate Setting
o In order to allow that association or business o Assets-Only Level
enterprise to enter into contractual relations before  Aggregation of Assets and Resources
the law  Law on Sales, wherein the Seller is the Corporation
 Creature of the Law: created by operation of law o Business Enterprise Level
o T/F: Is a partnership, as a juridical person, a creature  Economic unit or the “going concern”
of the law? TRUE  It as intangible asset, which earns money
 Separate Juridical Personality: with a right of succession o Juridical Entity Level
o Unlike a Partnership, a Corporation has a strong  The business or endeavor pursued in the medium of the
juridical personality. corporation
 Creature of Limited Powers: has only such powers,  Defines the “Subject Matter” of Contract
attributes and properties expressly authorized by law or  Determines the Applicable Law
incident to its existence  Corporate Vehicle is a complex form of Ownership-Management
o What are human beings before the law? You are a System and its underlying basis is Contract.
“free agent,” not bound by what the law says.  The demands of Commerce:
 Non-impairment clause of the Constitution o Corporation essentially a medium of pursuing Commercial
 Consensuality Transactions
o Equity versus Debt Investments

1 CLV LECTURE NOTES | CORPORATE LAW 2012


 What is the statutory provision that supports a strong juridical
II. Concepts personality? Section2
 Definition o Centralized Management
o Artificial being  Separate Juridical Personality  Equity is the technical and commercial term for the
 What sets the corporation apart from all the media of doing ownership of a business
business is a separate juridical person.  Shares of stocks: owners of the shares
 But it is not unique in that sense, because Partnerships  Where Section 23 does not exist, who will exercise acts of
have also separate juridical personality ownership? The shareholders.
 Each one is granted a charter (approved Articles of  The Board of Directors are agents of the principal
Incorporation), which makes it strong (corporation)
 Vs. partnership: the partners can themselves withdraw  What is the statutory provision that supports centralized
from the contract management? Section 23
o Created by law  Strong Juridical Personality o Limited Liability
 The law provides it with a strong juridical personality  When the Board of Directors exercise their
 The law grants the separate juridical personality to a powers/prerogatives pursuant to Section 23, they act in the
partnership capacity of agents of the corporation.
 Consensual or informal separate juridical personality  Every agent acts in behalf of the principal (corporation)
 The nexus of its separate juridical personality of a corporation  Partnership
is a State grant (commission, charter)  Unlimited liability: partners are secondary liable (benefit
 T/F: The primary basis of the personality creating a of excussion)
corporation is the law granting it. While the primary basis of  What is the basis? The law says so.
the personality of the partnership is the concept.  What is the statutory provision that supports limited liability?
 Nexus: meeting of the minds between 5 or more persons to It has no direct statutory support, but falls as a necessary
create a corporation consequence of Section 2 that a corporation is an artificial
 T/F: The basis by which the law grants a separate juridical being. It refers to the doctrine of relativity, in that only those
personality to a corporation and a partnership is the meeting who give their consent to the contract are bound by the
of the minds. TRUE contract.
 Why is the juridical personality of the corporation strong?  There is no privity between the stockholders and the contract
What makes it strong? entered into by the corporation, and hence, the stockholders
o It a strong one, because it is formal and solemn in cannot be held liable for such contract to which they never
character. gave its consent.
 Why is the juridical personality of the partnership weak?  The corporation is just a medium for the stockholders, and
o The personality of a partnership is informal and weak. that is why, there is the doctrine of limited liability. The
 It is solemn because it needs to follow a prescribed procedure separate juridical personality is the basis of limited liability.
in order to be created.  T/F: The Doctrine of Limited Liability emanates as a
o Right of succession  Separate Juridical Personality consequence of separate juridical personality according to
 Is it possible for a partnership to be a separate juridical Section 2. TRUE.
personality without a state-grant?  T/F: Whenever the law grants to a business a separate
 Juridical Personality always comes from the State. juridical personality, then necessarily, the doctrine of limited
 T/F: Right of succession comes about as a necessary legal liability is a necessary consequence. TRUE.
consequence of the law granting to it separate juridical  In a corporation, the management powers are given to the
personality. FALSE Board of Directors (centralized management)
 In every artificial being that is created by law, and  As it is mutual agency for a partnership, it is centralized
thereby, every artificial take their existence from the management as to a corporation.
law, not the persons who compose it.  Limited Liability finds its support from separate juridical
 The right of succession necessarily follows a strong personality and centralized management.
juridical personality.  Are directors and officers personally liable for the liabilities of
 There is no right of succession in a partnership because of the corporation? No, it falls under the attribute of centralized
delectus personae. It is expressly provided for by law management
(mutuality or obligatory force). o Free Transferability of Units of Ownership
o T/F: Delectus personae is the implementation of the  Shares of stock are freely transferrably
doctrine of mutuality.  Basis: Section 63
o Delectus personae is the highest personification of the  Shares of stock are personal and incorporeal property
doctrine of relativity in contract law. (intangible and movable).
 The right of succession is based on the binding and  One of the characteristics of full dominion is the right to
obligatory force of the contractual relationship. dispose. A shareholder, being the full owner of the shares, has
o Having the powers, attributes, and properties expressly the power to dispose of his shares.
authorized by law or incident to its existence  The attribute refers to the corporation having powers,
 Doctrine of Creature of Limited Power attributes and properties expressly authorized by law.
 Human Beings: Universal Declaration of Human Rights  When a shareholder sells his shares, everything that pertains
 Persons Before the Law to him as owner is transferred to the buyer.
 Any law which hampers the free-transferability is against
 Natural Person: creature of unlimited powers
public policy.
 Juridical Person: creature of limited powers
 Why does the corporation law goes out of its way to take away
 Doctrine of Creature of Unlimited Power
the ability or the power of the corporation to limit a
 Since the corporation is merely a medium of natural
shareholder’s power of the 7 juses?
persons, our media should also be able to do what natural  Units of ownership have been made transferable in order to
persons do. build the capital market.
 Doctrine of Ultra Vires  It is a structural attribute of a corporation.
o T/F: When you look at the definition, it promotes the 4 attributes o The Corporation Code is the product of common law, meant to
of a Corporation. FALSE cover large markets through the investments of millions of
 Attributes of Corporation people. It is a medium and corner-stone of a public market.
o Strong (Formal) and Separate Juridical Personality  Theories of the Formation of Corporation

2 CLV LECTURE NOTES | CORPORATE LAW 2012


o Theory of Concession  Is it possible for a corporation to be liable as a principal by
 Occupies the Juridical Entity relationship (Section 2) inducement?
o Theory of Enterprise Entity  A corporation cannot have a malicious intent, because it
 Occupies the Intra-Corporate and Extra-Corporate has no mind by which no malicious intent can be imputed.
relationships  There are no processes in our laws that allow a filing of a
 Tayag v. Benguet complaint against a corporation.
o The Theory of Concession prevails in this jurisdiction. A  How come, the malicious intent of an agent in pursuing its
Corporation is a creature of the law, and therefore subject to the business, cannot be imputed to the corporation?
will of its Creator. It does not have the ability to say “no” to the  If a corporation does not induce or participate, then it is not
Creator. criminally liable.
o Genossenschaft theory: A corporation is an entity, independent of o Sia v. Court of Appeals
state recognition and concession.  When a crime has been committed by an officer in the name
o Is there a rejection of the Theory of Enterprise Entity of a corporation that officer is not liable unless there is an
(genossenschaft) in this jurisdiction? No, it does not even apply in express provision of the law that makes such officer liable.
the Juridical Entity Level (Theory of Concession)  Can a principal corporation, as a general rule, be held liable,
o Juridical Entity Level: Theory of Concession for the criminal offenses committed by its agents? No
 State (Judiciary) v. Corporation (Benguet)  No malice
o Situs of Shares of Stock  No way to punish it
 Subject of taxation  It offends public policy: hiding behind the veil of
 Subject of venue corporate fiction
 Must necessarily follow the domicile of the corporation that  Except:
issued them  When the corporation is made expressly liable, but the
 Stockholders of F. Guanzon Sons v. Court of Appeals corporation’s officers and agents are the ones made
o Stockholders are not co-owners of corporate property, because of liable.
the strong juridical personality of the corporation, all of its o Criminal liability is a personal act
properties are owned by the corporation as a separate being.  PD 115: It is one of the few statutes that makes the officers
o Why does equity shareholders represent vis-à-vis the assets of the liable
corporation?  A man can only be convicted only of his guilt his proven
 Shares of stock are property, but they are not property of the beyond reasonable doubt.
corporation.  Because PD 115 has been promulgated, then there is doubt as
o Whether when the stockholders decided to distribute among to Sia’s criminal liability, and therefore, he cannot be
themselves, after the assets have been determined, was it a convicted. When a penal statute has been amended or
partition or distribution? appealed it has retroactive effect.
o The only way by which stockholders are deemed to be o Ching v. Secretary of Justice
partitioning, are only when they are co-owners of the partnership o Consolidated Bank v. Court of Appeals
assets.  Nationality Rule
 Partnership o (1) Primary Test: Place of Incorporation
o Element:  A domestic corporation is a corporation incorporated in the
 Meeting of the minds to contribute to a common fund and Philippines
with the intention to divide the profits among themselves o (2) Secondary Control Test Rule
o The moment all of the elements are present, but there is a  The only purpose of such test is because of nationalized
stipulation in the agreement that they are not constituting a industries.
partnership, what happens? They will still be governed by the law  The nationality of a corporation is determined by the majority
of partnership, even if the parties say otherwise. of the nationality of the stockholders of a corporation. The
 Pioneer Insurance v. Court of Appeals majority is anything in excess of 50%.
o Was there a corporation formed? No  The control test is as to the Board of Directors.
o Was there a de facto partnership formed? No, Lim induced the  Nationalized Industries: industries, occupations of our
other would-be incorporators to create a corporation. There was industrial and economic areas where the Constitution or
an offer by Lim to create a corporation. the law has reserved the equity ownership thereof, either
 Lim Tong Lim v. Fishing Gear Industries fully or in part, to Filipino nationals.
o Corporation by Estoppel Doctrine o Examples: Retail Trade Liberalization Act
 The reality of the business enterprise is there. It has been  Exploitation of Natural Resources
pursued as a business.  Filipino citizens and juridical personalities whose capital
 The essence of a business transaction is a contract. is owned by at least 60% Filipinos
 Section 21 of the Corporation Code  Private Land
 Filipino citizens (except: hereditary succession) or
III. Nature and Attributes of a Corporation corporations 60% of which is owned
 Nature of Power to Create a Corporation  Mass Media
o There is a Constitutional limit.  100% Filipino corporation
 Corporation as a Person  Advertising
o Constitutional rights  70& Filipino corporation
 Self-incrimination: A corporation is a person primarily used for  Public Utilities
a business, and only doctrines and policies consistent with  60% Filipino corporation
proceeding with commercial transactions make sense o Nationalized industries: It is not enough that you are incorporated
o Agency under Philippine laws, but it is also necessary that you comply
o Torts with the ownership requirements.
 Corporate Criminal Responsibility o T/F: The only test of nationality, therefore, is the nationality
o West Coast Life Ins. Co v. Hurd test. FALSE. The primary test is the place of incorporation.
 Are corporations generally liable for committing a criminal o Incorporation Test: a corporation is a Filipino corporation when it
offense? No, the exception is when the law expressly states is incorporated under Philippine laws.
that the corporation is specifically liable for the offense.  Asks where are you incorporated?
 Why is it generally, in our jurisdiction, cannot be held liable  A corporation is a creature of the law under which it is
for committing a criminal offense? incorporated.

3 CLV LECTURE NOTES | CORPORATE LAW 2012


o Control Test: nationality of a corporation is determined by at o ABC CORP.
least the majority of the equity  60% Juan Inc.
 Based on equity holdings  60% Juan
 There are certain sectors critical to national interest and  40% George
safety that the framers of the Constitution sought to limit the  40% George Corp.
control of certain industries to Filipinos.  40% Juan
o Why is the place of incorporation test not enough to save certain  60% George
industries?  Illustration B:
 When a corporation performs its transactions, those o ABC Corp. enters into a JVA with Juan Inc.
transactions are being done by Filipinos. o Is ABC Corp. considered 100% Filipino-owned for
 The Board of Directors are elected by the stockholders, the purposes of Mass Media? No, because it becomes
latter being the source of powers of the Board of Directors. equivalent to operating (the 40% of the foreign equity
Since they hold majority of the interests, the majority of the in Juan Inc.).
Board of Directors will be under the control of the  DOJ-SEC Rule
stockholders.  The moment at least 60% of the capital is owned by
o Roman Catholic Apostolic Administrator of Davao v. Land Filipino citizens (father), it shall be considered as of
Registration and the Register of Deeds of Davao Philippine nationality. If the percentage is less than 60%,
 Was it lawful to register under the name of the corporation Filipino ownership will still be proportionately
sole when the owner is a Canadian citizen? determined.
 Yes, because a corporation sole has no nationality. It does o At least 60%-owned Filipino= 100% Filipino-owned
not have a nationality because the Roman Catholic Church o At least 60%-foreign owned: not 100% foreign-owned
has pre-existed before the Constitution. Having no  In the illustration above, ABC Corp. can engage in public
nationality, where it holds land, it cannot be a foreigner. utilities because it is 76% Filipino-owned.
 The corporation sole was registered in the SEC (or o The 60% of Juan Inc. is considered of Filipino
counterpart at that time) nationality (100% of 60% is Filipino). 40% share of
 A corporation sole is a medium of holding the properties George Corp. in ABC Corp. is 40% owned by Juan (40%
of the church. of 40% is 16%). Hence, ABC Corp. is 76% Filipino-
o People v. Quasha owned.
 Tri-Level of Corporate Existence  The DOJ-SEC Rule only applies to investments.
 Aggregation of Assets and Resources  The DOJ-SEC Rule will not apply to Mass Media because
 Business Enterprise 100% equity ownership is required and 100% Filipino
 Juridical Entity Level management.
 Primary Franchise: one that grants the group a juridical entity o Palting v. San Jose Oil
 Juridical Person: primary franchise  charter  Real control over the company is until the 3rd tier.
 Secondary Franchise: business enterprise
 Business Enterprise: secondary franchise IV. Separate Juridical Personality and Doctrine of Piercing the Veil of
 Nationalization laws are based on the business enterprise. Corporate Fiction
What is seeks to regulate is not the person of the corporation.  Main Doctrine: A corporation has a personality separate and
The unique feature is the relationship among those who come distinct from its stockholders or members.
into the corporation and the business enterprise. o Main purpose: to allow a business to efficiently transact
o Tatad v. Garcia o Rules, Legal Consequences
 Built-Operate-Transfer Law (BOT Law)  It has a right of succession
 Business Enterprise  Limited liability (relativity) and vice versa
 A business enterprise is also property.  It has its own properties and vice versa
 Assets/Property  Rights and privileges cannot extend to the shareholders and
 How do we distinguish a business enterprise as a property and vice versa
the assets? o DBP v. NLRC
 What makes an asset rise to the level of a business  General rule: In a corporate setting, the rights and obligations
enterprise? When is the usefulness of an asset put it to the only pertain to the corporation. The shareholders are not
level of a business enterprise? liable for the obligations of the corporation.
o When it has the ability to earn income.  EXCEPT: Piercing the Veil of Corporate Fiction
o When a group of assets are able to earn income by  The Doctrine of Piercing the Veil of Corporate Fiction was not
transactions with the public, it now becomes a applied to the case because of Centralized Management.
business enterprise. There is no alter-ego here. DBP is always passive.
 The nationality rule is based on the business enterprise.  Piercing the Veil of Corporate Fiction
 A corporation is allowed to exist because it is an efficient o Not supported by any provision of law. It is a judge-made law.
medium for people to enter into commercial transactions. o U.S. v. Milwaukee Refrigerator Transit Co.
o Grandfather Rule  The general rule is that the law encourages people to use the
 Vs. Control Test: the nationality of a corporation is corporate fiction in order to gain advantage. The use of
determined by the nationality of the controlling stockholders corporate fiction in order to gain advantage, privilege, or
of a corporation right is good. The exception is when it is a piercing situation.
 The primary test of nationality is the place of incorporation. o Types of Piercing:
When it comes to public utilities, it is not enough that it is  Fraud Piercing
incorporated in the Philippines, but it must be under the  Malice is essential
control of Filipinos or a corporation 60% of which is owned by o Fraud
Filipino citizens. o Defend crime
 The rule is a variation of how to apply the control test. o Justify wrong
 The rule applies to a situation where the operating company  Alter-Ego Piercing
(ABC Corp.) is owned by another company.  Disrespect of the Separate Juridical Personality
 Determine the nationality of the grandson by the  If the corporation itself does not respect the separate
nationality of the grandfather juridical personality, the public transacting with such
 Illustration A: corporation cannot be expected to respect the same.

4 CLV LECTURE NOTES | CORPORATE LAW 2012


 Because of the attribute of limited liability, when a the said facilities, and it ultimately prejudices the
parent corporation controls a subsidiary corporation to stockholders.
such an extent that the transactions and operations of the  Can the piercing doctrine be applied in an intra-corporate
subsidiary corporation are effectively transactions of the situation?
parent corporation, the veil of corporate fiction should be  There was no injustice committed to Roxas, because she
pierced. chose to be in a corporation.
 The reason for this is that the creditors and the public  The doctrine can only be asked if a person becomes a victim
transacting with the corporation will be confused as to in a situation to which she had no fault.
who to make liable for the transactions. If a subsidiary o General Credit Corporation v. Alsons Development
corporation is controlled by a parent corporation, the  Claim: alter-ego piercing
creditors of the subsidiary or parent corporation will be  T/F: Piercing is not only an equity remedy, it is transactional
prejudiced because of the attribute of limited liability. in character. TRUE. It can only be applied to transactions
 It refers to the corporation, not on a juridical entity level, which became the basis of the piercing.
but on the level of a business enterprise.  T/F: Piercing doctrine, once applied, takes away the
 Defeat Public Convenience (Equity Piercing) Piercing corporation’s separate juridical personality forever. FALSE. It
 Creditors is meant to apply to do justice in a particular situation. It is
 Why do we have to realize that there are 3 forms of piercing? res judicata.
 There are differences on how they are constituted and the o Piercing has no application when the dispute is intra-corporate?
legal consequences of such piercing. Yes
o Francisco Motors Corp. v. Court of Appeals  Parties: stockholders, incorporators, board of directors,
 You apply piercing in order to achieve an end: officers
 There is no fraud in the case.  Intra-corporate Level
 When the factual basis for piercing is present and piercing is  Based on consent (consensuality): contractual binding
applied, the separate juridical personality is already effect (obligatory force)
inexistent, and the stockholders and/or officers are made  Separate Juridical Personality
liable. o Anti-thesis: Piercing the Veil
 T/F: Whenever piercing is applied, then it makes the  No, you are estopped. You are bound by obligatory force. You
stockholders and officers of the corporation are made liable acknowledge the fact and legal consequences of separate
for the obligations of such corporation. FALSE juridical personality.
 The purpose of piercing the veil of corporate fiction is to  Piercing is not available in intra-corporate disputes
make the parties at fault liable.  You cannot be a victim of your own consent
 T/F: Once piercing has properly been done, all persons behind  T/F: No form of piercing can be applied in an intra-corporate
the veil is made liable. FALSE setting.
 Only the directors, officers, stockholders who employed  Fraud Piercing
fraud, those who did the disrespect, those that are required o Concept Builders v. NLRC
that justice be done are the ones held liable.  Fraud case
 There is no basis for piercing. Piercing is not allowed as a o In order for fraud piercing to be applied, it must be shown that it
general rule. If the burden of proof is not proven by the is the corporation that is being used to commit the fraud, prevent
plaintiff, the separate juridical personality prevails. or escape liability.
o Traders Royal Bank v. Court of Appeals  The alter-ego factors are the necessary ingredients to show
 There is a Memorandum Circular issued by the Central Bank that there is fraud.
stating that the CBCI were non-transferrable, and so TRB o Padilla v. Court of Appeals
could not claim piercing because of fraud.
 TRB was not an innocent victim of equity of piercing because IV. Corporate Contract Law
it knew very well that the certificates were non-transferrable.  Corporate Contract Law is peculiar to the Ateneo Law School.
 Piercing of the veil of corporate fiction can only be availed of o It is a term that had to be devised in order to put together many
by a person who acts in good faith. concepts in Corporate Law that are actually based on promoting
o PNB International v. Ritratto Group policies under Contract Law.
 The piercing doctrine is only applied when the separate o Contract Law made alive in the world of corporations.
juridical personality is used for wrongful purpose. o What areas in Corporation Law fall under Contract Law?
o Umali v. Court of Appeals  Promoter’s Contracts
 Falls under fraud piercing  De Facto Corporations
 Piercing cannot be availed of when the action seeks to make  Corporations by Estoppel Doctrine
an action for annulment of mortgage void. Piercing is  Trust Fund Doctrine
applicable only when the stockholders of a corporation are  Articles of Incorporation: Highest level of corporation law
sought to be made liable.  By-Law of the Corporation
 The remedy of piercing the veil of corporate fiction is a o Manual of Corporate Governance
remedy of last resort, because piercing is a remedy based on  All are based on consent, but governed mostly by
equity. It has no statutory basis. Corporate Law
 Why is it that equity is a remedy of last resort? If there is o Corporate Contract Law animates the extra-corporate level of the
a basis to declare the real estate mortgage, the action is corporation.
an action to rescind based on fraud.  Except that there is now a convergence of all 3 levels in the
 T/F: Fraud is only illusory. FALSE, because many cases have Articles of Incorporation and By-Laws
been decided on fraud piercing. Fraud is a personal defense.  Why do all of those relationships exist?
o Indophil Textile Mill Workers Union v. Calica  3 Levels of the Extra-Corporate Level (Corporation and
 Piercing cannot apply if the purpose is to merge the 2 unions Third-Parties)
for the CBA.  Corporation and its counter-part contracting parties
 Piercing is resorted to in order to resolve issues of o The basis is the meeting of the minds
liability. o Governed by Contract Law
o Siain Enterprises v. Cupertino Realty Corp.  Corporation and its employees
o Boyer-Roxas v. Court of Appeals o Governed by Labor Law, but it is established by the
 By using the recreational and staff house as her own contract of service (employment contract)
residence, Roxas was depriving the corporation of the use of

5 CLV LECTURE NOTES | CORPORATE LAW 2012


 Corporation and those members of the public injured by  T/F: Every contract that is entered into in behalf of the
its operations corporation that does not yet exist is a promoter’s contract.
o The basis in quasi-delict FALSE, corporation by estoppel doctrine
o Governed by the Civil Code provisions on Torts  When does the situation go into a promoter’s contract or a
o Not based on the meeting of the minds corporation by estoppel doctrine?
 What is the common denominator in the 3 levels? Consent, as  In a promoter’s contract, the parties knew that at the
the necessary ingredient. time of the meeting of the minds, the corporation was
 Deals with the repercussions of the grant of consent. still in the process of being incorporation. They are always
 Pre-Incorporation Contracts entered into by a promoter.
o Pre-Incorporation Subscription Agreement  In a corporation by estoppel scenario, there is a
o Promoter’ Contract representation by the supposed corporation that it exists.
o Bayla v. Silang Traffic Co. They represent that the corporation exists already.
 In order for a contract relationship to exist, the following  Differences:
must be present:  Liability in Corporation by Estoppel
 Consent, subject matter, cause or consideration o The contracting parties will be liable as general
 Whenever one element does not exist, the contract is partners, meaning, unlimitedly liable.
void. o Parties will only be liable if they knew that the
 Whenever something is wrong with the consent, the corporation did not exist. Those who did not actively
contract is voidable. participate in the operations are not liable.
 When the contract is against public policy, the contract is  Liability in Promoter’s Contract
void. o The promoter will only be liable if the corporation
 Whenever all 3 elements are present, but both parties do does not ratify the contracts entered into by the
not have consent, the contract is unenforceable. promoter.
 When all 3 elements are present, but there is economic o If the corporation is not formed, the promoters will be
damage, the contract is rescissible. personally liable.
 Subscription Agreement  The court refused to apply the ratification doctrine, because
 A contract wherein an outsider purchases unissued shares the contract was void.
of stock.  The contract was void for lack of meeting of the minds
 Issuance and subscription are the same terms. It is because at the time the sale was entered into, the
“issued” from the point of view of the corporation, and corporation does not yet exist.
“subscription” from the point of view of the subscriber.  What is the status of a promoter’s contract at the time it was
 Mutual restitution is the effect of rescission, EXCEPT: executed? Unenforceable, because it was given in behalf of a
 When forfeiture is expressly agreed upon. person who did not give its consent at all, and therefore,
 In a subscription agreement, Corporation Law principles are subject to ratification.
applied. While in a purchase of shares of stock, the principles  But why did the Supreme Court say it was void? Sandiko
of Sales apply. transacted with Tabora, the parcels of lands were in the name
 In an ordinary contract of sale, with respect to the purchase of Tabora.
price, the obligor is the buyer, and the obligee is the  The promoter becomes liable, because Tabora will be treated
corporation. The corporation may waive its right to payment as the person to whom such third-person transacted with,
of receivables. because such promoter’s contract will be valid as to the
 Differences between an Ordinary Purchase: agent. It is as though the agent (promoter) entered it in its
own name.
 In a true subscription agreement, waiver of collection of
 Once it is ratified, it becomes valid as to the principal
unpaid subscription is ultra vires and void. (Waiver)
(corporation).
 In a subscription agreement, it is not possible for the
 From the point of view of the principal, the contract is void. If
corporation to rescind. (Rescission)
the corporation does not ratify it, it is not valid.
 In a subscription agreement, the moment the corporation
 Ratification by the corporation, through its Board of Directors,
becomes insolvent, all subscriptions become immediately cleanses the unenforceability of such promoter’s contract.
due and demandable despite an agreement to the  When the seller fails to transfer ownership to the buyer, when
contrary. It is overtaken by corporate law doctrines. (Full he is not in a position to transfer the same, such seller cannot
payment) demand payment of the full price from the buyer.
 In a subscription agreement, by merely subscribing, you o Rizal Light & Ice Co. v. Public Services Commission
assume being part of the Intra-Corporate Doctrine.  All that is required for a promoter’s contract to be valid is
o In an ordinary purchase agreement, the buyer does when the corporation is organized and it expressly ratifies the
not become an owner/investor/part of the family of same.
the corporation, but only becomes such after full o Caram, Jr. v. Court of Appeals
payment of the price, or  Doctrines:
 In a simple purchase agreement, the intention is to  A contract entered into by a promoter on and in behalf of
acquire property (shared). In a subscription agreement, the corporation binds the corporation when it ratifies such
the subscriber is committing himself to be an investor. An contract.
investor becomes a member of the family. o The corporation is deemed to have ratified the
 See Section 60 of the Corporation Code contract when it receives benefits thereto, through its
 Every contract involving unissued shares is always a board resolutions, or pursues the contract.
Subscription Agreement. However, it is governed by Corporate  When the corporation does not ratify the promoter’s
Contract Law. contract, it is the promoter who becomes personally liable
o Cagayan Fishing Dev. Co. v. Teodoro Sandiko for the contract entered into in behalf of the corporation.
 When a contract is void, do third parties have the right to o When do promoters become liable for the contracts
raise the nullity of that contract? No, under the principle of entered into in behalf of the corporation?
relativity.  Personally assumes liability
 What makes a contract a promoter’s contract? A promoter’s  Corporation fails to materialize
contract is one that is entered into with a corporation that is  Corporation fails to ratify the contract
yet to be formed. o Is it possible for a non-promoter to be personally
liable in a promoter’s contract?

6 CLV LECTURE NOTES | CORPORATE LAW 2012


o T/F: In a pre-incorporation contract, all persons who  Trust Fund Doctrine (Section 122)
have invested in the corporation who are non- o In Corporation Law, outstanding capital stocks shall serve as a
promoters can never be liable for a promoter’ trust for the benefit of the creditors of the corporation, except
contract. FALSE, non-promoters may be held liable for for unrestricted retained earnings which may be distributed to the
contracts entered into in behalf of a purported stockholders.
corporation.  Assets (properties): everything owned by the corporation
 Those who are passive investors become limitedly  Sources:
liable to the extent of their investment if they o Liabilities: assets placed into the corporation by
benefitted from it. But what does “benefit” creditors
mean? The business enterprise to which they o Capital stock: assets contributed into the company by
entered into is benefitted. the owners
 Section 21, Corporation by Estoppel o Retained earnings
 T/F: When both the corporation and the third-  How is it different from “income” and
party believe in good faith that the “expenses?”
corporation exists but in fact there was no  It is the aggregate amount of the income less
corporation, then Section 21 does not apply. expenses over a given period
FALSE  When expenses far exceed income, it is called
o A contract cannot be undermined by the net loss
fact that the corporation does not exist. A  How is net income different from retained
party cannot use the fact that the earnings?
corporation does not exist in order to  Accumulation from the life of the corporation
avoid liability or obligation under the of all those income
contract.  The assets contributed by the owners or taken
o Corporation by estoppel doctrine applies from lenders have now been increased.
when there is or there is no fraud.  Deficit: expenses have exceeded net income as an
 The provision does not care about accumulated number
corporations, but cares about the institution  Creditors
of contracts (obligatory force). The provision o Loan: Mutuum
promotes the integrity of the contracts. o The relationship of creditors to the corporation is
o Hall v. Piccio governed by the law on Credit Transactions
 De Facto Corporation o Found in the Extra-Corporate Level
 Organized under a valid law (corporation law)  The corporation and the counter-contracting party
 Colorable compliance with formalities of incorporation in  Stockholders
good faith o Governed by the law on Corporation Law
o For the juridical entity o Found in the Intra-Corporate Level
 Use of corporate powers or actual organization o Stockholders are covered by the Trust Fund Doctrine
o For the business enterprise organization but protects the interests of the Creditors to the
o Examples: hiring people, renting office space, etc. disadvantage of the stockholders.
o It is meant only to protect part of the public in good  Legal Effects of the Trust Fund Doctrine:
faith. This allows the public to believe that there is a  During the life of the corporation, it would be unlawful to
corporation. This is the only way the public sees the return or distribute any form of asset that is coming from
corporation and claim good faith. the capital stock
o But why does this element does not apply in o This assets, when given to stockholders, are valid
corporation by estoppel doctrine? distributions: proper reduction of capital stock
 SEC issuance of Certificate of Registration o Distribution of dividends is valid because it is sourced
o Specific rendering of “colorable compliance” from Retained Earnings
o Those who are part of incorporation must be sure that o Talks about actual capital received by the corporation
they comply with this requirement.  There can be no proper waiver of Subscription Receivables
 T/F: In the de facto corporation doctrine, the whole from stockholders because they are part of the Trust
public benefits from the de facto corporation. FALSE. Only Fund.
members of the public interests who deal in good faith o Consequence:
are the ones protected.  They become immediately due and demandable
 Quo Warranto proceedings which challenge the authority of a despite what has been stipulated in the
corporation to act as such can only be raised by the SEC. subscription agreement.
(Section 20)  Any dividend payment not from unrestricted Retained
 Stockholders cannot invoke the estoppel doctrine, because Earnings is void.
they can never claim the element of good faith. o Any salary or remuneration that is not reasonable is
 Stages of Corporate Contract Law void.
o Pre-Incorporation o Donation is against the Trust Fund Doctrine if it is
 Pre-Incorporation Subscription Agreement unreasonable.
 Promoter’s Contract o Donation that is unreasonable is void because it takes
 The parties acknowledge that the would-be corporation is still away assets that are either for creditors or
in the incorporation stage. stockholders.
o Post-Incorporation Stage  When the corporation is insolvent, the assets will be
 Corporation De Jure divided among the creditors: all assets are held by the
 Corporation De Facto Board for the creditors
 Corporation by Estoppel o Insolvency: Assets > Liabilities
 At least one side did not know that the corporation does  What assets are not covered by the Trust Fund Doctrine?
not yet exist.  Assets that represent unrestricted retained earnings
o Dissolution  The Trust Fund Doctrine is limited only to capital stock
 After Incorporation  Why does the Trust Fund Doctrine not extend to Retained
o Corporation by Estoppel Doctrine Earnings? Why is it limited to the capital stock?
 Dissolution

7 CLV LECTURE NOTES | CORPORATE LAW 2012


 When a corporation is allowed to be a medium of doing o Corporation and directors and regulated by the Corporation
business, the Trust Fund Doctrine is being drawn to protect officers Code.
against Limited Liability.  Articles are inherently intramural  Purpose: to govern the inner
 It is the Limited Liability feature of a corporation that has and external workings and intramural
necessitated the creation of the Trust Fund Doctrine. o They are binding on third relationship
 Doctrine of Unlimited Liability: a person is not only liable parties because it is a public  It does not include the State.
to the extent of what he invested into the business, but document and the public is  Inherent in every association,
also with his separate properties (non-business assets) bound to know the contents of organization because of the
 Is there statutory basis for Limited Liability? None, it is the same. principle of survival and
derived from Strong Juridical Entity (Section 2)  The power to adopt and live by necessity.
characteristic of the corporation, based on the contract the Articles of Incorporation is  Amendment: at least the
law doctrine of relativity. expressed in the Corporation majority of the stockholders
 The general rule is actually “NO LIABILITY.” Code. of outstanding capital stock
 “Limited Liability” is a recognition that the corporation is  Without the power expressly
a tool for the benefit of the stockholders. granted to it, a corporation
o The aberration hurts the creditors, and therefore, cannot amend its articles of
because it is an aberration, the Trust Fund Doctrine is Incorporation.
a countervailing doctrine.  Purpose: meant to giver the
 It is meant to preserve the expectations that are corporation its separate juridical
possible, including stockholders. personality
 Illustration: o It’s Charter is a Primary
 Assets (P500M) = Liabilities (P200M) + Capital Stock Franchise in which the
(P200M) +Retained Earnings (P100M) Corporation is granted its
 The Board of Directors returns P200M of the Capital Stock separate juridical personality
o The stockholders are personally liable for the return o It constitutes the very life and
 To whom is the Retained Earnings owed? They eventually person of the corporation.
pertain to the stockholders o It is an exercise of legislative
 Board of Directors issues cash dividends of P100M: power. The power of the
o Assets (P400M) = Liabilities (P200M) + Capital Stock legislative power is plenary,
(P200M) + Retained Earnings (0) the only limitation being is
 Without the Trust Fund Doctrine, is it lawful for the the Constitutional provision
corporation to return P200M? No, see Section 122.  Amendment: 2/3 of the
 Board of Directors returns the capital stock stockholders of outstanding
o Assets (P200M) = Liabilities (P200M) + Capital Stock (0) capital stock
+ Retained Earnings (0)
 When net losses happen further, stockholders can  Ways to adopt by-laws:
no longer take it on the chin because the capital o As part of incorporation
stock is already declared out. It is the creditors o After 30 days after incorporation
who take it on the chain and sustain the loss.  The by-laws, as a general rule, will not be binding to govern
o The creditors are not supposed to absorb anything. the intramural affairs of the corporation until the issuance of
 How do the stockholders sustain loss? When he loses even certificate of the SEC, EXCEPT when the SEC has failed to act
his capital, and when capital stock is wiped out by deficit. on the application for approval of the by-laws within 6
o Ong Yong v. Tiu months.
 Pre-Subscription Agreement
 The Trust Fund Doctrine is Panoramic because it is meant to VI. Corporate Powers and Authority
protect the whole purpose of the corporation (to do business  It does not go into centralized management. It looks at the
for the benefit of stockholders) corporation itself as a person that enters into contracts.
o Looks at the capacity of the corporation as a party to the contract
V. Articles of Incorporation and By-Laws it enters into.
 Articles of Incorporation and By-Laws are the greatest manifestations  Juridical Level
of Corporate Contract Law. o A corporation is a creature of the law.
o It is a creature of limited powers. (Sec. 2, 38, 45)
Articles of Incorporation By-Laws  Section 2: old definition of corporation law; concentrates as
 Incorporators are those who  Contractual Relationship merely constituting the corporation as a creature of the law
originally sign the Articles of between and among: o Intra Vires v. Ultra Vires Doctrine (Sec. 45)
Incorporation o Corporation and the  Only contracts and transactions that have been entered into
o Are they the only ones bound stockholders within the corporation’s expressed or implied powers are
by the Articles of o Corporation and the deemed to be valid.
Incorporation? No officers  It can only act in the legal world only with the powers given
 Stockholders: bound by o Stockholders and officers to it by the law.
the doctrine of  By-Laws are a public  A corporation is only a tool of the state. It is a legal fiction.
consensuality document, but are Outside of the grant, the corporation does not exist.
 Right to associate intramural.  Contract entered into ultra vires.
 Contractual Relationship between:  Does not represent the  Express Powers: that which is granted by the state
o Corporation and the State: contractual relationship  Sources of Incidental Powers:
Charter (Certificate of between the corporation and o Corporation Code, Sec. 36
Incorporation) the State. o Charter: it defines what its area of business is
o Corporation and the  The power to adopt and live  Implied Powers: powers incidental to a corporation’s
stockholders by the By-Laws is inherent, expressed powers
o Among the stockholders even if not granted by the  Incidental Powers: comes as a necessary or reasonable
o Directors and officers and State. However, such power outcome of a corporation being a business enterprise
stockholders is expressed because it is

8 CLV LECTURE NOTES | CORPORATE LAW 2012


 When a corporation enters into contracts outside its o Doctrines that animate the relationship between the corporation
expressed, implied, and incidental powers, the acts are void and the State
for lack of consent.  Creature of the State
 Sec. 42: a corporation must define its primary purpose and  Creature of limited powers
secondary purposes o What is the relevance of SJP in the Intra-Corporate Level?
 Ultra vires doctrine is a doctrine that holds its sway in the  See repurcissions of SJP above
Juridical Entity Level and conflicts with the Extra-Corporate o Extra-Corporate Level
Level  See value of SJP above
 What is important in the 3rd level is not the corporation, o A corporation can only enter contracts which it is empowered to
but the transactions. enter under its express, implied, or incidental powers.
 Sanctity of contractual relations is the most important o T/F: In SJP, unless the contracts it has entered into is within its
aspect. expressed, implied, or incidental powers, such contracts are void.
 The ultra vires doctrine is meant to strengthen the FALSE, see countervailing doctrines
administrative power of the state over the corporation  Overcome by the Public Policy: A third party in good faith who
when it conflicts with the sanctity of corporate contracts. enters into a contract with a purported corporation has the
 3 Types of Ultra Vires Doctrines: right to expect that the contract entered into are valid and
 Classical (Sec. 45): only contracts entered into within the binding (animates all 3 levels)
expressed, implied, or incidental powers are valid  Statutory basis: all contracts entered into are binding in
o Entered outside: the contracts are void for lack of whatever form they may have been entered into (Civil
consent Code)
o The courts will look at the articles in order to  Constitution: non-impairment clause
preserve the contract.  Countervailing Doctrines have been developed in order to
 2nd type: entered into within a corporation’s expressed, promote the non-impairment clause:
implied, or incidental powers, but not by the Board of  De Jure Corporation Doctrine
Directors  De Facto Corporation Doctrine
o Meant to champion centralized management  Corporation by Estoppel
o When the corporation acts other than through its duly  Limited Liability
authorized agents, the contract is void o Refers to the Stockholders
 Basis why it is void and not merely unenforceable: o Tool: Separate Juridical Personality
contrary to corporate law principles (centralized o Statutory basis: none, because it is borne out by SJP (logical and
management) natural consequence)
o Ultra vires doctrine as it applies to centralized  Supported by Centralized Management
management o Doctrine: Relativity
 General ultra vires: against the law, public policy, morals, o T/F: The public who enters a contract with a corporation has no
etc. (Art. 1409 of the Civil Code) cause of action against the parties behind the corporation.
o Section 40: Sale of Disposition of Assets  T/F: There is no countervailing doctrine. FALSE, piercing
 Sale of all or substantially all of the assets of the corporation doctrine
o Section 42  Piercing Doctrine ensures SJP never becomes a tool to
 Investment in non-primary purpose business frustrate legal relations
 Promotes the public policy:
DISCUSSION o Promotes the value of SJP
3 Levels of Legal Relationships in Corporation Law o Those who have invested in the corporation are assured that the
 Juridical Entity Level liabilities and debts assumed cannot be ascribed to them in excess
o State v. Corporation of what they have or promised to invest.
o Promotes the policies and issues when trying to develop the issues o Is it relevant in the Juridical Entity Level?
between the corporation and the State o Is a corporation limitedly liable?
 Intra-Corporate Level o It comes after SJP, because it is a logical and natural consequence
o Stockholders v. Corporation of SJP under the doctrine of relativity.
o Stockholders v. Board of Directors o The value of Limited Liability is also the value of the SJP
o The relationship between the corporation and the stockholders, o What is the public policy behind the piercing doctrine that it
corporation and agents, stockholders among themselves, overrides SJP?
stockholders andagents  Relativity and obligatory force are set aside in order to
o Repurcission of SJP is Limited Liability promote the public policy that every member of the public
 Extra-Corporate Level dealing in good faith with the corporation has the right to
o Corporation v. Third Persons expect that his contracts are valid and enforceable, and the
o Relationship between the corporation and those it deals with, use of the corporation as a tool cannot be used as an excuse
corporation and its employees, corporation and those injured by it to enforce such contract.
without contractual relationships (quasi-delicts) o T/F: Every enterprise that is granted SJP is granted limited
o Value of SJP liability. FALSE, partnerships
 Third persons can only sue the corporation, and not the  In spite of the grant of separate juridical personality to a
stockholders or the corporation’s agents partnership, there is still no limited liability because there is
 Doctrines: no centralized management; the partners are mutual agents
 Relativity of each other
 Consensuality  Centralized Management
o Refers to the Board of Directors and the Corporation
4 Principles of Corporate Law o Cements Limited Liability
 Strong Juridical Personality o Tool: Board of Directors
o T/F: It only operates in the juridical entity level. FALSE, it always o Statutory basis: Section 23
operates in all levels o Operative Doctrine: Business Judgment Rule
o The value of SJP in the Juridical Entity Level  Decisions and actions of the BOD are presumed to be in good
o Tool: Charter/Articles of Incorporation faith and in the furtherance of the purpose of the corporation
o Statutory basis: Section 2

9 CLV LECTURE NOTES | CORPORATE LAW 2012


 When a corporate action has been entered into by its BOD and  By Board resolution
even though it causes losses to the corporation, the BOD
cannot be held liable thereto VII. Directors, Trustees, Officers
 Basis: BOD is the agent of the corporation  Corporate Governance: Centralized Management
 When are agents liable even when he acts in the name of o Section 23
the principal and in the name of the principal?  Granted naked title to the properties
o The agent expressly binds himself  Board of Directors become the agents of the corporation:
o Negligence fiduciary relationship by the very nature of the relationship
o Bad faith o T/F: Members of the Board are elected into office by the
o Fraud stockholders. TRUE
 T/F: The power to appoint a sub-agent is never presumed. o Power to Remove during the Term
TRUE  Vested in the stockholders: 2/3 of the outstanding capital
 In the law of agency, an agent can appoint a sub-agent stock
unless prohibited by the principal.  Removal may be for or without cause
 The Board appoint a sub-agent is inherent o Compensation
o Board of Directors represent power to control and manage a  By-laws
corporation and manage its assets  Vote by at least a majority of the OCS
 Exercise power in what capacity? Agents o Minority Stockholders
 For the benefit of the corporation (primarily) and stockholders  Elected through a cumulative voting system
 Fiduciary bound to the corporation, as agents, and o Can directors, by majority vote, remove or suspend one of their
stockholders, as trustees own? No
 Board of Directors: trustee  Such provision appearing in the articles of incorporation or by-
 Stockholders: beneficiary laws shall be void
 Manifestation: Section 23 grants naked title to the Board o Is it valid for the Board to resolve for themselves compensation?
of Directors No
o Section 23  Provided for in the articles? No
 Business Judgment Rule o T/F: The Board owes fiduciary duties to the stockholders. TRUE
 Ultra Vires Doctrine o T/F: The Board owes its fiduciary duties because they are agents
 Those entered into outside its express, implied, or incidental of the stockholders. FALSE
powers  What is the legal basis of this relationship of the board to the
 Contracts are void because they are contrary to law stockholders? Section 23 (power flows from the law, not from
o Section 2: limited powers the stockholders), the board of the directors are trustees,
 Juridical Entity Level while the stockholders are beneficiaries.
 The board holds legal and naked title to all corporate
 Enforced by the Duty of Obedience
properties: Section 23, the board of directors holds all the
 Those entered into within its express, implied or incidental
properties of the corporation
powers but not through or by its Board of Directors
o Power to Remove, Compensate, Elect, Forgive, Discipline
 Contracts are void because it is contrary to law
 The powers are not given to the board
 Section 45
 If it is not provided for in the Code, the powers of the
 Intra-Corporate Level
board is plenary (business judgment rule)
 Countervailing Doctrines: o Good Corporate Governance Principle:
o Apparent Authority  All powers to discipline/compensate are not given to the
 The board can act by itself, but more often than board: each of them must be accountable only to the
not, it asks another person to do it. stockholders
o Estoppel or Acceptance of Benefits  Cumulative Voting
 Section 23 says that the Board of Directors’s  Directors are elected annually by stockholders in an annual
power is plenary stockholder’s meeting
 There is no need to ask if the Board is acting  Any provision against it is void
within its authority  Qualifications and Disqualifications
 Cannot overcome the public policy that a member of the
 They occupy a fiduciary relationship, and it is best that it
public…
is peopled by those who can discharge those duties.
 Free Transferability of Units of Ownership
 Qualifications:
o Refers to the Stockholders
o Every director must own at least 1 share of stock in
the corporation, which shall stand in his name on the
ROUND-UP
books
 The consent of the corporation in all its contracts is through the
 To avoid the directors being strangers to the
consent of the Board. corporation
 Enter into Partnership or Joint Venture  The moment they no longer own at least 1 share
o Not an implied power or inherent of stock, they cease to be directors
 Section 36 o At least a majority of the members of the Board are
o Power to Donate or Provide for Employee’s Gratuity residents of the Philippines
 Not an inherent power  For them to be able to oversee the corporation
 Maximization of stockholder’s value or profits  The law does not say what the consequences are
o Any transaction against maximization of profits is if the majority of directors cease
ultra vires  Disqualification:
 When the donations or gratuity are unreasonable, they are o A director must not have been convicted of an offense
unreasonable punishable by imprisonment exceeding 6 years or have
o Power to Sue and be Sued committed any violation of the code within 5 years
 Inherent in the Board because it is plenary, EXCEPT in a prior to his election
derivative suit  There must be actual conviction of a crime
o Power to Sell  Gokongwei v. SEC
 By Board resolution
o Power to Loan

10 CLV LECTURE NOTES | CORPORATE LAW 2012


 The qualifications and disqualifications in the code are  In agency: preparatory and progressive
minimal, and it is possible for the corporation to adopt  Section 2 and 45: creature of limited powers
additional qualifications and disqualifications  Loyalty
o Usually expressed in the by-laws  Strongest in the intra-corporate level
 Must be in the articles of incorporation, by-laws,  Diligence
corporation code, but never in a board resolution, house o Doctrines in Contract Law
rules, minutes of the meeting  Relativity
o Against good corporate governance: a director should  Incorporation: every contract contains with it every relevant
not be under the power of the board to discipline provision of law
 Fiduciary Duties  Obligatory force
o Loyalty  Mutuality
o Obedience: owed to the corporation  Autonomy
o Diligence  Consensuality
o To Inform o Duties are open-ended, while obligations are close-ended
 Cumulative Voting vs. Straight Voting  What makes obligations close-ended? What does it mean that
o Non-stock corporations: default rule is straight voting an obligation is close-ended?
o T/F: Cumulative voting is the default rule in stock corporations.  Doctrine of mutuality: obligatory force is only within the 4
FALSE, it is the only rule allowed in stock corporations corners of consent
o Non-stock voting: can be straight voting or cumulative voting  Duties are based on persons
o Illustration: o Duties of Directors and Officers
 In a 5-man board, there are 2 sets of stockholders A (80), and  Obedience
B (20)  Obligation that when they pursue the corporate business,
 Cumulative Voting they stay within the express, implied, incidental powers
o Classic Formula: (Cole Formula) of the corporation
ABC Corp. : 5-man Board  Loyalty
Authorized Capital Stock: 1.0 Million  Because directors and officers are agents of the
Subscribed Stock: 0.5 Million corporation, then, in conflict of interest situations, they
Paid-up: 0.3 Million cannot choose their own interest over that of the
Stockholder A: 300,000 shares corporation’s, and when they do, they become liable.
Stockholder B: 200,000 shares  Is it expressed twice in the Corporation Code?
Voting power: 2,500,000 (500,000 x 5) o Section 31 par. 2
 Directors, trustees, or officers become personally
S1 = S x D1 +1 liability
D+1  He owes everything with respect to that
business to the corporation, and holds such
1,000,000 = 2,500,000 x D1 +1 property for and in behalf of the corporation.
5+1 (Disgorge)
o Constructive implied trust (bad faith)
999,999 = 2,500,000 x D1 o Account for all profits
6  Par. 1: become solidarily liable (duty of
diligence)
D1 = 2.399 o Section 34
 Defects:  Covers only directors
 Does give a strategy o Difference between Section 31 par. 2 and Section 34
o It only answers the question: How many directors a  In case a director violates his duty of loyalty, the
bloc is assured of electing? more prevailing provision would be Section 34.
 Assumes that there are only 2 blocs  The act of the director in entering into the
 Occasionally erroneous contract or transaction in Section 34 in violation
o D’Hondt Remainders Table of the duty of loyalty can be ratified by a vote of
ABC Corp. the stockholders representing at least 2/3 of the
ACS: 1 Million OCS.
SCS: 0.5 Million  Section 31 par. 2 is non-ratifiable?
Paid-up: 0.3 Million  T/F: Section 34 expresses a clear provision for
5-man board ratification that allows a director, whenever
Total Voting Power: 2,500,000 ratified by 2/3 of the OCS, to cheat the rule.
Carlos Group: 2,000,000 o Is disgorgement preventable by obtaining
Rodriguez Group: 500,000 the ratificatory vote of the stockholders?
o When the breach has been committed,
1 2 3 4 5 what is the consequence of that breach?
Carlos 2,000,00 1,000,00 666,666.6 500,00 400,00 The refunds the profits to the
0 0 7 0 0 corporation, to ensure that if it is a net
Rodrigue 501,000 250,000 166,666.67 125,000 100,00 loss, only the director will suffer, and if it
z 0 a net profit, it will go to the corporation
 T/F: Returning the profits is an obligation,
 Determines how many candidates a group can present except when ratified by the stockholders.
 Can only encircle one that which is clearly higher o To ratify it as not a breach of loyalty.
 Answers the following questions  T/F: In Section 31, when an officer has
 Number of seats assured of getting breached his duty of loyalty, his obligation
 How many nominees should I cast my ballot for? now is to disgorge, cannot be ratified by 2/3,
 Obligations versus Duties even if 2/3 of the OCS says that “he can keep
o Duties: it,” it will not absolve him from his obligation
 Obedience: obedience to the mandate of the State to return.

11 CLV LECTURE NOTES | CORPORATE LAW 2012


o Between a director breaching his duty of  As a general rule, the president or officers of a corporation
loyalty, and a trustee or officer violating cannot be held personally liable for the obligations of the
their duty, the director has much better corporation.
case, because his actions can be ratified.  The duty of loyalty is intracorporate character: corporation
(Wrong interpretation of the law) (board) v. defaulting director, trustee or officer
 What is it in the position of a director that the  The contract entered into by a director (in conflict) is still
law goes out of its way to make it ratifiable valid, but insofar as the 3rd party is concerned he is out of
on their part? the picture, and any profit he earns, he has to account.
o Can directors of a stock corporation be  T/F: The duty of obedience is purely intracorporate. FALSE
removed by a majority vote of the rest of  Relates to the duty of the board of the directors (owe the
the board? No, only stockholders can duty of obedience to the corporation and ultimately to
remove them and the vote of the the State) to the State and is primordial in the Juridical
stockholders is final (power to remove is Entity Level
vested in the stockholders) Section 28  T/F: It has no application in the intracorporate
o What about trustees? Removed in the relationship. FALSE
same manner as directors o It affects the relationship between the board and
o Can members of the board or trustees be corporation. If the board of directors enter into a
allowed, by the fact that they render contract outside its express, implied, and incidental
service, receive remuneration? powers, they are violating their duty of obedience.
 No, because the position of a member  The duty of obedience is really the relationship between
of the board is non-remunerative and the agents (directors) and the principal (corporation),
quasi-public in character since they because it is to them that they owe the duty of
are also stockholders of the obedience.
corporation, and therefore, running  The rationale behind the duty of obedience is because of
the company and getting the best the corporation wishing to stay within its charter because
return is the best motivation. of its relation to the State. If the corporation is acting at
 Trustees? A trustee is also a member the mercy of its board, then it requires from them the
of a non-stock corporation and there duty of obedience.
to render public service and not for  Then, the duty of obedience is primordial in the
profit. Intracorporate Level.
 T/F: Directors are in a more favorable  Breach of the duty of obedience gives rise to:
position when it comes to breach of loyalty, o Make the agent of the corporation personally liable to
because their act of stealing is raitfiable, the corporation for any damages sustained by the
whereas trustees and officers and their acts of corporation.
stealing are non-ratifiable. FALSE o As a corporation now becomes liable to the 3rd person
o It is in fact the trustees and officers which they have dealt with, the duty of obedience is now
are favored, and it is the directors which primordial here because it is creates the duty on the
are disfavored. part of the board to enter into contracts only within
o Section 34 expressly provides that the acts its express, implied, and incidental powers.
of the directors are only ratifiable by a o Do the agents of the corporation become personally
vote of the stockholders, while, Section liable to the 3rd person?
31 is silent regarding ratification, (but the  As a general rule, they do not become liable to
act of “forgiving or ratifying” the act of the 3rd party.
the trustee or officer is within the  When they violate their duty of obedience, what is the
business judgment of the board) status of that contract? It is ultra vires.
 Section 23 gives centralized o The contract is not void, because although the duty of
management of the board. obedience is important in an agency relationship and
 “Unless ratified…” under Section 34 is under Sections 2 and 45, it cannot overcome public
the exception that is provided for in policy.
the “Unless otherwise provided in this  Third persons who deal with the corporation in
Code” in Section 23. good faith have the right to expect that contract
 It (Section 34) needs the ratification is to be complied with.
by the stockholders because it is  T/F: The duty of diligence is primordial only in the Juridical
“otherwise provided” in Section 23. Entity Level. FALSE
 Acts under Section 31 par. 2 is ratifiable by  T/F: In fact, it has no meaning in the Juridical Entity
the board because it has plenary power Level.
under Section 23. o Ultra vires of the 3rd type: all contracts against laws,
 Diligence public policy, public order are void.
 Directors should not:  T/F: Ultra vires cannot overcome public policy in
o Willingly and knowingly vote for patently unlawful extra-corporate relationships. FALSE, when a
acts contract is contrary to law, morals, public policy,
o Act in gross negligence in conducting the corporate public order, even those who deal with the
affairs corporation in good faith, it is still void because
o Act in bad faith the public policy (3rd persons who deal in good
 Section 31 is not the only “standard of diligence” because faith…) cannot overcome a greater public policy
this standard may still evolve based on jurisprudence. (contracts contrary to…)
 Inform  Expressed in Article 1409 and the provisions on
o Tramat Machineries v. Court of Appeals the freedom to contract
 David Ong was sued in his personal capacity. He claims that he  T/F: When violating the duty of diligence, it is essentially
cannot be held liable with the corporation because he was intracorporate in character. TRUE
merely acting in behalf of the corporation and cannot be held o The board can only act if they act within the scope of
liable for the non-payment of the consideration of the tractor. their authority (express, implied, incidental powers)

12 CLV LECTURE NOTES | CORPORATE LAW 2012


o The fiduciary obligation of the agent to the principal o Directors can make mistakes. Can they be liable for
requires that it take care of the affairs of the the mistakes they made for the corporation? No, as
principal. long as it is not gross.
 He should not accept that fiduciary relationship if  The act of the board is the act of the corporation, and no
he is not ready to take care as his principal power on earth can set it aside even if you can prove
himself would. beyond reasonable doubt that the act is going to cause
o T/F: When you violate the duty of diligence, it has no damage.
effect at all in the extra-corporate level. FALSE o For as long as you cannot show abuse of discretion,
 Every violation of the duty of diligence has an gross negligence, bad faith, the act sticks. The proof
impact on every contract, transaction, project that it will cause loss to the corporation is one that
that the corporation deals with to the public, and the courts cannot set aside.
all of these is done by the corporation through its  Just because losses or damages are sustained by the
board. corporation, by the exercise of the 1st branch of the BJR
 Therefore, the duty of diligence has the following does not make the officers and directors liable because
effects insofar as the public is concerned: the general rule is that officers and directors are never
 It will make the officer acting personally liable.
liable to the corporation o A business is a risk, and the board of directors
 General Rule: An agent is never liable for the acts handling the affairs of the corporation is not expected
and contracts it has entered into for and in behalf to know all the consequences of their actions.
of the corporation. o You cannot make the board of directors a guarantee
 Law on Agency: an agent acting within the for profitability.
scope of his authority and in the name of the  Corporate Officers
principal cannot be held liable for the o Gurrea v. Lezama
obligations entered into in behalf of the  The power to enter into a contract, as a general rule, is with
corporation. the Board of Directors.
 The agent is a stranger to that contract.  If a general manager is basically hired by the board, where
 EXCEPTIONS: does he get his authority that in order to terminate him, it
o Bad faith cannot be by board resolution alone?
o Fraud  A President is an officer of the corporation. If you need to
o Negligence terminate him, do you need 2/3 ratificatory vote? No
o Makes himself personally liable o Corporate Secretary? No
 Exceptions are found in Section 31 but differently o Treasurer? No
worded o Corporate Officer? No
 Agent: mere negligence  There is no provision in the law that says that an officer
 Corporation: gross negligence makes the can only be terminated with 2/3 ratificatory vote.
board or officer personally liable  Illustration:
 Gross negligence  ABC Corp. has a provision in its AoI that says “officers of
 Bad Faith: almost at the level of fraud; moral the corporation cannot be removed by mere board
obliquity resolution, and requires the ratificatory vote of the
 Fraud: malicious intent stockholders representing at least 2/3 of the OCS.”
 The general rule is that when you set out liability, is the o Is that provision valid? Yes
officer, director, or trustee of a corporation, when directing  The power to hire and terminate officers is within the
corporate affairs, is he personally liable? No business judgment powers of the board.
 EXCEPTIONS: o T/F: Can be limited by by-law provisions. TRUE
o Ascends to a patently unlawful act  A general manager is not an officer of the corporation,
o Acts in bad faith because an officer of a corporation are the only ones
o Acts in gross negligence in conducting the affairs of mentioned in the by-laws of the Corporation Code.
the corporation  Since a general manager is not an officer, the 2/3 ratificatory
 Personal liability of a corporate director, trustee or officer, vote of the OCS is not required to terminate him.
along, although not necessarily with the corporation, may so  A corporate officer is one so named in the Corporation Code,
validly attach as a rule only when: namely, the President, Corporate Secretary, and Treasurer,
 He ascends to a patently unlawful act of the corporation and those enumerated in the by-laws of the corporation.
 For bad faith, gross negligence in directing its affairs  Only corporate officers do not enjoy security of tenure and
 For conflict of interest resulting in damages to the within the business judgment of the board to hire and to fire.
corporation if stockholders or other persons  Only corporate officers, as defined by Gurrea, are bound
 Consents to the issuance of watered stocks, or who, by the 3-fold duties?
having knowledge thereof, does not express his objection  Illustrations:
in writing (Section 65)  De Leon is the EVP of ABC Corp. He has been in that
 He agrees to hold himself personally liable with the company for 10 years without an employment contract,
corporation but he is not within the by-law description of an officer.
 He is made, by specific provision of the law, to personally The board says “we’re firing you, Mr. de Leon.” And the
answer for his corporate acts board passes a resolution that says his term ends by the
 Branches of the BJR end of this month. De Leon says it cannot be. The board
says he was directly hired by the board. De Leon says “you
 The acts of the board, made in good faith, cannot be
cannot fire me.” Who wins?
questioned by the court, and the court cannot supplant its
o De Leon wins, because he is not a corporate officer,
judgment
and falls under security of tenure.
o The acts of the board are acts of the corporation
 Floor Manager was hired 3 years ago by the board. The
 The board cannot be made liable for the obligations of the
board saw him one morning, with his hair parted in a
corporation when they act within the scope of their
different way. The board said the reason they hired him
authority
was no longer there, so they fired the floor manager. Flor
claimed that the board couldn’t fire him. Who wins?

13 CLV LECTURE NOTES | CORPORATE LAW 2012


o Flor wins, because of security of tenure, he cannot be  Labor problems involve non-officers, and within the
removed except for cause. jurisdiction of the NLRC
o If the “Floor Manager” is included in the list of  Officers are not considered as employees, and any dispute
corporate officers in the by-laws, the corporation will with regard to their situation is called intracorporate. It is
win because it is within their business judgment to wrong for the RTC to handle a case involving an employee,
hire or to fire him. even if he is very high (EVP), because it within the original
 Gurrea lost, despite his being a non-officer, because before jurisdiction of the NLRC, and vice-versa.
Marcos became president, it was within the corporation’s  Labor Arbiter
prerogative on who to hire and who to fire.  Can argue that business judgment does not bind them,
 There was no security of tenure when Gurrea was because they only know labor law
decided.  RTC
o Mita Pardo de Tavera v. Tuberculosis Society  They don’t know anything about labor law.
 Tavera, an employee of the corporation, was claiming that he  Although it was not included in the roster of officers in the
was illegally dismissed, on the ground that she can only be by-laws, it was provided that the board of directors could
removed for cause, as provided in the by-laws. elect officers as may be necessary.
 “Employees can only be removed for cause by a decision  The appointment of Nacpil as comptroller was approved
of the board.” by the board. He was deemed a corporate officer and
 “Officers serving at the pleasure of the board can be therefore the SEC has jurisdiction.
removed at the pleasure of the board.” o A provision in the by-laws that says, “and the board is hereby
 Tavera was not “removed,” because the letter of appointment authorized to elect officers as it may deem necessary,” was first
was for only a temporary position because it did not state the recognized in Tabang v. NLRC.
term.  When a by-law provision empowers the board to elect officers
 For the by-law provision to apply, an employment contract as it wishes, then that’s the source of every appointment?
should have been executed, but there was none.  Without the by-law provision, can the board appoint such
 Security of tenure other officers? Yes, Section 25
 Cannot be removed except for cause  Ability to appoint officers does not have to be in the by-
 Corporate Law laws?
o General Rule: The hiring and termination of corporate  T/F: The power to appoint is inherent. TRUE
officer are within the business judgment of the board  It is in the power to terminate that the power of the
 The President, Corporate Secretary, and Treasurer board has been so structured.
must be within the business judgment of the  When you appoint, you don’t need a by-law provision for
board, because if you take it out of the business that (Section 23)
judgment, then you undermine centralized o Provision in the by-law that they can appoint officers
management and endanger the operations of the is a suplusage
company.  Nacpil and Tabang: Although the position may not be
o General Rule: When it comes to employees, they are specifically included in the roster of corporate officer, so long
protected by the Constitution and can only be as it is provided for in the by-laws, the board of directors has
removed for cause. the power to appoint officers as it deems necessary (enabling
 Security of tenure is allowed to civil service eligibles. clause)
o Are the exemptions found in the Constitution? Yes  Enabling clause: no security of tenure
 The general rule is that the power of the board to hire or  Section 23: security of tenure
to fire is overcome by the Constitutional provisions on
security of tenure, which means that they can only fire VIII. Non-Stock Corporations, Foundations and Cooperatives
for cause, except when it comes to corporate officers.  Primary legal distinction between stock corporations and non-stock
o What is the basis for that exception? and non-profit corporations: diverging rules on profit distribution
o What is the reason why corporate officers should be o Stock corporation: fiduciary obligation to provide profits;
within the business judgment of the board? Stockholder’s Theory
 Corporate officers are so integrated with the  It is easy to verify contractual expectations
operations of the corporation that their ability lie o Non-stock corporation
in the heart of being able to pursue the business  Difficult to confirm contractual expectations
enterprise successfully or not.  Medium allowed by the State to encourage citizens to be able
o Corporate officers are basically employees of the to part with service, volunteerism, charitable purposes, with
corporation, and as such, why would corporate officer a clear assurance that the money will be channeled to those
considerations of the corporation law become an purposes
exception to constitutional precepts that makes no  Operating Doctrine
exception? o Rationale for eleemosynary purpose
o Why is it that corporate officers although basically  Private sector comes into an area usually for public purpose
employees, do not enjoy security of tenure? that is supposed to be provided by the government
 The Supreme Court says so. o Contractual failure
 A corporate officer is not entitled to security of tenure, o Prohibition on distribution of profits/dividends
because he is within the business judgment of the board to  Essence of Non-Stock Corporations
hire and to fire. o Eleemosynary Purpose
 Except: o Non-distribution of Profits (Section 87)
o By-laws provide for a term  It is possible that profits are derived
o By-laws provides otherwise  Those profits are derived primarily from its eleemosynary
o In the absence of a by-law or article provision, he has purpose and they are spent for the same
signed an employment contract that has provided a  Implications when it Earns Profits
term o General Rule: a non-stock corporation is not empowered to
 The board has already exercised that judgment. engage in business for profit. It may be allowed to engage in
 A non-officer is entitled to security of tenure because it is profitable business only if it is necessary or essential to carry out
provided for by the law. the purposes for which it was organized
o Nacpil v. International Broadcasting Corp.

14 CLV LECTURE NOTES | CORPORATE LAW 2012


 Mere fact that it may earn profit does not make it a profit-  Manner of assessing members must be in accordance with the
making corporation where such profit or income is used to provisions of the by-laws
carry out the eleemosynary purposes  No provision: Board may collect only reasonable membership
 Implications where there is “Capital Stock” dues and only for purposes of accomplishing the purposes or
o Statutory power to declare dividends objective for which the corporation was organized
 There must be a provision in the articles of incorporation and  Non-Applicability of the Nationalization Laws
by-laws prohibiting the distribution of dividends  Does not apply to owning of land
o Voting rights and cumulative voting  Selling of raffle tickets and other profit-seeking activities
 Section 24 v. Section 89  Distribution of Assets of Non-Stock Corporations
o Transfer of “shares” and Rights  Conversion to Stock Corporation
 Section 63 v. Sections 89 and 90  Foundations
 Membership is not a proprietary right, it is a condition o It is not different from a non-stock corporation
 Distribution of Net Assets and Profits upon Dissolution o It is meant to distinguish 2 types of non-stock corporations (Tax)
 Applicability of Stock Corporation Provisions o Creature of the Tax Code
o Section 87
o Exceptions: IX. Close Corporations
 Section 6: providing for voting rights even to non-voting  Concept
shares on enumerated major corporate acts and transactions o Convergence of ownership and management
 Section 89 applies: members classified as non-voting in  Found in Partnerships: equity-owners and managers
the articles of incorporation or by-laws shall prevail  Everything is personal
 Section 23: on requirement that only individuals can be o Superiority of Contractual Intent on Proprietary Matters pursued
members of the Board of Directors in Judicial Vehicle
 Section 23: limiting the number of members of the Board of  Look at the juridical person, not as separate and distinct, but
Directors to not exceeding 15, and can sit in office only for 1 a means by which they can come to agree on certain
year contractual relations
 Section 92 applies: AoI or by-laws may provide for a  First and foremost, it is formed by consent and are
number of Board of Trustees exceeding 15 contractual in nature
 Section 24: which makes it mandatory that the cumulative  Publicly-held corporation: contractual intent is subsumed
voting system be applied in all election of directors in the separate juridical entity
 Section 25: corporate officers shall be elected by the Board of  Rationale
Directors o Implementing vehicle of contractual understand on sharing of
 Section 92 applies: unless otherwise provided in the AoI or control, risk, and benefits in the business enterprise
by-laws, officers of a non-stock corporation may be  Publicly-held corporations are first and foremost, impersonal
directly elected by the members in character: stockholders do not control the business
 Section 51: all stockholders’ meeting be held within the place  Free transferability of units of ownership: does not apply
where the corporation’s principal office is located to close corporations
 Jurisdictional for stock corporations o Essentially an “incorporated partnership”
 Section 58: proxy voting and representation cannot be denied  Corporation is impersonal, limited liability, centralized
stockholders, but can only be regulated through appropriate management
by-law provisions  Best of both partnerships and corporations
 Section 89 applies: unless otherwise provided by the AoI  Statutory Definition (Section 96): definitive test
or the by-laws, a member may vote by proxy o One whose articles of incorporation provided that:
 Section 63: essential transferability of shares are general rule  All issued stock of all classes, exclusive of treasury shares,
against unreasonable restrictions shall be held of record by not more than a specified number
 Section 90 applies: membership is inherently personal which cannot exceed 20
 Section 69: questions on delinquency sale of shares of stock  20 is only indicative
must be brought within the 6-month period does not apply to  All issued stock of all classes shall be subject to right of first
delinquency issues on members in a club refusal
 Section 71  Corporation shall not list in any stock exchange or make
 Members of Non-Stock Corporations public offering of any of its stocks
o Membership purely personal: unless otherwise provided in AoI or  Provided: Corporation shall not be deemed a close corporation
by-laws when at least 2/3 of its voting stock or voting rights is owner
 Personal and non-transferable or controlled by another corporation not a close corporation
 May be terminated in manner and for causes provided in the  The moment that the actuality shows this proviso, then it
AoI or by-laws is not a close corporation, and not governed by title 12
 Termination of membership shall have the effect of o Problems with the Statutory definition
extinguishing all rights of a member in corporation or in its  Large portion of closely-held corporations left out which are
property in effect de facto close corporations
o Juridical entities as members  Requisites existing, but not enumerate in AoI
o Nature of Members’ Voting Right  Not all are found, but 2/3 are found
 Trustees and Officers o Dulay: The Supreme Court did not even pass upon the definition of
o Default rule on voting: straight voting a “close corporation” under Section 96
o Nominee must be a registered member o SF Naguiat: the president and vice-president can be made
 Specific Rules Applicable to Non-Stocks personally and solidarily liable
o Power to Adopt Rules and Regulations  There was no finding if the requirements under Section 96 are
 Should not be contrary to the provisions of the by-laws, AoI present
and/or Corporation Code o San Juan Structural
 Rules and regulations do not need SEC approval  Lacking any evidence that it complied with Section 96, Title
o Assessment of Membership Dues 12 cannot be applied
 Board may assess membership dues even when nothing has  Decision of the trial court did not contain a determination
been provided for in AoI and by-laws that it was a close corporation
o Gala: based on the fact that families are involved

15 CLV LECTURE NOTES | CORPORATE LAW 2012


 Classification of Shares and Restriction of Transfer  Irrespective of payment
o Section 97(1)  Payment of deficiency is made on call
o Section 98  Subject to the trust fund doctrine
 Embodies when the right of first refusal is valid  When the subscriber fails to pay, the corporation cannot
o SEC Opinion dated March 13, 2006 rescind based on the trust fund doctrine
 Free transferability of units of ownership should still be  Corporation cannot condone/waive the payment of the
preserved subscription
 Classification of Directors: Section 97(2)  Purchase agreement: governed by the Law on Sales
 Provisions for greater quorum or voting requirements: Section 97(3)  Will become a stockholder only when such shares have
 Stockholders as Managers been paid for
o It is possible to do away with the board and allow the stockholders  Upon substantial breach: corporation can rescind
to manage the corporation  Seller has the right to condone
 Agreements among Stockholders: Section 100  Subscription Agreement
o Centralized management is not sacrosanct in close corporations o As long as the subject matter is unissued shares, it shall be
o “People are more important than business” considered as a subscription agreement and shall be governed by
 Ong Young v. Tiu the Corporation Code
o Original decision of the SC en banc was to decree the dissolution o Intra-corporate level of relationship
of the corporation  Meant to protect those who lend to the corporation (extra-
 corporate level)
o Motion for Reconsideration o Subscription agreement is consensual, not real
 Trust Fund Doctrine: it is unlawful for the corporation to  Payment is not essential
return to the stockholders a portion of their investment or  Modes of delivery:
promised investment  Public document
 You cannot pre-empt the business judgment rule  Negotiation or assignment of certificates of stock
 For the courts to tell the corporation what it should,  Enjoyment of the rights and prerogatives of the right
which all requires the passing of board resolutions, (used in the Corporation Code)
amendments, etc., cannot be ordered by the court o Kinds:
because the court is without authority to tell them to do  Pre-Incorporation
things.  Post-Incorporation
 Asking for rescission based on substantial breach  Free Transferability of Shares of Stock
 Nobody ever raised the principles of close corporation o Trust Fund Doctrine
 SEC has the power to dissolve the corporation in a  Subscription Agreement: species of the contract of sale
deadlock situations o Sale has the following characteristics:
o It can order the return of the purchase value of the  Nominate and principal
shares in a close corporation setting  Consensual
 Bilateral and reciprocal
X. Shares of Stock  Onerous
 Attributes of a Corporation  Commutative
o Strong Juridical Personality: Section 2  Not mode, but title
o Creature of Limited Powers: Section 2, 45 o Characteristics:
o Centralized Management: Section 23  Onerous v. gratuitous: supported by consideration
o Free Transferability of Units of Ownership: Section 63  Price
 Free Transferability of Units of Ownership: Section 63 o Real v. false v. simulated
 Garcia v. Lim Chu Sing  Simulated: valid, but subject to reformation
o Shareholders are not creditors of the corporation o In money or other valuable consideration v. nominal
 Corporation (debtor; note payable/accounts payable))  P20 M  consideration
Lender (creditor; notes receivable/accounts receivable)  Nominal price: void; equivalent to “no price”
o Contract of loan (mutuum) o Certain or ascertainable
o Does the lender hold a property arising from the relationship? Yes,  Not certain or ascertainable: void; goes into
personal intangible property obligatory force
 Corporation  P20 M  Shareholder (subscriber) o Terms of payment
o Is the shareholder holding property in his hands? Yes, he is holding  Not stipulated: void; economic indication of
shares of stock certainty or ascertainability
o What kind of property is a “share” of stock? Personal, intangible  T/F: The general rule in a SA is that when the price
o What does the share of stock represent? agreed upon has all the elements, it is valid.
 The shareholder does not constitute himself as a creditor o What is the status of issued watered stocks?
against the corporation. It is an equity holding.  T/F: A SA issuing a watered stock is void. FALSE.
 Difference between equity holding and a debt holding?  T/F: A SA that effects the issuance of watered stocks is void
o Debt holding: the creditor expects to be paid the principal and under express provision of the law. FALSE, it is valid, but
interest subjects the board to pay the balance
o Equity holding: the shareholder expects dividend income  What is the difference between watered stocks and
o What is the difference between the returns of a debtor and discounted stocks?
shareholder?  Discounted share: issued at a discount under an
 Debt: contractual, obligatory in character agreement to pay less than the par value in money
 Dividend: depends on the earnings of the corporation  Watered stock: shares issued as fully paid when in truth
 It is born of contract (contract of sale) the consideration received is known to be less than the
 Where does the return come from in an equity par value or issued value
investment? Business enterprise’s earnings  What is the consequence of the illegal transaction?
 Bayla v. Silang Traffic Co.  Consideration for stocks
o Subscription Agreement v. Purchase Agreement (before o Cash: it must be paid one way or another; it cannot be considered
Corporation Code) paid until it is actually paid
 Subscription agreement: governed by the Corporation Law  Terms of payment is covered by the “Call” of the board

16 CLV LECTURE NOTES | CORPORATE LAW 2012


o Property on the basis of the Deed of Sale, he should be the
 Is it necessary to deliver the property? registered owner. The corporation says “No.” Who
 The property must not only be given, but must be useful. If it wins?
is not useful, it should be paid in cash.  If by the signature of the owner he sells them,
o Labor performed for or service actually rendered to the who is the corporation to say that it will not
corporation recognize them?
o Previously incurred indebtedness of the corporation  The seller goes to the corporation and says that
o Amounts transferred from unrestricted retained earnings to stated there was indeed a sale. The corporate secretary
capital asks for the certificate, but the seller “burned”
o Outstanding shares exchanged for stocks in the event of them. The corporation still refuses to register.
reclassification or conversion Who wins?
 Certificate of Stock  The seller says, “Sorry, wala tayong nagawa. Sakin
o Nature of Certificate na ulit yung shares.” A refuses. Who wins?
 Function of certificates of stock  A wins, because as to them, the contract is
 Stockholder valid and binding. Section 63 is
o Greatest proof that the holder is the owner is the intracorporate, whereas, when a registered
shares of stock owner deals with shares of stock, it is not
o Allows the person to negotiate the certificates governed by corporate law.
 Corporation  Shares of stock, when issued, are not properties of the
o Guarantees to the world that the covered shares are corporation.
“non-assessable” o Only the subscriber has dominical rights over shares of
 When a certificate has been issued for shares of stock
stock, it means that the subscriptions are deemed o So why does the corporation has a say on how the
fully paid. registered owner manages his shares?
 The corporation will still win even if certificates  The corporation will require the turning over of
of stock are issued despite the subscription are the original certificate of stock precisely to
not yet fully paid, because of the trust fund ensure that there will be no fraud in the future.
doctrine, in order to protect the interests of the  Tan v. SEC says that it is only “may” (endorsement and
creditors. delivery) with respect to how the parties deal with the
 In a suit between the corporation and a buyer shares of stock (certificate of stock), but it is not “may”
in good faith, the latter will win because of insofar as the corporation is concerned, because the
the non-assessable doctrine. certificates are issuances of the corporation, to which it is
 The corporation cannot claim the deficiency bound by law to guarantee them.
from the buyer in good faith, but the creditors o The only way for the corporation to guarantee them
can run after the subscriber (quasi-negotiability character), they do not end up
 To preserve the quasi-negotiable characteristics with someone who takes them in good faith and for
of certificates of stock value for which the corporation is now liable, it must
 The trust fund doctrine will override the quasi- make sure that there’s endorsement and delivery.
negotiable characteristic of the certificates of o The certificates are issuances of the corporation, and
stock it is a certification of the corporation to the world,
 Public policy behind the non-assessable doctrine: and it must be returned to the corporation in order to
to protect those who deal in good faith with the be able to issue a new certificate to the new owner.
shares of stock  Ponce v. Alsons Cement
 Tan v. SEC  Ponce obtained shares through a deed of undertaking and
 In order to deal with shares through a certificate, is an endorsement of the certificate of stock
endorsement necessary? Yes, section 63 o Ponce went to the corporation for the issuance of new
 What is it only directory, not mandatory? certificates in his name, but the corporation refused
o Every intangible personal property is recognizable by since it was not in accord with the rules of the
law to capable of being delivered through the corporation
following: o Ponce went to the court asking for mandamus so that
 Execution of a public instrument the corporation will issue to him certificate of stocks
 Enjoyment or exercise by the buyer of all the  It is not enough, under Section 63, that there be an
rights pertaining to the intangible with the endorsement by the registered owner (seller), but there
knowledge and consent of the seller must be specific instruction or special power of attorney
 Endorsement and delivery granted to the buyer giving instructions to the corporate
 Negotiation, transfer, assignment of the secretary to transfer the shares of stock.
evidence of the intangible (certificate of o T/F: If the corporation registers the sale on the basis
stock) of a duly endorsed certificate, the corporation is at
 Section 63 governs only this mode fault and can be held liable.
o When negotiation is used to transfer ownership, then, o T/F: When a true certificate has been endorsed and
endorsement and delivery is necessary, but there is delivered by the registered owner and is in the hands
nothing under Section 63 which says that the only way of a buyer who paid good value for it and in good
to deal with intangible property is through faith, and he presents it to the corporation for
negotiation, because there are 2 other modes. registration, there is no legal basis for the corporation
 De los Santos v. Republic to register.
 Personal property of the owner who has the absolute right  FALSE, that is the nature of quasi-negotiable.
to deal with them Under Section 63, it must be registered once
 Illustration: there is endorsement and delivery. (Outside of the
o I bought 100 shares (certificate 123), which I bought case)
for P100,000. A wanted to buy them and paid P1M. I  TRUE, in the case of Alsons, aside from
said that A doesn’t need the certificate, but they endorsement and delivery, there must be specific
executed a Deed of Sale which was notarized. I issued instruction by the registered owner to the
a receipt. A goes to the corporation and demands that

17 CLV LECTURE NOTES | CORPORATE LAW 2012


corporation to cancel the shares and now issue  Registration cannot be compelled unless there is a written
new certificates in the name of the new owner. instruction to the corporation to transfer the title to the
 The suit was for mandamus, but there was no certificates to the buyer
legal obligation for the corporation to issue  Registration in the stock and transfer book does not bind
him new certificates of stock. the public
o It must be clear that the seller is instructing the  Public instrument and exercise of the rights: valid and binding
corporation to cancel the certificate against what between the seller and buyer
evil?  When it comes to pledging shares of stock, all that is
 Every corporation has the power to protect the necessary is endorsement and delivery of the certificate of
quasi-negotiable character of the certificate, and stock.
also the registered stockholder.  By doing a transaction similar to a sale, then you
o If it were not mandamus, who would win? Ponce “transfer” the pledgee the power of ownership, as if he is
 Deed of Absolute Sale holding in his hands the amount.
o Despite the existence of the deed of absolute sale, o Equitable mortgage principles state that it is unlawful
the corporation still refused to register the certificate for the pledgee to appropriate for himself things given
in the name of Ponce in security for loan.
o It could be an equitable mortgage.  Fua Cun: Transaction was really a pledge, and yet, when he
 One that looks like a contract of sale, in the form defaulted, it was necessary to foreclose and conduct a public
of sale with right of redemption and one that is a sale, otherwise, the title doesn’t hold, and the registration of
deed of absolute sale the certificate in the name of the purchaser is void.
o Why is it that even if there is a deed of absolute sale  Equip the pledgee, aside from endorsement and delivery,
of shares of stock, you cannot compel the a short note, signed by the borrower, which authorizes
corporation, without that specific instruction, to issue the corporate secretary to cancel the certificate of stocks
new certificates to the buyer? in the name of the borrower and issue new ones in the
 T/F: Section 63 covers encumbrance of shares. name of the lender.
FALSE, it only covers dispositions, sales and o Because according to Alsons, the corporate secretary
transfers. Encumbrances are not covered by has the right to refuse registration
Section 63  Under such circumstances, the certificate is valid (quasi-
 Because it might be an equitable mortgage, then negotiable), but the title is void. However, the nullity of
to transfer ownership directly to lender is pactum the title is something between the pledgee and pledgor
commissorium. and something of public policy.
 Summary o The law, insofar as the title is concerned, is void, but
 Tan v. SEC: An issue between buyer and seller is not the SC has allowed it to pass many times.
governed by Section 63, but the sale is valid as between o Right to issuance
the parties, but void as to everybody else (corporation,  Shares should be fully paid for before certificates of shares
you and me). are issued by the corporation
 Bitong: When it involves the certificate of stock, you have  Subscription is what makes a person a stockholder in a
to protect the quasi-negotiable character, and even if it’s corporation. Subscription is done with the meeting of the
valid as between them, you cannot compel the minds, and not by payment
corporation to register the sale. If the certificate is issued o Lost or destroyed certificates
again and someone takes it in good faith and for value, o Forged and unauthorized transfers
the corporation will be bound thereby.  J. Santamaria v. HSB
o Although it is quasi-negotiable, it is not really quasi-  The quasi-negotiability character of a certificate of stock
negotiable. The only thing that is quasi-negotiable is only meant to protect buyers in good faith.
about certificates is that it can be handled by  Nuegene Marketing v. Court of Appeals
endorsement and delivery, and people can be rest  Intra-corporate dispute
assured that when they take it, they can go to the  Stock and Transfer Book
corporation with that written instruction and ask that o Fua Cun v. Summers
it be transferred.  “Unpaid claim” refers to “unpaid subscription”
 Section 63 (process binding on the corporation): If you o Monserrat v. Ceron
don’t go through endorsement and delivery, or there is o Chuan Guan v. Samahang Magsasaka
endorsement and delivery but you don’t go to the extent  General rule: writ of attachment or levy, when properly
of registering the sale in the STB, insofar as the served by the sheriff attaches only to the property of the
corporation and world is concerned, the buyer has not judgment debtor
become the owner, and that affects the rights against  Issue: When the writ was served upon the corporation, were
attaching and levying creditors. the shares of stock, as a matter of law, still in the ownership
o Endorsement and delivery and specific instruction, of Chua Toco
and once you have all of these, can you register  The corporate secretary was willing to issue certificates of
 If you don’t register, the sale is void as to the stock in the name of Chua Guan provided that the new
corporation and to the world certificates include an annotation that they were attached
o What makes negotiation superior to assignment is that prior to the mortgage.
when it is an assignment, it puts the assignee into the  Chattel Mortgage  Attachment
shoes of the assignor, but it is possible in negotiation  BUT before Chua Guan could transfer the certificates of
to put somebody who takes it in good faith and for stock to his name, there was already an attachment
value have better rights than his assignor.  Chua Guan argues that the certificate should be issued clear
o Quasi-negotiable character of any encumbrances, and that he is not bound by the writ of
 Endorsement and delivery makes them negotiable attachment issued against Chua Toco.
 But in dealing with shares of stock, it can be dealt with by  General Rule: A writ of attachment can lawful served and
public instrument or exercise of the rights binding on the property of the judgment debtor
 Section 63: endorsement, delivery and registration in the  When the writ of attachment was served on the
stock and transfer book corporation, were the shares of stocks, as a matter of
law, still owned by Chua Toco, therefore the creditors

18 CLV LECTURE NOTES | CORPORATE LAW 2012


win, or they were no longer part of the estate of Chua  By the mere act of endorsement and delivery, a pledge is
Toco, then Chua Guan will win? constituted on a share of stock
o In order for the sale, disposition, transfer, assignment  Pactum commisorium applies to a pledge
of shares to be valid, when it is done by public  There is no pactum commisorium in the case because there
instrument, or endorsement and delivery, or an was a letter by Ledesma authorizing the transfer the shares by
exercise of the rights pertaining to the owner, for Talisay.
those modes to be valid as against the corporation, o Nava v. Peers Marketing Corp.
what is required?  No certificate of stock shall be issued without full payment of
 World: actually, eventually, registered in the STB subscription and interests
o  When a stockholder has fully paid his subscription, he can
 For shares of stock, the registration of the chattel mortgage in compel the corporation to issue certificates of stock
the city where the mortgagor resides is not enough, but it is  If the corporation issues certificates over shares which have
also necessary to register the chattel mortgage in the registry not yet been fully paid, the certificates are still valid and in
of deeds where the owner resides. (corporation resides) fact under the doctrine of non-assessability
 The judgment creditors won, and not Chua Guan.  If the corporation does not wish to do that, mandamus
 Chuan Guan registered with the RD where the corporation cannot lie against the corporation
is located, and not where Chua Toco resides.  The corporation cannot be compelled to record
 When does a chattel mortgage become a lien on shares of transactions over shares of stock which are not yet fully
stock? paid
 Upon double registration
 When does a writ of attachment or levy become a lien on XI. Rights of Stockholders
shares of stock?  Rights of Stockholders
 Service of process by the sheriff, regardless of whether it o Right to attend and vote at stockholders’ meeting
is registered in the STB of the corporation  Right to Vote
 When does the pledge of shares of stock become binding on  Constitutes one of the juses of roman law
the world?  T/F: The right to vote can be taken away.
 Endorsement and delivery of certificates of stock  How is the voting right granted to a stockholder?
 Had there been double registration, who would’ve won? o It is a common law right
 In the present case, there was only delivery, and no  How do you take away voting right from stocks?
endorsement o Provided for by the articles of incorporation
o Uson v. Diosomito o By-laws cannot override common law rights
 First in time, priority in right  T/F: Outside of articles of incorporation, the corporation
 Uson: judgment creditor is removed of the power to take away voting rights. TRUE
 Bought at a public auction: becomes the owner upon o All juses of roman law are subject to contractual
proper service of writ of attachment agreement
 Jollye: buyer of Barcelon  Proxy
 Becomes the owner upon registration in the STB o Meanings:
 Encumbrance: personal in character  Agent of the stockholder
 Lien: more than personal, it is property-based; it attaches  Contract (agency)
to the property  Instrument
o Escano v. Filipinas Mining o In order for a proxy to be valid, the following
 Shares of stock become property when they are issued by the solemnities are required:
corporation  Must be in writing
 Escano (garnisher) v. Standard Investment (buyer)  Signed by the stockholder, properly describing the
 When there are claims by 2 parties to the same shares of shares he can vote on
stock, one is a judgment creditor and the other is a buyer,  Filed with the corporate secretary before the
who wins? meeting
 First in time, priority in right o The corporation, through its corporate secretary, has
 Garnisher: service of writ on the corporation the right to refuse the binding effect of a proxy unless
 Buyer: transaction is registered in the STB the solemnities are complied with.
 The registration of transactions also apply to unissued  In accordance with the provisions of the by-laws
shares  General rule: anytime before the meeting starts
 Encumbrancer o T/F: When a proxy is not in writing it is void. TRUE
 The moment there is a registered assignment of shares of  Because of the word “filed”
stock in the STB, it will bind the encumbrancer o Doctrines that apply:
 All that an encumbrancer will have to do is double  Essentially revocable
registration  Irrevocable: agency coupled with interest
 How does he know that what he has done has priority? o Coupled with interest:
o He must be an encumbrancer in good faith.  Proxy is an integral part of the
 When he has no notice of a sale or a levy security by which a loan or
 How does he know? indebtedness is to be paid or
 Sale: reference to the STB liquidated
 Levy: ask the corporation  When an onerous contract, the
o Levier in good faith fulfillment of which, depends upon it
 How do they know if there is no priority o Purely personal
encumbrancer? o T/F: By its very nature, only has to do with the voting
 Go to all register of deeds attached to the shares. TRUE
 Buyer  T/F: When the stockholder authorizes the proxy
to sell the shares, it is still a proxy. FALSE, it is
 The buyer will have to search all register of deeds to know
called a special power of attorney
if there are any encumbrances of the shares of stock
 Only involves an agency with respect to voting
o Bachrach Motos v. Lacson-Ledesma
rights
 Voting Trust Agreement

19 CLV LECTURE NOTES | CORPORATE LAW 2012


o Contract of Trust  When you declare stock dividends, a corporation really
o It is not revocable in essence. declares nothing.
 A trustee is an owner in his own right (naked o Pre-emptive right
owner)  It is a common law right that arises from the fact that one is
o Requisites: an owner of shares.
 In writing and notarized (otherwise, it is  Covers unissued shares and treasury shares
unenforceable) o Right to the issuance of certificate of stock
 It has to be signed by the stockholder, or else o Right to transfer his properties
it will not be notarized  Inheres from ownership
 Signed by the registered shareholder (trustor)  Protected under Section 63
 Registered in the SEC and the corporation  T/F: Every provision in the articles of incorporation or by-laws
 Not registered with the SEC: unenforceable that prohibits a stockholder from transferring or
 Not registered with the corporation: encumbrancing his share is void.
unenforceable  By-laws: cannot serve to restrict the ability of the
o The VTA can cover other rights of the stockholder stockholder to transfer his shares because its function is
 Voting rights only to govern internal matters of the corporation
 Right to receive dividends o Breach of public policy: free transferability of units of
 Right to be present ownership
 Right to inspect  Articles of incorporation: such provision restricting the
 Right to file a derivative suit transfer of shares by stockholders is void
 It is really a share trust agreement o Unreasonable restraint of trade
o What is the clearest proof that a person becomes a o Breach of public policy
naked title holder in a VTA? o The articles of incorporation is essentially a creature
 The certificate is actually cancelled and a new of corporate law, rather than a species of contract
one is issued to the trustee law. It must be consistent with corporate law
 Shareholders Agreement (Pooling Agreement) doctrines.
o The parties are stockholders of record, but not all of  T/F: When a stockholder enters into a contract with the
them. corporation prohibiting the stockholder from transferring
o The manner by which they vote their shares his shares is void. FALSE
o T/F: It is not governed by the corporation code. FALSE o It is not against public policy
 Section 100 under Close Corporations o There is no absolute prohibition on the free
 T/F: Without Section 100, shareholders agreement transferability of units of ownership
is deemed to be illegitimate. FALSE, because it is o A prohibition that he has contracted out is valid when
an aspect of ownership he has contracted out the right to transfer his shares.
o Usefulness of Section 100 o Shares of stock are property and governed by free
 1000 shares, 51% yes, 49% no: it will be registered transferability, and if a person contracts away his
as yes (all 1000 shares) right to transfer shares, it is not his “trade” that is
 Par. 4 contracted away.when you are weak inlaw, you must
 Centralized management is not respected in close pound on equity
corporations, because there is no board of  T/F: Every restriction of the right to transfer not found in a
directors, and the corporation is run by the contract is void. FALSE
stockholders.  The restrictions really void are:
o Right to dividends o Absolute restriction
 At dissolution, to receive a proportional value of the “net  In corporate law, it violates free transferability
assets”  In civil law, what public policy is being
 T/F: The right is always demandable under any circumstances. undermined?
FALSE  Constitutional policy against restraint of trade
 Depends on the unrestricted retained earnings: profits  Non-competition clause
o Just because there is unrestricted retained earnings,  Meant to promote competition
it does not mean that they have the right to demand  It is in restraint of trade
 Requirements: o Anything that requires prior consent from a
 Board resolution (cash or property dividends) stockholder, board, or corporation
 2/3 of the outstanding capital stock when stock dividends  It takes away the right to transfer
are declared  Valid Restrictions
 Part of the Business Judgment Rule  Right of First Refusal
 When is it outside the business judgment rule? o A right granted to the optionee to determine whether
o When the unrestricted retained earnings exceeds 100% he wants to buy the shares or not
of the paid-in capital stock o T/F: Whether found in the articles of incorporation,
o Except: (exclusive list) by-laws, or contract is always valid. FALSE
 Corporate expansion project  What type of first refusal is valid?
 Loan agreement prohibits the distribution of  Reasonable as to time
dividends o 30-60-90-120 day
 Contingency debts  Reasonable as to exercise
 Kinds of dividends o It must not undermine the commercial
 Cash dividends value
 Property dividends  Reasonable as to purpose
 Stock dividends o What are the considerations whether the right of first
 Why does the law provide that when it comes to stock refusal is reasonable?
dividends, there should be 2/3 ratificatory vote and board  If it is not of such length of time as to undermine
resolution? the commercial value
 The effect of stock dividends is to take them from  Unreasonable restraint of trade
retained earnings and put them into capital

20 CLV LECTURE NOTES | CORPORATE LAW 2012


 You cannot enter into a contract that prohibits a person  The case will be considered a
from making a livelihood harassment suit
 Waiver of future support: “self-destruction”  Not a stockholder at the time the cause of
 Essentially void if it renders a person dead because he action accrued: he will not be the best person
cannot earn a living to champion the cause of the corporation
 Restraint of trade in order to be valid because he is ignorant of what has happened
o Reasonable as to time period  Not a stockholder at the time of the filing of
o Reasonable as to process or execution the suit: he did not actually file the suit for
 What is the consideration whether the restraint of trade is the corporation
reasonable?  Exhaustion of all intra-corporate remedies
 About property, even if referred to by the Supreme Court  Such exhaustion must be alleged in the
is Restraint of Trade complaint
o Right to file a derivative suit  Why is it jurisdictional? Unless there is
 An exception to the business judgment rule exhaustion, there is yet no cause of action
 The power to sue is with the Board. It is one of the  Why is compliance with such requirement a
incidental powers of the corporation. satisfaction of the right as an equity-remedy?
 Is there any statutory support? Section 36: every  If you don’t exhaust, the natural remedy is to
corporation has a power to sue and be sued seek it from the board.
o Lodged with the board (Section 23) o The real and natural saving grace is from
o It is always with the board, why? the board because the natural champion
 “Unless otherwise provided in this Code” does not wish to move.
 It is the exception to the exception to the general rule  When is it not required?
o General Rule: the power is vested in the board o Whenever it is the board itself that is the
o Exception: unless otherwise provided in the code cause of the loss due to fraud, malice,
o Exception to the exception: derivative suit gross negligence, bad faith
 It is a common law right o If it possible for there to be a derivative
 It is common law right suit if the board has not acted with fraud,
 When you are weak in the law, you must pound on equity malice, or bad faith?
 T/F: Derivative suit is a right founded on equity. TRUE  No, but why would you still need to
o E.g. implied trusts exhaust?
 The law goes out of its way to create a o You are not in equity unless you ask the
relationship between the parties because of the board they correct their mistake.
need to provide justice.  The cause of action that of the corporation
o The right is created for the interest of the  See discussion under exhaustion of all intra-
corporation. corporate remedies
 The corporation is vulnerable.  There must not be an appraisal right available
 Is it legal in an agency situation to waive the  Not every corporate act gives right to
duties of obedience, loyalty, diligence? No, such appraisal right. But whenever a transaction
waiver is void. that is being questioned has the appraisal
 The duties are of the agent, and the right to right, can the dissenting stockholder still file a
the principal. If it is a right of the principal, derivative suit?
can he waive the duties owed to him by the o Yes, when there is not enough
agent? No, such waiver is void. unrestricted retained earnings
o In whose favor is the right to file a derivative suit o T/F: Whenever there is an appraisal right
granted? involved, but you never dissented, you
 To the corporation, against the directors when can never be a relator.
they do not perform their duties  Every time an assenting stockholder files a
 It grants to the stockholders the right to protect derivative suit, it is a nuisance suit, because
the corporation his actions are inconsistent, and in effect, he
 It is a right that cannot be exercise as a matter of fact. It is not championing the cause of the
can only be exercised if the “duck is almost dead” corporation
 He duties are duties of the agent, and owed to the principal.  A dissenting stockholder cannot file a
Does It must follow certain requisites derivative suit the because of action (in the
 T/F: A right duly protected under the Corporation Code. “derivative suit”) pertains to the stockholder
FALSE, it is a common law right and not the corporation, which goes against
 It is not expressly granted by statutory law. It is derived the very purpose of a derivative suit.
from jurisprudence.  Must not be a nuisance suit or a harassment suit
 It is under remedial law.  Rationale for the requisites of a relator
o Rules of Court  Interim Rules of Procedure  If they are doing it for their own interests,
Governing Intra-Corporate Controversies they are not actually championing the cause
 SMC v. Kahn of the corporation
 When you file a derivative suit, you are now called the  What is the greatest example that it is a
relator. nuisance suit? If he fails to exercise his right
o The SC consolidated the requisites for a derivative of appraisal
suit o A stockholder who ascended to the
 The person must be a stockholder at the time of transaction (part of the 2/3), but he still
the filing of the suit and at the time of the files a derivative suit, it is a nuisance suit.
violation  It is not genuinely in behalf of the corporation
 (Interim Rules) Remain a stockholder during but is actually for himself
the pendency of the case o A relator need not be a director, but only a
o But what happens to the suit? stockholder of record.

21 CLV LECTURE NOTES | CORPORATE LAW 2012


o As long as the stockholder is a stockholder of record  Authorizing preferences in any respect
of the corporation, such stockholder can still file a superior to those of outstanding shares of any
derivative suit. class
 It doesn’t matter how small your proprietary o Is free transferability illusory?
interest is. The right being protected belongs to  Yes, it gives such dissenting stockholders a way
the corporation. out.
 Chua v. Court of Appeals  Sale, lease, exchange, transfer, mortgage, pledge or
 A case filed by the treasurer against the secretary other disposition of all or substantially all of the corporate
o It was made to appear that Chua was present in the property and assets
meeting o The source of the income is the business enterprise.
 A corporation can be a proper party in the appeal because When the business enterprise is sold, there will be no
the criminal action involving the falsification of the longer any manner by which the corporation will earn
corporation’s project and documents profit.
 T/F: Every time the corporation is included as a party- o But what about free transferability of units of
plaintiff, in a case filed by a relator, is a derivative suit. ownership?
FALSE  The characteristic of free transferability of units
o The cause of action sought to be recovered should be of ownership is illusory because there is no
for the corporation. business enterprise.
 For a proper derivative suit to prosper, the corporation  Mergers and consolidation
should appear as a plaintiff or petitioner.  Right of appraisal: a right of a dissenting stockholder the
o Putting the corporation as a defendant is improper. Is value of his shares
the case dismissible?  Based on rebus sic stantibus
 No, the defect is merely in name.  It is not a common law doctrine, because it goes against the
 The determination whether the corporation is the trust fund doctrine.
proper party plaintiff is the cause of action. Such  Why does the law give it?
defect is not fatal. o Right to examine and copy corporate records
 The business judgment rule cannot be availed of if it is  It is a common law right, incident to the right to hold stocks
exercised in fraud, bad faith, gross negligence.  Right to vote, right to dividends, right to inspect
 Illustration  Can the right to inspect be contracted away?
 No allegation that the board of directors knew that the  No, because all other rights depend on the right to inspect
o A derivative suit cannot be filed because of the  You cannot protect your other rights if you don’t have the
business judgment rule right to be informed
o Since there is no allegation that the board entered  Can only be germane as to why a person is a stockholder:
into the transaction with fraud, malice, gross to protect the other rights of the stockholders
negligence, the board of directors even if it will o All other commercial rights and interests of a
amount to losses stockholder are dependent on this
 There is an allegation that the board of directors knew o It can only be exercised validly in order to protect the
that the transaction will result into losses other commercial rights
o Appraisal right: provided for by law o Ang-Abaya v. Ang
 T/F: All stockholders have an appraisal right. FALSE  Section 74 is the provision for which Section 144 can be
 Only dissenting stockholders can exercise their appraisal applicable
right  Requisites to be liable under Section 144:
 Who are dissenting stockholders?  Formal letter by the stockholder to examine the books
o The stockholders who disagree.  Agent or officer refuses to allow the person to examine
o T/F: All dissenting stockholders have appraisal right. the books
FALSE  Refusal is made pursuant to a board resolution
 When can dissenting stockholders exercise the right of o Officers or directors will be liable
appraisal?
 Corporate term is extended or shortened XII. Corporate Capital Structures
o Shorten  Authorized stock: found in the AoI representing the stock that may be
 Right of appraisal is not triggered offered to the public
o Extend  SCS: portion of the authorized capital stock that has been issued by
 The law triggers the right of appraisal the corporation
 Extension of the corporate term is rebus sic  Classification of Shares
stantibus o Articles of Incorporation must provide for the classifications
 Why is the right of appraisal granted? o Preferred Shares
 Corporate funds are invested in non-primary purpose  Will only have voting rights if provided for in the AoI
business or enterprise  As to Assets upon Liquidation
 Amendment of articles of incorporation  Preferred over the common stockholders, after payment
o Procedure to amend articles of incorporation: to the creditors
 Meeting duly called for the purpose  As to Dividends
 Board resolution  Cumulative or Non-cumulative
 Stockholders representing at least 2/3 of the o Cumulative: past dividends not paid + current
outstanding capital stock vote for the amendment dividends
 Filing of certificate of amendment with the o Non-cumulative: current dividends
amendments in the SEC  Participating or Non-participating
 Issuance of certificate of amendment of articles o Participating: after receipt of dividends, he can still
o Not every amendment in the articles of incorporation participate as if he also has common shares
will trigger the appraisal right  T/F: Every preferred stock is deemed to be cumulative. FALSE
 Amendment has the effect of:  T/F: Every preferred stock is deemed to be participating,
 Changing or restricting the rights of any rather than non-participating. FALSE
stockholder or class of shares

22 CLV LECTURE NOTES | CORPORATE LAW 2012


XIII. Dissolution  Those who are creditors, upon dissolution, have rights to
 Stages of the Corporate Life the assets of the corporation
o Pre-Incorporation o By allowing the directors to take risks to which the
 Promoter’s contract creditors already have claimed
 Both contractors knew that there was yet no corporation o Liquidation: a process usually triggered by dissolution
 Principle of agency in the name of a purported principal  Does insolvency cause the dissolution of a corporation? (business
comes into play enterprise)
o Void as to the principal, valid as to the promoter, and o Balance Sheet Test
ratifiable by the principal corporation o Cashflow Test: that point in time that the corporation cannot
 Pre-incorporation subscription agreement service its debts when it falls due
o Post-Corporation o Effect on the trust fund corporation is the same as in the
 De jure corporation dissolution of the corporation
 De facto corporation o Once the corporation becomes insolvent, the obligation of the
 Corporation by estoppel directors at that point is to protect the interests of the creditors.
 Intra-Vires v. Ultra Vires  There is nothing more to protect for the stockholders
 Undermined by: (to protect members of the public dealing  The moment the directors pursue a new business, they can be
with the corporation in good faith in their expectation held personally liable (insolvency trading) even in the
that their contracts will be complied with) exercise of business judgment
o Estoppel o Insolvency proceedings are similar to liquidation proceedings
o Doctrine of apparent authority  Original term has expired and there is no move to extend it
o Dissolution and Liquidation  Extension must be done within the last 5 years. If it is done
 Things radically change after the corporation is dissolved, it is considered a new
o Pre-Incorporation and Post-Incorporation business.
 Public policy: members of the public dealing in good faith  Reincorporation
with the corporation has a right to expect that contracts they o Basis: sale of all of substantially all of the assets of the
have entered into will be complied with corporation (Section 40)
 Trust Fund Doctrine o When the term has expired, you recopy the articles of
 Dissolution and Liquidation (corporate person) incorporation and re-file them anew.
o When do we know that the problem is already covered in the o Difference between extension of term and reincorporation
dissolution stage and not in the pre-incorporation and post-  Extension of term
corporation stage?  There is no break
o Dissolution: that point in time when the corporation ceases to be  Reincorporation
a juridical person for the pursuit of the business  There is a break between the first and the second
 It occurs at the end of its term: provision in the articles of corporation
incorporation as to the term of its existence o Everything starts with the second corporation anew
 Indication of the value of the corporation: how long it  The moment the corporation is dissolved, the contingent right
shall be pursued as a “going concern” to the value of the shares become realized. Once dissolution
 Helps to determine has been reached, the 2/3 of the OCS cannot bind what the
o Value of the investment stockholder already has (value of the stocks).
o Length of the loan and when it is realizable o Reincorporation cannot be done in fraud of creditors.
 When the term of the corporation has ended, then it has  Ways of Dissolution
reached the point of dissolution o Voluntary
 What is the importance of the dissolution point?  Methods:
 The corporation ceases to have a juridical personality to  Expiration of term as found in the AoI
pursue a new business  Amendment of the AoI to shorten corporate life
o As a “going concern” with respect to the corporation, o “The life of this corporation will expire on (date)”
stockholders, third persons o Follow procedures of the Corporation Code on
 Upon dissolution, the corporation still has a juridical amendment
personality, but it can only pursue dissolution and liquidation. o To bind all
 Board of Directors are mandated by law to manage the  Give notice to stockholders, creditors, SEC
business only for the purpose of liquidating the corporate  Affidavit of assumption of liability
affairs o There is no right of appraisal in the shortening of
 BoD will have fiduciary obligations to the shareholders corporate life because it quickens the process.
o Outreach of the Trust Fund Doctrine  Case with the SEC
o The moment they pursue a new business, they o BoD adopt a resolution for the dissolution of the
become personally liable corporation with the ratification of 2/3 of the OCS
 Insofar as the BoD are concerned, the creditors are in the o Administrative proceedings does not allow the
first place exercise of appraisal right
 Illustration:  Modes:
 6 months after the dissolution of the corporation and  No creditors are affected
unknown to the directors, officers, and stockholders who o The SEC has no discretion. It must grant dissolution
purchases property and ratified by the stockholders, what  Creditors are affected
is the status of the contract? o Subject to a hearing. It is not necessary that the SEC
o It is void, because it has been entered into wherein will grant dissolution
there is lack of consent. The corporation is a ghost. o Involuntary
o The corporation itself cannot ratify the contract  Done by the State: quo warranto
o Said contract is a “new business”  Highest punishment on the corporation that has offended the
o The doctrines under the Pre-Incorporation and Post- laws or its charter
Corporation stage do not apply  A petition is filed in court, seeking for the decapitation of the
o Why does the consideration change? corporation.
 Trust Fund Doctrine  There is notice and hearing
 Rights solidified  Liquidation comes in to protect the interests of creditors

23 CLV LECTURE NOTES | CORPORATE LAW 2012


 Liquidation: process wherein all the assets of the corporation are  Piercing concerns itself with controlling the business
gathered and liquefied to satisfy the obligations of the corporation, enterprise of the corporation.
and if net assets remains, it is distributed to the stockholders o Dealings with shares of stock have nothing to do with the business
o Section 122: juridical personality continues in order to liquidate enterprise because it is in the juridical entity level.
corporate assets  EXCEPT when it amounts to a juridical entity level transaction
 The corporation is given 3 years to liquidate the assets o What is the control that is allows the piercing doctrine? Control
 Centralized management still exists over the business enterprise
o Types of Liquidation Process  When what is being controlled is the business enterprise (to
 Board itself: good only for 3 years the disrespect), that is now the control that is prohibited
 After 3 years, the BoD is a stranger and there is nothing under alter-ego piercing.
they can do about it  After having acquired the shares of Insular, Pacific also took
 In order to go beyond the 3 years, the corporate assets the business enterprise of Insular.
are placed in the hands of either the receiver or trustee  After Pacific took over Insular, it sold all of the shares to an
 Receiver: court-appointed office individual. That itself does not allow piercing because the
 Trustee control was still with the board of directors (business
 Contract arrangement enterprise). It is still in keeping with the free transferability
 Advantage: can go on for many years because there is an of units of ownership.
owner o When you do something or exercise something that is allowed by
o Implied Trust Doctrine law, it cannot be the subject of piercing because it is an equity
 Pursue all the assets wherever they may be remedy and given only to render justice.
 Can be sued up to the extent of the property they hold in o However, when what is being transferred is the ability to transfer
their hands the business enterprise, it is disparage of the control that
 Based on personal relationships warrants the application of the piercing doctrine because the
 All are geared to protect the creditors: for them to have the ability to purchase was made for a consideration. There was no business
resort to the assets wherever they may lie enterprise, since Insular was no longer a going concern.
o Once dissolution is done, what is the remedy of the creditors of
XIV. Acquisitions, Mergers and Consolidations the dissolved corporation?
 Run after the assets wherever they may have gone.
 Levels of Dealings: goes into the subject matter of the transaction
o Assets-Only Level  General Rule: One cannot be held liable for any obligation to which he
 Subject matter: property never bound himself
o Business Enterprise Level o EXCEPT
 Subject matter: ability to earn profit  When the purchaser expressly assumes the liability
 “Going concern”  Guaranty or surety: must be in writing to be enforceable
 Motivation: transfer the earning capacity of the corporation  Novation (change in the principal party of the obligor): to
 The buyer purchases the business and controls it directly be valid, it needs the consent of the creditor
o Juridical Entity Level o Unenforceable unless in writing
 Subject matter: shares of stock (control)  In fraud of creditors
 Vs. sale governed by the Law on Sales  Rescissible contracts
 Not every share of stock refers to a juridical entity level. o Accion pauliana (in fraud of creditors)
The sale must be in order to take control of the o Lesion
corporation, to be in the juridical entity level.  When the purchaser merely continues the business of the
 Motivation: to dispose of, to take over and control of the purchasee
earning capacity of the corporation  Why is it that if the business enterprise (subject matter) is
 Buyer purchases shares of stock of the corporation, and it being sold, the purchasee becomes liable as opposed to
is still the corporation who manages and controls the assets as the subject matter?
business o It is the earning capability which is sold, and as a
 Vs. Business Enterprise result, he becomes liable to the debts of the business
enterprise for the benefit of the creditors of the
 Control over the corporation is with the board
transferor. It is inflicted upon the transferee.
 Edward J. Nell Co. v. Pacific
o When what you sell renders the corporation unable to
o Pacific holds Insular as its subsidiary when it bought all or
continue to earn (sale of all or substantially all of the
substantially all of the latter’s property.
assets of the corporation)
o General Rule: A purchasing corporation will not be liable for the
 When does the promissory note follow the car (property)
liabilities of the purchasee.
wherever it may go?
 Except:
o When you attach a mortgage to support the mutuum
 Purchaser expressly or impliedly assumes the debts and
(loan)
liabilities of the purchasee
 Common law lien: a lien that follows the business
 Entered into the transaction in fraud of creditors
enterprise wherever it goes
 Purchaser merely continues the business of the purchasee
o The only real hold that suppliers have on merchants is
 There is merger or consolidation the going concern.
 Piercing doctrine o Basis: the continuous operation of the business
o Piercing doctrine? enterprise is the consideration
 The piercing doctrine cannot apply.  McLeod v. NLRC
 When it is clear that Pacific purchased all or substantially all o The transferee cannot be held liable because they only took over
of the properties of Insular, that doesn’t warrant piercing? No, the assets of the transferor.
it doesn’t warrant piercing. Mere control of all or substantially o Piercing is not proper because the transferee cannot be
of the shares of stock of the corporation, by itself, does not considered the mere alter ego of the old corporation solely on the
warrant piercing because that by itself does not disregard the ground that there are interlocking directors and because there
separate juridical personality of the corporation. Being the was a legitimate business purpose for the dacion en pago.
only shareholder does not grant your control over the o The consideration for applying the business enterprise doctrine is
corporation or guarantee you a seat in the board. It is still the entirely different from the piercing doctrine.
board that directs and runs the business of the corporation. o Why are employees not given the common law lien?

24 CLV LECTURE NOTES | CORPORATE LAW 2012


 It is a commercial doctrine meant to protect commercial o The transfer is valid as to them, but void as to the
transactions and employment contracts are not commercial creditors, because it’s the creditors who can waive it.
transactions.  XYZ moved into another business. The creditors knew this,
 Different Rules on Succession of Liabilities but nevertheless sought payment from ABC. Who wins?
o Assets-Only o The creditors will win, but ABC will have recourse
o Business Enterprise against XYZ.
o Juridical Entity o The application of the doctrine, does not extinguish
 Merger: union whereby one or more existing corporations are the obligation of XYZ. It is not a form of novation.
absorbed by another corporation which survives and continues the Business enterprise rules on the transfer and
combined business succession of liabilities is not novation.
 Consolidation: union of two or more existing corporations to form a o The creditors can still go against ABC. The business
new corporation called the consolidated corporation enterprise transfer doctrine is not an equitable
 Mergers and Consolidation remedy (not a remedy of last resort)
o Procedure  ABC decided to purchases 999,000 shares from X, Y, and
 The Board will adopt a plan of merger or consolidation Z.
 Stockholders will determine the exchange rates of their o Equity transfer
respective shares  Laguna Trans. v. SSS
 Ratification by the stockholders, in a meeting duly called for o SSS wins because the business enterprise of the corporation was
the purpose, representing at least 2/3 of the outstanding merely the continuation of the business enterprise of the
capital stock unregistered partnership.
 Dissenting stockholders can exercise their appraisal rights  PEA v. NLRC
 Articles of Merger or Consolidation o General rule: The transferee shall be liable for the obligations of
 Merger the business enterprise, except the its liabilities to its employees
o “Amended” AoI of the surviving corporation  Pepsi Cola Bottlers v. NLRC
 Consolidation o When a corporation purchases the franchise of another
o Entirely new AoI corporation, the transferee becomes liable under the business
 Approval by the SEC enterprise transfer succession of liability rule.
 Merger or consolidation inherently does not prejudice o Does the rule include all creditors including employees as
creditors creditors?
 Long Form Audit of each of the constituent corporation  No, the employees cannot hold the transferee liable under the
 Evaluation of all the assets and liabilities of the business enterprise transfer succession of liability rule
corporation  As a rule, in a business enterprise transfer, the transferee
o Determine whether the proprietary rights of the becomes liable for all the obligations of the business
stockholders are protected; whether they are enterprise, except employees because an employment
receiving a fair value of the shares exchanged in the contract do not arise from the business as a going concern.
merger or consolidation (to represent the true value) o The trasnferee does not become liable under the business
 Transfer – Acquisition of Corporation v. Merger – Consolidation of enterprise rule, but under the: (1) piercing doctrine (fraud), (2)
Corporation expressly assumes liability, (3) merger and consolidation, (4)
o What is the purpose why one buys shares of stock in an equity accion pauliana (transfer is made in fraud of creditors)
transfer? To manage the business enterprise  Pepsi Cola v. NLRC 247
 Illustration  Phividec v. Court of Appeals
 XYZ Inc. with 1,000,000 shares
 A purchases 20,000 shares: assets-only transfer XV. Foreign Corporations
 A purchases 510,000 shares: equity transfer  Domestic Corporation: a corporation organized under the laws of the
o For the purpose of managing the underlying business Philippines
enterprise o Vs. Foreign Corporation: a corporation organized in another state
 Business enterprise transfer other than under the Philippines
 The transferee will still be held liable for the obligations  Foreign Corporation
of the transferor o Reciprocity: unless Philippine nationals are granted business
 In an equity transfer, the transferee does not become liable access in a foreign state, then the corporate entities of such
for the obligations of the transferor. foreign state would likewise not be granted legal business access
 It is still the corporation which is liable for its obligations. within Philippine territory
The stockholder does not by that reason alone become the o By naming foreign corporations, their existence has been
owner directly of the business assets and does not become recognized in the Philippines (Doctrine of State Comity)
personally liable for the debts and liabilities of the  If the Philippines express a policy which it will not recognize
business the existence of a foreign corporation, is the policy legal?
 In a business enterprise transfer, the transferee becomes That provision is legal
liable for all the obligations of the transferor.  Expression of state comity: Section 123
 Illustration: o Section 123
 XYZ Inc.  Defines what is not a domestic corporation
o Assets: P1B  Reciprocity
o Liabilities: P0.5B  T/F: Insofar as all foreign corporations coming from states
o S/E: P0.5B which do not grant reciprocity rights, they do not exist
o 1,000,000 shares under Section 123.
 ABC Co. purchases XYZ’s business for P2B. Only the assets  Is it lawful for citizens to recognize foreign corporations
are going to be purchased, and all the liabilities will be that do not have the reciprocity clause? Yes
for the account of XZY.  Is it possible for courts being organs of the State to define
 The creditors of XYZ file a claim against ABC. Who wins? the will of the state? No
o Creditors, based on the business enterprise transfer  Is it possible for the courts to recognize foreign
succession liabilities. Even if they stipulate that it is corporations who do not grant reciprocity rights? Yes,
only an assets-only transfer. under Section 133

25 CLV LECTURE NOTES | CORPORATE LAW 2012


o The courts have the right not to recognize the business? No, there must be progressive
standing of foreign corporations doing business in the pursuit of the purpose of the corporation
Philippines without obtaining a license  Agilent Technologies v. Integrated Silicon
 If they are doing business but are not licensed: o Whether Agilent is engaged in business
courts may not recognize the existence of the  Requirement of a license is only relevant after a
foreign corporation determination of whether the corporation is
o Whether a foreign corporation has standing in the host engaged in business
state is dependent on the policy of the host state, o Whether Agilent has the capacity to sue
BUT under the doctrine of state comity and Section o Principles
133, the state policy is that:  Doing business without a license: cannot sue but
 The Philippines will recognize foreign may be sued
corporations, whose laws also recognize the  Domestic corporation cannot assail the capacity of
existence of Philippine corporations and that if the foreign corporation if it has entered into a
____ contract with the same because it is estopped
 Even if the foreign corporations do not engage in  Not doing business: no need for a license, but it
business, the Philippines still recognizes them can sue and be sued on isolated transactions
provided that ____  Doing business with a license: can sue and be sue
 Doctrine of State Comity o Agilent was not engaged in business, and so, it need
o Foreign corporations are still recognized here even if not obtain a license in order to sue
they are not engaged in business  It was a long-term isolated transaction
o Doctrine of Isolated Transaction: a commercial o Long-term isolated transaction
restatement of the Doctrine of Juridical Consent  There is no progressive pursuit
 Born under a contract o If foreign corporations buy raw materials they need to
 Doctrine of Juridical Presence manufacture products, are they considered to be
o Foreign corporations that engage in business in the engaged in business? Yes
Philippines are considered as having presence in the  In the present case, even if Agilent complied with
Philippines the commercial test, it is still deemed as not
o All about territory: you are here under the aegis that doing business because of the DTI Implementing
all persons and properties located within the Rules and Regulations in its definition of not being
jurisdiction of the state are effective and paramount included in the term “doing business.”
within the jurisdiction of that state  Pacific Vegetable Oil v. Singson
 Persons: physical presence in Philippine territory o The salient portions of the transaction were made
 Corporations: engaging in business outside the Philippines
 But does that mean that when they file a  Delivery of the subject matter
petition in court, by that alone, the courts  Payment of the price
have jurisdiction over the corporation? No  Perfection of the contract
o Local courts can obtain jurisdiction by o Contract Test
proper service of summons o Is it legally possible for a foreign corporation to step
 Doctrine of Juridical Consent / Surrender into Philippine shores without having a license? Yes,
o Foreign corporations, regardless of whether they are by “deleting” Section 133
engaged in business or not, will be recognized in the  If they do not comply with the requirements of
Philippines so long as they submit to the jurisdiction Section 133, foreign corporations will not have
of the Philippines standing in local courts or they pay a fine or they
o All about “yes” cannot obtain a remedy.
 Mentholatum v. Mangaliman o When a Nigerian corporation deposits $1B into a local
o Even if Mentholatum was not in the Philippines, it was bank, is it present in our shores?
engaged in business through its exclusive distributing  Only by engaging business in the Philippines
agency, Philippine-American Drug. Under the doctrine o Can the courts obtain jurisdiction over a controversy
of agency that the acts of the agents are acts of the between a Nigerian corporation based on a
principal, then, Mentholatum is deemed to be condominium he purchased in the Philippines?
engaged in business.  Through voluntary surrender, engaging in business
o Jurisprudential definition of “doing business in the in the Philippines, and
Philippines” (Commercial Test) o When do you invoke the Doctrine of Isolated
 Transaction or series of transactions that seeks Transaction?
the progressive pursuit of the purpose and  A foreign corporation needs to prove that it is an
object of the corporation (profit) isolated transaction so that it will no longer be
 The transactions must be intended to earn required to obtain a license in order to be able to
profits sue.
 With clear intention to do it in a continuing  To show that it is not bound by Section 133
basis; otherwise, it is an isolated transactions  Aetna v. Pacific Star
 T/F: When a transaction undertaken within the o The contract was signed and perfected in New York.
Philippines by a foreign corporation is important The premiums were also paid in New York, and hence,
to the purpose of the corporation with no even if it filed 13 other cases, it is still not deemed
intention to pursue it in a continuing basis, then, doing business in the Philippines.
it is still engaged in business. FALSE, it is only an o In collecting the proceeds of the insurance policies, it
isolated transaction. There must be an intention is still not engaged in business, because it is not
to continue, without which, it is an isolated transacting business. The transacting of business is
transaction. entering into insurance contracts. In the present case,
 Is it then necessarily an isolated transaction? it is merely seeking a remedy.
Yes  Granger Associates v. Microwave Systems
 If there is only an intention to do continue, o T/F: When a foreign corporation manages its
does it necessarily mean that it is engaged in businesses, but appoints a local agent, it is not
engaged in business. TRUE

26 CLV LECTURE NOTES | CORPORATE LAW 2012


 What is the difference between appointing a local o A foreign corporation that enters into a series of auxiliary
agent and a commercial broker? transactions that have arisen from an isolated transaction do not
 If it appoints commercial broker and sells the constitute as “doing business.”
goods in its own name, the foreign corporation is o Doing business (more than one transaction) does not require a
not engaged in business. (IRR) series of transactions (there is only an isolated transaction) as
 Except when the corporation participates in long as it complies with the 2 requirements in Mentholatum.
the management of the broker and makes it a o What is essential for an isolated transaction?
mere conduit or alter-ego o A single transaction would allow a foreign corporation to be
 Procedure to Acquire License considered as doing business in the Philippines if it is done in the
o Articles of Incorporation duly authenticated progressive pursuit of the purpose of the business.
o Deposit securities for the benefit of its present and o If it is just one transaction, but it is in the progressive pursuit of
future creditors the business, how do you determine the intent?
o Oath on Reciprocity compliance  Extension of credit
o Designate who their resident agent is  Venue stipulated is in the Philippines
 Qualified:  Contract Test
 An individual, with good moral character and o If the performance of the contract or its perfection is done in the
of sound financial standing Philippines, it is important that it be so in order for the
 Domestic corporation lawfully transacting transaction to be “doing business.”
business in the Philippines  Home Insurance v. Eastern Shipping Lines
 In order to ensure that service of summons and all o It is a foreign corporation doing business without a license.
legal process are made properly through the o An isolated transaction must also happen in the country, without a
resident agent license, and not engaged in business, it can sue.
o In the absence or death of the resident agent, o At the time the contract was perfected, Home Insurance was not
authorize the SEC to be served with summons yet licensed.
 Express provision or application authorizing the o Schools of Thought
SEC  The contract is null and void because the contract has been
 The SEC will send the processes to the corporation entered into against the prohibition of the law.
within 10 days  The contract is valid, but it suspends the ability of the foreign
 Western Equipment v. Reyes corporation to seek remedy based on the contract until it is
o Western Equipment is opposing the registration of its ready to comply with the requirement of the law.
trade name by a group of individuals in the o Section 133 does not go into the validity of the contract entered
Philippines. into by a foreign corporation. It just goes into the standing of the
 Protecting its goodwill, trade name corporation in a suit, remedy available to the foreign corporation.
o Herman filed a motion to dismiss on the ground that o The penal provision in the Old Corporation Law was penalizing
Western Equipment is doing business in the Philippines doing business without a license, and NOT entering into a contract
without obtaining a license. without a license.
o How is Western alleged to be doing business? Its  Atlantic v. Cebu Stevedoring
products and its brand were so well-known in the o When a foreign corporation files a complaint, it must aver that it
Philippines is foreign corporation whether it is doing business or not,
o Western has capacity to sue since the suit is for the otherwise, the complaint will be dismissed based on the lack of
protection of its trade name, a property right, which capacity to sue.
may be proceeded in an action in rem. o Jurisprudence said that there was no need to aver that it was
o Greatest penalty on a foreign corporation engaged in doing business or not because it was a matter of affirmative
business but without a license: such corporation defense on the part of the local.
cannot sue  BUT it would be unfair for a local corporation to determine if
o When a foreign corporation has property in this the foreign corporation is engaged in business since it is in the
country that is the object of a litigation, can it be foreign corporation that is bringing the case.
sued even if it is not doing business in the country?  Merrill Lynch Futures v. Court of Appeals
 The plaintiff will have to attach the properties, o When a foreign corporation alleges that the transaction is an
and only then, will the courts will obtain isolated one, when in fact, it is engaged in business, the
jurisdiction over the foreign corporation defendant will try to prove that the foreign corporation is in fact
 What if it is the corporation that is suing on a engaged in business in a motion to dismiss on the ground of lack
property, but it has engaged in business without a of capacity to sue.
license?  The foreign corporation is actually engaged in business but is
 Section 133 does not distinguish whether the without a license.
action is in rem or in personam o Better route: file an answer raising the affirmative defense of lack
 No matter what the action is filed, as long as of capacity to sue
the corporation is engaged in business but  Only when it comes to proving that the foreign corporation is
without a license, it cannot sue not doing business in the country
o The corporation was allowed to pursue the case o The spouses are estopped from saying that the corporation has no
notwithstanding the motion to dismiss because capacity to sue, because it entered into transactions knowing that
Western is not seeking to enforce any legal or it was engaged in business without a license.
contract rights arising from any business which it has o Doctrine of Estoppel
transacted in the Philippines.  Estopper: Spouses
o International Law  Treaties  Knowing that Merrill Lynch was without license, it still
 Constitution transacted with the foreign corporation
 Section 133, Corporation Code  Estoppee: Merrill Lynch
o As long as a trade name is recognized in a jurisdiction  Engaging in business without a license
which is a member of a Union, it shall be binding on o “Avoidance of Unjust Enrichment”
all members of the Union, irrespective of whether  Eriks v. Court of Appeals
that foreign corporation was doing business or not. o Notwithstanding the fact that the foreign corporation does not
 Antam v. Court of Appeals have a license and without the capacity to sue, the case will be

27 CLV LECTURE NOTES | CORPORATE LAW 2012


dismissed, but it can still sue a local after it obtains the required
license.
 Facilities Management Corp. v. De la Osa
o By engaging in business, it is deemed to be present in the
Philippines, and the court can obtain jurisdiction over the
properties of the foreign corporation located in the Philippines.
o if a foreign corporation, not engaged in business in the
Philippines, is not banned from seeking redress from courts in the
Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done
against a person or persons in the Philippines.
o If a foreign corporation not doing business can sue a local in an
isolated transaction (true, based on the doctrine of voluntary
surrender), a fortiori, as a necessary consequence, that foreign
corporation can be sued for an isolated transaction. (Illogical: non
sequitur; it has no presence in the country)
 When it sues, it invokes the jurisdiction of the local courts

28 CLV LECTURE NOTES | CORPORATE LAW 2012