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Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Case Title; Topic Quick Facts
CHAPTERS I and II1
Union Glass v. SEC  Pioneer Glass mortgaged to DBP its assets in order to get loans. DBP was
Government Regulation of Corporations able to get control of the majority of the common shares of stocks because
of the payment scheme of Pioneer Glass.
 When Pioneer Glass suffered serious liquidity problems such that it could
no longer meet its financial obligations with DBP, it entered into a dacion
en pago agreement with the latter, whereby all its assets mortgaged to DBP
were ceded to the latter in full satisfaction of the corporation's obligations
 Holifena, a stockholder, instituted the complaint contesting the dacion en
pago
 Union Glass is a lessee of the Pioneer Glass plant
Abejo v. dela Cruz dispute between the principal stockholders of Pocket Bell:
Government Regulation of Corporations  spouses Abejo sold their shares to Telectronics, making the latter the majority
stockholder
 before the sale, the erstwhile majority stockholders were the Bragas
 Corporate Secretary refused to transfer the certificate of stock in Telectronics’
name
 Bragas asserting that they have preemptive rights
 This triggered off the series of intertwined actions between the protagonists,
all centered on the question of jurisdiction over the dispute. The Bragas assert
that the regular civil court has original and exclusive jurisdiction as against
the Securities and Exchange Commission, while the Abejos and Telectronics,
as new majority shareholders, claim the contrary.
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From http://www.scribd.com/doc/60353957/Chapter-I-and-II-Corporation-Law
Janz Hanna Ria N. Serrano
Held/Ratio/Doctrine
SEC has NO jurisdiction.
The fact that the controversy at bar involves the rights of petitioner Union Glass
who has no intra-corporate relation either with complainant or the DBP, places
the suit beyond the jurisdiction of the respondent SEC. The case should be tried
and decided by the court of general jurisdiction, the Regional Trial Court. Since
petitioner has no intra-corporate relationship with the complainant, it
cannot be joined as party-defendant in said case as to do so would violate
the rule or jurisdiction.
The SC added however that for Hofileñas complaint against Union Glass to
prosper, final judgment must first be rendered in the issue of the validity of the
dacion en pago, which is a prejudicial question, the resolution of which is a logical
antecedent of the issue involved in the action against petitioner Union Glass.
The Court held that such action for recovery of the glass plant could be brought by
the dissenting stockholder to the regular courts only if and when the SEC
rendered final judgment annulling the dacion en pago and furthermore subject to
Union Glass' defenses as a third party buyer in good faith.
SEC has original and exclusive jurisdiction
"the issue is not the ownership of shares but rather the nonperformance by the
Corporate Secretary of the ministerial duty of recording transfers of shares of
stock of the Corporation of which he is secretary."
The dispute at bar is an intracorporate dispute that has arisen between and
among the principal stockholders of the corporation Pocket Bell due to the refusal
of the corporate secretary to perform his "ministerial duty" to record the transfers
of the corporation's controlling (56%) shares of stock, covered by duly endorsed
certificates of stock, in favor of Telectronics as the purchaser thereof.
The very complaint of the Bragas for annulment of the sales and transfers as filed
by them in the regular court questions the validity of the transfer and
endorsement of the certificates of stock, claiming alleged preemptive rights in the
case of the Abejos' shares and alleged loss of the certificates and lack of consent
and consideration in the case of Virginia Braga's shares. Such dispute clearly
involves controversies "between and among stockholders," as to the Abejos'
right to sell and dispose of their shares to Telectronics, the validity of the
latter's acquisition of Virginia Braga's shares, who between the Bragas and
the Abejos' transferee should be recognized as the controlling shareholders
of the corporation, with the right to elect the corporate officers and the
management and control of its operations. Such a dispute and case clearly
fall within the jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A.
Insofar as the Bragas and their corporate secretary's refusal on behalf of the

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Magalad v. Premier Financing Corporation
CIR v. Club Filipino
Stock and Non-Stock Corporations
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 Premiere is a financing company engaged in soliciting and accepting money
market placements or deposits.
 Premiere, with expired permit to issue commercial papers and with
intention not to pay or defraud its creditors, induced and misled Magalad
into making a money market placement of P50,000.00 at 22% interest per
annum for which it issued a receipt as well as two (2) post-dated checks in
the total sum of P51,079.00 and assigned to Magalad its receivable from a
certain David Saman for the same amount.
 Drawee bank dishonored the checks for lack of sufficient funds to cover the
amount. Despite demands by Magalad for the replacement of said
checks with cash, Premiere, for no valid reason, failed and refused to
honor such demands and due to fraudulent acts of Premiere.
Club Filipino, Inc. de Cebu is a civic corporation, owning and operating a club
house, a bowling alley, a golf course, and a bar-restaurant where it sells wines and
liquors, soft drinks, meals and short orders to its members and their guests.
The bar-restaurant was a necessary incident to the operation of the club and -its
golf-course.
The club is operated mainly with funds derived from membership fees and dues.
Janz Hanna Ria N. Serrano
corporation Pocket Bell to record the transfer of the 56% majority shares to
Telectronics may be deemed a device or scheme amounting to fraud and
misrepresentation employed by them to keep themselves in control of the
corporation to the detriment of Telectronics (as buyer and substantial investor in
the corporate stock) and the Abejos (as substantial stockholders-sellers), the case
falls under paragraph (a). The dispute is likewise an intra-corporate
controversy between and among the majority and minority stockholders as
to the transfer and disposition of the controlling shares of the corporation,
falling under paragraph (b) of Sec 5 PD 902-A. As pointed out by the Abejos,
Pocketbell is not a close corporation, and no restriction over the free
transferability of the shares appears in the Articles of Incorporation, as well as in
the bylaws 10 and the certificates of stock themselves, as required by law for the
enforcement of such restriction.
An intra-corporate controversy is one which arises between a stockholder
and the corporation. There is no distinction, qualification, nor any
exemption whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations.
Considering that Magalad's complaint sufficiently alleges acts amounting to
fraud and misrepresentation committed by Premiere, the SEC must be held
to retain its original and exclusive jurisdiction over the case, despite the fact
that the suit involves collection of sums of money paid to said corporation,
the recovery of which would originally fall within the jurisdiction of regular
courts.
The fraud committed is detrimental to the interest of the public and, therefore,
encompasses a category of relationship within the SEC jurisdiction. Otherwise
stated, in order that the SEC can take cognizance of a case, the controversy must
pertain to any of the following relationships: (a) between the corporation,
partnership or association and the public; (b) between the corporation,
partnership or association and its stockholders, partners, members or officers; (c)
between the corporation, partnership or association and the state so far as its
franchise, permit or license to operate is concerned; and (d) among the
stockholders, partners or associates themselves (Union Glass & Container Corp. v.
SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).
The fact that Premiere's authority to engage in financing already expired
will not have the effect of divesting the SEC of its original and exclusive
jurisdiction. The expanded jurisdiction of the SEC was conceived primarily
to protect the interest of the investing public.
For the liability to pay taxes to attach, the operator thereof must be engaged in the
business as a barkeeper and restaurateur.
The plain and ordinary of a business is restricted to activities or affairs where
profit is the purpose or livelihood is the motive, and the term business when used
without qualification, should be construed in its plain and ordinary meaning,
restricted to activities for profit or livelihood.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Manuel R. Dulay Ent. v. CA
Close Corporations
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Whatever profits it had, were used to defray its overhead expenses and to
improve its golf-course.
In 1951, as a result of a capital surplus, arising from the re-valuation of its
real properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to the
stockholders.
In 1952, a BIR agent discovered that the Club has never paid percentage tax on the
gross receipts of its bar and restaurant. The Collector of Internal Revenue
assessed against and demanded from the Club, percentage taxes on its gross
receipts as well as fixed taxes and compromise penalty. The Club wrote the
Collector, requesting for the cancellation of the assessment. The request having
been denied, the Club filed the instant petition for review.
 Petitioner corporation through its president, Manuel Dulay, obtained various
loans for the construction of its hotel project, Dulay Continental Hotel (now
Frederick Hotel).
 It even had to borrow money from petitioner Virgilio Dulay to be able to
continue the hotel project. As a result of said loan, petitioner Virgilio Dulay
occupied one of the unit apartments of the subject property since 1973
while at the same time managing the Dulay Apartment as his shareholdings
Janz Hanna Ria N. Serrano
Having found as a fact that the Club was organized to develop and cultivate
sports of all, class and denomination, for the healthful recreation and
entertainment of its stockholders and members; that upon its dissolution,
its remaining assests, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu; that it is operated mainly with funds derived
from membership fees and dues; that the Club's bar and restaurant catered
only to its members and their guests; that there was in fact no cash dividend
distribution to its stockholders and that whatever was derived on retail
from its bar and restaurant was used to defray its overall overhead
expenses and to improve its golf-course (cost-plus-expenses-basis), it stands
to reason that the Club is not engaged in the business of an operator of bar
and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and
restaurant, but such fact does not necessarily convert it into a profit-making
enterprise. The bar and restaurant are necessary adjuncts of the Club to
foster its purposes and the profits derived therefrom are necessarily
incidental to the primary object of developing and cultivating sports for the
healthful recreation and entertainment of the stockholders and members.
That a Club makes some profit, does not make it a profit making club.
The fact that the capital stock of the respondent Club is divided into shares, does
not detract from the finding of the trial court that it is not engaged in the business
of operator of bar and restaurant. What is determinative of whether or not the
Club is engaged in such business is its object or purpose, as stated in its
articles and by-laws. It is a familiar rule that the actual purpose is not
controlled by the corporate form or by the commercial aspect of the
business prosecuted, but may be shown by extrinsic evidence, including the
by-laws and the method of operation.
Moreover, for a stock corporation to exist, two requisites must be complied with,
to wit: (1) a capital stock divided into shares and (2) an authority to distribute to
the holders of such shares, dividends or allotments of the surplus profits on the
basis of the shares held (see. 3, Act No. 1459). In the case at bar, while the
respondent Club's capital stock is divided into shares, nowhere in its articles of
incorporation or by-laws could be found an authority for the distribution of its
dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered
a stock corporation, within the contemplation of the corporation law. "A tax is a
burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-
profit, non-stock organizations, unless the intent to the contrary is manifest and
patent."
In the instant case, petitioner corporation is classified as a close corporation
and consequently a board resolution authorizing the sale or mortgage of the
subject property is not necessary to bind the corporation for the action of its
president. At any rate, a corporate action taken at a board meeting without
proper call or notice in a close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with the secretary of
the corporation after having knowledge of the meeting which, in this case,

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
NDC v. Phil. Veterans Bank
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in the corporation was subsequently increased by his father.
 Manuel Dulay by virtue of Board Resolution No. 186 of petitioner
corporation sold the subject property to private respondents spouses, Maria
Theresa and Castrense Veloso in the amount of P300,000.00. The parties
then executed a Memorandum to the Deed of Absolute, giving Manuel Dulay
within two (2) years or until December 9, 1979 to repurchase the subject
property for P200,000.00 which was however, not annotated.
 Thereafter private respondent Maria Veloso, without the knowledge of
Manuel Dulay, mortgaged the subject property to private respondent Manuel
A. Torres for a loan of P250,000.00 which was duly annotated. The subject
property was sold on April 1, 1978 to private respondent Torres as the
highest bidder in an extrajudicial foreclosure, upon default of Veloso to pay
the loan. Veloso then executed a Deed of Absolute Assignment of the Right to
Redeem in favor of Manuel Dulay assigning her right to repurchase the
subject property from private respondent Torres. As neither private
respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem
the subject property within the one year statutory period for redemption,
private respondent Torres sought to consolidate his ownership over the
property. Petitioner Virgilio Dulay appeared in court to intervene in said
case alleging that Manuel Dulay was never authorized by the petitioner
corporation to sell or mortgage the subject property, and sought to cancel
the sheriff sale to Torres and regain possession of the property.
 AGRIX executed in favor of Phil Veterans Bank a REM over 3 parcels of land.
 During the existence of the mortgage, AGRIX went bankrupt.
 Veterans Bank than filed a claim with the AGRIX Claims Committee for the
payment of its loan credit.
 Agrix and NDC refused to recognize the claim, invoking PD 1717 which
ordered the rehabilitation of the Agrix Group of Companies is administered
by the National Development Company. Sec 4(1) thereof provides all
mortgages and other liens attached to the assets of the dissolved
corporations are hereby extinguished. Agrix proceeded to cancel the
mortgage lien in light of the PD.
Janz Hanna Ria N. Serrano
petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a
personality distinct and separate from its individual stockholders or members, the
veil of corporate fiction may be pierced when it is used to defeat public
convenience, justify wrong, protect fraud or defend crime. The privilege of being
treated as an entity distinct and separate from. its stockholders or members is
therefore confined to its legitimate uses and is subject to certain limitations to
prevent the commission of fraud or other illegal or unfair act. When the
corporation is used merely as an alter ego or business conduit of a person, the law
will regard the corporation as the act of that person. The Supreme Court had
repeatedly disregarded the separate personality of the corporation where the
corporate entity was used to annul a valid contract executed by one of its
members.
Petitioners' claim that the sale of the subject property by its president,
Manuel Dulay, to private respondents spouses Veloso is null and void as the
alleged Board Resolution No. 18 was passed without the knowledge and
consent of the other members of the board of directors cannot be sustained.
Virgilio is very much privy to the transactions involved. To begin with, he is
an incorporator and one of the board of directors designated at the time of the
organization of Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the said
entity is loosely referred to as a family corporation'. The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R.
Delay Enterprises, Inc. is typical: four-fifths of its incorporators being close
relatives namely, three (3) children and their father whose name identifies their
corporation.
Petitioner corporation is liable for the act of Manuel Dulay and the sale of the
subject property to private respondents by Manuel Dulay is valid and binding. The
sale between Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V.
Veloso and Castrense C. Veloso, was a corporate act of the former and not a
personal transaction of Manuel R. Dulay. This is so because Manuel R. Dulay was
not only president and treasurer but also the general manager of the corporation.
The corporation, was a closed family corporation, where the incorporators and
directors belong to one single family. It cannot be concealed that Manuel R. Dulay
as president, treasurer and general manager almost had absolute control over the
business and affairs of the corporation.
Estoppel does not apply where Veterans Bank invoked the questioned PD when
Pres Marcos was still absolute ruler and his decrees were absolute law. Not a
single act or issuance of Marcos was ever declared unconstitutional as long as he
was in power.
In this case, Veterans Bank has not been paid a single centavo on its claim, which
was kept pending for more than 7 years. The new corporation, New Agrix Inc, is
neither owned nor controlled by the government. The DC was merely required to
extend a loan of not more than P10M to New Agrix Inc. it is entirely private and so
should have been organized under the Corporation Law. The Court thus declared

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Pioneer Insurance v CA
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 TC annulled the entire PD 1717. NDC appeals. It claims that since Veterans
Bank invoked questioned PD when it filed a claim with the Agrix Claims
committee, it is thus estopped from questioning the validity of the PD which
also provides that all mortgages attached to properties of Agrix shall be
extinguished
 Southern Airlines was a single proprietorship. Its owner entered into
contracts of sale over aircrafts
 Pioneer Insurance and Surety Corporation as surety executed and issued its
Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance
price of the aircrafts and spare parts.
 It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
Constancio Maglana contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their
contributions to a new corporation proposed by Lim to expand his
airline business. Lim had duly received the amount of P151,000.00 from
defendants Bormaheco and Maglana representing the latter's
participation in the ownership of the subject airplanes and spare parts.
 The indemnitors then executed two (2) separate indemnity agreements in
favor of Pioneer, one signed by Maglana and the other jointly signed by Lim
for SAL, Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally bind themselves jointly and
severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer may incur in
consequence of having become surety upon the bond. Lim doing business
under the name and style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for Pioneer’s suretyship.
 Lim defaulted on his subsequent installment payments prompting JDA to
request payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said
chattel mortgage. The Cervanteses and Maglana, however, filed a third party
claim alleging that they are co-owners of the aircrafts. Pioneer also filed an
action for judicial foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses, Bormaheco and
Maglana.
Janz Hanna Ria N. Serrano
the PD 1717 as unconstitutional.
Does a defective incorporation result into a partnership? NO.
1. If parties intended to create a corporation, then a partnership
arrangement cannot be created in its stead since such is not
within their intent
2. Important differences between the corporation and partnership,
such as limited liability, centralized management, and easy
transferability of shares are by themselves strong factors to be
bound by a corporate agreement
It is ordinarily held that persons who attempt, but fail, to form a corporation
and who carry on business under the corporate name occupy the position of
partners inter se. Where persons associate themselves together under
articles to purchase property to carry on a business, and their organization
is so defective as to come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their rights as members of
the company to the property acquired by the company will be recognized.
However, such a relation does not necessarily exist, for ordinarily persons cannot
be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist, and it should be implied only when
necessary to do justice between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in business under the
name of the pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution. A partnership relation
between certain stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make the former liable
to contribute for payment of debts illegally contracted by the latter.
In this case, it was established by the evidence contrary to Lim’s postulations, that
Cervantes, Bormacheo, and Maglana contributed the amount needed by Lim to put
up the corporation as he promised, which he received. It is therefore clear that the
petitioner never had the intention to form a corporation with the respondents
despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to
make contributions to a proposed corporation which was never formed because
the petitioner reneged on their agreement. Necessarily, no de facto partnership
was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf of his other
would-be incorporators in transacting the sale of the airplanes and spare parts.
(When parties come together intending to form a corporation, but no corporation
is formed due to some legal cause:
(1) parties who intended to participate or actually participated in the
business affairs of the proposed corporation would be considered as
partners under a de facto corporation
(2) parties who took no part except to subscribe for stock in a proposed
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Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano
corporation, do not become partners with the subscribers engaged in
the business of the corporation)

CHAPTER III
A corporation's right to use its corporate and trade name is a property right, a
right in rem, which it may assert and protect against the world in the same
Philips Export BV v. CA Petitioner prays for the removal of the word "PHILIPS" from private respondent's manner as it may protect its tangible property, real or personal, against trespass
Corporate Name corporate name. or conversion. It is regarded, to a certain extent, as a property right and one which
cannot be impaired or defeated by subsequent appropriation by another
corporation in the same field

Name is one of its attributes, an element of its existence, and essential to its
identity. The general rule as to corporations is that each corporation must have a
name by which it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same manner as the
name of an individual designates the person; and the right to use its corporate
name is as much a part of the corporate franchise as any other privilege granted

A corporation acquires its name by choice and need not select a name identical
with or similar to one already appropriated by a senior corporation while an
individual's name is thrust upon him. A corporation can no more use a corporate
name in violation of the rights of others than an individual can use his name
legally acquired so as to mislead the public and injure another

Section 18 of Corp code cannot be any clearer. To come within its scope, two
requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of
such corporate name; and
(2) the proposed name is either:

(a) identical; or
(b) deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from
infringement by similarity is determined by priority of adoption

The second requisite no less exists in this case. In determining the existence
of confusing similarity in corporate names, the test is whether the similarity
is such as to mislead a person, using ordinary care and discrimination. In so
doing, the Court must look to the record as well as the names themselves.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Lyceum of the Phils. v. CA
Corporate Name
7
Janz Hanna Ria N. Serrano
was registered as far back as 1922. Petitioners, therefore, have the exclusive right
to its use which must be free from any infringement by similarity. A corporation
has an exclusive right to the use of its name, which may be protected by
injunction upon a principle similar to that upon which persons are
protected in the use of trademarks and tradenames Such principle proceeds
upon the theory that it is a fraud on the corporation which has acquired a right to
that name and perhaps carried on its business thereunder, that another should
attempt to use the same name, or the same name with a slight variation in such a
way as to induce persons to deal with it in the belief that they are dealing with the
corporation which has given a reputation to the name.
Lyceum of Baguio asserts that it has exclusive rights to the use of the word The policy underlying the prohibition in Section 18 is the avoidance of fraud
“Lyceum” in its name upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations.
It is claimed by petitioner that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that word, although originally a
generic, has become appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The doctrine of secondary meaning
originated in the field of trademark law. Its application has, however, been
extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to
use a particular trademark or tradename.
In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of
secondary meaning was elaborated in the following terms: " . . . a word or
phrase originally incapable of exclusive appropriation with reference to an
article on the market, because geographically or otherwise descriptive,
might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch
of the purchasing public, the word or phrase has come to mean that the
article was his product."
In other words, while the appellant may have proved that it had been using the
word 'Lyceum' for a long period of time, this fact alone did not amount to mean
that the said word had acquired secondary meaning in its favor because the
appellant failed to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that
confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned
errors must necessarily fail."
Petitioner institution is not entitled to a legally enforceable exclusive right to use
the word "Lyceum" in its corporate name and that other institutions may use
"Lyceum" as part of their corporate names. To determine whether a given
corporate name is "identical" or "confusingly or deceptively similar" with another
entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety and
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Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano
when the name of petitioner is juxtaposed with the names of private respondents,
they are not reasonably regarded as "identical" or "confusingly or deceptively
similar" with each other.
PC Javier & Sons, Inc. et. al. v. CA Petitioner liable to PAIC Savings and Mortgage Bank, formerly known as First Their argument does not hold water. Their defense that they should first be
Corporate Name Summa Savings Bank. formally notified of the change of corporate name of First Summa Savings and
Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., before they will continue
Petitioner argues that they were legally justified to withhold payments because paying their loan obligations to respondent bank presupposes that there exists a
they weren’t notified of the change in bank’s name requirement under a law or regulation ordering a bank that changes its corporate
name to formally notify all its debtors.

After going over the Corporation Code and Banking Laws, as well as the
regulations and circulars of both the SEC and the Bangko Sentral ng Pilipinas
(BSP), we find that there is no such requirement. This being the case, this
Court cannot impose on a bank that changes its corporate name to notify a
debtor of such change absent any law, circular or regulation requiring it.
Such act would be judicial legislation. The formal notification is, therefore,
discretionary on the bank. Unless there is a law, regulation or circular from the
SEC or BSP requiring the formal notification of all debtors of banks of any change
in corporate name, such notification remains to be a mere internal policy that
banks may or may not adopt.

Malabang v. Benito
De Facto Corporations – Law Subsequently Declared Void
Petitioners brought the action for prohibition to nullify EO 386 creating the
municipality of Malabang, Lanao del Sur
In the case at bar, though there was no evidence showing that petitioners were
furnished copies of official documents showing the First Summa Savings and
Mortgage Bank’s change of corporate name to PAIC Savings and Mortgage Bank,
Inc., evidence abound that they had notice or knowledge thereof. Several
documents establish this fact.
As a result of this analysis of the cases the following principles may be deduced
which seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal
corporation may be:
1. A valid law enacted by the legislature;
2. An unconstitutional law, valid on its face, which has either (a) been
upheld for a time by the courts or (b) not yet been declared void;
provided that a warrant for its creation can be found in some other
valid law or in the recognition of its potential existence by the
general laws or constitution of the state.;
II. There can be no de facto municipal corporation unless either directly or
potentially, such a de jure corporation is authorized by some legislative
fiat;
III. There can be no color of authority in an unconstitutional statute alone,
the invalidity of which is apparent on its face;
IV. There can be no de facto corporation created to take the place of an
existing de jure corporation, as such organization would clearly be a
usurper.

In the cases where a de facto municipal corporation was recognized as such

despite the fact that the statute creating it was later invalidated, the decisions
could fairly be made to rest on the consideration that there was some other valid
 9
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Harril v. Davis The four defendants, after having agreed to form a corporation, ordered goods
De Facto Corporations - “Substantial” or “colorable” compliance from the plaintiff even before they filed their articles of incorporation. And after
they had filed such articles in one of the two public offices required by law, they
ordered additional goods. This is an action to recover the purchase price of said
goods from the defendants as partners
Counsel for defendants argue with much force and persuasiveness that they
escape liability because they became a corporation de facto
Janz Hanna Ria N. Serrano
law giving corporate vitality to the organization. Hence, in the case at bar, the
mere fact that Balabagan was organized at a time when the statute had not been
invalidated cannot conceivably make it a de facto corporation, as, independently
of the Administrative Code provision in question, there is no other valid statute to
give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva,
this Court granted a similar petition for prohibition and nullified an executive
order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez
ruling, despite the fact that the municipality was created in 1961, before section
68 of the Administrative Code, under which the President had acted, was
invalidated. 'Of course the issue of de facto municipal corporation did not arise in
that case.
Where parties procure a charter or file articles of association under a general law,
thereby secure the color of a legal incorporation, believe that they are a
corporation, and use the supposed franchise of the corporation in good faith, and
third parties deal with them as a corporation, they become a corporation de facto
and exempt from individual liability to such third parties, although there are
unknown defects in the proceedings for their incorporation
Parties who actively engage in businesses for profit under the name and pretense
of a corporation which they know neither exists nor has any color of existence
may not escape individual liability because strangers are led by their pretense to
contract with their pretended entity as a corporation. In such cases they act as
the agents of a principal that they know does not exist, and they are liable
under a familiar rule where there is no responsible principal

Hall v. Piccio2
De Facto Corporations - “Substantial” or “colorable” compliance
 On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma
Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged
in Leyte, the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber business to
carry on as general contractors, operators and managers, etc. Attached to the
article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the
corporation described in a list appended thereto. Immediately after the
execution of said articles of incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election of its officers.
 On 2 December 1947, the said articles of incorporation were filed in the office
of the Securities and Exchange Commissioner, for the issuance of the
corresponding certificate of incorporation.
 On 22 March 1948, pending action on the articles of incorporation by the
Neither the hope, the belief, nor the statement by parties that they are
incorporated, nor the signing of the articles of incorporation which are not filed,
where filing is requisite to create the corporation, nor the use of the pretended
franchise of the nonexistent corporation, will constitute such a corporation de
facto as will exempt those who actively and knowingly use s name to incur legal
obligations from their individual liability to pay them. There could be no
incorporation or color of it under the law until the articles were filed (requisites
for valid incorporation).
The Securities and Exchange Commission has not issued the corresponding
certificate of incorporation. The personality of a corporation begins to exist only
from the moment such certificate is issued — not before. Not having obtained
the certificate of incorporation, the Far Eastern Lumber and Commercial
Co. — even its stockholders — may not probably claim "in good faith" to be a
corporation. Under the statue it is to be noted that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and
Industry which calls a corporation into being. The immunity if collateral attack is
granted to corporations "claiming in good faith to be a corporation under this act."
Such a claim is compatible with the existence of errors and irregularities; but not
with a total or substantial disregard of the law. Unless there has been an evident
attempt to comply with the law the claim to be a corporation "under this act"
could not be made "in good faith."

2
http://berneguerrero.com/downloads/2005nr74_comm-corp.pdf

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
ABC v. Standard Products
Corporation by Estoppel
Cranson v. IBM
Corporation by Estoppel
Salvatierra v. Garlitos, et. al.
Corporation by Estoppel
10
aforesaid governmental office, Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella filed before the Court of First Instance of
Leyte the civil case, alleging among other things that the Far Eastern Lumber
and Commercial Co. was an unregistered partnership; that they wished to
have it dissolved because of bitter dissension among the members,
mismanagement and fraud by the managers and heavy financial losses. C.
Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the
court's jurisdiction and the sufficiently of the cause of action.
 After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of
the company; and at the request of Brown, et. al., appointed Pedro A.
Capuciong as the receiver of the properties thereof, upon the filing of a
P20,000 bond. Hall and Hall offered to file a counter-bond for the discharge of
the receiver, but Judge Piccio refused to accept the offer and to discharge the
receiver. Whereupon, Hall and Hall instituted the present special civil action
with the Supreme Court.
At the trial of the case the plaintiff failed to prove affirmatively the corporate
existence of the parties and the appellant insists that under these circumstances
the court erred in finding that the parties were corporations with juridical
personality and assigns same as reversible error.
Due to an oversight by the lawyer of which Cranson wasn’t aware, the certificate
of incorporation signed and acknowledged in May 1961 was not filed until
November. Between that time Cranson’s corporation purchased 8 typewriters
from IBM
Salvatierra leased his land to the corporation. He filed a suit for accounting,
rescission and damages against the corporation and its president for his share of
the produce. Judgment against both was obtained. President complains for being
held personally liable.
Janz Hanna Ria N. Serrano
This is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders,
without the intervention of the state.
There is no merit whatever in the appellant's contention. The general rule is that
in the absence of fraud a person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless its existence is
attacked for cause which have arisen since making the contract or other dealing
relied on as an estoppel and this applies to foreign as well as to domestic
corporations.
The defendant having recognized the corporate existence of the plaintiff by
making a promissory note in its favor and making partial payments on the same is
therefore estopped to deny said plaintiff's corporate existence. It is, of course, also
estopped from denying its own corporate existence. Under these circumstances it
was unnecessary for the plaintiff to present other evidence of the corporate
existence of either of the parties. It may be noted that there is no evidence
showing circumstances taking the case out of the rules stated.
Under the circumstances of the case, the officer (Cranson) of a defectively
incorporated association may not be subjected to personal liability
There, is as we see it, a wide difference creating a corporation by means of the de
facto doctrine and estopping a party, due to his conduct in a particular case, from
setting up the claim of no incorporation
When there is a concurrence of the 2 elements necessary for the application of the
de facto doctrine, there exists an entity which is a corporation de jure agains all
persons but the state. On the other hand, the estoppels theory is applied only to
the facts of each particular case and may be invoked even when there is no
corporation de facto. Accordingly, even though one or more of the requisites of
a de facto corporation are absent, we think that this factor does not preclude
the application of the estoppels doctrine in a proper case, as in the one at bar.
There can be no question that a corporation with registered has a juridical
personality separate and distinct from its component members or stockholders
and officers such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president and conversely, a
stockholder or member cannot be held personally liable for any financial
 11
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Chiang Kai Shek School v. CA3 Fausta F. Oh reported for work at the Chiang Kai Shek School in Sorsogon on the
first week of July, 1968. She was told she had no assignment for the next semester.
Oh was shocked. She had been teaching in the school since 1932 for a continuous
period of almost 33 years. And now, out of the blue, and for no apparent or given
reason, this abrupt dismissal. She demanded separation pay, social security
benefits, salary differentials, maternity benefits and moral and exemplary
damages. The original defendant was the Chiang Kai Shek School but when it filed
a motion to dismiss on the ground that it could not be sued, the complaint was
amended. Certain officials of the school were also impleaded to make them
solidarily liable with the school.
Court of First Instance of Sorsogon dismissed the complaint. On appeal, its
decision was set aside by the respondent court, which held the school suable
and liable while absolving the other defendants
3
http://www.scribd.com/doc/61022869/Chiang-Kai-Shek-School-vs-CA
Janz Hanna Ria N. Serrano
obligation be, the corporation in excess of his unpaid subscription. But this rule
is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated
association.
The reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of
law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and
subject to all the liabilities of a principal, a person acting or purporting to
act on behalf of a corporation which has no valid existence assumes such
privileges and obligations and comes personally liable for contracts entered
into or for other acts performed as such, agent.
Considering that defendant Refuerzo, as president of the unregistered corporation
Philippine Fibers Producers Co., Inc., was the moving spirit behind the
consummation of the lease agreement by acting as its representative, his liability
cannot be limited or restricted that imposed upon corporate shareholders. In
acting on behalf of a corporation which he knew to be unregistered, he assumed
the risk of reaping the consequential damages or resultant rights, if any, arising
out of such transaction.
It is true that Rule 3, Section 1, of the Rules of Court clearly provides that "only
natural or juridical persons may be parties in a civil action." It is also not denied
that the school has not been incorporated. However, this omission should not
prejudice the private respondent in the assertion of her claims against the school.
Having been recognized by the government, it was under obligation to
incorporate under the Corporation Law within 90 days from such recognition. It
appears that it had not done so at the time the complaint was filed
notwithstanding that it had been in existence even earlier than 1932. The
petitioner cannot now invoke its own non-compliance with the law to immunize it
from the private respondent's complaint.
There should also be no question that having contracted with the private
respondent every year for thirty two years and thus represented itself as
possessed of juridical personality to do so, the petitioner is now estopped from
denying such personality to defeat her claim against it. According to Article 1431
of the Civil Code, "through estoppel an admission or representation is rendered
conclusive upon the person making it and cannot be denied or disproved as
against the person relying on it."
As the school itself may be sued in its own name, there is no need to apply Rule 3,
 12
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
LBC Express, Inc. v. CA. President suing LBC because of lately-delivered parcel. TC awarded corporation
moral damages
Lozano v. delos Santos upon the request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner
and private respondent agreed to consolidate their respective associations and
form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers' Association,
Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of
officers who shall be given the sole authority to collect the daily dues from the
members of the consolidated association; elections were held on October 29, 1995
and both petitioner and private respondent ran for president; petitioner won;
private respondent protested and, alleging fraud, refused to recognize the results
of the election; private respondent also refused to abide by their agreement and
continued collecting the dues from the members of his association despite several
demands to desist.
Private respondent moved to dismiss the complaint for lack of jurisdiction,
claiming that jurisdiction was lodged with the Securities and Exchange
Commission (SEC).
Janz Hanna Ria N. Serrano
Section 15, under which the persons joined in an association without any juridical
personality may be sued with such association. Besides, it has been shown that
the individual members of the board of trustees are not liable, having been
appointed only after the private respondent's dismissal
Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar injury. A corporation, being an artificial person and
having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish.
Mental suffering can be experienced only by one having a nervous system and it
flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by
respondent bank as an artificial person.
There is no intracorporate nor partnership relation between petitioner and
private respondent. The controversy between them arose out of their plan to
consolidate their respective jeepney drivers' and operators' associations into a
single common association. This unified association was, however, still a
proposal. It had not been approved by the SEC, neither had its officers and
members submitted their articles of consolidation in accordance with
Sections 78 and 79 of the Corporation Code. Consolidation becomes effective
not upon mere agreement of the members but only upon issuance of the
certificate of consolidation by the SEC.
The doctrine of corporation by estoppel advanced by private respondent cannot
override jurisdictional requirements. Jurisdiction is fixed by law and is not
subject to the agreement of the parties. It cannot be acquired through or waived,
enlarged or diminished by, any act or omission of the parties, neither can it be
conferred by the acquiescence of the court.

Corporation by estoppel is founded on principles of equity and is designed to

Lim Tong Lim v. Phil. Fishing Gear Industries, Inc.4
Corporation by Estoppel
 On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated 7 February 1990, for the purchase of fishing
nets of various sizes from the Philippine Fishing Gear Industries, Inc. (PFGI).
They claimed that they were engaged in a business venture with Lim
Tong Lim, who however was not a signatory to the agreement.
 The buyers, however, failed to pay for the fishing nets and the floats; hence,
PFGI filed a collection suit against Chua, Yao and Lim Tong Lim with a prayer
for a writ of preliminary attachment. The suit was brought against the
three in their capacities as general partners, on the allegation that "Ocean
Quest Fishing Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission.
 Lim filed the Petition for Review on Certiorari. Lim argues, among others, that
prevent injustice and unfairness. It applies when persons assume to form a
corporation and exercise corporate functions and enter into business relations
with third persons. Where there is no third person involved and the conflict
arises only among those assuming the form of a corporation, who therefore know
that it has not been registered, there is no corporation by estoppel.
Even if the ostensible corporate entity is proven to be legally nonexistent, a party
may be estopped from denying its corporate existence.
"The reason behind this doctrine is obvious — an unincorporated association has
no personality and would be incompetent to act and appropriate for itself the
power and attributes of a corporation as provided by law; it cannot create agents
or confer authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at their own
risk. And as it is an elementary principle of law that a person who acts as an agent
without authority or without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a principal, a person
acting or purporting to act on behalf of a corporation which has no valid existence

4
http://berneguerrero.com/downloads/2005nr74_comm-corp.pdf
 13
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him.
Int’l Express Travel v. CA5  IETTSI, through its managing director, wrote a letter to the Philippine
Football Federation, through its president, Henri Kahn, wherein the former
offered its services as a travel agency to the latter. The offer was accepted.
 IETTSI secured the airline tickets for the trips of the athletes and officials of
the Federation to the South East Asian Games in Kuala Lumpur as well as
various other trips to the People's Republic of China and Brisbane.
 For the tickets received, the Federation made two partial payments, then
through the Project Gintong Alay, paid some more
 On 27 December 1989, Henri Kahn issued a personal check in the amount of
P50,000 as partial payment for the outstanding balance of the Federation.
Thereafter, no further payments were made despite repeated demands.
 IETTSI sought to hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation. Kahn filed his answer with counterclaim,
while the Federation failed to file its answer and was declared in default by
the trial court.
 In due course, the trial court rendered judgment and ruled in favor of IETTSI
and declared Henri Kahn personally liable for the unpaid obligation of the
Federation. The complaint of IETTSI against the Philippine Football
Federation and the counterclaims of Henri Kahn were dismissed, with costs
against Kahn. Only Henri Kahn elevated the decision to the Court of Appeals.
On 21 December 1994, the appellate court rendered a decision reversing the
5
ibid
Janz Hanna Ria N. Serrano
assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent."
The doctrine of corporation by estoppel may apply to the alleged corporation and
to a third party. In the first instance, an unincorporated association, which
represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received
advantages and benefits. On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless treated it as a corporation and
received benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly assented to or took
advantage of.
There is no dispute that PFGI is entitled to be paid for the nets it sold. The only
question here is whether Lim should be held jointly liable with Chua and Yao. Lim
contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Although technically it is true that
Lim did not directly act on behalf of the corporation; however, having reaped the
benefits of the contract entered into by persons with whom he previously had an
existing relationship, he is deemed to be part of said association and is covered by
the scope of the doctrine of corporation by estoppel.
Both RA 3135 (the Revised Charter of the Philippine Amateur Athletic Federation)
and PD 604 recognized the juridical existence of national sports associations. This
may be gleaned from the powers and
functions granted to these associations (See Section 14 of RA 3135 and Section 8
of PD 604). The powers and functions granted to national sports associations
indicate that these entities may acquire a juridical personality. The power to
purchase, sell, lease and encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical capacity. However, while
national sports associations may be accorded corporate status, such does
not automatically take place by the mere passage of these laws. It is a
basic postulate that before a corporation may acquire juridical personality,
the State must give its consent either in the form of a special law or a general
enabling act.
The Philippine Football Federation did not come into existence upon the passage
of these laws. Nowhere can it be found in RA 3135 or PD 604 any provision
creating the Philippine Football Federation. These laws merely recognized the
existence of national sports associations and provided the manner by which
these entities may acquire juridical personality. Section 11 of RA 3135 and
Section 8 of PD 604 require that before an entity may be considered as a national
sports
association, such entity must be recognized by the accrediting organization, the
 14
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
trial court. IETTSI filed a motion for reconsideration and as an alternative
prayer pleaded that the Federation be held liable for the unpaid obligation.
The same was denied by the appellate court in its resolution of 8 February
1995. IETTSI filed the petition with the Supreme Court.
Janz Hanna Ria N. Serrano
Philippine, Amateur Athletic Federation under RA 3135, and the Department of
Youth and Sports Development under PD 604. This fact of recognition, however,
Henri Kahn failed to substantiate. A copy of the constitution and by-laws of the
Philippine Football Federation does not prove that said Federation has indeed
been recognized and accredited by either the Philippine Amateur Athletic
Federation or the Department of Youth and Sports Development.
Accordingly, the Philippine Football Federation is not a national sports association
within the purview of the aforementioned laws and does not have corporate
existence of its own.

As such, Henry Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled principal in
corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts performed as such
agent. As president of the Federation, Henri Kahn is presumed to have known
about the corporate existence or non-existence of the Federation.

Loyola Grand Villas Homeowners v. CA6
 Loyola Grand Villas Homeowners Association (LGVHAI) was organized on 8
February 1983 as the association of homeowners and residents of the Loyola
Grand Villas. It was registered with the Home Financing Corporation, the
predecessor of Home Insurance and Guaranty Corporation (HIGC), as the
sole homeowners' organization in the said subdivision under Certificate of
Registration 04-197. It was organized by the developer of the subdivision
and its first president was Victorio V. Soliven, himself the owner of the
developer.
 For unknown reasons, however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws.
They failed to do so. To the officers' consternation, they discovered that
there were two other organizations within the subdivision — the Loyola
Grand Villas Homeowners (North) Association Incorporated (North
Association) and the Loyola Grand Villas Homeowners (South) Association
Incorporated (South Association).
 The North Association was registered with the HIGC on 13 February 1989
under Certificate of Registration 04-1160 covering Phases West II, East III,
West III and East IV. It submitted its by-laws on 20 December 1988. In July
1989, when Soliven inquired about the status of LGVHAI,
The Court cannot subscribe to the position taken by the appellate court that even
assuming that the Federation was defectively incorporated, IETTSI cannot deny
the corporate existence of the Federation
because it had contracted and dealt with the Federation in such a manner as to
recognize and in effect admit its existence. The doctrine of corporation by
estoppel is mistakenly applied by the appellate court to IETTSI. The application of
the doctrine applies to a third party only when he tries to escape liabilities on a
contract from which he has benefited on the irrelevant ground of defective
incorporation. Herein, IETTSI is not trying to escape liability from the contract but
rather is the one claiming from the contract.
Section 46 reveals the legislative intent to attach a directory, and not mandatory,
meaning for the word ''must" in the first sentence thereof. The second paragraph
of the law which allows the filing of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out mandatory compliance with
the requirement of filing the by-laws "within 1 month after receipt of official
notice of the issuance of its certificate of incorporation by the Securities and
Exchange Commission." It necessarily follows that failure to file the by-laws
within that period does not imply the "demise" of the corporation. By-laws
may be necessary for the "government" of the corporation but these are
subordinate to the articles of incorporation as well as to the Corporation
Code and related statutes. There are in fact cases where by-laws are
unnecessary to corporate existence or to the valid exercise of corporate
powers, thus: "In the absence of charter or statutory provisions to the contrary,
by-laws are not necessary either to the existence of a corporation or to the valid
exercise of the powers conferred upon it, certainly in all cases where the charter
sufficiently provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation the power to
adopt by-laws, the failure to exercise the power will be ascribed to mere
nonaction which will not render void any acts of the corporation which would

6
Ibid.
 15
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
 Atty. Joaquin A. Bautista, the head of the legal department of the HIGC,
informed him that LGVHAI had been automatically dissolved for two
reasons. First, it did not submit its bylaws within the period required
by the Corporation Code and, second, there was non-user of corporate
charter because HIGC had not received any report on the association's
activities. Apparently, this information resulted in the registration of the
South Association with the HIGC on 27 July 1989 covering Phases West I,
East I and East II. It filed its by-laws on 26 July 1989. These developments
prompted the officers of the LGVHAI to lodge a complaint with the HIGC.
 They questioned the revocation of LGVHAI's certificate of registration
without due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and South
Associations by reason of the earlier issuance of a certificate of registration
in favor of LGVHAI.
Fleischer v. Botica Nolasco7  March 13, 1923: Manuel Gonzales made a written statement to the Botica
International Organization of Corporation: By-Laws Nolasco, Inc., requesting that 5 shares of stock sold by him to Henry Fleischer
be noted transferred to Fleischer's name
o He also acknowledged in said written statement the preferential right of
the corporation to buy said five shares
 June 14, 1923: he withdraw and cancelled his written statement of March 13,
1923
o Nolasco replied that his letter of June 14th was of no effect, and that the
shares in question had been registered in the name of the Botica Nolasco,
Inc.,
 November 15, 1923: Fleischer filed an amended complaint against the Botica
Nolasco, Inc., alleging that he became the owner of 5 shares of fully paid stock
of Botica Nolasco Co (Nolasco) by purchase from their original owner, Manuel
Gonzalez
 Despite repeated demands, Nolasco refused to register said shares in his
name in the books of the corporation caused him damages amounting to P500
 Nolasco's defense: article 12 of its by-laws: it had preferential right to buy the
shares at the par value of P100/share, plus P90 as dividends corresponding to
the year 1922
 offer was refused by Fleischer
 Trial Court: favored Fleischer and ordered the shared be registered
7
http://incessantlylearn.blogspot.com/2011/07/corporate-law-case-digest-fleischer-vs.html
Janz Hanna Ria N. Serrano
otherwise be valid."
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
the period provided for in Section 46. And even if such omission has been
rectified by Presidential Decree 902-A, and under the express grant of power and
authority to the SEC, there can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corporation Code. There is no outright "demise"
of corporate existence. Proper notice and hearing are cardinal components
of due process in any democratic institution, agency or society. In other
words, the incorporators must be given the chance to explain their neglect
or omission and remedy the same.
As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it," by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period required by law
by no means tolls the automatic dissolution of a corporation.
Mandamus will lie to compel the officers of the corporation to transfer said stock
upon the books of the corporation
The Code empowers a corporation to make by-laws, not inconsistent with any
existing law, for the transferring of its stock.
Section 35 of Act No. 1459 (now Sec. 63) contemplates no restriction as to whom
they may be transferred or sold. It does not suggest that any discrimination may
be created by the corporation in favor or against a certain purchaser.
The holder of shares, as owner of personal property, is at liberty, under said
section, to dispose of them in favor of whomsoever he pleases, without any other
limitation in this respect, than the general provisions of law
GR: the by-laws of a corporation are valid if they are reasonable and calculated to
carry into effect the objects of the corporation, and are not contradictory to the
general policy of the laws of the land
o A by-law cannot take away or abridge the substantial rights of
stockholder.
o Under a statute authorizing by- laws for the transfer of stock, a
corporation can do no more than prescribe a general mode of transfer
on the corporate books and cannot justify an unreasonable restriction
 16
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano
upon the right of sale.

Government v. El Hogar8
International Organization of Corporation: By-Laws
The Phil gov’t instituted a quo warranto proceeding against EL Hogar for the
purpose of depriving it of its corporate franchise, excluding it from all corporate
rights anf privileges and effecting a final dissolution of the corpo.
March 1906-Corpo law came into effect. Sec 171 to 190 are on building and loan
association.
El Hogar-first corpo in the Phil. Under the law then, the capital of an association
was not permitted to exceed 3M but then amended to 10M.
By-law cannot operate to defeat his rights as a purchaser who obtained them in
good faith and for a valuable consideration
NO. The by-law (1st) is a mere nullity and could not be enforced if the directors
attempt to do so.
In the second cause of action, unless the law or the charter of the corporation
expressly provides that an office shall become at the expiration of the term
of office for which the officer was elected, the general rule is to allow the
officier to hold over until his successor is duly qualified. MERE FAILURE OF A
CORPO TO ELECT OFFICERS DOES NOT TERMINATE THE TERM OF EXISTING
OFFICERS AND DISSOLVE THE CORPORATION.

The by-laws of the corpo states a provision that: the BOD, by vote of an absolute
majority of its members, is empowered to CANCEL SHARES AND RETURN TO THE
OWNER thereof the balance resulting from the liquidation thereof, whenever, by
reason of their conduct of any other motive, the continuation as members of the
owners of such shares is not desirable.
The govt questioned the validity because it conflicts with the Corpo Law which
declares that the BOARD SHALL NOT HAVE THE POWER TO FORCE THE
SURRENDER AND WITHRAWAL OF UNMATURED STOCK EXCEPT IN CASE OF
LIQUIDATION OF THE CORPORATION OR OF FORFEITURE OF THE STOCK FOR
DELINQUENCY.
The govt asserts that because of the existence of the provision in the by-law, it
justifies its dissolution.
On the third cause of action as to the compensation of the BOD=the question
must be of the validity of the measure and not the propriety and wisdom of
the measure adopted.
The power to fix the compensation they shall receive, if any, is left to the
corporation to be determined by the by-laws. The remedy is in the hands of
the stockholders.
On the fourth cause of action: The Corpo Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and the
requirement of security from them for the proper discharge of the duties of their
offce.

There is also a provision in the by-laws that the directors shall elect from amoing
the shareholder members to fill the vacancies that may occur in the BOD until the
election at the general meeting.

Another cause of action of the govt was based on the BOD’s failure to hold annual
meetings and fill vacancies.

Third cause of action is the fact the directors of El Hogar have been receiving large
compensation because the by-laws provide a 5% of the net profit shown by the
annual balance sheet to be distributed to the directors in proportion to their
attendance at meetings of the board.

Fourth cause of action: Procedures to adopt when one is elected as a BOD=P5000

pay-up of shares as security—only the rich can be BOD and the waiver to receive
loans form the corpo
ISSUE: WON El Hogar may be dissolved on such grounds.
CHAPTER IV9

8
http://www.scribd.com/doc/4664781/Corpo-Digests

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Stockholders of T. Guanzon v. Register of Deeds of Manila
Theory of Corporate Entity: Its Effects
17
In September 1960, 5 stockholders of the F.Guanzon and Sons executed a
certificate of liquidation of the assets of the corpo because of the resolution of the
SH which they adopted dissolving the corporation.
They have distributed among themselves in propoertion to their shareholdings, as
liquidating dividends, the assets of said corporation, including real properties.
The certificate of liquidation was presented to the Register of Deeds of Mla but
WAS DENIED.
Grounds for denial:
1) number of parcels not certified to in the acknowledgement
2) fees not paid
3) documentary stamps weren’t attached to the documents
4) judgment of the court approving the dissolution and directing the
disposition of the assets of the corpo need to be presented
ISSUE: Commissioner of Land Registration=the issues hinged on WON the
certificate of liquidation merely involves a distribution on the corporation assets
or a transfer or conveyance.
Janz Hanna Ria N. Serrano
SC: Agree with the CLR.
A corporation is a juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from its members. While shares of stock
constitute personal property, they do not represent property of the
corporation. The corporation has property of its own which consists chiefly
of real estate.
The share of stock only typifies an aliquot part of the corpo property, and it only
gives the extent of the proceeds when it is distributed AND ITS HOLDER IS NOT
THE OWNER OF ANY PART OF THE CAPITAL OF THE CORPO.
When the purpose of the liquidation is to transfer the title from the corporation to
the stockholders in proportion to their shareholdings, this transfer cannot be
effected without the corresponding deed of conveyance from the corporation to
stockholders.

If it were a conveyance, there would be a need to reflect on the certificate a

statement of the numbers of parcels of land involved in the distribution in the
acknowledgement appearing therein. Documentary stamps are more expensive if
it’s a transfer rather than distribution.

CLR held that it is a transfer or conveyance.

Caram v. CA The plaintiff filed a claim for the payment of the preparation of the project study
Theory of Corporate Entity: Its Effects and his technical services that led to the organization of the defendant
corporation. He demands the solidary liability of the petitioners and their co-
defendants.
The petitioners contend that they had no contract with the private resp and that
their position was that they are mere subsequent investors in the corporation that
was later created. Caram et al asserted that they shouldn’t be held solidary liable
with the Filipinas Orient Airways, a separate juridical entity, and with Barretto
and Garcia.
ISSUE: WON the petitioners themselves are ALSO and PERSONALLY liable for such
expenses and if so to what extent (solidary or jointly?)
SC: Not liable.
There was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof responsible. Bona fide
corporation=the corporation should alone be liable for its corporate acts as duly
authorized by its officers and directors.
The Carams did not contract with the plaintiff. It is only the result of such services
that they were persuaded to invest in the proposed airline. Even if they have
benefited, there is no justification to hold them personally liable. Otherwise, all
other stockholders of the corpo including those who came in later, and regardless
of the amoung of their shareholdings, would be equally and personally liable.

CA held: Yes they should be jointly and severally liable for the said amount. Not
only the defendant corporation but all other def who were involved in the
preparatory stages of the incorporation (those who caused the preparation
and/or benefited from the project study and the technical services) must be liable.
Palay v. Clave Presidential Executive Assistant Clave directed petitioners Palay and Onstott (the
Theory of Corporate Entity: Its Effects president) to refund jointly and severally Dumpit as resolved by the National
The Carams are willing to be liable but that they are only questioning total
liability. The petitioners are not liable at all, jointly or jointly and severally.
1) Judicial action for the rescission is not necessary when it is provided in the
contract that it may be revoked and cancelled for violation of any of its

9
ibid

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
J.G. Summit Holdings v. CA
18
Housing Authority because the corporation extrajudically foreclosed the parcel of
land which Dumpit contracted with them under a Contract to Sell. DP was paid,
installments were done. Par. 6 of the contract provided for an automatic
foreclosure upon default in payment of any monthly installment after the lapse of
90 days from the expiration of the grace period, WITHOUT THE NEED OF NOTICE
AND WITH FORFEITURE OF ALL INSTALLMENTS PAID.
Dumpit (presumably) defaulted thus the foreclosure and thus the charge because
he was not even notified. He wrote after 6 yrs and asking for an update of his
account and request that his rights be assigned to Lourdes Dizon.
Long been rescinded and has already been resold.
NHA found them jointly and severally liable to refund Dumpit because the
rescission is void in the absence of any judicial or notarial demand.
ISSUES raised:
1) Is demand mandatory or may be dispensed with by stipulation?
2) May pet be held liable for the refund for the installments made?
3) Doctrine of piercing the veil of corporate fiction has application
4) Pres Exec Asst committed grave abuse of discretion
NIDC entered into a JVA with Kawasaki for the construction, operation and
management of the SNS (Subic Natl Shipyard) which became PHILSECO. Under the
contract, NIDC and Kawasaki shall contribute 330M for the capitalization of the
PHILSECO in the proportion of 60-40 respectively.
Contract states to grant the right of first refusal should either of them decide to
sell, assign or transfer its interest.
In the provision it states that right of the first refusal shall be given EXCEPT when
the transferee is a corporation owned or controlled by the government or by
Kawasaki affiliates.
NIDC transferred its rights to PNB and subsequently was transferred to the
National Govt pursuant to AO No. 14.
Pres Aquino established COP (comm on privatization) and APT (asset
privatization trust) to take title to and possession of, conserve, manage, and
dispose of non-performing assets of the National Govt. Trust agreement was
entered into by the National Govt and APT where the latter is the trustee in the
Govt’s share in PHILSECO. Because of a quasi-reorganization of PHILSECO to settle
its huge obligation to PNB, govt’s shareholdings increased to 97% reducing
Kawasaki’s shareholdings.
In the interest of the national economy, COP and APT deemed it best to sell the
gov’t’s share to private entities.
Negotiations insued bet APT and Kawasaki and they agreed that the latter’s right
to first refusal be exchanged for the right to top by 5% the highest bid for the
Janz Hanna Ria N. Serrano
terms and conditions. BUT in the cited cases, there was at least A WRITTEN
NOTICE sent to the defaulter informing him of the rescission.
RULE: Resolution of reciprocal contracts may be made extrajudicially unless
successfully impugned in Court. If the debtor impugns, then subject to
judicial determination. Rescission is ineffective and inoperative because of
the lack of notice of resolution (UP vs Angeles)
2) and 3) No. There is no badge of fraud on pet’s part. They had relied, albeit
mistakenly, on par 6 of its contract. There was no proof that the petitioner
used the corporation to defraud private responded.
RULE: Mere ownership by a single stockholder or by another corporation or
all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.
Disposition: Corpo is directed to refund Dumpit.
THE SC HELD: (which reverses its previous ruling)
a. Philseco is not a public utility because a shipyard is not a public utility.
No law declares it to be.
b. Nothing in the JVA prevents Kawasi from acquiring more than 40% of
PHILSECO
c. Exchange for right to top did not violate the principles of competitive
bidding
JG Summit filed the case to SC en banc claiming that there was executive
interference when Camacho forwarded to Davide the case to be part of the Court’s
agenda for resolution.
HELD by SC on en banc:
a. The right to top was an express reservation. It is a well-settled rule that
were such reservation is made in an Invitation to Bid, the higest or
lowest bidder, as the case may be, is not entitled to an award as a
matter of right.
b. The right to top was a condition imposed on all bidders equally, based
on APT’s exercise of its discretion in deciding on how best to privatize
the govt’s shares in PHILSECO.
c. There is no executive interference since the memorandum was merely
“noted” to acknowledge its filing and no further legal significance.
d. The decision of the Court should be based on contract law and not on
policy considerations.
e. Right of first refusal or right to top cannot be exercised by a consortium
which is not the proper party granted such right.
 19
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
said shares. Kawasaki would be entitled to name a company in which it was
a stockholder, which could exercise the RIGHT TO TOP. It elected Philayards
Holdings (PHI).
From ABSR (rules for the bidding), it was stipulated that from the moment the
highest bid becomes acceptable to the govt, Philyards shall have 30 days to top the
highest which is to top 5%.
They need to notify APT if they will exercise such right and deposit 10% of the
highest bid plus 5% within 30 days. They shall be sent a notice as a preferred
bidder and would have 90 days to pay the balance.
JG Summit bid for 2B with an acknowledgment of Kawasaki’s right to top.
PHILYARDS exercised its right to top and fully paid the balance.
JG Summit questioned the offer of PHI to top its bid on the ff grounds:
a. Kawasaki/PHI consortium was composed of Kawasaki, mitsui, Keppel,
SM Group, ICTSI, and Insular Life and this violated the ASBR bec the last
4 companies were the losing bidder
b. ONLY Kawasaki could exercise the right to top
c. Giving right to top to PHI constituted unwarranted benefit to a third part
d. No right of first refusal can be exercised in a public bidding or auction
sale
e. JG Summit consortium was not estopped from questioning the
proceedings.
CA: JG is estopped from questioning because it knew from the start the right to top
granted to Kawasaki/philyards.
Janz Hanna Ria N. Serrano
f. The 60-40 arises from contract and constitution and need not be a
public utility to exercise such partition.
There is nothing in the ASBR that bars the losing bidders from joining either
the winning bidder (should the right to top is not exercised) or
Kawasaki/PHI (should it exercise its right to top as it did), to raise the
purchase price. There was no proof of fraud. The main goal of the case is to
dispose the shares of a corporation which the govt sought to privatize.
HELD by SC on Reconsideration:
a. Mutual rights of first refusal under the JVA bet Kawasaki and NIDC is
valid. Right of first refusal is a property right of PHILSECO. It is even
valid to allow PHILSECO’s equity be owned by Kawasaki by more than
40% because what would be affected would not be the foreign
corporation’s stockholder’s ownership but the capacity of the
corporation to own land—it is disqualified to own land.
Right of first refusal pertains to the shareholders while the capacity to own
land pertains to the corporation. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed
the allowed foreign equity, what the law disqualifies is the corporation from
owning land.
What was transferred was the right of first refusal (and subsequently the right to
top) as to the shares, which are immovable property, and not as to the land which
PHILSECO owns or holds, which are movable. The prohibition is only to the
acquisition of the land and not to the acquisition of the shares.

SC: Philseco shipyard is a public utility whose capitalization must be 60% Filipino-
owned. That the right to top granted to Kawasaki was illegal not only because it
violates the rules on competitive bidding, but more so, because it allows foreign
corporations to own more than 40% equity in the shipyard. And that even when
JG had the opportunity to review the ASBR, it cannot be estopped to question an
illegal and inequitable provision thereof.

Thus SC voided the transfer of the national gov’t share in Philseco to Philyard and
upheld the right of JG Summit.

Reconsideration was filed by Philyard to SC on three basic issues:

Tramat Mercantile Inc v. CA
a. Is Philseco a public utility?
b. WON under the 1977 JVA, Kawasaki can exercise right of first refusal
only up to 40% of the total capitalization
c. WON right to top granted to Kawasaki violates the principles of
competitive bidding.
Melchor dela Cuesta doing business under Farmers Machineries sold a tractor to The contract between dela Cuesta and Tramat was ABSOLUTE SALE and not
Tramat Mercantile whose president is David Ong. In payment, Ong issued a check conditional and that dela Cuesta did not violate any warranty on the sale of the
which replaced an earlier postdated check. tractor.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Marvel Bldg. v. David
Disregarding Corporate Entity
20
Tramat sold the tractor, together with a lawn mower fabricated by it, to Nawasa.
David Ong caused a stop payment of the check when NAWASA refused to pay the
tractor and lawn mover after discovering that aside from stated defects of the
lawn mover, the engine sold by de la Cuesta was a reconditioned unit.
Dela Cuesta filed for recovery and atty’s fees. Ong answered that dela Cuesta has
no cause of action and that the questioned transaction was between Tramat and
Farmers and that they payment was stopped because the tractor had been priced
as brand new and not as a reconditioned unit.
Pau’s version: Dela Cuesta sold a tractor with a 1.3 engine to Tramat and the latter
sold this same tractor to MWSS together with a fabricated lawn mower. Tramat
caused a stop payment bec Nawasa refused to pay Tramat because it found out
that the lawn mower had defects and that the tractor’s engine was reconditioned
and not brand new. Dela Cuesta filed for recovery. The reason why the lawn
mower was defective was because Tramat fabricated it and it was shown that it
had no experience in fabricating one. It’s competitor Alpha Machinery had
stopped manufacturing the same. It was the fabrication of Tramat that was the
root of all the problems. The engine did not function not because it was
reconditioned but because it was made to do what it cannot.
Plaintiffs brought this action as stockholders of Marvel enjoining the CIR from
selling at public auction various properties, three lands with buildings, which
were under the name of the corporation.
Seized by CIR and detained for the collection of war profits taxes assessed
against Maria Castro. Plaintiffs assert that these properties belong to the corpo
and not to Maria.
RTC: CIR failed to prove that Maria is the true owner of all the stock certificates of
the corpo. An evidence susceptible of two interpretations, the interpretation
which would deprive one of property without the due process of the law should
not be made.
Sec. of Finance: considered the report of a special committee assigned to study the
war profit taxes of Mrs. Castro recommended the collection of war profits taxes
and instructed the CIR to collect the same.
Janz Hanna Ria N. Serrano
If it was conditioned on the acceptance of MWSS then why did it issue a check in
payment of the item and even long after MWSS had complained about the defect,
why did it still draw a check to an increased amount?
But it was an error to hold Ong jointly and severally liable to dela Curste because
ong had acted not in his personal capacity but as an officer of a corporation, but as
an officer of Tramat.
Personal liability of a corporate director, trustee, or officer, along (although
not necessarily) with the corporation may so validly attach, as a rule, only
when—
a. He assents (a) to a patently unlawful act of the corporation, or (b) for
bad faith or gross negligence in directing its affairs, or (c) for conflict of
interest, resulting in damages to the corporation, its stockholders or
other persons.
b. He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto.
c. He agrees to hold himself personally and solidarily liable with the
corporation or
d. He is made, by a specific provision of law, to personally answer for his
corporate action (Article 144, Corpo Code and Trust Receipts Law Sec.
13).
Not the corpo’s but Maria’s as the true sole owner.
Evidence:
1) Endorsement in blank of the shares of stock issued in the name of the other
incorporators, and the possession thereof by Marai. All of the certificates EXCEPT
that in the name of Maria were endorsed in blank by the subscribers. (witnesses
Auino as IR examiner, Mariano as examiner, and Llamado, USec of Finance).
Plaintiffs are claiming that these endorsement could have been superimposed
however the court said that it is a mere possibility and the circumstances prove
that they were not superimposed.
2) The stockholders did not have incomes in such amounts during the time of the
organization or immediately thereto as to enable them to pay in full for their
supposed subscriptions. Proved by their tax return or the absence thereof.
There was a prima facie case that Castro had furnished all the money that the
Marvel Building Corpo had.
1) If they really wanted to prove that they paid for the subscription, they
could have just showed receipts to testify their payments. But they
refused to do so.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Magsaysay-Labrador v. CA
Disregarding Corporate Entity
Indo Phil Textile Mills v. Calica
Disregarding Corporate Entity
21
Adelaida Rodriguez-Magsaysay, widow and special administratix of the late Sen.
Magsaysay, brought against Panganiban, SUBIC, FILMANBANK and the Register of
Deeds of Zambales an action.
She alleged that she and her husband acquired thru conjugal funds a parcel of land
with improvement known as Pequena Island and that after the death of her
husband, she discovered an annotation at the back of the TCT that the land was
acquired thru his husband’s separate capital.
Her husband executed an assignment to SUBIC and SUBIC executed a mortgage in
favor of FILMANBANK.
She questions the validity of the acts and alleged that these were done in an
attempt to defraud the conjugal partnership considering that the land is conjugal,
her marital consent to the annotation was not obtained, and that the change made
by the Register of Deeds of the titleholders was effected without the approval of
the Commissioner of Land Registration and that her husband executed the Deed of
Assignment by mistake, violence or intimidation. And that the assignment in favor
of SUBIC was without consideration and consequently null and void.
The sisters of the senator filed for intervention of the ground that their brother
conveyed to them ½ of his shareholdings in SUBIC and as assignees of 41% of the
total outstanding shares of such stocks, they have a substantial and legal interest
in the subject matter.
Indophil Textile Mill Workers Union-PTGWO is a labor organization duly
registered with DOLE and is the exclusive bargaining agent of all the rank-and-file
employees of Indophil Textile Mills Inc. Calica is the Voluntary Arbiter or the
NCMB of DOLE while Indophil is a corporation engaged in the manufacture, sale,
and export of yarns or various kinds and of materials of kindred character and its
plants are in Bulacan.
The corporation and the union executed a CBA.
Indophil Acrylic Manufacturing Corp was formed and registered with SEC. Acrylic
applied for incentives with the BOI under the Omnibus Investments Code.
Application was approved on a preferred non-pioneer status.
Workers of Acrylic unionize and a CBA was executed. However, the petitioner
union claimed that the plant facilities build and set up by Acrylic should be
considered as an extension or expansion of the facilities of resp Company based
on the CBA which states that “the agreement shall apply to the company’s facilities
and installations and to any extension and expansion thereat”. In other words,
they are claiming that they are part of the Indophil agreement unit.
Janz Hanna Ria N. Serrano
There was evidence that there were 25 certificates which were signed by the
president. There is evidence of the motive of Castro to evade taxes.
IF YOU ARE THE TRUE OWNERS OF THE SHARES, YOU WILL ALWAYS ASK FOR
RECEIPTS AS PROOF OF PAYMENT FOR YOUR SUBSCRIPTION.
The interest of the petitioners here are purely inchoate, at the very least, or in
sheer expectancy of a right in the management of the corporation and to share in
the profits thereofd and in the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations.
The share of stock represents a proportionate or aliquot interest in the property
of the corporation but it does not vest the owner thereof with any legal right or
title to any of the property, his interest in the corporate property being equitable
or beneficial in nature. Shareholders are in no legal sense the owners of
corporate property, which is owned by the corporation as a distinct person.
The petitioners cannot claim the right to intervene on the strength of the transfer
of shares allegedly executed by the senator. The corporation did not keep books
and records. No transfer was ever recorded, much less effected as to prejudice
third parties.
The transfer must be registered in the books of the corporation to affect
third persons. The law on corporations is explicit. Sec 63 of the Corpo Code
provides:
“No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of
the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.”
They are separate corporations. CBA does not extend to Acrylic.
Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exists, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere
association of persons. The members or stockholders or the corporation will be
considered as the corporation, that is liability will attach directly to the officers
and stockholders.
In Umali vs. CA, it was emphasized that “the legal corporate entity is
disregarded only if it is sought to hold the officers and stockholders directly
liable for a corporate debt or obligation.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Jacinto v. CA
Disregarding Corporate Entity
Concept Builders v. NLRC
Disregarding Corporate Entity
22
Janz Hanna Ria N. Serrano
Pet: Both corp are engaged in the same line of business i.e. manufacture and sale
of yarns of various counts and kinds of of other materials of kindred character or
nature.
Resp: Thru SolGen argues that Acrylic is not an alter ego or an adjunct or business
conduit of private resp because it has a separate business purpose.
INDOPHIL: engage in the business of manufacturing yarns of various counts and
kinds and textiles.
ACRYLIC: manufacture, buy, sell, at wholesale basis, barter, import, export and
otherwise deal in yarns of various counts and kinds.
Acrylic cannot manufacture textiles while Indophil cannot buy or import yarns.
Petitioners alleged that:
a. the two corp have their physical plants, offices and facilities in the same
compound
b. many of Indo’s machines were transferred and installed and being used
in Acrylic.
c. Services of a number of units, departments and sections are being
provided to Acrylic.
Employees of private resp are the same persons manning and servicing Acrylic
Jacinto is the President and General Manager of Inland Industries and under the ISSUE: WON the piercing of the veil was valid even when it was not alleged in the
Trust Receips, applied for a Letter of Credit and paid this loan under the Bills of complaint.
Exchange to Metropolitan Bank and Trust Co. The company failed to pay thus the
charge against him and the company to pay jointly and severally the plaintiff. In HELD: Yes. While on the face of the complaint, there is no specific allegation that
the reconsideration, Inland chose not to join him in this appeal. the corporation is a mere alter ego of petitioner, subsequent developments, from
the stipulation of facts up to the present of evidence and the examination of
The allegation of the bank is that Inland and Jacinto are one and the same. There witnesses, unequivocably prove that petitioner and the corporation are one of
was nothing in the transactions that states that he was doing the transactions in that he is the corporation. No serious objection was heard from petitioner.
his official capacity.
Sec. 5 or Rule 10 of Rules of Court states that when evidence is presented by one
RTC: He is in fact the corporation itself. No mention that he did transactions in his party with the express or implied consent of the adverse party, as to issues not
official capacity. alleged in the pleadings, judgment may be rendered validly as regards those
issues, which shall be considered as if they have been raised in the pleadings.
CA: dismissed Jacinto’s appeal. Although Jacinto asserted that the principles of There is implied consent to the evidence thus presented when the adverse party
piercing the fiction of corporate entity should be applied with great caution and fails to object thereto.
not precipitately, because a dual personality by a corporation and its stockholders
would defeat the principal purpose which a corporation is formed. It is not
undisputed that Jacinto and his wife own the major shares of stocks which is 52%.
Jacinto even asserts that he is not the President of the Corporation and that there
are different officers. But in the evidence, he was the one who sighed the trust
receipts as president and manager.
Concept Builders Inc is a domestic corporation engaged in the construction HPPI is liable. Conduit or alter ego of CBI.
business and the respondents were employed as laborers, carpenters and riggers.
Probative Factors of identity that will justify the application of the doctrine of

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Claparols v. CIR
Disregarding Corporate Entity
23
The resp were served individual written notices of termination of employement
by pet and igt was stated that the contracts of employment had expired and the
project in which they were hired had been completed.
But the resp found out that the corp engaged the services of sub-contractors
whose workers performed the functions of priv resp. They thus filed a complaint
for illegal dismissal, unfair labor practice and non-payment of some sums.
LA: Reinstate private resp and pay them back wages. Thus the reconsideration to
NLRC by the corpo.
NLRC: Dismissed the recon and made a finding as to the amount of the back
wages.
LA issued a write of execution directing the sheriff to execute decision and partial
satisfaction of the amoung was garnished from the corp’s debtor MWSS. Said
amount was turned to NLRC cashier.
Alias writ of execution was issued by LA but the guards of the petitioner refused
to let the alias be served on the ground that the corporation no longer occupy the
premises. The corporation occupying the premises is Hydro Pipes Phil Inc (HPPI)
and not by Concept Builders.
Sheriff recommended a break-open be issued to enable him to enter petitioner’s
premises so that he could proceed with an auction sale.
The day before the scheduled auction, the vice-president Cuyegkeng filed a third-
party claim with the LA alleging that the properties sought to be levied were
properties of HPPI.
Resp filed motion for the issuance of Break-Order alleging the HPPI and Concept
Buildiers were owned by the same incorporator/stockholders. They also alleged
that the pet temporarily suspended the business operations in order to evade its
legal obligations to them.
In support of their claim against HPPI, the private resp presented copies of the GIS
which HPPI submitted to SEC.
Pet claims that HPPI and Concept are two separate corporations and are engaged
in two different kinds of businesses. HPPImanufacturing CBI construction. LA
still issued the order and ordered sheriff to proceed with the auction sale. NLRC
denied reconsideration.
CIR ordered the petitioners Claparols et al to pay back wages and bonuses to
private respondents for its unfair labor practices which was filed by Allied
Workers Association because of the dismissal from the Claparols Steel and Nail
Plant.
CIR found Mr. Claparols guilty of union busting and of having dismissed the
complainants because of their union activities.
Janz Hanna Ria N. Serrano
piercing the corporate veil:
1. Stock ownership by one or common ownership of both
corporations
2. Identity of directors and officers
3. The manner of keeping corporate books and records
4. Methods of conducting the business
SEC explained the instrumentality rule which courts have applied in
disregarding the separate juridical personality of corporations:
The test in determining the said doctrine:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances by of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will, or existence of
its own;
2. Such control must have been used by the defendant to commit fraud or
wrong to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff’s legal
right.
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate
veil. In applying the instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the corporation operated and the
individual defendant’s relationship to that operation.
This case cited Claparols vs CIR on the avoid-the-liability scheme 90% of the
second corp is owned by the first corp.
Twin requirements of due notice and hearing were complied with. Third-party
and pet claimants were given the opportunity to submit evidence.
The Claparols Steel and Nail Plant was SUCCEEDED by the Claparols Steel
Corporation. It is very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skillfully timed to avoid the
financial liability that already attached to its predecessor, the CSNP. Both
predecessor and successor were owned and controlled by Eduardo Claparols and
there was no break in the succession.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Villa Rey Transit v. Ferrer
Disregarding Corporate Entity
24
Records show that the Claparols Steel Corporation was established on July 1, 1957
succeeding the Claparols Steel and Nail Plant which ceased operations on June 30,
1957 and that the Claparols Steel Corp stopped operations on Dec. 7, 1962.
Corp cannot reinstate the workers and that if they are entitled to back wages, only
limited to 3 months based on Sta Cecilia Sawmills vs CIR and since Claparols
stopped operations in 1962, reemployment cannot go beyond that date.
Villarama was an operator of a bus transportation under Villa Rey Transit
pursuant to certificates of public convenience granted to him by the PSC which
authorized to operate 32 buses in various routes from Pangasinan to Mla and vice-
versa.
He sold 2 certs to Pantranco with the condition that Villarama shall not apply for
10 years for any TPU service identical or competing with Pantranco.
Three months after, Villa Rey Transit INC (CORPO) was organized and Natividad
Villarama was the treasurer and one of the incorporators and Natividad
subscribed to 1,000 of its stocks.
After a month CORPO bought 5 certs of Public convenience, 49 buses, tools and
equip from VALENTIN FERNANDO. On the day of the execution of the contract, the
parties applied to PSC for its approval with a prayer for the issuance of
provisional authority in favor of the CORPO to operate the service. PSC granted
with a condition that it may be modified or revoked by the Commission. But
before PSC could make a final action on the application, the Sheriff levied two of
the five certs of public convenience pursuant to a write of execution issued by
the RTC of Pangasinan in favor of Eusebio Ferrer against VALENTIN FERNANDO.
Public bidding was executed and highest bidder is Ferrer.
FERRER SOLD the two certs to Pantranco and jointly submitted to PSC the
approval of the sale. Pantranco then prayed for provisional auth to operate the
service involved in the said certs.
TWO SALES are therefore before the PSC, FERNANDO-CORPO (VILLA REY) and
FERRER-PANTRANCO. PSC orders, during pendency and before final resolution,
PANTRANCO shall be the one to operate provisionally the services under the two
certs. CORPO questioned.
Villarey filed for the annulment of the sheriff’s sale. Ferrer and Pantranco averred
that the CORPO had no valid title to the certs because the contract where they
acquired the certs from Fernando was subject to a suspensive condition—the
approval of the PSC which had not been fulfilled. Thus sheriff levy and sale, then
Ferrer sale to Pantranco were valid.
Pantranco filed a third-party complaint against Mr. Jose Villarama, alleging that
the corporation and Villarama are the same and that they were disqualified from
operating the two cers because of the stipulation that Villarama shall not apply for
Janz Hanna Ria N. Serrano
AVOID-THE-LIABILITY scheme: very patent. 90% of the subscribed shares of
stocks of the 2nd corp was owned by the Claparols himself and ALL assets of the
dissolved Claparols Steel and Nail Plant were turned over to the emerging
CSC.(Conveyance? There must be a notarized conveyance and proof of tax
payment?)
Pierce the veil of corporation. Adjunt, business conduit or alter ego, fiction of
separate and distinct corporate entities should be disregarded.
ISSUES:
a) “Shall not apply for 10 years for any TPU service identical to the buyer”
valid? To existing or only to new lines?
b) If yes, does it bind the corporation?
HELD:
Villarama and the Villa Rey Transit Inc is one and the same.
Villarama made it appear that he was not an incorporator nor a stockholder and
that he did not have a sufficient fund to invest. That it was his wife who was an
incorporator with the least subscribed shares and was elected treasurer. But the
funds were managed by the treasurer in such a way and extent that Villarama
appeared to be the actual owner-treasurer of the business without regard to the
rights of the stockholder.
Evidence:
 Initial cash capitalization of the corporation was mostly financed by
Villarama. The initial 105K, the 85K of it was covered by VIllarama’s
personal check. Employees of the bank testified that the drawer of the
check was Jose Villarama himself.
 Accountant of the corpo testified that the first and second installment for
the subscriptions from the original subscribers were received but he was
directed by JV to make vouchers liquidating the sums and it was made to
appear that a part of the installment was payment to Villarama for an
equipment purchased from him and that 100,000 was loaned as advances
to the stockholders.
 There were no amount of money that had actually passed hands among
the parties involved.
 Initial months of the operation, JV purchased and paid with his personal
checks Ford trucks for the Corpo, the checks being drawn by JV.
 It appeared that JV supplied the organization’s expenses and assets and
there was no actual payment by the subscribers.
 JV used the corpo’s money and deposited them in his personal accounts
and that the corpo has paid his personal accounts.
 He even admitted that he mingled the corpo funds with his own money.
 Gasoline purchases of the corpo were made in his name and his reason
was that he wanted the corpo to benefit from the rebates that he receives.
 No coard of Resolution allowing him to hold the corpo’s fund when he is
not treasurer and was only a part-time manager.
 25
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
a TPU service identical with Pantranco for 10 years.
The decision of the RTC were: (which Pantranco questions)
a) Villarey and Jose Villarama are two distinct and separate
personalities and entities
b) Restriction in the contract between Villa Rey and Pantranco
was null and void
c) Sheriff sale was null and void
d) No damages awarded to Pantranco against Villarama
Secosa et. al. v. Heirs of Erwin Suarez Francisco10 On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year
Disregarding Corporate Entity old third year physical therapy student of the Manila Central University, was
riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the
City of Manila. At the same time, Petitioner, Raymundo Odani Secosa, was driving
an Isuzu cargo truck with plate number PCU-253 on the same road. The truck was
owned by petitioner, Dassad Warehousing and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel truck,
which in turn was being tailed by the Isuzu truck driven by Secosa. The three
vehicles were traversing the southbound lane at a fairly high speed. When Secosa
overtook the sand and gravel truck, he bumped the motorcycle causing Francisco
to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted
in his instantaneous death. Fearing for his life, petitioner Secosa left his truck and
fled the scene of the collision.
Respondents, the parents of Erwin Francisco, thus filed an action for damages
against Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and
10
http://juliesprudence.multiply.com/journal?&show_interstitial=1&u=%2Fjournal
Janz Hanna Ria N. Serrano
With all the foregoing evidence, he cannot just be a part-time general manager.
The corpo is his alter ego. He did not deny any of the abovementioned allegations,
he just offered excuses. Management and disposition of funds were controlled by
JV and it is impossible to segregate and identify which money belonged to whom.
Corpo law-acts and conduct of the corporation be carried out in its own corporate
name because it has its own personality. The veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will
be lifted to allow for its consideration merely as an aggregation of individuals.
VILLA REY TRANSIT IS AN ALTER EGO OF JV AND THAT THE RESTRICTIVE
CLAUSE IN THE CONTRACT ENTERED INTO BY THE LATTER AND PANTRANCO
IS ALSO ENFORCEABLE AND BINDING AGAINST THE CORPO.
RULE: SELLER OR PROMISSOR MAY NOT MAKE USE OF A CORPORATE
ENTITY AS A MEANS OF EVADING THE OBLIGATION OF THIS OWN
COVENANT. WHERE THE CORPORATION IS SUBSTANTIALLY THE ALTER EGO
OF THE COVENANT OR TO THE RESTRICTIVE AGREEMENT, IT CAN BE
ENJOINED FROM COMPETING WITH THE COVENANTEE.
Intention of the restriction:
To eliminate the seller as a competitor of the buyer for ten years along the lines of
operation covered by the certificate or public convenience. “APPLY” (shall not
apply), was broadly used. Prior authorization is needed before any one can
operate a TPU service, whether the service consists in a new line or an old
one acquired from a previous operator.
The seller cannot compete with the buyer and he has bound himself not to do so.
While it may be true that Sy is the president of petitioner Dassad Warehousing
and Port Services, Inc., such fact is not by itself sufficient to hold him solidarily
liable for the liabilities adjudged against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested
by law with a personality separate from that of its stockholders or members. It
has a personality separate and distinct from those of the persons composing it as
well as from that of any other entity to which it may be related. Mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not in itself sufficient ground for disregarding the
separate corporate personality. A corporation’s authority to act and its liability
for its actions are separate and apart from the individuals who own it.
The so-called veil of corporate fiction treats as separate and distinct
the affairs of a corporation and its officers and stockholders. As a general rule, a
corporation will be looked upon as a legal entity, unless and until sufficient reason
to the contrary appears. When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Yu v. NLRC
Disregarding Corporate Entity
26
Dassads President, El Buenasucenso Sy.
The trial court rendered a decision in favor of respondents and ordered the
petitioners herein to pay jointly and severally damages. Petitioners then appealed
said Decision to the CA, which affirmed the Trial Court’s Decision in toto.
Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque Estoce,
and Rodrigo Santos were employees of respondent corporation Tanduay
Distillery, Inc. (TDI). 22 employees of TDI, including private respondents
employees, received a memorandum from TDI terminating their services, for
reason of retrenchment, effective 30 days from receipt thereof or not later than
the close of business hours on April 28, 1988. On April 26, 1988, all 22 employees
of TDI filed an application for the issuance of a temporary restraining order
against their retrenchment. The labor arbiter issued the restraining order the
following day. However, due to the 20-day lifetime of the temporary restraining
order, and because of the on-going negotiations for the sale of TDI to the First
Pacific Metro Corporation, the retrenchment pushed through. The instant petition
involves only the 4 individual respondents herein, namely, Fernando Duran,
Eduardo Paliwan, Roque Estoce, and Rodrigo Santos. On June 1, 1988, or after
respondents-employees had ceased as such employees, a new buyer of TDI's
assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed the
business name Tanduay Distillers.
The employees filed a motion to implead herein petitioners James Yu and Wilson
Young, doing business under the name and style of Tanduay Distillers, as party
respondents in said cases. Petitioners filed an opposition thereto, asserting that
they are representatives of Tanduay Distillers an entity distinct and separate from
DTI, the previous owner, and that there is no employer-employee relationship
between Tanduay Distillers and private respondents. Respondents-employees
filed a reply to the opposition stating that petitioner of TDI labor union of
Tanduay Distillers' decision to hire everybody with a clean slate on a probation
basis.
Janz Hanna Ria N. Serrano
corporation as an association of persons. Also, the corporate entity may be
disregarded in the interest of justice in such cases as fraud that may work
inequities among members of the corporation internally, involving no rights of the
public or third persons. In both instances, there must have been fraud and proof
of it. For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.
Neither may be said that petitioners and Tanduay Distillers are one and the same
as TDI, as seems to be the impression of respondents when they impleaded
petitioners as party respondents in their complaint for unfair labor practice,
illegal lay off, and separation benefits.
Such a stance is not supported by the facts. The name of the company for whom
the petitioners are working is Twin Ace Holdings Corporation. As stated by the
Solicitor General, Twin Ace is part of the Allied Bank Group although it conducts
the rum business under the name of Tanduay Distillers. The use of a similar
sounding or almost identical name is an obvious device to capitalize on the
goodwill which Tanduay Rum has built over the years. Twin Ace or Tanduay
Distillers, on one hand, and Tanduay Distillery, Inc. (TDI), on the other, are
distinct and separate corporations. There is nothing to suggest that the owners of
DTI, have any common relationship as to identify it with Allied Bank Group which
runs Tanduay Distillers.
The fact that their businesses are related and that the 236 employees of Georgia
Pacific International Corporation were originally employees of Lianga Bay
Logging Co., Inc. is not a justification for disregarding their separate personalities.
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any other
legal entity to which it may be related (Palay, Inc vs. Clave)
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace
was only a subsequent interested buyer. At the time when termination notices
were sent to its employees, TDI was negotiating with the First Pacific Metro
Corporations for the sale of its assets. Only after First Pacific gave up its efforts to
acquire the assets did Twin Ace or Tanduay Distillers come into the picture.
Respondents-employees have not presented any proof as to communality of
ownership and management to support their contention that the two companies
are one firm or closely related. The doctrine of piercing the veil of corporate entity
applies when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime or where a corporation is the mere alter ego
or business conduit of a person (Indophil Textile Mill Workers Union vs.
Calica) To disregard the separate juridical personality of a corporation, the
wrong-doing must be clearly and convincingly established. It cannot be presumed.
Another factor to consider is that TDI as a corporation or its shares of stock
were not purchased by Twin Ace. The buyer limited itself to purchasing
most of the assets, equipment, and machinery of TDI. Thus, Twin Ace or

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Cease v. CA
Disregarding Corporate Entity
27
1908-one Forrest L Cease, one predecessor in interest of the parties together with
5 other American citizens organized the Tiaong Milling and Plantation Company
but in the course of its existence, Cease was able to buy out all other original
incorporators but in the name of his children Ernest, Cecilia, Teresita, Benjamin,
Florence and Bonifacia Tirante.
Charter lapsed in June 1958 but there were no showing that there was a
liquidation process. In 1959, Cease died and an extrajudicial partition of was
disposed but this is exactly the problem because two of his children wanted actual
division while the other wanted reincorporation.
Janz Hanna Ria N. Serrano
Tanduay Distillers did not take over the corporate personality of TDI
although they manufacture the same product at the same plant with the
same equipment and machinery. Obviously, the trade name "Tanduay" went
with the sale because the new firm does business as Tanduay Distillers and
its main product of rum is sold as Tanduay Rum. There is no showing,
however, that TDI itself was absorbed by Twin Ace or that it ceased to exist
as a separate corporation. In point of fact TDI is now herein a party
respondent represented by its own counsel.
In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La
Campana (KKM), (93 Phil. 160 [1953], La Campana Coffee Factory, Inc. and La
Campana Gaugau Packing were substantially owned by the same person. They had
one office, one management, and a single payroll for both business. The laborers
of the gaugau factory and the coffee factory were also interchangeable, the
workers in one factory worked also in the other factory.
In Claparols vs. Court of Industrial Relations (65 SCRA 613 [1975], the
Claparols Steel and Nail Plant, which was ordered to pay its workers backwages,
ceased operations on June 30, 1956 and was succeeded on the very next day, July
1, 1957, by the Clarapols Steel Corporation. Both corporations were substantially
owned and controlled by the same person and there was no break or cessation in
operations. Moreover, all the assets of the steel and nail plant were transferred to
the new corporation.
In fine, the fiction of separate and distinct corporate entities cannot, in the instant
case, be disregarded and brushed aside, there being not the least indication that
the second corporation is a dummy or serves as a client of the first corporate
entity. In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two
separate and distinct entities, the order for Tanduay Distillers (and petitioners) to
reinstate respondents-employees is obviously without legal and factual basis.
— Yu: when a transferee purchases only the assets of the transferor, the
transferee cannot be held liable for the labor claims and obligation for
reinstatement adjudged against the transferor
— there must be continuity of the identity of the owners in the business;
— the doctrine of business-enterprise transfer as to make the transferee liable
for the business obligations of the transferor is really a species of piercing
doctrine and would require a certain degree of continuity of the same
business by the same owners using the corporate fiction as a shield
In sustaining the theory that the estate of Forrest and Tiaong Milling are merged
as one personality and that the company is only the business conduit and alter ego
of Forrest, the TC correctly ruled that the company developed into a close family
corporation, with the Board and stockholders belonging to one family, the head of
which was Forrest who always retained the majority stocks and thus control and
management of its affairs.
Generally, a corporation is invested by law with a personality separate and
distinct from that of the persons composing it as well as from that of any other
legal entity to which it may be related. The notion of corporate entity will be
pierced or disregarded and the corporation will be treated as an association of

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Delpher Trade v. IAC
Disregarding Corporate Entity
28
Those opposing incorporated the FL Cease Plantation Co. and registed it with the
SEC but the the two sons wanted settlement of the estate and filed that the two
corporations be declared as one.
Plaintiffs wanted the properties to be placed under receivership but the
defendants filed a bond so that these properties remain in their possession.
On the eve of the expiration of the 3-year period provided by law for the
liquidation of corporations, the BOARD OF LIQUIDATORS of Tianong Milling
executed an assignment and conveyance of properties and trust agreement in
favor of FL Cease as Trustee of the Tianong Milling so that during the motion, the
judge ordered that the trustee be included as party defendant.
RTC: Divide the properties. The properties of the TMPC are also properties of the
FLC and thus the estate should be divided among the heirs. Transfer and
Conveyance with Trust Agreement is null and void. FLC is removed as trustee.
Thus the petition to the Supreme Court, on mandamus.
Petitioners argue that no evidence has been found to support the conclusion that
the registered properties of Tiaong Milling are also properties of the estate of
Cease and that for 50 years these properties were registered under Act No. 496 in
the name of Tiaong
Siblings Deflin and Pelagia Pacheco co-owned Lot No 1095 which they leased to
Construction Components. The lease contract had a right of first refusal provision
in favor of the lessee.
CCI then assigned its rights to Hydro Pipes, which included the RFR, with the
consent of the Pachecos. The Pachecos then executed a deed of exchange of the
property with Delpher Trades Corp for 2,500 shares, or a total value of
P1,500,000.
Delpher is a family corporation organized by the children of the Pachecos in order
to perpetuate their control over the property and avoid taxes. The transfer of
shares in exchange for the land are equivalent to a 55% majority stake in Delpher,
with the remaining 45% also in the hands of the Pacheco family (they call it estate
planning).
Hydro argues that Delpher is a corporate entity separate from the Pachecos and is
not their alter ego or business conduit, and that the transfer was in the nature of a
sale which prejudiced their RFR and supports their claim to exercise the right
under the terms granted to Delpher. Delpher claims there was no transfer of
ownership in the nature of a sale prejudicing the RFR of Hydro, because the
corporation is a mere alter ego or conduit of the Pachecos, hence Delpher and
Pachecos should be deemed one and the same. Thus there was no sale and that
the Pachecos merely exchanged the land for shares of stock in their own
corporation. Hydro sues for reconveyance exercising its RFR under the same
terms of the transfer to Delpher. TC rules ifo Hydro, and the CA affirms.
Janz Hanna Ria N. Serrano
persons or where there are two corporations, they will be merged into one, the
one being merely regarded as part or instrumentality of the other. The business of
the corporation in question is largely the personal venture of Forrest. The
children were neither subscribers or purchasers of the stocks they own. Their
participation as nominal shareholders emanated solely from Forrest’s gratuitous
dole out of his own shares to the benefit of his children.
The DoE between Pachecos and Delpher cannot be considered a contract of sale.
There was no transfer of actual ownership.
The Pacheco family merely changed their ownership from one form to
another, and it remained in the same hands. After incorporation, one becomes
a stockholder by subscription or purchasing stock directly from the corporation
or from the individual owners thereof.
In this case, the Pachecos became owners of the corporation by subscription,
which is an agreement to take and pay for original unissued shares of a
corporation formed or to be formed. It is significant in this case that the Pachecos
took no par value shares in exchange for the properties. A no-par value share does
not purport to represent any stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the whole number of shares of the
issuing corporation. The capital stock of a corporation issuing only no-par shares
is not set forth by a stated amount of money, but is expressed to be divided into a
stated number of shares. This indicates that a shareholder of say 100 shares is an
aliquot sharer in the assets of the corporation, no matter what the value of the
shares are. By ownership of 2500 shares, the Pachecos have control over Delpher,
which makes it a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher to take control of the
properties and save on inheritance taxes. The records do no point to anything
objectionable about this estate planning scheme. The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or avoid them cannot

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Garnett v. Southern Railway Co.
Parent-Subsidary Relationship
Jardine Davies v. JRB Realty Inc
Parent-Subsidary Relationship
29
Garrett is a wheel molder employed by Lenoir Car Works who claims and sues for
Workmen’s Compensation under the Federal Employer’s Liability Act because of
injuries contracted from silica dust which permeated the foundry. He contends
that since Southern Railway acquired the entire capital stock of Lenoir and so
completely dominated it that it was merely an instrumentality or subsidiary of
Southern, he is considered an employee of Southern and thus entitled under the
Act mentioned for recovery.
He cites the ff facts:
— All directors and officers of Lenoir are employees of southern
— Southern owns all stock of Lenoir except 5 shares
— All profits of Lenoir went to Southern
— Claims of Lenoir employees for accidents are handled by Southern
— Litigation against Lenoir is handled by Southern
— General accounting of Lenoir is handled by Southern
— Lenoir sold to Southern $30M of its products compared to $4.5M to
other buyers
Southern, countered with the ff facts in support of its contention that it is not the
parent of Lenoir:
— Management of Lenoir is vested in its manager, Henry Marius, who is in
the payroll of Lenoir and has no other connection with Southern except
holding and proxy voting for Southern
— Marius establishes the pricing of Lenoir products and all Lenoir sales are
the result of his business judgment
— Lenoir does not sell to Southern exclusively, and Southern does not buy
from Lenoir exclusively or substantially, and that it buys from Lenoir
just as it buys from other sellers
— Lenoir’s corporate and accounting offices are in Washington DC in a
building owned by Southern; but it is still based in Tennessee
— Lenoir is a specialty business and Southern has not in any way been in a
position to direct or supervise the operations of Lenoir
— Lenoir is a duly qualified employer under the Tennessee Workmen’s
Compensation Act and suits and claims similar to Garretts have been
covered by that law
— Lenoir maintains a separate bank account and has never intermingled its
funds with Southern
— Lenoir and Southern keep separate books and pay their own taxes
— Lenoir’s general accounting and legal is handled by its own departments
in Lenoir City
Jardine Davies was impleaded as defendant in a performance suit, considering
that Aircon was a subsidiary of the petitioner.
Janz Hanna Ria N. Serrano
be doubted. As they are still the owners, Hydro has no basis for its claim of RFR
under the lease contract.
The Court finds the existence of two distinct companies. There is no evidence that
Southern dictated the management of Lenoir. In fact, Marius the manager was in
full control of its operations. He established prices, handled all negotiations in
CBAs. It paid local taxes, had local legal counsel, maintained Workmen’s
Compensation.
Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions
and pricing remained in the hands of Marius and was not dictated by Southern.
Marius operated the business as a going concern.
The facts do not reveal the intimacy and inseparability of control which would
lead one to believe that Southern and Lenoir are one and the same. It was also not
an agent of Southern because it was not a common carrier by railroad to make it
liable under the Federal Act. It was not an operator of a terminal, performed no
switching or transportation functions at all. It was a manufacturer and Garrett
was one of its employees.
There are certain circumstances which if present in the proper combination,
would render the subsidiary an instrumentality:
(1) parent owns all or most of the capital stock
(2) parent and subsidiary have common directors or officers
(3) parent finances the subsidiary
(4) parent subscribes to all capital stock of the subsidiary or causes its
incorporation
(5) subsidiary has grossly inadequate capital
(6) parent pays salaries and other expenses or losses of subsidiary
(7) subsidiary has substantially no business except with the parent or no
assets except those conveyed to the parent
(8) the subsidiary is described as a department in the books of the parent
(9) parent uses the property of the subsidiary
(10) directors of the subsidiary do not act independently but take orders
from the parent
(11) formal legal requirements of the subsidiary are not met
Since only two of the 11 indicia occur—the ownership of most of capital stock and
subscription by Southern to capital stock of Lenoir—Lenoir is not a subsidiary
and is a separate corporation. Thus there is no basis for the claim of Garrett with
Southern under the Federal Act
It is an elementary and fundamental principle of corporation law that a
corporation is an artificial being invested by law with a personality separate and
distinct from its stockholders and from other corporations to which it may be
connected. While a corporation is allowed to exist solely for a lawful purpose, the
law will regard it as an association of persons or in case of two corporations,
merge them into one, when this corporate legal entity is used as a cloak for fraud
or illegality.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Koppel(Phil) v. Yatco
Parent-Subsidary Relationship
30
(the subsidiary was so controlled by the parent that its separate identity was hardly
discernible, and became a mere alter ego of the parent and was used to evade taxes).
Koppel Industrial and Car Company is a corporation organized and existing under
the laws of the State of Pennsylvania. They are not licensed to do business in the
RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of
stock of the said company (the remaining 5 were owned by the 5 officers of
Koppel Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a
prospective client.
Koppel Phils however quoted a higher price for the buyer than that quoted by
Koppel Industrial. Koppel Phils then cabled to ship the merchandise to Manila.
Koppel Phils received a %age of the profits realized or its share of the losses on
the transactions. Koppel also returned a sum allotted as payment of commercial
Janz Hanna Ria N. Serrano
This is the doctrine of piercing the veil of corporate fiction which applies only
when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime. The rationale behind piercing a corporation's
identity is to remove the barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities.
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily
follow that Aircon's corporate legal existence can just be disregarded. The Court
categorically held in another case that a subsidiary has an independent and
separate juridical personality, distinct from that of its parent company; hence, any
claim or suit against the latter does not bind the former, and vice versa.
In applying the doctrine, the following requisites must be established: (1) control,
not merely majority or complete stock control; (2) such control must have been
used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest acts in contravention of
plaintiff's legal rights; and (3) the aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
The records bear out that Aircon is a subsidiary of the petitioner only because the
latter acquired Aircon's majority of capital stock. It, however, does not exercise
complete control over Aircon; nowhere can it be gathered that the petitioner
manages the business affairs of Aircon. Indeed, no management agreement exists
between the petitioner and Aircon, and the latter is an entirely different entity
from the petitioner. In the instant case, there is no evidence that Aircon was
formed or utilized with the intention of defrauding its creditors or evading its
contracts and obligations.
There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air conditioners, complied with its obligation of providing
two air conditioning units for the second floor of the Blanco Center in good faith,
pursuant to its contract with the respondent. Unfortunately, the performance of
the air conditioning units did not satisfy the respondent despite several
adjustments and corrective measures.
The Court said that the virtual control of the shareholdings of a corporation would
lead to certain legal conclusions. It could not overlook the fact that in the practical
working of corporate organizations of the class to which the two entities
belonged, the holder or holders of the controlling part of the capital stock of the
corporation, particularly where the control is determined by the virtual
ownership of the totality of the shares, dominate not only the selection of the
board of directors but more often than not, also the action of that board.
It held that applying this to the case, it cannot be conceived how the Koppel Phils
could effectively go against the policies, decisions, and desires of the American
corporation… Neither can it be conceived how the Phil corporation could avoid
following the directions of the American corporation in every other transaction
where they had both to intervene, in view of the fact that the American

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Liddell and Co. v. CIR
Parent-Subsidary Relationship
31
broker’s tax of 4%. Koppel Industrial demanded from Koppel Phils the sum of
P64,122.51 as merchant’s sales tax of 1 ½% of the share of Koppel Phils in the
profits.
(corporate entity was used to evade the payment of higher taxes)
Liddell & Co was engaged in importing and retailing cars and trucks. Frank Liddell
owned 98% of the stocks. Later Liddell Motors Inc was organized to do retailing
for Liddell & Co. Frank’s wife owned almost all of that corporation’s stocks. Since
then, Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the
CIR considered the sales by Liddell Motors to the public as the basis for the
original sales tax.
Janz Hanna Ria N. Serrano
corporation held 99.5% of the capital stock of the Phil corporation… In so far as
the sales are concerned, Koppel Phils and Koppel Industrial are for all intents and
purposes one and the same, and the former is a mere branch, subsidiary, or
agency of the latter. The ff are facts which led to the Court to conclude the above:
— share in the profits of Koppel Phils was left to the sole, unbridled control
of Koppel Industrial
— shares of stock of Koppel Phils are all owned by Koppel Industrial
(overwhelming majority)
— Koppel Phils acted as agent and representative of Koppel Industrial
— Koppel Phils alone bore the incidental expenses for transactions, such as
cable expenses
— Koppel Phils was fully empowered to instruct banks it deals with, if
purchasers were not able to pay the bank drafts to the bank as payment
for the purchases
— Koppel Phils makes good any deficiencies by deliveries from its own
stock
The application of the piercing doctrine is not a contravention of the principle that
the corporate personality of a corporation cannot be collaterally attacked. When
the piercing doctrine is applied against a corporation in a particular case, the
court does not deny legal personality… for any and all purposes. The application
of the piercing doctrine is therefore within the ambit of the principle of res
judicata that binds only the parties to the case and only to the matters actually
resolved therein.
The Court, agreeing with the CIR, held that Frank Liddell owned both corporations
as his wife could not have had the money to pay her subscriptions. Such fact alone
though not sufficient to warrant piercing, but under the proven facts alone, Liddel
Motors was the medium created by Liddel & Co to reduce its tax liability. A
taxpayer has the legal right to decrease, by means which the law permits, the
amount of what otherwise would be his taxes or altogether avoid them; but a
dummy corporation serving no business purposes other than as a blind, will be
disregarded. A taxpayer may gain advantage of doing business thru a corporation
if he pleases, but the revenue officers in the proper cases may disregard the
separate corporate entity where it serves but as a shield for tax evasion and treat
the person who actually may take the benefits of the transaction as the person
accordingly taxable.
Mere ownership by a single stockholder or by another corporation of all or nearly
all capital stocks of the corporation is not by itself a sufficient ground for
disregarding the separate corporate personality. Substantial ownership in the
capital stock of a corporation entitling the shareholder a significant vote in the
corporate affairs allows them no standing or claims pertaining to corporate
affairs. Where a corporation is a dummy and serves no business purpose and is
intended only as a blind, the corporate fiction may be ignored.
Substantial ownership in the capital stock of a corporation entitling the SH to a
significant vote in corporate affairs allows then no standing or claims pertaining
to corporate affairs. Mere ownership by a single SH or by another corporation of
all or nearly all capital stock of a corporation is not of itself sufficient ground for

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
La Campana Coffee Factory v. Kaisahan
Parent-Subsidary Relationship
McArthur v. Times Printing Co.
Liability of Corporation for Promoter’s Contracts
11
http://www.scribd.com/doc/4664781/Corpo-Digests
32
Tan Tong and family owned and controlled 2 corporations: one engaged in the
sale of coffee and the other in starch. Both corporations had one office, one
management, and one payroll, and the laborers of both corporations were
interchangeable. The 60 members of the labor association in the coffee and starch
factories demanded higher wages addressed to La Campania Starch and Coffee
Factory. La Campania Coffee sought dismissal on the ground that the starch and
coffee factory are two distinct juridical persons.
Tan Tong had been in the business of buying and selling gaugau under the
tradename La Campana Gaugau Packing in BInondo and was transferred to QC
since 1932. In 1950, Tan Tong and his family as sole incorporators and
stockholders, organized a family corporation known as the La Campana Coffee
Factory Co. with its office located in the same place.
Tan Ton entered into a CBA with the PLOW union but Tan Tong’s employees later
formed their own organization know as the KMLC (see above). The members of
the union, 66 members, demanded for higher wages and more privileges and the
demand addressed to La Campana Starch and Coffee Factory which this union just
designated to the company.
CHAPTER V11
Times Printing has Nimocks and others as promoters. Through the latter,
McArthur was contracted for his services as advertising solicitor for one year. In
1890, he was discharged in violation of the contract, thus the filing of the
complaint for damages for break of contract.
Defenses of Time:
a. Not for any stated time but from week to week.
b. He was discharged for a good cause
He was contracted on and after October 1, when the company would be organized
but in fact it was actually organized in October 16 but the corporation has
commenced operations from October 1 when the publication of the paper was
stared by the promoters. But on April or in 6 months time, he was discharged.
The BOD never took any formal action with reference to his contract but the
shareholders, directors and officers of the corporation knew of this contract at the
time of the organization or were inform of it and none of them objected but on the
contrary, retained plaintiff in the employment of the company without other or
new contract as to his services.
Janz Hanna Ria N. Serrano
disregarding the separate corporate personality
CIR found that they are just one and the same. That La Campana Gaugau Packing
is just a business name. And that even when Tan Tong leased the land to his son
the manager of the coffee company, he did so only when the case was already
pending, and that the advertisements in delivery trucks states that it is just one
entity and that the employees or laborers of gaugau company receive their pay
from the same persons which are also holding the coffee factory and there is only
one payroll and they separate the payrolls only when the case was filed. One
office, all trucks are used by both companies.
It is to be noted that they questioned CIR’s jurisdiction because the number of the
Coffee factory is below 31, the jurisdictional number, however this loses it’s force
when we hold that the two companies are just one business.
A subsidiary or auxiliary corporation which is created by a parent corporation
merely as an agency for the latter may sometimes be regarded as identical with
the parent corporation, especially if the stockholders or officers of the two
corporations are substantially the same or their system of operation unified.
While a corporation is not bound by engagements made on its behalf by its
promotres before its organization, it may, after its organization, make such
engagements its own contracts.
The BOD’s formal action would only be necessary where there would be any
similar original contract but not a requisite in such adoption or acceptance, which
may be expressed or implied. It may be inferred from the acts or acquiescence on
the part of the corporation, or its authorized agents, as any similar original
contract might be shown.
The right of the corporation to adopt an agreement originally made by promoters
depends upon the purposes of the corporation and the nature of the agreement.
The agreement must be one which the corporation itself could make and
one which the usual agents of the company have express or implied
authority to make.
Statute of Frauds would not apply, for terms not to be performed within one year
from the making of the contract because the liability of the corporation under the
circumstances does not rest upon any principle of the law of agency but upon the
immediate and voluntary acts of the company.
The promoters act of “ratifying” in behalf of the corporation, is loosely applied
because, ratification implies an existing person, on whose behalf the contract
might have been made.
There cannot, in law be a ratification of a contract which could not have been

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Cagayan Fishing Dev. Co. v. Teodoro Sandiko
Liability of Corporation for Promoter’s Contracts
Builder’s Duntile Co. v. Dunn Mfg. Co.
Corporate Rights under Promoter’s Contract
33
Manuel Tabora is the registered owner of four parcels of land in Linao, Aparri,
Cagayan, and he wanted to build a Fishery. He loaned from PNB P8,000 and to
guarantee, it mortgaged the said parcels of land.
In May 1930, he sold the parcels to Cagayan Fishing Development which was only
in the process of incorporation, in consideration of P1 and making the corporation
assume the mortgages in favor of PNB and Severina Buzon and that the title of the
land shall not be transferred to the company until the company has fully paid
Tabora’s indebtedness.
The articles of incorporation were filed on Oct. 22, 1930 or 5 months after the sale
and after 6 days after, the company sold the parcels of land to Sandiko for 42,000
on the reciprocal obligation that Sandiko will shoulder the three mortgages. He
executed a promissory note that he shall be 25,300 after a year with interest and
on the promissory notes, the parcels were mortgage as security.
Sandiko defaulted, thus the action for payment. The lower court held that deed of
sale was invalid because of vice in consent and repugnancy to law.
The corporation filed a motion for reconsideration.
WE Dunn Company manufactures machinery for making duntile, a hollow
building tile. Samuels told Gaston the agent of Dunn that he was organizing a
company to manufacture the duntiles. Samuels preferred to organize the
corporation and then make the contract for the machinery. Gaston wanted to
make the contract first, then form the corporation after. Samuels then made the
contract ordering the machinery from WE Dunn, which also provided for the free
services of an experienced serviceman (Aaron) for 5 years to insure proper
installation. WE Dunn accepted the contract, and the machinery was shipped to
Samuels. Aaron the serviceman began setting up the machinery. Meantime, the
articles of the Builder’s Duntile (Samuels’ company) was filed. Operations for the
manufacture of the duntiles then started. It turns out that the duntiles made were
so inferior in quality and practically value-less for building purposes, because the
machinery had been installed improperly by Aaron the service guy, and had even
used the wrong formula for the mixing. Builders (not Samuels) sues WE Dunn Co.
to recover on the contract made before the corporation formed.
Janz Hanna Ria N. Serrano
made binding on the ratifier at the time it ws made, because the ratifier was not
then in existence.
In this case, adoption is what ruled because adoption is the making of a contract
as of the date of the adoption and not as of some former date.
Cagayan Fishing was not yet in existence when Tabora sold to it his lands. It was
not even a de facto corp at the time, thus not being in legal existence it does not
yet possess juridical capacity to enter into contracts. The Tabora contract was
entered into not only between him and a non-existent corporation, but between
him as owner and the same Tabora, his wife and others, as mere promoters of the
corporation. They could not have acted as agents for a projected corporation since
that which had no legal existence could have no agent. A corporation, until
organized, has no life and therefore no faculties. The SC refused to extend the
doctrine of ratification which would result in the commission of injustice or fraud
to third parties. Tabora owned a majority of the shares subscribed and paid.
Tabor was also one of the directors, and title remained under Tabora’s name.
Sandiko the buyer dealt with Tabora directly and considered him as the owner.
Even PNB treated Tabora as the owner, not the corporation. Thus Cagayan Fishing
never really purchased the lands, and thus it did not have the right to dispose by
sale to Sandiko.
— There are circumstances where the acts of promoters may be ratified by the
corporation, but in Cagayan the SC declined to extend the doctrine of
ratification which would result in the commission of injustice or fraud,
because the object of the contracts were treated as personal assets and not
corporate assets
— Ratification is the key element in upholding the validity and enforceability of
promoter’s contracts
The case turns on the right of a corporation to sue upon a contract made in its
behalf by one of its promoters before it was organized.
A corporation has the power to adopt a contract of its promoters, and one of the
effects of this adoption is that the contract becomes that of the corporation. But
the power to adopt must only be limited to such contracts as the corporation
itself can make or is authorized to make.
In this case it was clear that the contract was made by Samuels in behalf of the
projected corporation, and after it was formed, the incorporators took over the
whole thing and ratified all that had been done in its behalf. To deny the
corporation the right to sue for damages for breach of contract and the loss it
sustained by reason of the first agent’s negligence and improper acts would be to
deny it all remedy for the breach of contract, for Samuels did not make the
contract for himself, and he personally did not sustain any damages. It was the
corporation that sustained the damages resulting from the breach.
The corporation was the real party in interest, and brought suit in its own name.
The contract, though made in the name of Samuels was, as all parties knew, made
in his name for the benefit of the corporation to be organized. He was one of the

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Rizal Light and Ice Co. v. PSC and Morong Electric Co.
Corporate Rights under Promoter’s Contract
34
Case involves two (2) petitions of the Rizal Light & Ice Co., Inc., (1) to review and
set aside the orders of respondent Public Service Commission cancelling and
revoking the certificate of public convenience and necessity and forfeiting the
franchise of Rizal, and (2) to review and set aside the decision of the Commission
granting a certificate of public convenience and necessity to respondent Morong
Electric Co., Inc to operate an electric light, heat and power service in the
municipality of Morong, Rizal.
Petitioner opposed in writing the application of Morong Electric, alleging among
other things, that it is a holder of a certificate of public convenience to operate an
electric light, heat and power service in the same municipality of Morong, Rizal,
and that the approval of said application would not promote public convenience,
but would only cause ruinous and wasteful competition.
The Commission, in its decision dated March 13, 1963, found that there was an
absence of electric service in the municipality of Morong and that applicant
Morong Electric, a Filipino-owned corporation duly organized and existing under
the laws of the Philippines, has the financial capacity to maintain said service. The
Commission found that Morong Electric is a corporation duly organized and
existing under the laws of the Philippines, the stockholders of which are Filipino
citizens, that it is financially capable of operating an electric light, heat and power
service, and that at the time the decision was rendered there was absence of
electric service in Morong, Rizal.
While the petitioner does not dispute the need of an electric service in Morong,
Rizal, it claims, in effect, that Morong Electric should not have been granted the
certificate of public convenience and necessity because (1) it did not have a
corporate personality at the time it was granted a franchise and when it applied
for said certificate; (2) it is not financially capable of undertaking an electric
service, and (3) petitioner was rendering efficient service before its electric plant
was burned, and therefore, being a prior operator its investment should be
protected and no new party should be granted a franchise and certificate of public
convenience and necessity to operate an electric service in the same locality.
Janz Hanna Ria N. Serrano
promoters but had no intention of buying it for himself. Though there was no
formal assignment of the contract to the corporation, its action to bring suit were
an adoption of the contract.
The bulk of petitioner's arguments assailing the personality of Morong Electric
dwells on the proposition that since a franchise is a contract, at least two
competent parties are necessary to the execution thereof, and parties are not
competent except when they are in being. Hence, it is contended that until a
corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it
cannot enter into any contract as a corporation.
The certificate of incorporation of the Morong Electric was issued by the SEC on
October 17, 1962, so only from that date, not before, did it acquire juridical
personality and legal existence. Petitioner concludes that the franchise granted to
Morong Electric on May 6, 1962 when it was not yet in esse is null and void and
cannot be the subject of the Commission's consideration. On the other hand,
Morong Electric argues, and to which argument the Commission agrees, that it
was a de facto corporation at the time the franchise was granted and, as such, it
was not incapacitated to enter into any contract or to apply for and accept a
franchise. Not having been incapacitated, Morong Electric maintains that the
franchise granted to it is valid and the approval or disapproval thereof can be
properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal
personality on May 6, 1962 when a municipal franchise was granted to it is
correct. The juridical personality and legal existence of Morong Electric began
only on October 17, 1962 when its certificate of incorporation was issued by the
SEC. Before that date, or pending the issuance of said certificate of incorporation,
the incorporators cannot be considered as de facto corporation. But the fact that
Morong Electric had no corporate existence on the day the franchise was
granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted
the franchise in accordance with the terms and conditions thereof.
— “The fact that a company is not completely incorporated at the time the grant
is made to it by a municipality to use the streets does not, in most
jurisdictions, affect the validity of the grant. But such grant cannot take effect
until the corporation is organized.”
— “While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the
company is fully organized.”
— “An ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the
introduction of the ordinance. It is enough that organization is complete
prior to the passage and acceptance of the ordinance. The reason is that a
privilege of this character is a mere license to the corporation until it accepts
the grant and complies with its terms and conditions.”

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Quaker Hill v. Parr
Personal Liability of Promoter on Pre-Incorporation Contracts
Old Dominion Copper Mining and Smelting Co v. Bigelow
Fiduciary Relationship between Corporation and Promoter
35
Parr et al while in the course of negotiations with Quaker Hill Inc, a NY
corporation, for the former to purchase nursery stock, undertook to organize a
separate corporation to be known as the Denver Memorial Nursery Inc. Two
orders for nursery stock were signed by Parr in behalf of Denver Memorial which
to the knowledge of Quaker was not yet formed. The nursery stock was then
delivered to Parr and was planted with the help of Quaker.
A substitute order was then made, with the name Mountain View Nurseries
instead of Denver Memorial, which never actually came into being. Because of
name confusion, it was subsequently called Mountain View Nurseries. Its articles
were filed but the companies never functioned as going concerns.
After Mountain View was formed, a new note and contract was submitted to
Parr et al, containing the name Mountain View as contracting party. Quaker
then referred to the company as Mountain View. Mountain View became
financially troubled, and Quaker sues Parr et al (in his personal capacity)on the
ground that the corporation was not yet formed at the time the sales contract was
made and that Parr et al as promoters should be personally liable.
Action to recover secret profits made by Bigelow and Lewisohn, promoters of the
Old Dominion Copper. Bigelow and Lewisohn framed a scheme for the
capitalization of Old Dominion for $3,750,000, then sell to the corporation for
$3,250,000 their property worth $1M but having a market value of not over $2M,
and then sale to the general public at par for cash of the remaining $500,000 of
stock, and all this without providing Old Dominion with any independent board of
officers to pass upon the wisdom of the purchase and without disclosing the
Janz Hanna Ria N. Serrano
The incorporation of Morong Electric on October 17, 1962 and its acceptance of
the franchise not only perfected a contract between the respondent municipality
and Morong Electric but also cured the deficiency pointed out by the petitioner in
the application of Morong Electric.
The conclusion herein reached regarding the validity of the franchise granted to
Morong Electric is not incompatible with the holding of this Court in Cagayan
Fishing Development Co., Inc. vs. Teodoro Sandiko, where it was held that a
corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business. It
should be pointed out, however, that this Court did not say in that case that the
rule is absolute or that under no circumstances may the acts of promoters of a
corporation be ratified or accepted by the corporation if and when subsequently
organized. Of course, there are exceptions. It will be noted that American courts
generally hold that a contract made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by the corporation when organized.
— Although a franchise may be treated as a contract, the eventual
incorporation after the grant of the franchise and its acceptance thereof, as
well as the efforts made to prosecute the application not only perfected a
contract but cured the deficiency
— Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or
accept a contract made by promoters in behalf of the corporation before its
incorporation
General Rule—promoters are personally liable on their contracts, though made in
behalf of a corporation to be formed.
Exception—if the contract is made in behalf of the corporation and the other party
agrees to look to the corporation and not to the promoters for payment.
In this case, Quaker was well aware that the corporation was not yet formed
and even urged that the contract be made in the name of the to-be formed
corporation. The entire transaction contemplated the corporation as the
contracting party. Thus personal liability does not attach. There was clearly
an intent on the part of Quaker to contract with the corporation and not
with the promoters.
Notwithstanding this fiduciary relation, the promoter may sell property to the
company which he is promoting. In order that the contract may be absolutely
binding, the promoter must pursue one of 4 courses of action:
(1) provide an independent board of officers and make a full disclosure to
the corporation through the board;
(2) make a full disclosure of all material facts to each original subscriber of
 36
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
substance of the transaction and their extraordinary profit to the purchasers of its
stock for cash at par.
(Pau: They sold their property to themselves and assigning themselves as trustee
for the corporation while it is being formed. So the fiduciary relationship is
between them as promoters and the subsequent investors to the under
construction corporation).
The court has decided that such a transaction creates a liability on the part of the
promoters to account for the secret profits to Old Dominion. The corporation
seeks to recover the secret profit made by the promoters in the sale of their own
property to the corporation, basing its claim on the general rule that a promoter
cannot lawfully take a secret profit and will be held to account for it if he
does. Fundamentally the action is to recover profits obtained by a breach of trust,
as promoters have duties as fiduciaries to the company. A promoter includes
those who undertake to form a corporation and to procure for it the rights,
instrumentalities and capital by which it is to carry out the purposes set forth in
its charter and to establish it as fully able to do its business. It is now established
without exception that a promoter stands in a fiduciary relation to the corporation
which he is interested in, and that he is charged with all the duties of good faith
which attach to other trusts.
Janz Hanna Ria N. Serrano
shares
(3) procure a ratification of the contract by vote of the shareholders of the
completely established corporation
(4) he may be himself the real subscriber of all the shares of the capital
stock contemplated as part of the promotion scheme.
In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares.
They held all the shares issued at the time of ratification, but not all which it was
proposed to issue as part of their promotion scheme. There is a liability of the
promoter to the corporation when further original subscribers to capital stock
contemplated as an essential part of the scheme of promotion came in after the
transaction complained of, even though that transaction is known to all the then
SHs at the time—which are the promoters themselves and their representatives.
In the present case, the whole purchase price was paid in stock, issued before any
stock was issued to the public although after a substantial public subscription. In
other words, it is the order in which the transaction is carried out, and not its
substantial nature, which makes the difference between liability and
immunity of the promoter. It is of know consequence whether in fact the
dummy directors know of the terms of sale and the breach of trust of the
promoters. The point is that the directors were selected with the purpose that
they should be the mere instruments of the promoter and they carried out the will
of their masters.
Promoters have in their hands the creation and molding of the company, like clay
in the hands of a potter. It is not necessary to inquire how far he may be trustee
also for shareholders and associates. In the present case the inquiry relates wholly
to his obligation to the corporation. The fiduciary relation must continue until the
promoter has completely established according to his plan the being which he has
undertaken to create. The principle that one cannot rightfully sell property,
belonging to him in his private capacity, to himself in a trust capacity is
universal.
The theory upon which corporations are founded is that they are entities,
separate and distinct from officers and SHs. Looking through the form of the
corporation to the SHs and treating them as the corporation is an exception to the
rule that the corporation is a separate legal entity for all purposes, even though all
its stock be held by a single interest and it be to all practical intents merely the
instrument of the SH. The wrong which the promoters did in this case was in
selling property worth $1M and in the market at most $2M for $3.25 without
revealing that they were making a secret profit. The wrong was done to the
corporation. It affected all its SHs, present and future alike. It is done
directly to the corporation as an independent entity, and thus indirectly the
rights of those who are or will become SHs are affected.
In buying the promoter’ property, the directors of the corporation acted for the
corporation, as such, without regard to who were the then SHs. The wrong is not
done when the innocent public subscribes but when the sale was made to
the corporation at a grossly exaggerated price with secret profit. The
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Prof. Jacinto
2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano
occasion for complaining of this wrong comes when the promoters issue to the
public the balance of stock in order to provide the money necessary to set the
corporation on its feet.

The breach of trust is in nature of a tort, thus, renders Bigelow and Lewisohn
solidarily liable for the whole damage. Remedy is to return the secret profit.

Republic of the Philippines v. Acoje Mining
Corporate Powers
CHAPTER VI
Acoje Mining requested the opening of a post office at its mining camp in
Zambales to service employees living in the camp. The Director of Posts agreed to
set up the office, provided that in the meantime that funds are not available, the
company would provide for all essential equipment and assign a responsible
employee to perform the duties of a postmaster. He also added that the company
shall assume direct responsibility for whatever pecuniary loss may be suffered by
the Bureau of Posts by reason of the dishonesty or negligence of the employee
assigned. A Resolution by the Acoje Board of Directors was passed. The
postmaster assigned, Hilario Sanchez, went on leave and never returned. It was
soon discovered that a shortage was incurred iao P13,867.24, apparently
embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its
liability contending that the resolution issued by the board was ultra vires, and its
liability if any would only be that of a guarantor.
Plaintiff even presses that it is entitled to recover the difference between the
market value of the shares received by the defendant and Lewisohn and the cost
of them of the property conveyed. But the court said that there is no finding here
that such fiduciary relation existed at the time (because this is the measure of
recovery when there is a fiduciary relationship). No finding that such relationship
exised at the time Bigelow purchased the property. Market value is the standard
commonly applied where property has such value. It is only in cases where the
value of property cannot be fairly ascertained bu the application of this test that
resort is had to any other.
It should be noted that it was Acoje itself that requested for the setting up of a
post office for the convenience of its employees, which the SC held to cover a
subject which is “a reasonable and proper adjunct to the conduct of the business
of Acoje Mining.” An ultra vires act is one committed outside the object for which a
corporation is created, but there are certain corporate acts that may be performed
outside the scope of the powers expressly conferred if they are necessary to
promote the interest and welfare of the corporation.”
Even in the case of ultra vires acts which are not illegal per se, a corporation
cannot be heard to complain that it is not liable for the acts of its board, because of
estoppel by representation. The term ultra vires should be distinguished from an
illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be
invalidated. It being merely voidable, an ultra vires act can be enforced or
validated if there are equitable grounds for taking such action. In this case, it is
fair that the resolution be upheld at least on the ground of estoppel.

The defense of ultra vires rests on violation of trust or duty towards the
stockholders, and should not be entertained where its allowance will do greater
wrong to innocent parties dealing with the corporation. The acceptance of
benefits arising from the performance of the other party gives rise to an estoppel
precluding the repudiation of the contract.

NPC v. Vera Sea Lion is a port and arrastre operator with a contract for stevedoring services
Corporate Powers with NPC which had already expired. Its PPA permit for cargo handling services at
the NPC Calaca pier had expired as well. Napocor did not renew Sea Lion’s
contract for Stevedoring Services for Coal-Handling Operations at Calaca plant,
and took over its stevedoring services pursuant to a provision in its charter, “[t[o
exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to
time, may be declared by the Board to be necessary, useful, incidental or auxiliary
to accomplish said purpose.” Sea Lion sues, alleging that NPC had acted in bad
In determining whether or not the act of NPC falls within the purview of the
charter which creates it, the Court must decide whether or not a logical and
necessary relation exists between the act questioned and the corporate purpose
expressed in the NPC charter. For if that act is one which is lawful in itself and not
otherwise prohibited, and is done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends in a substantial and not in
a remote and fanciful sense, it may be fairly considered within the corporation's
charter powers. A pier located at Calaca, Batangas, which is owned by NPC,
receives the various shipments of coal which is used exclusively to fuel the

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Madrigal & Co. v. Zamora
Corporate Powers
Government v. El Hogar
38
faith and with grave abuse of discretion in not renewing its Contract for
Stevedoring Services for Coal-Handling Operations at the Calaca plant, and in
taking over its stevedoring services. Judge Vera, acting on Sea Lion’s suit, issued a
writ of preliminary injunction enjoining NPC from further undertaking
stevedoring and arrastre services in its pier located at the Batangas Coal-Fired
Thermal Power Plant at Calaca, Batangas and directing it either to enter into a
contract for stevedoring and arrastre services or to conduct a public bidding
therefor. Sea Lion was also allowed to continue stevedoring and arrastre services
at the pier.
Madrigal & Co was engaged in the management of Rizal Cement Co., Inc. and is
also its sister company, both being owned by the same or practically the same
stockholders. The Madrigal Central Office Employees Union sought for the renewal
of its collective bargaining agreement and proposed a wage increase of P200.00 a
month, an allowance of P100.00 a month, and other economic benefits. Madrigal
requested for a deferment in the negotiations.
Thereafter, Madrigal on two occasions reduced its capital stock from 765,000
shares to 267,366 shares and from 267,366 shares to 110,085 shares by virtue of
two alleged resolutions of its stockholders, which was effected through the
distribution of the marketable securities owned by the petitioner to its
stockholders in exchange for their shares in an equivalent amount in the
corporation.
The Union filed a case for ULP with the NLRC. Madrigal answered citing
operational losses. Madrigal then informed the Secretary of Labor that Rizal
Cement Co., Inc., "from which it derives income as the General Manager or Agent"
had "ceased operating temporarily. In addition, because of the desire of the
stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of
business incentives and prospects, and in order to prevent further losses," it had
to reduce its capital stock on two occasions. The labor arbiter, having found that
the petitioner "had been making substantial profits in its operation" since 1972
through 1975, granted the wage increase, and was affirmed by NLRC. Meanwhile
Madrigal tried to terminate the services of Union members citing retrenchment
but its application was declared illegal by DOLE. Upon appeal to OP, Ronaldo
Zamora affirmed the decision of DOLE.
This is a quo warranto proceeding, alleging 17 causes of action, instituted originally in this court by the Government of the Philippine Islands on the relation of the
Janz Hanna Ria N. Serrano
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric
power. The stevedoring services which involve the unloading of the coal
shipments into the NPC pier for its eventual conveyance to the power plant are
incidental and indispensable to the operation of the plant. The Court holds that
NPC is empowered under its Charter to undertake such services, it being
reasonably necessary to the operation and maintenance of the power plant. This
Court is, guided by the case of Republic of the Philippines v. Acoje Mining Company,
Inc., where the Court affirmed the rule that a corporation is not restricted to the
exercise of powers expressly conferred upon it by its charter, but has the power to
do what is reasonably necessary or proper to promote the interest or welfare of
the corporation. Whether NPC will enter into a contract for stevedoring and
arrastre services to handle its coal shipments to its pier, or undertake the services
itself, is entirely and exclusively within its corporate discretion. It does not involve
a duty the performance of which is enjoined by law. Thus, the courts cannot direct
the NPC in the exercise of this prerogative.
What clearly emerges from the recorded facts is that the petitioner, awash with
profits from its business operations but confronted with the demand of the union
for wage increases, decided to evade its responsibility towards the employees by a
devised capital reduction. While the reduction in capital stock created an apparent
need for retrenchment, it was, by all indications, just a mask for the purge of union
members, who, by then, had agitated for wage increases. In the face of the
petitioner company's piling profits, the unionists had the right to demand for such
salary adjustments. That the petitioner made quite handsome profits is clear from
the records. We agree with the National Labor Relations Commission that "[t]he
dividends received by the company are corporate earnings arising from corporate
investment." 42 Indeed, as found by the Commission, the petitioner had entered
such earnings in its financial statements as profits, which it would not have done if
they were not in fact profits. 43
Moreover, it is incorrect to say that such profits — in the form of dividends — are
beyond the reach of the petitioner's creditors since the petitioner had received
them as compensation for its management services in favor of the companies it
managed as a shareholder thereof. As such shareholder, the dividends paid to it
were its own money, which may then be available for wage increments. It is not a
case of a corporation distributing dividends in favor of its stockholders, in which
case, such dividends would be the absolute property of the stockholders and
hence, out of reach by creditors of the corporation. Here, the petitioner was acting
as stockholder itself, and in that case, the right to a share in such dividends, by
way of salary increases, may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction efforts
were, to begin with, a subterfuge, a deception as it were, to camouflage the fact
that it had been making profits, and consequently, to justify the mass layoff in its
employee ranks, especially of union members. They were nothing but a premature
and plain distribution of corporate assets to obviate a just sharing to labor of the
vast profits obtained by its joint efforts with capital through the years. Surely, we
can neither countenance nor condone this. It is an unfair labor practice.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Corporate Powers
39
Janz Hanna Ria N. Serrano
Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final dissolution of said corporation. The respondent, El Hogar Filipino, was apparently the first corporation organized in
the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success.
The articles of incorporation bear the date of December 28, 1910, at which time capital stock in the association had been subscribed to the amount of P150,000 of which
the sum of P10,620 had been paid in. Under the law as it then stood, the capital of the Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed
December 23, 1911, the statute was so amended as to permit the capitalization of building and loan associations to the amount of ten millions. Soon thereafter the
association took advantage of this enactment by amending its articles so as to provide that the capital should be in an amount not exceeding the then lawful limit.
From the time of its first organization the number of shareholders has constantly increased, with the result that on December 31, 1925, the association had 5,826
shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25. During the period of its existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of P7,618,257,.72; and in the same period it distributed in the form of dividends among its stockholders the
sum of P7,621,565.81.
I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in violation of the law that while corporations may loan funds upon real estate security,
they shall dispose of the same within 5 years after receiving title
H: the corporation has not been shown to have offended against the law in a manner which would entail forfeiture of its charter. The evident purpose behind the law
restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail or other similar institution by which land could be
fettered and its alienation hampered. In the case, El Hogar had in GF disposed of the property at the expiration of the period fixed by law. Under the circumstances the
destruction of the corporation would bring irreparable loss upon thousands of innocent shareholders of the corporation without any corresponding benefit to the
public.
I: W/N el Hogar is illegally owning and holding a business lot in excess of the reasonable requirements and in contravention of the Corpo law that every corporation has
the power to purchase hold lease real property as reasonable and necessary required for the transaction of the lawful business
H: The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were
created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their
business exclusively in leased offices — a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. We
are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate
principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner.
I: W/N el Hogar has engaged in activities foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends, specifically:
(1) the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public; (2) the administration and
management of properties belonging to delinquent shareholders of the association; (3) the management of some parcels of improved real estate situated in Manila not
under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so
H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of
action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided,
the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful.
(2) The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce
collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association
may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the
clause giving the association the right to take over the property which constitutes the security for the delinquent debt and to manage it with a view to the satisfaction of
the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to
be not open to doubt.
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(3) The practice described in the passage above quoted from the agreed facts is in our opinion unauthorized by law. The administration of property in the manner
described is more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to which this
criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the association. The circumstance that the
owner of the property may have been required to subscribe to one or more shares of the association with a view to qualifying him to receive this service is of no
significance. It is a general rule of law that corporations possess only such express powers. The management and administration of the property of the shareholders of
the corporation is not expressly authorized by law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of
any of the granted powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it does
not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort.

I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation for his services rendered by him during the early stages of the organization of the
corporation, is unconscionable, excessive, and thus necessitates dissolution
H: No possible doubt exists as to the power of a corporation to contract for services rendered and to be rendered by a promoter in connection with organizing and
maintaining the corporation. It is true that contracts with promoters must be characterized by good faith; but could it be said with certainty, in the light of facts existing
at the time this contract was made, that the compensation therein provided was excessive?

If the amount of the compensation now appears to be a subject of legitimate criticism, this must be due to the extraordinary development of the association in recent
years. If the Melian contract had been clearly ultra vires — which is not charged and is certainly untrue — its continued performance might conceivably be enjoined in
such a proceeding as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action to
annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such an action is either the
corporation itself, or some shareholder who has an interest to protect.

I: W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be illegal and inconsistent with the plan and purposes of building and loan
associations,and that these are held by well-to-do people purely for investment purposes and not by wage-earners for savings
H: The ground for supposing the issuance of the "special" shares to be unlawful is that special shares are not mentioned in the Corporation Law as one of the forms of
security which may be issued by the association. Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares are
precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; in if close attention be paid to the language
used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where evidently created for the purpose of meeting the condition
cause by the prepayment of dues that is there permitted. The language of this provision is as follow "payment of dues or interest may be made in advance, but the
corporation shall not allow interest on such advance payment at a greater rate than six per centum per annum nor for a longer period than one year." In one sort of
special shares the dues are prepaid to the extent of P160 per share; in the other sort prepayment is made in the amount of P10 per share, and the subscribers assume
the obligation to pay P10 monthly until P160 shall have been paid.

It will escape notice that the provision quoted say that interest shall not be allowed on the advance payments at a greater rate than six per centum per annum nor for a
longer period than one year. The word "interest " as there used must be taken in its true sense of compensation for the used of money loaned, and it not must not be
confused with the dues upon which it is contemplated that the interest may be paid. Now, in the absence of any showing to the contrary, we infer that no interest is ever
paid by the association in any amount for the advance payments made on these shares; and the reason is to be found in the fact that the participation of the special
shares in the earnings of the corporation, in accordance with section 188 of the Corporation Law, sufficiently compensates the shareholder for the advance payments
made by him; and no other incentive is necessary to induce inventors to purchase the stock.

It will be observed that the final 20 per centum of the par value of each special share is not paid for by the shareholder with funds out of the pocket. The amount is
satisfied by applying a portion of the shareholder's participation in the annual earnings. But as the right of every shareholder to such participation in the earnings is
undeniable, the portion thus annually applied is as much the property of the shareholder as if it were in fact taken out of his pocket. It follows that the mission of the
special shares does not involve any violation of the principle that the shares must be sold at par.

From what has been said it will be seen that there is express authority, even in the very letter of the law, for the emission of advance-payment or "special" shares, and
the argument that these shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even
assuming that the statute has not expressly authorized such shares, yet the association has implied authority to issue them. The complaint consequently fails also as
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2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano
regards the stated in the ninth cause of action.

I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at the discretion of its Board, the value of real properties acquired by it at its sales,
thereby frustrating the right of SHs to participate annually and equally in the earnings.
H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court may do in determining the internal policy of a business
corporation. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to depreciation be well founded,
the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by building and loan associations. Certainly this court cannot
undertake to control the discretion of the board of directors of the association about an administrative matter as to which they have legitimate power of action. The
tenth cause of action is therefore not well founded.

I: W/n el Hogar’s charter should be revoked because it illegally maintains excessive reserve funds and because it pursues a policy, allegedly unlawful, of paying a
straight annual dividend of 10% regardless of losses suffered and profits made by the corporation and in violation of the requirement s of the corpo code.
H: It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is unnecessary in the case of building and loan associations, and at any rate
the keeping of reserves is inconsistent with section 188 of the Corporation Law. Upon careful consideration of the questions involved we find no reason to doubt the
right of the respondent to maintain these reserves. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of
common observation that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such
contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan associations, though among the most
solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any fiscal institutions, while uniformity
in the payments of dividends, continued over long periods, supplies the surest foundations of public confidence.

Moreover, it is said that the practice of the association in declaring regularly a 10 per cent dividend is in effect a guaranty by the association of a fixed dividend which is
contrary to the intention of the statute. The government insists upon an interpretation of section 188 of the Corporation Law that is altogether too strict and literal.
From the fact that the statute provides that profits and losses shall be annually apportioned among the shareholders it is argued that all earnings should be distributed
without carrying anything to the reserve. But it will be noted that it is provided in the same section that the profits and losses shall be determined by the board of
directors: and this means that they shall exercise the usual discretion of good businessmen in allocating a portion of the annual profits to purposes needful to the
welfare of the association. The law contemplates the distribution of earnings and losses after other legitimate obligations have been met. Our conclusion is that the
respondent has the power to maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves
referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative
matters which have been confided to the discretion of the board of directors. The causes of action under discussion must be pronounced to be without merit.

I: W/n el Hogar illegally departed from its charter because it has made loans which were intended to be used by the borrowers for other purposes than the building of
homes. There is no statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the building
of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations are designed to promote.

Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association from time to time to fix the premium to be charged. In
the brief of the plaintiff a number of excerpts from textbooks and decisions have been collated in which the idea is developed that the primary design of building and
loan associations should be to help poor people to procure homes of their own. This beneficent end is undoubtedly served by these associations, and it is not to be
denied that they have been generally fostered with this end in view. But in this jurisdiction at least the lawmaker has taken care not to limit the activities of building and
loan associations in an exclusive manner, and the exercise of the broader powers must in the end approve itself to the business community.

I: W/n the el Hogar charter may be revoked because various loans now outstanding have been made by the respondent to corporations and partnerships, and that these
entities have in some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans, and that some of these juridical entities became
shareholders merely for the purpose of qualifying themselves to take loans from the association.

H: the Corporation Law declares that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its
general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in
section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Pirovano v. Dela Rama Steamship
Corporate Powers
42
Janz Hanna Ria N. Serrano
instance, it would seem reasonable to say that the incorporators of a corporation ought to be natural persons, although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not exceeding fifteen, may form a private corporation. But the context there, as well as the common sense of
the situation, suggests that natural persons are meant.
When it is said, however, in section 173, that "any person" may become a stockholder in a building and loan association, no reason is seen why the phrase may not be
taken in its proper broad sense of either a natural or artificial person. At any rate the question whether these loans and the attendant subscriptions were properly made
involves a consideration of the power of the subscribing corporations and partnerships to own the stock and take the loans; and it is not alleged in the complaint that
they were without power in the premises. Of course the mere motive with which subscriptions are made, whether to qualify the stockholders to take a loan or for some
other reason, is of no moment in determining whether the subscribers were competent to make the contracts. The result is that we find nothing in the allegations of the
sixteenth cause of action, or in the facts developed in connection therewith, that would justify us in granting the relief.
I: W/n el Hogar, in disposing of real estate purchased in the collection of defaulted loans, on credit at first and then sold and mortgaged to el Hogar to secure payment of
the purchase price, had incurred several outstanding loans, and that that the persons and entities to which said properties are sold under the condition charged are not
members or shareholders nor are they made members or shareholders of the defendant.
H: This part of the complaint is based upon a mere technicality of bookkeeping. The central idea involved in the discussion is the provision of the Corporation Law
requiring loans to be stockholders only and on the security of real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the
respondent sells property acquired at its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and
hence prohibited.
But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years after receiving title to the same, the
law does not prescribe that the property must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such sales can of course be made upon
terms and conditions approved by the parties; and when the association takes a mortgage to secure the deferred payments, the obligation of the purchaser cannot be
fairly described as arising out of a loan. Nor does the fact that it is carried as a loan on the books of the respondent make it a loan on the books of the respondent make it
a loan in law. The contention of the Government under this head is untenable.
Under the leadership and management of Enrico Pirovano, president of Del Rama Under the AOI of Dela Rama Steamship it is provided under (g) that the company
Steamship, the company grew and progressed until it became a multi-million may invest and deal with moneys of the company not immediately required, in
corporation, the assets of which grew and increased from P240K to around P15M. such a manner as from time to time may be determined, and under (i)… to lend
He was insured by the company for P1M. Esteban dela Rama, majority money or to aid in any other manner any person association, or corporation of
stockholder, distributed his shares among his 5 daughters, including the NDC, to which any obligation or in which any interest is held by the corporation or in the
which Dela Rama had an outstanding bonded indebtedness iao P7.5M, through a affairs of prosperity of which the corporation has a lawful interest. The
debt-equity swap arrangement which also gave the NDC representation in the corporation was thus given broad and almost unlimited powers to carry out the
Board. purposes for which it was organized. The word ”deal” is broad enough to include
any manner of disposition, and thus the donation comes within the scope of this
Pirovano was killed by the Japanese during the war, and a Boardres was adopted broad power. The company was in fact very much solvent as it was able to declare
granting to the Pirovano children the proceeds of the insurance policies taken on and issue dividends to its stockholders, and shows that the excess funds which
the life of the late president. However, the policy had lapse because the company were not needed by the company which was donated to the children was justified
was not able to pay the premiums regularly. The BoardRes authorizes the under the AOI.
allocation of P400K convertible into 4000 shares of stock ifo of the Pirovano
children, as well as a waiver of the preemptive rights of the former owners, the Under the second broad power, the corporation knew well its scope such that
Dela Rama siblings. This was submitted to the stockholders which duly approved noone lifted a finger to dispute its validity. The company gave the donation not
the same. only because it was indebted to him but also because it was fit and proper to make
provisions for the children and out of a sense of gratitude.
It appears, however, that Don Esteban did not realize that the dole out would
actually be giving to the Pirovano children more than what they intended to give. Even assuming that the donation was ultra vires, still it cannot be invalidated or
This was because the value then of the shares was 3.6 times the par value thereof, declared legally ineffective for that reason alone, it appearing that the donation
thus the donation iao P400K would amount to a total of P1.44M. Thus the voting represents not only the act of the Board but also that of the stockholders
strength of the Pirovano children would be twice as much as that of the dela Rama themselves since they expressly ratified the resolution. By this ratification, the
sisters. The old Resolution having been nullified, the Board adopted a new BR infirmity of the corporate act, if any, has been obliterated thereby making the act
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Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
changing the form of the donation from 4000 shares into a renunciation of the
Company’s right and title to the life insurance policies of Pirovano.
It also provides that the proceeds of the policy be retained by the Company as a
loan drawing interest payable to the Pirovano children whenever the company is
in a position to meet this financial obligation and after the Company settles its
bonded indebtedness ifo NDC. This was ratified by the Dela Rama stockholders.
Mrs Pirovano accepted the donation, and buys property in the US. Upon inquiry
with the Sec, it was found that the donation was illegal and thus void on the
grounds that the corporation acted ultra vires and that it could not dispose of its
assets through donation. The stockholders then voted to revoke the donation. Mrs
Pirovano sued to demand the credit owed to them by the Company.
Harden et al v. Benguet Consolidated Mining Balatoc Mining, engaged in the mining of gold, sorely needed the infusion of new
Corporate Powers capital to resuscitate its stalled operations. The officers approached the Benguet
Mining Co, an entity also engaged in gold mining. A contract was executed, which
states that Benguet agrees to construct a milling plant for the Balatoc mine and
erect a power plant, in exchange for Balatoc Mining shares valued at P600K and
the excess in cash to compensate for the cost of the contract.
By the time of the complaint, the value of the stock of Balatoc had soared for a
nominal valuation to more than P11 per share. It was alleged by Harden of Balatoc
that the Benguet Mining Co held shares of stock in another mining corporation,
the Balatoc Mining Company, in violation of a prohibition against mining
corporations from owning stock of another mining corporation in the old Corpo
law. The shareholders of Balatoc sued Benguet Mining to annul stock certificates
of Balatoc issued ifo Benguet and to recover money earned from the transaction.
TC dismissed complaint.
CHAPTER XI12
Ellingwood v. Wolf’s Head Oil Refining Ellingwood is a preferred SH of the Wolf’s Head Oil Co. At a SH meeting, the
Preferred stocks: as to voting rights corporation was in default in the declaration and payment of dividends for 2 years
on the PS. The AOI provides that PS holders are entitled to cumulative dividends,
and gives exclusive voting power to holders of CS. PS holders have no voting
rights, but is the corporation is in default in the payment of dividends, the
majority PS holders shall have an election to exercise the sole right to vote for the
election of directors and all other purposes, to the exclusion of the CS holders,
until the corporation declares and pays dividends for a full year on the PS.
Thereafter the right to vote shall revert to the CS holders. Ellingwood contends
that the clause “until the corporation pays for a one year period dividends on the
PS” restricts the above provision in the AOI as to the duration of time when PS
holders shall have the right to vote. TC ruled that PS were entitled to vote at the
SH meeting.
Hay v. Hay The Big Bend Co. is a real estate business concern. It amended its articles,
Preferred stocks: preference upon liquidation stipulating that holders of PS are entitled to receive cumulative dividends, such
that if in any year dividends shall not have been paid, the deficiency shall be paid
before dividends are declared or paid upon the CS. It also provides: that out of any
surplus profit remaining after payment of full dividends on PS for all dividend
periods and after full dividends have been paid in full, then dividends may be paid
12
http://www.scribd.com/doc/4663657/Chapter-XI-Financing-the-Corporation
Janz Hanna Ria N. Serrano
perfectly valid and enforceable, especially so if the donation is not merely
executory but consummated. The defense of ultra vires cannot be set up against
completed or consummated transactions.
An ultra vires act may either be an act performed merely outside the scope of the
powers granted to the corporation by its AOI or one which is contrary to law or
violative of any principle which would void any contract. A distinction has to be
made with respect to corporate acts which are illegal and those merely ultra vires.
The former are contrary to law, morals, public order or policy, while the latter are
not void ab initio, but merely go beyond the scope of the powers in the AOI, and
which renders the act merely voidable and thus ratifiable by the stockholders.
Although the contract between the two mining companies was illegal for
contravening the old Corpo Law, the Legislature, in adopting such a provision had
the intention that public policy should be controlling in the granting of mining
rights. The violation in this case was of such a nature that it can be proceeded
upon only by way of a criminal prosecution, or by action quo warranto, which can
be maintained only by the State.
Insofar as the parties are concerned, no civil wrong had been committed between
them, and if public wrong had been committed, then the directors of Balatoc
Mining and Harden were the active inducers of that wrong. The contract has in
fact been performed on both sides, and there is no possibility of undoing what had
been done. Thus even where corporate contracts are illegal per se, when only
public or government policy or interests are at stake and no private wrong is
committed, the courts will leave the parties as they are, in accordance with their
original contractual expectations.
The AOI of the company evidences an intention to make provision for the
protection of PS holders. When a dividend for a full year is paid on PS, the sole
right to vote reverts to the CS holders, notwithstanding that dividends for 2 years
are still due on PS. It clearly appears therefore that when the annual meeting of
the corporation was held, dividends were accrued and unpaid on the PS, thus the
company was in default, and therefore the PS holders were entitled to vote for the
election of directors and all other purposes as stipulated in the AOI.
The contract stating the rights of the PS has a double aspect. The provision on
annual dividends payable out of the surplus profits was founded on the hope and
prospect of a profitable business. Such dividends could be paid by a corporation
financially successful. There can be no dividends declared by a corporation in
financial distress. But if there were provision for the rights of PS holders even in
the event of a business disaster resulting in voluntary winding up or dissolution of

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Augusta Trust Co. v. Augusta Hallowell
Preferred stocks: preference stockholder is not a creditor
Garcia v. Lim Chu Sing
Nature of Subscription Contract
44
to CS; and in the event of any liquidation of the corporation the holders of PS shall
be entitled to be paid in the full the par value thereof, and all accrued unpaid
dividends thereon before any sum shall be paid to any assets distributed among
the holders of CS. No creditors are involved. No dividends on cumulative PS have
been declared or paid. No surplus profits are available with which to pay
dividends. A plan of liquidation, distribution, and dissolution of the corporation
was adopted. It appears that the net assets were sufficient to redeem the PS at par,
but if the PS holders received the promised dividends per the amended AOI, assets
instead of surplus profits would be used. The result will be that the CS holders will
get no part of such assets. The liquidating trustees, being in doubt as to who was
entitled to receive the assets upon liquidation after redemption of the PS, sought a
declaratory judgment from the court.
It is contended that the phrase “all accrued unpaid dividends” means that before
there can be a dividend, there must be surplus profits, and that since none ever
existed, the right to the dividends never accrued and therefore none are payable.
A counterargument is raised that the provisions of the amended AOI relate to the
payment of dividends to PS holders out of surplus profits while the corporation is
a going concern, but that it authorizes payment of accumulated and unpaid
dividends out of assets upon liquidation of the corporation, even though there is
no surplus profits available.
Augusta Railroad had outstanding bonds secured by mortgage. These bonds gave
the holders the right to convert into preferred stock of the company. The
corporation contends that the certificates of PS issued in exchange for bonds were
in fact certificates of indebtedness and not stock.
Lim Cuan Sy is the debtor of the Mercantile Bank of China, by virtue of a trust
account with the bank, in the form of trust receipts guaranteed by CMs and by
Defendant Lim Chu Sing as the surety of Lim Cuan. Lim Chu is also a SH of the
bank iao P10000. When the obligation became due, the bank foreclosed the CMs
Janz Hanna Ria N. Serrano
the corporation, they would be entitled to receive in full both the amount of their
shares and the unpaid dividends accrued. In this case the words of preference
were designed to be operative even under conditions of adversity. The advantages
of holders of PS are not restricted to conditions of prosperity, but general in scope
and intended to be operative in all the hazards of business. In the present case, the
holders of PS are entitled to both the par value of their stock and to dividends
which have not been declared or paid but which would have been so, had the
company experience surplus profits.
An investor places his money in cumulative PS because it has a guaranteed
dividend and certain preferences, as set forth in the stock agreement. If this
agreement gives preferences as to dividends in the liquidation proceedings, the
stock would normally be considered as a better business risk. The clause “unpaid
dividends accrued” would thus mean that it gives preference to holders regardless
of any consideration of profits or surplus.
Dissent: Differences of opinion usually arise when on liquidation, PS holders
sought to have a preference in the distribution of assets to reimburse them,
because the corporation may not have earned any net profits out of which
dividends can be paid. Two schools of thought: (1) a dividend can come into being
and exist only by affirmative declaration of the corporation, and only if there is
surplus profits. No surplus profits, no right to the dividends accrues, and thus
cannot be demanded in liquidation; (2) dividends, if not regularly paid out of
available earnings, may be amassed, whether earned or not, at regular dividend
rates, and may be paid out of assets when the corporation is liquidated if the AOI
so provide.
It is within the power of the legislature to prescribe that corporations may issue
certificates in the form of certificates of PS, making the holders creditors of the
corporation as well as SHs, and giving them a lien upon the corporate property
with a priority over other creditors. This is not ordinary PS, nor technically PS at
all. It is sui generis, not governed by the ordinary rules. The preferences given the
holders of the PS in this case were not authorized by statute when made. The
stock was not statutory PS of the kind described.
PS may be issued in such a way as to make the certificates thereof merely
evidence of indebtedness and the holders creditors and not SHs. Here all facts and
circumstances characterize the PS issued by the corporation as PS, and not bonds.
SHs voted increases in capital stock by the creation of PS. The certificates
delivered to the holders of the bonds exchanged for it designated the stock as PS.
The holders had the right to vote. The certificates contain every essential feature
of a certificate of PS and none of a contract of indebtedness. By surrendering their
bonds, and taking in lieu thereof PS, the bondholders ceased to become creditors
and became mere SHs. Those who have no made the exchange are entitled to the
security of the mortgages, excluding the illegal conversion agreements. The PS are
not entitled to share in the assets of the corporation until all creditors are paid in
full.
A share of stock or the certificate thereof is not an indebtedness to the owner nor
evidence of indebtedness, and is thus not a credit. SHs are not creditors of the
corporation. The capital stock of a corporation is a trust funds to be used for the
security of the creditors of the corporation, who deal with it on the credit of the

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Wallace v. Eclipse Pocahontas Coal Co.
Pre-incorporation Subscription
Bayla et. al. v. Silang Traffic Co.
Post-incorporation subscription
45
without the knowledge of the surety Lim Chu. The bank also required Lim Chu as
surety to execute a PN, where in the event of Lim’s default in payment of any
installment as they become due, the entire amount or unpaid balance becomes
due and demandable. Lim leaves a balance of P9,105.17. The bank is under
liquidation at the time of the action.
Case involves a contract entered into by Wallace and the promoters of the Eclipse
Pocahontas Coal Co. Wallace was to transfer and assign an option for a lease to the
promoters and from the promoters to the corporation, in exchange for money to
pay for the purchase price for the lease, and once the corporation is up and
running, Wallace was to have a 1/5 interest in the property fully-paid up, and a
1/5 interest in the corporation fully paid up. Wallace was also to be entitled to 50
shares of the corporation, but only 5 shares were issued to him. Wallace alleged
that the corporation and its promoters failed to perform their part of the contract.
TC ruled that Wallace was to recover a little over $1000 from each of the
defendants, or a total of $4300, which the court found to be the value of 43 shares
which he had been deprived, being 1/5 of the shares issued less 5 shares
delivered to him. The corporation was not held liable. Wallace contends that he
was erroneously limited to money decrees against the promoters and seeks a
judgment against the entire property and plant of the corporation as a trust
therein his 1/5 undivided interest or a judgment to order the issuance and
delivery of 43 additional shares, or a judgment for the actual, not par value of the
shares.
Bayla et al are SHs who file an action to recover certain sums of money which they
had paid to the corporation on account of shares of stock they individually agreed
to take and pay for under certain specified conditions. The action is based on a
resolution by the board of Silang Traffic Inc. The resolution revokes the rescission
of the agreement. Silang argues that the resolution does not apply to Bayla
because on the date thereof the subscribed shares had already automatically
reverted to the corporation, and the installments paid had already been forfeited,
without need for demand, and that the resolution itself had been revoked. TC
ruled ifo Silang Traffic, invoking the ruling in Velasco v Poizat that a corporation
has no legal capacity to release an original subscriber to its capital stock from the
obligation to pay for its shares, and any agreement to this effect is invalid. CA
affirms. The parties, TC and CA treated the agreement as a contract of subscription
to the capital stock of Silang Traffic. It should be noted that the agreement is
entitled, “Agreement for Installment Sale of Shares in the Silang Traffic Co. Inc,
and that while the purchaser is designated as a “subscriber”, the corporation is
described as “seller.” The agreement took effect long after incorporation of the
company.
Janz Hanna Ria N. Serrano
capital stock. SC ruled that Lim Chu not being a creditor of the Bank, although the
latter is a creditor of the former, there is no sufficient ground to justify a
compensation.
Promoters are indeed solidarily liable to Wallace for the stock to which he is
entitled, and so is the corporation. The corporation and the other subscribing SHs
accepted and benefited from the contract with Wallace. Thus, not only did the
corporation have notice of Wallace’s right but all the SHs of the corporation
participating in the 1st SH meeting of the corporation had notice that Wallace had
at least some interest or claims based on his contract.
Wallace is definitely a subscriber to the stock of the corporation. His contract was
to sell or convey to the corporation the leasehold and accept payment in fully paid
up stock to the value of the property leased when fully equipped for the business
purposes of the corporation. Being entitled to this amount of stock easily
ascertainable when the equipment was completed, he became entitled to the
stock, and a court of equity can compel specific performance to deliver the shares
to him. One who has paid for his subscription may sue in court to compel the
issuance of proper certificates therefor.
The TC was therefore wrong in limiting Wallace to a money decree severally
against the promoters and not including the corporation.
I: W/N the contract in question is a subscription or a contract of sale.
H: Whether a particular contract is a subscription or a sale of stock is a matter of
construction and depends upon its terms and intention of the parties. A
subscription to a stock in an existing corporation is, as between the subscriber
and the corporation, simply a contract of purchase and sale. Thus the terms of the
contract indicate that they are contracts of sale and not of subscription.
A subscription is the mutual agreement of the subscribers to take and pay for the
stock of a corporation, while a purchase is an independent agreement between
the individual and the corporation to buy shares at a stipulated price. Likewise,
the rule that the corporation has no legal capacity to release an original subscriber
to its capital stock from the obligation to pay for his shares, is inapplicable to a
contract of purchase of shares. The contract being one of purchase and not
subscription there is no legal impediment to its rescission by agreement of the
parties. The rescission was made for the good of the corporation and in order to
terminate the pending civil case. Since the civil case was eventually dismissed, and
that the purchasers of stock would be able to benefit by the resolution. It would be
an unjust discrimination to deny the same benefit to Bayla. There is also no
intimation that the corporation is insolvent, or that the right of any creditor was
prejudiced by the rescission.
I: W/N under the contract, the failure of the purchaser to pay any of the
installments automatically gave rise to the forfeiture of the paid installments.
H: the contract did not expressly provide for automatic forfeiture and cancellation
without necessity of demand. Under the CC persons obliged to deliver or do
something are not in default until the amount the creditor judicially demands the
same, unless the obligation or the law expressly provides that demand shall not be
necessary or that by reason of the nature and circumstances of the obligation it
shall appear that the designation of the time when the thing is to be delivered or
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Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano
service rendered was the principal inducement to the creation of the obligation.

— The nature of a contract covering unissued shares after incorporation was

Datu Benito v. SEC
The Preemptive Right to Shares: Waiver of Preemptive Right
Stokes v. Continental Trust Co.
The Preemptive Right to Shares
Benito subscribed to 460 shares of the Jamiatul Philippine-Al Islamis Inc. The
corporation increase its capital stock, with an additional issuance of worth
P110,980.00. Benito files a complaint with the SEC alleging that the issuance was
made in violation of his pre-emptive right to the additional issue and that the SHs
of record were not notified of the meeting. SEC ruled that the issuance was valid,
and that his preemptive rights are inapplicable.
H: Issuance is not invalid even without notice to the SHs. The power to issue
shares of stocks is lodged in the board and no SH meeting is necessary to consider
it because additional issuance of shares does not need SH approval.
Stokes is one of the original SHs of Continental Trust Co, owning 221 shares at the
time of the controversy. Blair & Co. proposed that if the company decides to
increase the capital stock, they would purchase the new shares at a higher price,
and acquire the right to nominate their people to the board of trustees. The SH
were informed of the Blair offer, and Stokes made his demand to exercise his
preemptive right. Stokes at the SH meeting for the purpose of increasing the
capital stock, demanded the right to subscribe for 221 shares of the new stock at
par, but was refused. As a result, he now has only ½ voting power that he had
before, because the number of shares had been doubled while he still owns 221.
After the sale to Blair, Stokes renewed his demand but was again refused. At this
time the stock rose in value, from 450 to 550 to 750. Stokes sued. TC ruled that
Stokes had the right to subscribe, and was entitled to recover the difference
between the market value at the time of increase and its par value. CA reversed.
either a subscription contract or a purchase of shares of stock, depending on
the terms of the agreement and intent of the parties
— Subscription agreements are mutual agreements among subscribers to take
and pay for the stock of a corporation, and it is not possible for SHs to
withdraw from such an agreement without the consent of the other
subscribers
— Purchase agreements are independent agreements between the individual
and the corporation to buy shares at a stipulated price
GR: preemptive right is recognized only with respect to new issue of shares, and
not with respect to additional issues of originally authorized shares. The theory is
that when a corporation at its inception offers it first shares, it is presumed to
have offered all of those which it is authorized to issue. The original subscriber is
deemed to have taken his shares knowing that they form a definite proportionate
part of the whole number of authorized shares. When the shares left unsubscribed
are later reoffered, he cannot therefore claim a dilution of interest.
A vote to increase the capital stock, if it was not the creation of new and disjointed
capital, was in its nature an agreement among the SH to enlarge their shares in the
amount or in the number of the extent required to effect that increase. If the right
claimed by Stokes was a right of property belonging to him as SH, he could not be
deprived of it by the joint action of the other SHs and of all directors and officers
of the corporation. He has an inherent right to his proportional share of any
dividend declared, or of any surplus arising upon dissolution, and he can prevent
waste or misappropriation of the property of the corporation by those in control.
Hence the power of the individual SH to vote in proportion to the number of his
shares is vital and cannot be cut off or curtailed by the action of all other SHs even
with the cooperation of the other directors and officers.
The ownership of stock is in the nature of an inherent but indirect power to
control the corporation. The stock, when issued ready for delivery, does not
belong to the corporation, but is held by it with not power of alienation, and in
trust for the SHs, who are the beneficial owners and become the legal owner upon
paying therefor. The new stock issued by the corporation did not belong to it, but
was held in trust for the SHs.

In this case, the new stock came into existence through the exercise of a right
belonging wholly to the SHs. As the right to increase belonged to them, the stock
when increased belonged to them also, as it was issued for money and not for
property or for some other purpose other than the sale for money. By the increase
in stock the voting power of Stokes was reduced ½, and while he consented to the
increase he did not consent to the disposition of new stock which belonged to
them. In other words, it was a partial division of property of the old SHs.

The corporation cannot dispose of the shares to strangers against the protest of
any SH who insists that he has a right to his proportion. Otherwise the majority

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Thom v. Baltimore Trust Co.
The Preemptive Right to Shares
Ross Transport v. Crothers
The Preemptive Right to Shares
47
Thom, owner of 6416 of 70000 shares, is a SH of the Baltimore Trust Co who
wants to exercise his preemptive right to purchase a due proportion of a
supplemental issue of its capital stock. The Baltimore Trust Co wanted to merge
with the National Union Bank of Maryland, and that the company would issue
150000 shares at $112 to acquire the 10000 shares of National Union Bank at
$168/share, and would require delivery of 70% of the stock. A resolution was
passed to increase the capital stock of Baltimore, which also stipulated that the SH
shall have the pro rata preferential right to subscribe at such price and terms as
the board may fix. In any additional issuance, the directors may issue without
preferential subscription rights and on such terms as the board may deem proper.
Thom protested and voted against the merger, alleging the corporation
disregarded the proportional purchase right of SHs.
Derivative suit by SH Crothers to set aside the issuance of stock dividends to 4 SHs
and ordering them to repay Ross Transport Inc the dividends received on stock
declared to be illegally issued. The corporation’s business is to operate a fleet of
buses to service the transport needs of employees of the Triumph Explosives Inc.
The company was an immediate financial success. It was engaged in a special
business, of which it had a monopoly. The company then issued new stock to the
family of the directors and the president, and had the effect of increasing the
outstanding stock. There was no meeting, no notice, and no offer to the other SHs.
The company declared dividends 3 times, and authorized salary payments to the
officers. The benefit of the dividends would not only increase the value of the
Janz Hanna Ria N. Serrano
could deprive the minority of their proportionate power in the election of
directors and of their proportionate right to share in the surplus, each of which is
an inherent, preemptive, and vested right of property. It is inviolable and can
neither be taken away nor lessened without consent or a waiver implying consent.
A share of stock is a share in the power to increase stock, and belongs to the SHs
the same as the stock itself. When that power is exercise, the new stock belongs to
the old SHs in proportion to their holding of old stock, subject to compliance with
the lawful terms upon which it is based.
A SH has an inherent right to a proportionate share of a new stock issued for
money only and not to purchase property for the purposes of the corporation or
to effect a consolidation, and while he can waive that right, he cannot be deprived
of it without his consent except when the stock is issued at a fixed price not less
than par and he is given the right to take at that price in proportion to his holding,
or in some other equitable way that will enable him to protect his interest by
acting on his own judgment and using his own resources.
After the price was fixed it was the duty of the corporation to offer him his
proportion at that price, for it had notice that Stokes had not acquiesced in the
proposed sale of his share, but wanted it for himself. The directors were under the
legal obligation to give him an opportunity to purchase at the price fixed before
they could sell his property to a third party, even with the approval of a large
majority of the SHs. By selling to strangers without thus offering to sell him, the
corporation wrongfully deprived him of his property and is liable for such
damages.
The preemptive right of SHs are said to be inherent in their stock ownership. The
SHs of a corporation have a preferential right to purchase new issues of its shares,
to the proportional extent of their respective interests in the capital stock then
outstanding. The right adheres in stock ownership as an essential means of
enabling a SH to maintain the existing ration of his proprietary interest and voting
power in the corporation. In transactions involving the acquisition of property by
corporations in exchange for shares of stock, the determining consideration to the
owners of the property may be the advantage of sharing as SHs in the profits of
the corporation with which they are contracting. In this case, the preemptive
rights of Thom et al are recognized and protect by the amendment to its AOI. In
declaring the right as to sales of stock for cash, and in restricting it as to issues of
stock for accomplishing merger or acquisition of property, the amendment is
valid.
Existing SHs are the owners of the business, and are entitled to have the
ownership continued in the same proportion. Therefore, when additional stock is
issued, those already having shares, are held to have the first right to buy the new
stock in proportion to their holdings. This is the preemptive right. An exception
would be where the stock about the be issued is part of the original issue. This is
based on the fact that the original subscribers took their stock on the implied
understanding that the incorporators could complete the sale of the remaining
stock to obtain the capital necessary to start the business. The exception to the
exception would be where conditions have changed since the original issue.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Merritt-Chapman & Scott Corp. v. NY Trust Co.
Debt Securities: Convertible Securities; stock options
Jordan v. Allen
Debt Securities: Hybrid Securities
48
stock, but the first two declared dividends would pay back all the subscribers had
invested, leaving any future earnings and distributions pure profit. Under these
circumstances, they took the opportunity they thought they had to increase their
investment. Crothers et al contend that changed conditions make it unnecessary
to use the remaining unsold stock to obtain capital.
Stock purchase (option) warrants were issued by Merritt-Chapman (MC) in
bearer form. The bearer would be entitled to purchase fully-paid and non-
assessable shares of CS, no par value, at $30/share. To insure that the stock to be
purchased under the warrants would be available, the trust deed requires that
stock certificates for an aggregate amount of 40,000 shares be delivered to the
trustee and made the Trust co the agent of the corporation to receive the purchase
price and deliver the stock certificates. The board of the corporation issued a
resolution declaring a stock dividend iao 40%/shares of no par CS on each legally
issued and outstanding share of CS. The resolution fixed the price at $20/share,
and directed the warrant holders outstanding and to the trust company the 60-
day notice required incase the corporation shall pay any stock dividend upon the
outstanding CS. The corporation contends that the warrant holder must exercise
his warrant before a certain date in order to share in the dividend. The trustee
contends that the corporation must first deposit with the trustee, stock
certificates in the amount equal to 40% of the certificates now on deposit with the
trustee, and that the holder who wishes to exercise the warrant must pay the
basic purchase price before he will be entitled to receive 1.4 share.
The Jordan Company issues “Debenture Stock.” The company believes that the
pay-outs made on the debentures were actually interest, and thus entitling them
to deductions from their taxable income. The IRS claims the pay-outs were
dividends to the holders.
Janz Hanna Ria N. Serrano
Trustees and directors of corporations cannot purchase, directly or indirectly, at
their own sale. Such a transaction is entirely voidable at the option of the party
interested. The transaction may not be ipso facto void, but it is necessary to
establish that there had been actual fraud or imposition practiced by the party
holding the confidential or fiduciary relation. In this case, the directors have not
shown the company needed the money so badly and was such in a financial
condition that the sale of additional stock to themselves was the only way the
money could be obtained. On the contrary, the corporation appears to be in a very
good financial condition. The sale must be set aside as a constructive fraud upon
the other SHs.
At the time of the supposed ratification, the principal must have been fully aware
of every material aspect of the transaction, the real value of the subject of the
contract, and his act of ratification must have been an independent and
substantive act founded on complete information and of perfect freedom of
volition.
The warrants gave the holders the privilege, unlimited in time, to purchase 40,000
authorized but unissued shares. Had the warrant holders exercise their option,
they would have acquired a definite percentage of the CS. A stock dividend does
not change the proportional interest of each SH in the corporate enterprise; it
changes only the evidence which represents that interest. It is a mere “watering”
of outstanding shares. If the corporation were at liberty to declare stock dividends
without making provision for warrant holders, the percentage of interest in the CS
capital of the corporate enterprise which the warrant holders would acquire could
be reduced to practically the point of extinction. The privilege the warrant holders
originally had of acquiring a definite proportional interest in the CS would be lost
without recourse unless their contract with the corporation contained some
provision to protect it. By this covenant the corporation recognized the possibility
that a stock dividend might be declared and paid on outstanding shares before the
warrants had been exercised, and promised in that event to deposit with the
trustee stock certificates representing that proportion of dividend shares which
the shares subject to the warrants bore to all the CS, and that the trustee would
deliver such dividend shares without additional consideration.
I: W/N payments made to the holders of Debenture stock of the Jordan Company
were payments of interest on outstanding obligations or dividends paid on
invested capital.
H: The answer rests on what the payments actually are, and not what the
payments are called. Although there is no precise formula, the usual factors
considered are the ff: (1) treatment by the parties; (2) maturity date and right to
enforce collection; (3) rank/preference during dissolution; (4) uniform rate of
interest or income payable; (5) participation in the management and right to vote.
(1) voting rights: if security holders had such rights, this would strongly
indicate that the securities were stocks; the absence or extremely
limited rights is of little probative value, because it is common both to
bonds and preferred stock
(2) treatment by the parties: in this case the company itself treated the
debenture stocks as an obligation and the payments as interest. No
evidence as to how the holders treated the same.
(3) Preference/rank in dissolution: GR holders of obligations are secured or
 49
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Aladdin Hotel Co. v. Bloom Bloom is a minority bondholder of bonds issued by the Alladin Hotel Co. The
Debt Securities: The Trust Indenture bonds are secured by a deed of trust by which was mortgaged certain real estate,
with the Mississippi Valley Trust Co as trustee. The deed of trust contained
provisions empowering bondholders of not less than 2/3 to modify and extend
the date of payment of the bonds. The Joneses are majority bondholders as well as
the majority SHs of the company who entered into an agreement with the
company to extend the maturity date of the bonds. The changes were certified by
the trust company and has the consent of holders of 2/3 the principal amount of
the bonds. Bloom objects to the change, contending that these were invalid for not
being made in GF and that it was not for the benefit of the minority bondholders
and deprived them of their rights and property. She added that the Joneses acted
in a dual capacity as trustees for the other bondholders, being the majority, and
therefore must not act detrimental to the rights of the other holders. She also
added that the modifications are void for not giving notice to the other
bondholders. TC held that the changes did not benefit the minority bondholders
and that the bondholders were entitled to notice. But it held that the decree
should be limited to a money judgment only. The hotel appeals.
CHAPTER XII13
Triplex Shoe Co. v. Rice & Hatchins Triplex’ authorized capital stock totaled $150K, broken down into $75000 PS (par
13
http://www.scribd.com/document_downloads/direct/4663662?extension=doc&ft=1328554074&lt=1328557684&uahk=HwZ8juVZzvdRV79glmVOmz/icb8
Janz Hanna Ria N. Serrano
general creditors of the corporation and rank as such on dissolution.
Here the holders ranked ahead of the other SHs but inferior to general
creditors. One of the most important considerations is whether the
right to share in the assets of the corporation in case of dissolution is
subject to the rights of creditors. If subject to such rights, there is a
strong presumption that the interest in question is that of a SH
(4) Payment out of profits: the debentures provide for payment of interest
at a prescribed rate to paid out of the profits only. This fact loses
significance when considered in conjunction with the provision that
holders should rank inferior to general creditors
Maturity date and right to enforce payment. Of utmost significance. The existence
of a fixed maturity date for the principal sum, together with the right to enforce
payment as debt in case of default, is the most essential feature of a debtor and a
creditor as opposed to a SH relationship. One of the most fundamental
characteristics of a debt is a definite determinable date on which the principal
falls due. The obligation in the debenture stock clearly had no maturity date.
There was no time when the holders could demand their money; they were at the
mercy of the company’s fortunes and payment was merely a way of distributing
profit. Although the officers considered the debenture stock as matured after 20
years, mere opinion of corporate officers cannot override the provisions of the
certificates themselves and the charter and by-laws. It is to be noted that when
the issue was retired, after officers considered it matured, they retired it at a
premium. Payment of premiums is certainly more consistent with the retirement
of stock than with payment of past due obligations. The contention of the officers
that the term of the debenture matures upon termination of corporate existence is
also untenable. Termination of corporate existence cannot be considered the
maturity of the debenture stock as it would not be a fixed or determinable date set
in advance, but could be constantly moved forward simply by corporate action.
the modifications were made in strict compliance with the provisions of the trust
deed, which did not provide for notice to the bondholders. The changes were
approved by 2/3 of the bondholders. The rights of the bondholders are to be
determined by their contract and courts will not make or remake a contract
merely because one of the parties may become dissatisfied with the provisions.
There is no question that the provisions in the trust deed and the bonds were
legal provisions which violated no principle of public policy or private right. No
notice was required so far as the parties to the contract were concerned. Their
rights must be determined by their contract and not by any equitable doctrine,
and notice to the other bondholders could have served no possible purpose. There
is no substantial evidence warranting BF, fraud, or corruption on the part of the
Joneses. The changes made in the provisions of the trust deed were made before
Bloom acquired her bonds, and were in fact past due when she purchased them.
Bloom, with notice of the changes made, and with knowledge that she had no
notice of the application for the changes, made no effort to repudiate it until she
brought the suit, but accepted interest payable under the provisions of the
contract.
Issue: WON there was any CS voted for the B Ticket at the 1929 election that was

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Liability on Watered Stocks
McCarty v. Langdeau
Liability on Watered Stocks
Rhode v. Dock-hop Co.
Liability on Watered Stocks
50
value $100), and $75000 no par CS.
Directors meeting: Albert Dillman – Pres; Solly – VP and Sec, and Louis Dillman –
Treasurer ….. agreed to receive lower compensation and in consideration of
other services to be rendered and for managing the co., additional stocks were to
be given as follows: A Dillman – 376 CS, L Dillman – 114 CS, Solly – 50 CS. (Solly
transferred stock to 2 Dillmans).
An amendment was proposed, 2375 PS and 175 no-par CS. Rice and Hutchins
purchased 249 shares of PS and 83 shares CS (as bonus). The Dillman’s own 540
CS shares. During election of directors, the “B” ticket of the Dillmans were elected.
Rice questions the election, saying the there was no consideration for the CS at the
incorporation of Triplex.
Langdeau is the receiver of Estate Life Insurance Co, and McCarty is the President
of the company. Langdeau sues McCarty for the unpaid balance of his stock
subscription, iao $387,380 (he paid only $20) representing 19, 370 shares of no
par stock.
The contract between the corporation and McCarty was that he would:
-- pay a minimum of $20/month for the balance not exceeding 30 months,
evidenced by a note, payable w/o interest.
--that the company will have a lien on his shares until the note is paid.
-- He was to receive as much stock as his actual payments , but the company
would be able to vote the stock while the contract is in force (to be voted by
McCarty)
-Yet despite his default (only made a total payment of $8,120), the company did
not elect to terminate the contract. He claims that the contract is void for it
violates the constitution of Texas (“no corp. shall issue stock or bond except for
money paid, labor done or property actually received, and all fictitious increase of
stock or indebtedness shall be void.”)
Judgment creditors of a corporation sues the original SHs or incorporators of the
Dock-Hop Co, seeking to collect on the unpaid balances on the par value of their
Janz Hanna Ria N. Serrano
legally issued and outstanding at that time?
H: No, there was none. (Chancellor’s decision: No outstanding Cs and PS stocks
were voted).
The no par value CS issued before and after the amendment was invalid because
consideration was never fixed.
The certificate must state the total number of shares authorized that are without
nominal or par value. The provision in the articles that a certain part of capital is
in shares of CS no par and without stating the number of shares is not authorized
and is meaningless in the eyes of the law. Thus the CS in the original AOI was
invalid stock.
The consideration of the shares issued to Dillman were alleged to have been for
services rendered in organizing the company, and in agreeing to serve at a smaller
compensation that they would get otherwise. Clearly the consideration
mentioned, consisting of services, was not of such as the law contemplates. The
services do not appear to be essentially different or greater than the services
ordinarily rendered in the promotion and organization of the corporation. (also,
services still to be rendered are not lawful consideration) -- Hence, no proper and
lawful consideration was for the CS at the 1st Board Meeting.
the contract is enforceable
No declaration in the consti prohibition that a transaction in w/c something other
than money, labor or property shall be received in payment of the stock is utterly
void. If a security is to be accepted in payment for the stock, e.g. a subscriber’s
note, w/c is not property for such purpose, the Consti doesn’t say that it, or the
stock issued for it, shall be void. The word “void” is used only once and has
reference to the distinct clause w/c says that all fictitious increase of stock or
indebtedness shall be void.
--the affairs of the corporation in this case are in the hands of a receiver who
represents not only the SHs, but also the creditors, and the rights of creditors have
now intervened. The constitution of Texas prohibits such a transaction and makes
it unlawful
. It was aimed against his acquiring stock except upon lawful payment. It was
designed for the protection of the corporation and its creditors. In such a case as
this where the SH has paid nothing for his stock and deceived the public, he
cannot be permitted to take shelter under the constitutional prohibition, which
protects the corporation and its creditors.
--Purpose is to give integrity to the corp’s capital. It is to prevent false pretense at
its hands, and avoid imposition upon the public. None of these objects would be
promoted by declaring a note given by a subscriber for stock subscription in the
hands of a bonafide stockholder.
Court found that only 5/12 of the par value had been paid. At the lower court, it
ruled for the plaintiff on the theory that it made no difference WON the

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Velasco v. Poizat
How Payment of Shares Enforced
51
shares. Complaint alleged that only 25c on the dollar had been paid in on the par
value of their shares (watered stocks). Defendants deny however, that they are
subscribers, or that the full value of their stock had not been paid
Velasco is the assignee in the insolvency of Philippine Chemical Product Company
and is seeking to recover from Jean Poizat the unpaid subscription made by him to
the stock of the corporation.
Poizat, one of the incorporators and once the treasurer and manager of the
corporation, subscribed for 20 shares and paid in the par value of 5 shares (P500).
While in this capacity he called in and collected all subscriptions except 15 shares
subscribed by him and another 15 by Jose Infante.
2 resolutions were adopted by the board: (1) proposal that the directors or SHs
make good by new subscription the 15 shares w/h had been surrendered by
Infante, and that the latter would be released from his obligation to the
corporation; (2) as to Poizat, who was absent, he should be required to pay the
amount of his subscription upon the 15 shares he owes to the corporation. Poizat,
in a letter states that he was also to be relieved from his subscription, and that he
prefers “to lose the whole of the 25% rather than continue investing more money
Janz Hanna Ria N. Serrano
defendants were subscribers: the mere fact that that they were SHs and the
shares they held , although issued as fully paid were in fact issued for
property w/c the directors didn’t believe was equal in value, were enough to
warrant judgment against them.
Where a person accepts the ownership of stock which purports to be fully paid, it
cannot be said of him that he accepts the stock and enters upon the relation of SH
for the corporation. On the contrary, he accepts the ownership of the stock and
enters upon the relationship of SH with the contrary understanding. What then is
the principle upon which the holder of watered stock is under any circumstances
held obligated to supply substance and make good what it pretended the
corporation received by did not?
The SH is held upon the principle that one giving credit to the corporation is
entitled to rely upon its ostensible capitalization as the basis for the credit given,
and that, when the corporation issues watered stock, and thereby assumes an
ostensible capitalization in excess of its real assets, the transaction necessarily
involves the misleading of subsequent creditors, and whether done with that
purpose actually in mind or not, is at least constructive fraud upon such creditors.
In other words, the essence of the right of the creditor to brush aside the issuance
of stock as fully paid, and to show that it was not such and to compel payment, is
that its issuance as fully paid was as to him a fraud.
--the transferee of watered stock who takes it in ignorance of its real character is
not required, even at the suit of the of a creditor of the company, to pay anything
more upon it.
Campos: The innocent purchaser of watered stocks is thus treated like the holder in
GF of nego instrument, based on the policy of encouraging the free transferability of
shares as a means of enhancing the growth of commerce and industry. Apparently
the remedy of the defrauded creditor would be against the original owner of the
watered stocks.
Poizat is still liable on his subscription. A stock subscription is a contract between
the corporation on one side, and the subscriber on the other. It is a rule that a
subscription for shares of stock does not require an express promise to pay the
amount subscribed, as the law implies a promise to pay on the part of the
subscriber. A stock subscription is a subsisting liability from the time the
subscription is made, since it requires the subscriber to pay interest quarterly
from that date unless he is relieved from such liability by the by-laws.
There are two (2) remedies for the enforcement of stock subscriptions: (1) the
first is a special remedy which consists in permitting the corporation to put up the
unpaid stock for sale, and is merely a remedy in addition to that which proceeds
by action in court; (2) the other is an action in court, which exists even though no
mention thereof is made in statute.
Under the Insolvency Law, the assignee of the insolvent corporation succeeds to
all the corporate rights of action vested in the corporation prior to its insolvency,
and the assignee therefore has the same freedom with respect to suing upon a

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Lingayen Gulf Elec. Power Co. v. Baltazar
How Payment of Shares Enforced
52
in a… ruinous proposition.”
Soon the company became insolvent, and Velasco as assignee sues Poizat for his
unpaid subscription.
Baltazar subscribed for 600 shares (P100 par value) of Lingayen Gulf and paid
P15000, plus another payment leaving a balance of P18500 unpaid.
In a SH meeting it was agreed to call the balance of all unpaid subscribed capital
stock, the first 50% payable within 60 days, remaining 50% payable within 60
days hence. All unpaid subscription after due dates of both calls would be subject
to 12% interest. All remaining unpaid shares would revert to the corporation.
Baltazar offered to withdraw completely from the corporation by selling out all
his shares of stock. Another resolution (No. 17) was adopted rescinding the
previous resolution because the corporation was not in a financial position to
absorb the unpaid balance of the subscribed capital stock. Yet another resolution
(No. 4) was adopted to revalue the stock and assets of the corporation to attract
outside investors.
Although Baltazar was informed of the demand for payment the call however was
not published in a newspaper of general circulation. Another demand was made
upon Baltazar, who ignores the same upon the grounds that 1. action is
premature because there was no valid call, and 2. granting there was a valid call,
he was released from liability thru SH Res. Nos. 17 and 4. . The corporation sues.
TC rules ifo Baltazar, holding that the resolution was null and void for lack of
publication.
Janz Hanna Ria N. Serrano
stock subscription as directors themselves would have had under Sec 49 above
cited.
Another reason: When insolvency supervenes upon a corporation and the court
assumes jurisdiction to wind it up, all unpaid stock subscriptions become payable
on demand, and are at once recoverable in an action instituted by the assignee in
court.
It evidently cannot be permitted that a subscriber should escape from his lawful
obligation by reason of the failure of officers to perform their duty in making the
call; and when the original mode of making the call becomes impracticable, the
obligation must be treated as due upon demand.
As to the Infante release, it is not prejudicial to the right of the corporation or its
assignee to recover from Poizat, although in releasing Infante, the board
overstepped its bounds and should still be liable on shares that were not taken up
and paid for by the corporation.
— Poizat continued to be liable on his subscription
— When insolvency supervenes and court assumes jurisdction to wind up,
unpaid stock subscriptions become payable on demand and are at once
recoverable in an action by the assignee in insolvency
TC was correct that the law requires that notice of any call for the payment of
unpaid subscription should be made not only personally but also by publication.
The publication requirement is mandatory, and the reason is because it is not only
to assure notice to all subscribers, but also to assure equality and uniformity in
the assessment on SHs. Not only must personal notice be given in one of these
matters, but the notice must also be published once a week, for 4 consecutive
weeks in some newspapers.
The court reiterated the ruling in Velasco v Poizat, where the corporation
involved was insolvent, in which case all unpaid stock subscriptions become
payable on demand and are immediately recoverable in an action instituted by the
assignee. But when the corporation is a solvent concern, the rule is that the
suit demanding for payment of unpaid subscriptions must be preceded by a call or
assessment against the subscribers, and only then will there be a right of action.
As to claim of Baltazar that Resolution 17 released him from obligation to pay, in
order to effect the release, there must be unanimous consent of the SHs (here, 7
SHs were absent when said Res was made) . The GR is that a valid and binding
subscription cannot be cancelled so as to release the subscriber from liability
thereon without the consent of all the SHs. Furthermore, a subscription cannot be
cancelled by the company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the subscription, as against
persons who subsequently suebscribed or purchased without notice of such
agreement.
Exceptions: pursuant to a bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be effectual as against

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Da Silva v. Aboitiz & Co.
How Payment of Shares Enforced
National Exchange co v. Dexter
How Payment of Shares Enforced
53
Da Silva subscribes for 650 shares (par value of P500) of Aboitiz. He pays only for
200 shares, as there are remaining 450 shares unpaid (P225,000). Thru a Res.,
the board declared and informed all subscribers and SHs that all shares unpaid by
31 May shall be declared delinquent and to be sold at a delinquency sale on the
following June 16. Ad was published as announced in the notice.
Da Silva sued Aboitiz Co., contending that in prescribing another method for
payment of subscription different from that in the by-laws, the corporation had
exceeded its authority. He claims that in Art 46 of the by-laws, all shares
subscribed shall be paid out of the 70% of the profit obtained, to be distributed
among the subscribers and said Res., violates the said by-law
IB Dexter subscribed to 300 shares of CS Salmon & Co., which shall be “payable
from the first dividends declared on any and all shares of said company owned by
me at the time dividends are declared, until full amount of subscription has been
paid.” The subscription was initially paid P15,000, from a dividend declared by
the company, supplemented by Dexter’s own money.
Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on his
subscription. The assignee of Salmon, National Exchange Co, sues Dexter to
recover the balance. TC ruled ifo National Exchange.
Janz Hanna Ria N. Serrano
dissenting SHs and subsequent and existing creditors. A release which might
originally have been held invalid may be sustained after a considerable lapse of
time. In the present case, the release claimed by the Baltazar does not fall under
the exceptions referred to, because it was not given pursuant to a bona fide
compromise or to set off a debt due from the corporation and there was no
consideration for it.
I: W/N under the by-laws the corporation may declare the unpaid shares
delinquent or collect their value through another method.
H: YES> The by-law also authorizes and empowers the board to collect the
value of the shares subscribed and unpaid by deducting from the 70%,
distributable in equal parts among the SHs, to be applied on the payment of the
shares. It also authorizes the creation of a special emergency fund, applying the
70% of the profit on the payment of shares not fully paid. Thus it is discretionary
on the corporation to do whatever is provided in the said article relative to the
application of a part of the 70% of the profit distributable. It also shows that it is
the board and not he delinquent subscriber that may and must judge and decide
whether or not such value must be paid out of the 70% of the profit. It lies
therefore, within the discretion of the board to make use of such authority.
If the board opts not the make use of such authority, it has two other remedies to
accomplish the same purpose, as declared by the Court in Velasco v Poizat: (1) put
up the unpaid stock for sale; or (2) direct action in court. In this case the board
elected to avail of the first remedy, and complying strictly with the requirements
of law, the directors made use of the discretionary power granted by the law and
declared that the payment of the subscription to 450 unpaid shares was due and
demandable, and that said shares were delinquent.
— The Board has absolute discretion to choose which remedy it deems proper
in order to collect the unpaid subscriptions
Two other remedies: delinquency sale and action in court
I: w/n the subscription is payable from the first dividends declared has the effect
of relieving the subscriber from personal liability in an action to recover the
balance
H: Of course not. A corporation has the power to accept subscriptions upon any
special terms not prohibited or contrary to law or public policy, provided it does
not require the performance of corporate acts beyond the powers conferred, and
do not constitute a fraud upon other subscribers, SHs, or creditors. If it is unlawful
to issue stock otherwise than as stated it is self-evident that a stipulation in a
stock subscription that obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock is illegal. This is discriminatory ifo
the subscriber, to the detriment of the others. Nor has a corporation the power to
receive a subscription such terms as will operate as a fraud upon the other
subscribers or SHs by subjecting them to lighter burdens, or by giving greater
rights and privileges, or as a fraud upon creditors. As a general rule, an agreement
between a corporation and a subscriber, by which the subscription is not he be
payable, or is to be payable in part only… is illegal and void as in fraud of creditors
or other SHs.
 54
Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Janz Hanna Ria N. Serrano

Lumanlan v. Cura Lumanlan subscribed for 300 shares (par value P50) of Dizon & Co., paying only
How Payment of Shares Enforced P1500 of the P15000 par value of the shares. Creditors sued the company, and
prayed for a receiver as it appears that the corporation had no assets except
credits against those who had subscribed for shares of stock.
Tayag was appointed receiver for the purpose of collecting the unpaid
subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders Lumanlan to
pay the corporation (plus interest). Pending Lumanlan’s appeal, he agreed to
assume the obligation of the corporation to Valenzuela (P8,000), and that if he
withdraws his appeal, the corporation would collect only 50% of the amount
subscribed by him. Lumanlan then paid Valenzuela and was subrogated in place of
Valenzuela (P11,840 incl. interest).
Campos: …Besides assuring equality among SH, the law seeks to protect corporate
creditors. Making payment of subscription dependent on the existience of profits or
dividends would be contrary to the policy behind the law.
As it is evident that there are other creditors of the corporation, the corporation
has a right to collect all unpaid stock subscriptions and any other amounts due it.
Subscriptions to the capital of the corporation constitute a fund to which creditors
have a right to look for the satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription. A stock
subscription is an existing liability from the time subscription is made.
Thus the TC ruling is modified and that the corporation is ordered to credit
Lumanlan P13840 against the judgment previous (P15109), and to issue to
Lumanlan 300 shares of its capital stock upon payment of the difference of the
amount (P1269).

Disregarding the agreement and notwithstanding payment made to Valenzuela,

Fua Cun v. Summers
Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
Baltazar v. Lingayen Gulf Elec. Power Co.
Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
the corporation asked for the execution of the judgment in the previous suit and
his properties in Tarlac were levied upon. BPI as creditor of the corporation
intervenes as the assignee in the insolvency case of the corporation.
Chua Soco subscribed for 500 shares (P100 par) of China Banking Corporation,
paying ½ and leaving a balance of P25,000.
He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the
shares of stock, and endorsing the receipt of the stock purchase). Chua Soco was
also indebted to China Bank (P37,731.68), and upon default his interest in the 500
shareas was attached and the receipt seized by the sheriff. The attachment was
levied after the bank knew of the fact that the receipt had been endorsed to Fua
Cun.
Fua Cun then sued, contending that by virtue of payment of ½ the subscription
price of the shares, Chua Soco in effect became the owner of 250 shares and
sought to have his lien on the shares be declared to hold priority over the claim of
the bank. China Bank argued that the interest of Chua Soco was merely an equity
which cannot be made the subject of a CM. TC ruled ifo Fua Cun.
Baltazar and Rose were incorporators of the Lingayen Gulf Electric Power Co. and
subscribed to:
Baltazar = 600 shares (paid 535 shares – after transfers, owned 341 shares w/
cert. plus 65 shares w/o certificate)
Rose = 400 shares (paid 375 shares w/ certs)
 leaving unpaid a certain portion thereof. It is the company practice to issue
certificates of stock to its individual subscribers for unpaid shares of stock.
Defendants Ungson et al are small SHs ( <100 shares) of the corporation, and are
the majority of the board. Co-defendant Acena is the largest single SH with 600
shares and was responsible for election to the board of two of the 4 majority
board members (Ungson Group). Baltazar was responsible for the election of the
other 2 (Baltazar Group).
Ungson Group which controlled the corporation passed 3 resolutions which
threatened to expel the plaintiffs and prevent them from exercising their voting
TC erred in holding that Chua Soco became owner of 250 shares. Fua Cun’s rights
consist in an equity of 500 shares and upon payment of the unpaid portion, he
becomes entitled to the issuance of the certificate for 500 shares in his favor.
As to the CM, the CM would not prevail over liens of third persons without notice;
an equity in shares is of such an intangible character that is somewhat difficult to
see how it can be treated as chattel and mortgaged in the same manner that the
recording of the same will furnish constructive notice to third parties.
There can be no doubt that an equity in shares of stock may be assigned and that
the assignment is valid as between the parties and as to person to whom notice is
brought home. Such an assignment exists here, though it was made for the
purpose of securing a debt. As against the rights of fua cun, the bank had no lien
unless by virtue of the attachment, but the attachment was levied after the bank
had received notice of the assignment of Chua Soco’s interest to fua Cun and was
therefore subject to the rights of the latter.
I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the
latter
H: YES> The present case does not come under the principle in Fua Cun because
it was the practice of the company since its inception, to issue certificates of stock
even for unpaid shares and gave voting power to stocks fully paid. The present
law requires as a condition before a SH can vote that his full subscription be paid
in the case of no par value shares, and with respect to par value shares, the SH can
vote the shares full paid, irrespective of the unpaid delinquent shares. A
corporation may now, in the absence of provisions in their by-laws to the
contrary, apply payments made by subscribers either as full payment for the
corresponding number of stock or as payment pro-rata to each and all the entire
number of shares subscribed. In this case, corporation chose to apply payments
by the SHs to definite shares of stock and had full paid-up shares certificates for
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2nd semester AY 2011-2012
rights: (1) declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville
of no value and cancelled the same; (2) all unpaid subscriptions to bear interest,
and all payments to be credited to interest first, capital debt second, and ; (3) all
stock declared delinquent on the accrued interest are incapacitated to avail of
voting power.
Baltazar and Rose sought to allow them to vote their fully paid-up shares and to
declare the resolutions invalid. A compromise deal was executed, but enforcement
by the TC was enjoined by the Ungon Group and asked for amendment. TC
amended but was opposed by Baltazar. The Court then reversed the amending
decision, ruling that all shares of the capital stock of the corporation covered by
fully paid shares are entitled to vote in all meetings.
Baltazar claims that once a SH has subscribed to a certain number of shares,
although he has made partial payments, but is issued a certificate for the paid-up
shares, he is entitled to vote the whole number of shares subscribed, whether paid
or not. The corporation counters that under the doctrine in the Fua Cun case, a
partial payment of a subscription does not entitle the SH to a certificate for the
total number of shares subscribed by him, and his right consists only in equity to a
certificate of the total number of shares subscribed for, upon payment of the
remaining portion of the subscription price.
Nava v. Peers Mktg. Corp. Po was an incorporator of Peers Marketing and subscribed to 80 shares (P100
Rights and Obligations of Holders of Unpaid but Non-delinquent Stock p.v.) paying 25% of the amount of subscription. No certificate of stock was issued.
--Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was
the absolute and registered owner of the 20 shares sold.
-- Nava requested the corporation to register the sale, but was denied because Po
had not fully paid the amount of subscription. (was informed that Po was
delinquent in payment of his subscription and that corp had the claim to his entire
subscription of 80 shares). Nava filed a mandamus action to compel the
corporation to register the shares in the books. TC dismissed petition.
--Nava contends the ruling in Fua Cun is not applicable in affirming corporation’s
refusal to register in the books the sale to him of 20 shares. Nava relies on the
ruling in Baltazar v Lingayen Gulf Electric, which held that the corpo law requires
as a condition before a SH can vote his shares that his full subscription be paid in
the case of no par stock; but in par value stocks, the SH can vote his shares fully
paid by him, only, irrespective of the unpaid delinquent shares.
CHAPTER XIII
Nielson & Co. v. Lepanto Consolidated Mining MR filed by Lepanto Corp which involves an agreement subsequently extended, as
Form of Dividends to the compensation of Nielson (a promoter?) which provides that he is entitled to
Janz Hanna Ria N. Serrano
the payments. Its call for payments of unpaid subscription and its declaration of
delinquency only affecting the remaining number of shares.
Here the corporation applied the payments made to the full par value of shares
subscribed, instead of the accrued interest. This being the case, the application of
payments must be deemed to have been agreed upon by the corporation and the
SHs and cannot now be changed without the consent of the SHs concerned. It
would therefore result that a corporation may, upon the request of an interested
SH, apply payments by them to the full par value of subscribed capital stock.
— Since it was the practice of the corporation to issue stock certificates to not
fully paid subscribers, it may not take away the right to vote granted by the
certificate
— Stock certificates may be issued for less than the number of shares
subscribed for
o Provided the par value of each represented by the certificate has been
paid
And it is not prohibited by the by-laws
I: W/N the corporation can be compelled to enter in its books the sale made by Po
to Nava of 20 shares
H: NO>> The Nava transfer is not the alienation sale or transfer of stock
contemplated in the old Law. As a rule, shares which may be alienated are those
which are covered by certificates of stock.
As prescribed in the corpo law, shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. However, that cannot be
followed in the instant case because the 20 shares are not covered by any stock
certificate in Po’s name. Moreover, a corporation has a claim on the said shares for
the unpaid balance of the subscription.
A stock subscription is a subsisting liability from the time the subscription is
made. The subscriber is as much bound to pay his subscription as he would be to
pay any other debt. The right of the corporation to demand payment is no less
contestable. A corporation cannot release an original subscriber from paying for
his shares without valuable consideration, without the unanimous consent of the
SHs.
There is no clear duty here on the part of the officers of Peers to register the 20
shares in Nava’s name. The court also ruled that there is no parallelism between
Nava and the Baltazar case. In the latter, the SH-incorporator was the holder of a
stock certificate, and the issue was whether the said shares had voting rights
although the incorporator had not fully paid the subscription, which is not the
issue in this case. There is no stock certificate issued to Po, and without it—which
is the evidence of ownership of the stock—the assignment of corporate shares is
effective only between the parties to the transaction. The delivery of the stock
certificate is essential for the protection of both the corporation and its SHs.
Under the Code stock dividends cannot be issued to a person who is not a SH in
payment of services rendered. Nielson cannot be paid in shares of stock which

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Berks Broadcasting v. Crammer
Source of Dividends
56
receive 10% of any dividends declared and paid by Lepanto.
Nielson is not a SH of the corporation. During the extension period the
corporation declared dividends worth P3M. SC ruled that Nielson was entitled to
the 10% of the dividends paid and declared and Lepanto was ordered to issue and
deliver to Nielson shares of stocks as well as fruits or dividends accruing to the
same. Lepanto contends that payment to Nielson of stock dividends as
compensation violates the Corporation Law.
Craumer et al together with one Landis (4 people), are the incorporators and
directors of the Berks Broadcasting Company. The books indicate that the stock is
fully paid (auth. Capital stock = $100K) , through cash ($5K each) and the fixing of
a value of $80K upon an asset denominated “Franchise and Promotion Expense.”
A year later, this was written off and in its place were substituted 1) $50K as an
amount “Due on Unpaid Stock Subscriptions” -- (each SH paid $4.2K reducing the
item to $23,300. Then it was cancelled altogether and was replaced w/ the entry
“Goodwill and Promo Expense) and 2) “write-ups” or increases in the valuation of
fixed assets over and above depreciation costs, totaling $30K.
Balance sheet showed assets in excess (“surplus”) of liabilities iao $2,545.94.
However, the existence of that alleged surplus depended on the inclusion of the
assets of the write-ups of $26K; otherwise, there would be a deficiency to the
Janz Hanna Ria N. Serrano
form part of the stock dividends of Lepanto.
The understanding between Lepanto and Nielson was simply to make the cash
value of the stock dividends as the basis for determining the amount of
compensation that should be paid to Nielson.
R: Consideration for shares of stock: (1) cash; (2) property; (3) undistributed
profits.
A corporation may legally issue shares of stock in consideration of services
rendered by a person not a SH, or in payment of indebtedness, which is equivalent
to issuing a stock in exchange for cash. But a share of stock thus issued should be
part of the original capital stock of the corporation, or part of the stocks issued
when the increase in capitalization was properly authorized. In other words, it is
the shares that are originally issued by the corporation and forming the part of
capital that can be exchanged for cash or services rendered, or property—if the
corporation has original shares of stock unsold or unsubscribed, either coming
from the original capitalization or from the increased capitalization—these may
be issued to a person already a SH.
But a share of stock coming from stock dividends cannot be issued to one who is
not a SH of a corporation.
A stock dividend is any dividend payable in shares of stock of the corporation
declaring or authorizing it—a distribution of shares among SHs, as dividends. It is
actually 2 things: (1) a dividend; (2) the enforced use of dividend money to
purchase additional shares at par. When a corporation issues stock dividends, it
shows that the corporation’s accumulated profits have been capitalized instead of
distributed to the SHS or retained as surplus. Far from being a realization of
profits, it tends rather to postpone said realization, in that the fund represented
by the new stock has been transferred from the surplus to the assets and are thus
no longer available for actual distribution. It really adds nothing to the interest of
each SH; the proportional interest remains the same. It is the civil fruits of the
original investment, and to the owners of the shares go the fruits.
Although Lepanto says that the value of the dividends declared should be the
basis for determining the amount of compensation due to Nielson, it does not
mean that the compensation should be taken from the amount actually declared
as cash dividends to be distributed to the SHs. Otherwise there would be a
dilution of the dividend that corresponds to each share of stock held by the SHs.
GR: Capital of a corporation must not be impaired in any manner
Exception: impairments involuntarily made through losses resulting from
business operations. It is illegal to declare and pay dividends from other than a
surplus consisting of an excess in the value of the assets over the aggregate of the
liabilities and the capital stock. The object of this prohibition is to afford a margin
of protection for creditors in view of the limited liability of the SHs, and to protect
the interest of the SHs themselves by preserving the capital so that the purposes
of the corporation will be carried out.
The surplus must be a bona fide and not an artificial or fictitious one; it must be
founded upon actual earnings or profits and not be dependent for its existence
upon a theoretical estimate of an appreciation in the value of the company’s
assets. Such appraisals and conjectural valuations cannot be considered for the
purpose of dividends because are subject to market fluctuations, and are merely
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Prof. Jacinto
2nd semester AY 2011-2012
extent of almost $24K. Directors sold their stock, and declared a series of
dividends totaling $13K based on the earnings of the company of 12K+ plus the
“surplus.”
The corporation, now under the control of new SHs, sued the directors to recover
the $13K which was allegedly unlawfully declared and paid out as dividends.
Lich v. US Rubber Lich is a holder of 300 non-cumulative PS of United States Rubber Company. She
Source of Dividends seeks to enjoin payment of a dividend on common stock declared.
During 3 fiscal years (1935-37), the corporation experienced a deficit of close to
$24M, $17M and $10M for each of the 3 years, and a corresponding impairment of
capital. In each of these years, the annual net earnings were applied to the deficit,
and no dividends were declared.
The company underwent a reconstruction of its capital structure. It issued, in lieu
of no-par value CS, CS of par value $10. In the next 3 years the deficit was reduced
and cancelled and net profts were made available for dividends for non-
cumulative PS, but not common shares.
The company then declared a dividend, from the net profits for the current year
and from no other fund, on both PS and CS. In the deficit years, the company
maintained adequate reserves, which remain intact even when dividends were
declared. Lich contends that the preference of PS holders as to dividends extends
not only to the current year, but to the prior deficit years, and dividends cannot be
paid out to CS holders until dividends are paid to PS on the years in question and
the arrearages must be paid in full.
Janz Hanna Ria N. Serrano
anticipatory of future profits, and may never be actually realized as an asset of the
company.
It is thus clear that since the “write-ups” of $26,000 represented an unrealized
appreciation in the value of the fixed assets, their inclusion in determining the
existence of a surplus from which dividends might be declared was unlawful, and
since when eliminated there would be not a surplus, but a deficiency in capital.
---Sir: so long as the assets (even if they appreciate in value) are not yet disposed,
dividends cannot be declared based on the appreciated value (because it is still an
expectancy).
CAMPOS: Since our Corpo Code allows dividends only out of unrestricted retained
earnings, an increase in the value of existing assets cannot be a source of even a
stock dividend.
the doctrine of the Cast Iron Pipe Cases, based on sound equitable principles, is a
departure from the GR that holders of non-cumulative preferred stock lose with
the close of the fiscal year all rights in the undistributed net profits of that year. It
preserves to the holders of the non-cumulative PS their right in the undivided net
profits withheld from them and retained in the business, but otherwise available
for the payment of dividends. The right to earned dividends is not extinguished
upon the mere passing of the fiscal year. The doctrine, however, cannot be
extended by implication beyond its clear intendment.
It may be generally stated that as to the payment of dividends the holders of PS
are in no better position than the holders of CS except as to priority of payment.
Dividends on PS are not payable absolutely and unconditionally, but only out of
the sources designated by law.
The payment of dividends on non-cumulative PS is further circumscribed by the
certificate of incorporation and stock certificate; dividends on such stock are
payable only out of net profits and for the years in which the same were earned.
Thus the right of non-cumulative PS is conditional upon: (1) accrual of net profits
(2) retention of the same in the business. If there are no net profits, the deficiency
is not chargeable against the net profits of succeeding years. The test of
applicability is W/N there were in the years in which dividends were not declared,
net profits available for the lawful declaration and payment of dividends, but
withheld from non-cumulative PS and retained in the business. Net profits
connotes clear pecuniary gain remaining after deducting from gross earnings the
expenses incurred. It is not synonymous with annual net earnings, which may be
productive of net profits, or reductive of the deficit.
In this case there were in 1935-37 no net profits to which the inchoate right to
dividends could have attached. There was a substantial deficit in each of the three
years which greatly exceeded the annual net earnings of the corresponding year.
It is manifest therefore that the annual net earnings of each year resulted, not in a
profit, but in a reduction of the deficit.
There was no source from which dividends could be paid out lawfully; the
payment of dividends under such circumstance would have been unlawful. The
corporation is charged with the duty of maintaining the integrity of the capital, on
the faith of which credit was extended, as a trust fund for the security of creditors.

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Keough v. St. Paul Milk Co.
Dividend Declaration Discretionary with Board
58
Action to compel corporation to declare a cash dividend, on the ground that those
in charge of the corporate affairs (the Ryans) are wrongfully and needlessly
withholding profits available for cash dividends and conspiring to retain them for
their benefit and to the prejudice of the majority. The business, assets, liabilities of
the partnership were exchanged for 597 shares of the St Paul Milk Co. The 597
shares represent the only stock issued until the stock dividend. By amendment,
the authorized capital was increased to $300K. A 6-to-1 stock dividend was
declared and the amount necessary to cover the issued shares was transferred
from the surplus account to the capital account. When the corporation paid out its
first dividend, a total of $169,470 was distributed to SHs or about a 335% return.
There were no mortgages or liens or any other substantial indebtedness. Sales are
predominantly cash basis. Fixed assets were in good condition. Wages were paid.
The corporation had investments in bonds, CS in a wholly-owned subsidiary, but
the merchandise inventory was small. TC held that a liberal and reasonable
capitalization and surplus was the sum equal to the original outstanding stock
plus 2/3 of the accumulated surplus, and that all sums in excess were
unreasonable and constituted a violation of the fiduciary relation. Keough et al
claims that the capitalization in 1936 by the Ryans of a large percentage of the
accumulated surplus without reason or necessity other than to keep it within the
corporation under the dominating control of the Ryans. The Ryans contend that
the capitalization was for avoiding possible federal taxes upon undistributed
surplus. TC found that the capitalization was to strengthen control of the Ryans
over the corporation and surplus to prevent a distribution of earnings.
Janz Hanna Ria N. Serrano
When a man buys stock instead of bonds, he takes a greater risk in the business.
No one suggests that he has a right to the dividends if there are no net earnings.
But the investment presupposes that the business is to go on, and therefore even
if there are net earnings, the holder of stock is entitled to have a dividend declared
only out of such part of them as can be applied to the dividends consistently with
a wise administration of a going concern. If the annual net earnings of a
corporation are justifiable applied to legitimate corporate purposes, such as
payment of debts, reduction of deficits, and restoration of impaired capital, the
right of non-cumulative preferred SHs to the payments of dividends is lost. The
payment of dividends from annual net earnings, when the liabilities of a
corporation exceed the assets, would be in derogation of the rights of creditors.
The payment of dividends under such circumstances, while debts accrue, would
be contrary to sound business practice.
WON corp can be compelled to declare dividends.
H: In this case, YES> The determination of w/n to declare a dividend is essentially
a matter of internal management. It is primarily for the corporate directors in
their sound discretion to decide, and judicial review may be secured when abuses
contravening the SHs rights manifest themselves. A court will not compel a
dividend unless the directors act fraudulently, unjustly, or unreasonably so as to
impair the rights of the complaining SHs to their just proportion of the corporate
profit. Generally the mere fact that a large corporate surplus exists is not enough
to warrant equitable intervention. Ultimately the test is an examination of the GF
and reasonableness of the policy of retaining that which is otherwise available for
dividends.
The corporation did not have a reasonable need for the large surplus accumulated
and held as bonds or other easily liquidated assets. Inventory was small, cash
turnover was liquid, no substantial obligations, no expansion program, accounts
for depreciation were set up—in short, the surplus was easily available for
dividends, if the directors so elected to do so. The large surplus existed at the time
the Ryans were receiving salaries in excess of their worth and draining from the
corporation money otherwise available for dividends. The capitalization of the
surplus did not serve a corporate need; it was referable only to the desires and
purposes of those in control to keep it under their control and subject to their
machinations.
Furthermore, fraudulent expense items and other anomalies point to the intent of
the directors. Generally directors are proper parties to determine whether a
divided shall be in cash of stock, and a court will not interfere with the exercise of
their discretion; but where it appears that the object was to primarily benefit
those in whom the discretion rests, equitable powers can be called into operation.
Directors and officers of the corporation owe SHs the active duty of honesty and
GF in the transaction of the business and in their dealings. While it is true that the
court cannot ordinarily compel a corporation to declare a dividend at the suit of a
minority SH, yet where dividends are withheld for an unlawful purpose—to
deprive a SH of his rights—he may have the aid of equity for adequate protection.
A stock dividend really takes nothing from the property of the corporation, and

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
Dodge v. Ford Motor Co.
Dividend Declaration Discretionary with Board
Burk v. Ottawa Gas & Elec. Co
Preference as to Dividends
59
Action by John Dodge, a minority SH, against the Ford Motor Company to compel
the declarations of dividends.
--TC granted motion and ordered the payment of dividends.
-- At this time, Ford Motor Co had just concluded its most prosperous year of
operations. Demand for Ford cars continued. It could make and market 500,000
cars. Sales of parts and repairs increase. It had assets of more than $132M, COH
$54M, surplus of $112M.
-- Liabilities continue the corporation as a semi-eleemosynary institution, and not
as a business concern. Henry Ford himself testified that the company he built had
made too much money, had too large profits, and that a sharing of profits with the
public, by reducing the prices. It expected a profit upwards of $60M. Ford’s
defense was that its policy was to reduce the selling price of Ford cars while
improving their quality, with the goal of producing 1M cars per year.
There was a general plan for expansion of the productive capacity of the business.
Management decided not to reduce in the meantime the price, but to maintain the
same and accumulate a large enough surplus to pay for the proposed expansion of
plant and equipment. There was a large daily, weekly, monthly, receipt of cash.
The output was practically continuous and within a few days, turned into cash.
-- Dodge et al contend that the plan was to the selling price of cars should be
attained. Ford argues that although a manufacturing corporation cannot engage in
humanitarian works as its principal business, the fact that it is organized for profit
does not prevent the existence of implied powers to carry on with humanitarian
motives such as charity as are incidental to the main business of the corporation.
Suit by preferred SHs of Ottawa Gas, demanding an accounting of all property and
assets and declare and payment of dividends. Burk claims that earnings of the
business were such that the directors owed them an imperative duty to declare a
dividend.
--Ottawa Gas maintain that the corporate has been unable to declare a dividend
because its funds were exhausted by expenditures which it was obliged to make,
which was for the extensions of the company’s plant. TC ruled the extensions
necessary and for the betterment of the plant and its patrons.
Janz Hanna Ria N. Serrano
adds nothing to the interest of the SHs. Its property is not diminished, and their
interests are not increased. Where profits clearly warrant payment would be
proper, the SHs cannot be cut off by a stock dividend when it purpose is
wrongfully to keep the profits of the business with the control of those
dominating the affairs so as to be available to them. Such action is oppressive and
evinces BF sufficient to justify equitable intervention.
the plan does not call for and is not intended to produce immediately a more
profitable business but a less profitable one, with the apparent immediate effect
to diminish the value of shares and return to SHs. There is no doubt that certain
sentiments, philantrophic and altruistic, creditable to Ford, had largely influenced
the policy to be pursued by the company. There is an obvious difference between
an incidental humanitarian expenditure of corporate funds for the employees, and
a general purpose and plan to benefit all mankind at the expense of others. There
should be no confusion of the duties Mr Ford conceives as owed to the general
public and the duties which in law he and his directors owe to the protesting
minority SHs. A business corporation is organized for the benefit and profit of the
SHs. The powers of directors are to be exercise to that end. Discretion of directors
is to be exercised in the means to attain that end, and does not include the end
itself, through the reduction of profits or nondistribution thereof. It is not within
the lawful powers of the board to shape and conduct the affairs of a corporation
for the incidental benefit of SHs and for the primary purpose of benefiting others.
The Court however did not interfere in the proposed expansion of the business of
Ford Motor. It is recognized that plans must often be made for a long future, for
expected competition, for continuing as well as an immediately profitable venture.
The experience of FMC is evidence of capable management of its affairs. But it
noted that the company took from the public money required for its plan but that
the considerable salaries of Mr Ford were not diminished.
--It is true that a considerable cash balance must be at all times carried by such a
concern. But, cash is coming in and output immediately converted into cash… So,
it would appear that, accepting and approving the plan of the directors, it was
their duty to distribute a very large sum of money to stockholders.
Reversed and remanded to TC. Under the certificate of PS, the conditions which
the holder may demand a dividend depend on the precise terms of the contract
upon which it is issued.
The fair interpretation of the contract between the corporation and the PS holder
is that if in any year net profits are earned, a dividend is to be declared. To hold
that the board has a discretion to declare or not a dividend when it has funds it
can use is to hold that one of the parties to a contract has the option to pay
something to the other or not, at its own election since, if the dividend is not
declare, the benefits of accumulated profits are practically lost to these SHs. Such
a construction should be avoided.
The directors owe a positive duty to pay a dividend to the PS whenever in any
year there were net profits available. Inasmuch as the only possible source of
profit to the preferred SH from his investment is the distribution of earnings in
the year in which they accrue, he has the right to insist that an accounting be
taken annually, and that the surplus of one year, available for a dividend, shall not

Corporation Law Midterms Case Reviewer
Prof. Jacinto
2nd semester AY 2011-2012
McClaran v. Crescent Planning Mill Co.
When Right to Dividends Vests; Rights of Transferee
60
McLaran is the administrator of the estate of Humber, owner of 57 paid-up shares
of stock of the Crescent Planning Mill Co. and director of the company as well as
President. The company declared a dividend of 6%, divided into 4 payments of
1/1/2% each. No other action taken to set apart a fund out of which to pay the
dividend although the company was solvent and had adequate surplus.
Nonetheless the officers proceeded to pay Humber and other SHs the 1st
installment of the dividend. The next installment was not paid, the board having
discovered an error in the financial statements of the company such that its assets
were overstated by $6000. The board then voted to rescind and recall the order
paying out the dividends and defer the payment indefinitely. The company was
still perfectly solvent and had amply funds to pay the dividend. Humber
demanded payment of his dividend but was refused on account of the recent
action by the board. The corporation contends that there was no declaration
because the board failed to set aside funds for the purpose, and that by virtue of
the resolution its former action was rescinded and the payouts were recalled and
put on hold.
Janz Hanna Ria N. Serrano
be carried over to meet a possible deficiency of the next.
The holder of PS, is however not generally a creditor until a dividend is declared,
but if a dividend ought to have been declared in a certain year to such SHs, they
should be regarded as creditors to such extent from such time or times. The
company’s contract with the PS is not to pay him at all events the amount of 6% of
the net profits, but to declare a dividend on that basis. The obligation of the
corporation to pay dividends on the PS out of the yearly net profits is subordinate
to whatever obligation it owes to the public. Therefore if it was necessary for the
corporation to use the surplus in any year to make extension to which patrons
were entitled, a dividend for that year would have been excused.
Case concerns the declaration of a cash dividend by a solvent corporation
possessed of ample undivided profits and surplus. The corporation contends that
a resolution declaring a dividend is not sufficient to create a dividend or create a
debt from the corporation in the absence of further action in setting apart a fund
for the purpose. The court held that if the declaration of the dividend is fairly and
properly made, out of profits existing at the time it was declared, the relation of
debtor and creditor is thereby established between the corporation and the SHs
for the payment of the dividend to the SH. The declaration of dividends operates
as a severance thereof from the stock in the general mass of the corporate
property, and raises an implied promise on the part of the corporation to pay the
SH the amount of the dividend. Action on the part of the corporation in setting
aside the fund for the specific purpose constitutes such moneys as a trust fund in
the hands of the corporation for the use of the SHs and in the event of bankruptcy
of the corporation, the SHs are not required to go in pro rata with the general
creditors for such unpaid dividends, but may proceed as against a trustee on
account of such trust fund. Mere declaration of the dividend, without more, by
competent authority under proper circumstances, creates a debt against the
corporation ifo the SHs the same way as any other general creditor of the concern.
The setting apart of a fund thereafter, passes one step further toward securing the
payment of the debt to the SH.
Thus the mere declaration of the dividend itself, without the setting aside of the
fund, creates a debt, and the act of declaring a dividend from the stock and corpus
of the corporate property is ipso facto, in and of itself, the setting apart, setting
aside and segregating such dividends and it creates an immediate right of the SH
to demand and recover the same when due.