Revised Bagtas Reviewer by Ve and Ocfe 2A ATENEO DE MANILA LAW SCHOOL OUTLINE ON PHILIPPINE CESAR L. VILLANUEVA Atty.

CORPORATE LAW1 2ND SEMESTER, SY 2004-2005 I. HISTORICAL BACKGROUND 1. Philippine Corporate Law:2 Sort of Codification of American Corporate Law Under American sovereignty, attention was drawn to the fact that there was no en tity inSpanish law exactly corresponding to the notion "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introdu ce theAmerican corporation into the Philippines as the standard commercial entit y and to hasten theday when the sociedad annima of the Spanish law would be obsol ete. The statute is a sort ofcodification of American Corporate Law. Harden v. B enguet Consolidated Mining, 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, became effect ive on 1April 1906. It had various piece-meal amendments during its 74-year hist ory. It rapidly became antiquated and not adapted to the changing times. 3. The Corporation Code The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. It adop tedvarious corporate doctrines enunciated by the Supreme Court under the old Cor poration Law. It clarified the obligations of corporate directors and officers, expressed in s tatutory languageestablished principles and doctrines, and provided for a chapte r on close corporations. 4. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory princ iples, Corporate Law is essentially, and continues to be, the product of commercial dev elopments. Much of this development can be expected to happen in the world of commerce, and someexpressed jurisprudential rules that try to apply and adopt corporate princ iples into the changing concepts and mechanism of the commercial world. 1Unless otherwise indicated, all references to sections pertain to The Corporati on Code of the Philippines. 2The whole body of statutory and jurisprudential rules pertaining to corporation s is referred to as "CorporateLaw" to differentiate it from the old statute know n as "The Corporation Law," or Act No. 1459.

grant is conferred. A corporation will be formed only when 5 individual persons , as incorporators, agree to form a corporat II. CONCEPTS See opening paragraphs of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 ( No. 2, June 1994) 1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code) Sec. 2 Corporation defined A corporation is an artificial being created by opera tion of law, having the rights of succession and the powers attributes and properties, expres sly authorized by law or incident to its existence. Art. 44(3) The following are juridical persons Corporations, partnerships and as sociations forprivate interest or purpose to which the law grants a juridical pe rsonality, separate anddistinct from that of each shareholder, partner or member . Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by lawscreating or recognizing them. Private corporations are regulated by laws of general application on the subject . Partnerships and associations for private interest or purpose are governed by th e provisionsof this Code concerning partnerships. Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations oftheir organization. Art. 1775 Association and societies, whose articles are kept secret among the me mbers, andwherein any pone of the members may contract in his own name with thir d persons, shallhave no juridical personality, and shall be governed by the prov isions relating to co-ownership corporation is an artificial being created by operation of law. It has a persona lity separateand distinct from the persons composing it, as well as from any oth er legal entity to which itmay be related. PNB v. Andrada Electric & Eng ring Co., 381 SCRA 244 (2002). an artificial being - a person created by law or by state; legal fiction

created by law its existence is dependent upon the onsent or grant of the stateEXC EPT corporation by estoppel and de facto corporation -the definition of a corporation is merely a guide and does not really provide f or thebasis of a corporation Q. Why is it important to know that the corporation is a juridical person? A. To be able to know that the corporation is able to contract with others.

Revised Bagtas Reviewer by Ve and Ocfe 2A Q. Why does the definition of a corporation involve a statement creature of the law ? A. To reiterate the fact that the corporation can only do acts given to it by th e law. It is of limited existence, outside its powers, it does not exist. 2. Tri-Level Existence of the Corporation (a) AGGREGATION OF ASSETS AND RESOURCES physical assets of the corporation; the tang ibles ( ex. in a grocery, the goods being sold) (b) BUSINESS ENTERPRISE OR ECONOMIC UNIT the commercial venture; this includes not o nly thetangible assets but also the intangibles like goodwill created by the bus iness C) JURIDICAL ENTITY juridical existence as a person; the primary franchise granted by the state Q. Why is the distinction between the three levels important? A. Each is important in its own way as there are consequences for each. The dist inctions becomeimportant and come into play when it comes to dealing with corpor ation law What are you selling orbuying (and their worth) will depend upon the p articular level you choose. EXAMPLE: If you merelywant to purchase the assets an d not the business, a simple deed of sale would suffice and you willnot be liabl e for contingent liabilities. It will be different if you buy the business as an economic concept. SEC Regulations or Bulk sales Law may be applied. 3. Relationships Involved in a Corporate Setting A) JURIDICAL ENTITY LEVEL, which views the State-corporation relationship -the state cannot destroy a corporation without observing due process of law (b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractualrelationship on four (4) levels: Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by theLaw on Agency Between the corporation and its shareholders or members Between and among the shareholders in a common venture B) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation a ndthird-parties or outsiders , essentially governed by Contract Law and Labor Law. most imporatant level, highest form of law in this level is contract law. 4. Theories on the Formation of Corporation: -the SC has looked upon the corp. not merely as an artificial being but more as anAGGRUPATION OF PERSONS DOING BUSINESS or AN UNDERLYING ECONOMIC UNIT.

-The corp. is emerging as an enterprise bounded by economics rather than an arti ficialpersonality bounded by forms of words in a charter, minute books & books o f accounts. The proposition that a corp. has an existence separate and distinct from its

Tayag vs Benguet Consolidated, Inc. (26 SCRA 242) membership has its limitations. (Separate existence is for a particular purpose. ) There can be no corp. existence w/o persons to compose it & there can be no association w/o associates. (a) Theory of Concession (aTayag v. Benguet Consolidated, 26 SCRA 242 [1968]). corporation creature of the state limited no other privilege may be exercised beyond grant

To organize a corporation that could claim a juridical personality of its own an d transact business as such, is not a matter of absolute right but a privilege whi ch may beenjoyed only under such terms as the State may deem necessary to impose . cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) It is a basic postulate that before a corporation may acquire juridical personali ty, theState must give its consent either in the form of a special law or a gene ral enabling act, and the procedure and conditions provided under the law for the acquisition of s uchjuridical personality must be complied with. Although the statutory grant to an associationof the powers to purchase, sell, lease and encumber property can o nly be construed thegrant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding th at suchassociation acquired a separate juridical personality, even when it adopt s sets of constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisions of the Corpor ationCode, then even a simple family corporation cannot claim an exemption nor c an it haverules and practices other than those established by law. Torres v. Cou rt of Appeals, 278 SCRA 793 (1997). FACTS: -Idonah Slade Perkins died in 1960 with County Trust & Co. of New York as her domiciliary administrator & left, among others, 2 stock certificates covering 33 , 002shares of stock of appellant Benguet Consolidated, Inc. -Renato Tayag, as ancilliary administrator in the Philippines, requested County Trustto surrender to ancilliary administrator the stock certificates to satisfy the legitimateclaims of local creditors. However, County Trust refused. The lower court then presided by Judge Santos ruled that : 1. stock certificates are considered lost for all purposes of admin. & liquidationo f the Philippine estate of Perkins 2. said certificates are cancelled

3. directs said corp. To issue new certificates in lieu thereof, the same to bedeli vered by aid corp. to either Tayag or the Probate division of this court. -An appeal was taken not by County Trust, as domiciliary admin., but by Benguet on the ground that the certificates of stock are existing and in possession of Coun tyTrust. They also assert that there was a failure to observe certain requiremen ts ofits by-laws before new stock certificates could be issued. ISSUE: Whether or not Benguet properly pursued the appeal? HELD: The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order. -the challenged order represents a response & express a policy arsing out of a specific problem, addressed to the attainent of specific ends by the use of spec ificremedies, w/ full & ample support from legal doctrines of weight and signifi cance.

Form wn s pplic on & concession. virtue of a primary franchise given by the state. And it is within the power of the state to grant it or not. But once grante Revised Bag tas Reviewer by Ve and Ocfe 2A -A disagreement ensued between the ancilliary and the domiciliary admin to who w sentitled the certificate of stocks -The CFI ordered County Trust to produce and deposit the stocks with the court w /cwasn t complied with Thus the order of the CFI. 5 5 -Benguet didn t dispute Tayag s authority to gain control & possession of all thehe corp. life of its own tells it to go and multiply profitably. The corp. like eve ry Juan and Maria given life by God acts on it assets of the decedent w/n the Phil. -Corporation is an artificial being created by operation of law. It owes it life to the state its birth being purely dependent on its will. -Flether: A corp. is not in fact and in reality a person, but the law treats it a s thoughit were a person by process of fiction, or by regarding it as an artific ial persondistinct and separate from its individual stockholders. -There is thus a rejection of Gierke s genossenchaft theory. A corp as known to Ph il. Jurisprudence is a creature w/o any existence until it has received the imprimat ur ofthe state acting according to law. It is logically inconceivable therefore that it willhave rights and privileges of a higher priority than that of its cre ator. More than that it cannot legitimately refuse to yield obedience to acts of its state organs, ce rtainlynot excluding the judiciary, whenever called upon to do so. -Corporate by-laws must yield to judicial order -As a matter of fact, a corp. once it comes into being comes more often w/n the kenof the judiciary than the other two coordinate branches. It institutes the ap propriate court action to enforce its right. Correlatively, it is not immune from judicial controlin those instances, where a duty under the law as ascertained in an appr opriate legalproceeding is cast upon it. c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. R EV. 343 [1947]) -juridical personality -contractual relation between 5 or more individuals -recognize existence of an aggregation of individuals (enterprise entity) A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing its elf as acollective body, it waives no constitutional immunities and perquisites appropriate to sucha body. PSE v. Court of Appeals, 281 SCRA 232 (1997). Corporations are composed of natural persons and the legal fiction of a separate

corporate personality is not a shield for the commission of injustice and inequi ty, such asto avoid the execution of the property of a sister company. Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

5. Four Corporate Attributes Based on Section 2: A) A CORPORATION IS AN ARTIFICIAL BEING ( Ability to Contract and Transact ) -a person created by law or by state; a legal fiction B) CREATED BY OPERATION OF LAW ( Creature of the Law ) -its existence is dependent upon the consent or grant of the state EXCEPT corpor ationby estoppel and de facto corporation C) WITH RIGHT OF SUCCESSION ( Strong Juridical Personality ) -the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separatepersonality remains even if there has been a change in the members and s tockholdersof the corporation. D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCI DENT TO ITS EXISTENCE ( Creature of Limited Powers ) 6. Advantages and Disadvantages of Corporate Form: (a) Four Basic Advantageous Characteristics of Corporate Organization: (i) STRONG LEGAL PERSONALITY A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats the corporation as though it wer e aperson by process of fiction or by regarding it as an artificial person disti nct andseparate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989). The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. aStockholders of F. Gua nzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). STOCKHOLDERS OF F. GUANZON & SONS Inc. v REGISTER OF DEEDS Facts: In 1960, five stockholders of F. Guanzon & Sons, Inc. executed a certificate of liquidation of theassets of the corporation which provided that due to the resol ution of the stockholders dissolving thecorporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation including real properties located in Manila. Thecertificate of liquidation was denied registration by the Register of Deeds and one of the grounds isthat the judgment of the corporation in approving dissolution and directing opposition of assets ofthe corporation ne ed to be presented aside from the following: (1) the number of parcels which wer enot certified in the acknowledgement (2) P430.50 registration fees have to be p aid (3) P90.45docustamps need to be attached. Stockholders contend that it was n ot conveyance but a meredistribution of corporate assets after the corporation c eased to exist upon dissolution. Issue: WON the certificate merely involves a distribution of the corporate asset s or should be considered a transfer or conveyance. Held:

The Supreme Court agrees with the Register of Deeds and the Land Registration Co mmission. A corporation is a juridical person distinct from the members composing it. Proper ties registered in thename of the corporation are owned by it as an entity separ ate and distinct from its members. Whileshares of stock constitute personal prop erty, they do not represent property of the corporation. Thecorporation has prop erty of its own which consist mainly of real estates. A share of stock only typi fiesan aliquot part of the corporation s property or the right to share in the pro ceeds to that extent whendistributed according to law and equity. But its holder is not the owner of any part of the capital nor

Revised Bagtas Reviewer by Ve and Ocfe 2A is he entitled to the possession of any definite portion of its property or asse ts. The stockholder is not a co-owner or tenant in common of the corporate property. Thus, the act of liqui dation made by the stockholders of the corporation s assets cannot be considered as a partition of th e community property but rather a transference or conveyance of the title of its assets to t he individual stockholders in proportion to their stockholdings. Therefore, said transfer cann ot be effected without the corresponding deed of conveyance from the corporation to the stockholders. (ii) CENTRALIZED MANAGEMENT As can be gleaned from Sec. 23 of Corporation Code It is the board of directorsor trustees which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). The exercise of the corporate powers of the corporation rest in the Board ofDire ctors save in those instances where the Corporation Code requires stockholders app roval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appe als, 381 SCRA 557 (2002). (iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS One of the advantages of the corporation is the limitation of an investor sliabili ty to the amount of investment, which flows from the legal theory that acorporat e entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998). It is hornbook law that corporate personality is a shield against personal liabi lityof its officers a corporate officer and his spouse cannot be made personally l iableunder a trust receipt where he entered into and signed the contract clearly in hisofficial capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). Obligations incurred by the corporation acting through its directors, officers a ndemployees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS Authority granted to corporations to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his s hares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998). (b) Disadvantages: (i) Abuse of corporate management

(ii) Abuse of limited liability feature (iii) High cost of maintenance (iv) Double taxation Advantages and Disadvantages of Corporate Form: Four Basic Advantageous Characteristics of Corporate Organization: (i) Strong Legal Personality -entity attributable powers; -continuity of existence; Disadvantages: (i) Abuse of corporate management -there is severance of control and

. having the right of succession, the death of an individual stockholder does not affect corporateexistence . not a natural occurrence, exists mainly because thelaw provides for it. This is what distinguishes the separate juridical personality of a corporation from a partnership. The legal personality of a corp is strong because the law provides for the right of succession, surviving even w/o those who incorporated it while in a partnership the separate juridical personality is extinguished upon the death of a partner . no delectus personarum (ii) Limited Liability of Investors ( providedfor by jurisprudence only) -the liability of an investor islimited their investments and investors cannot be held accountable for more than what they invested. -CLV: However there are a lot of ways to circumvent thelaw and make the shareholders liable for more than his actual investment (ex. A creditor requiring thechairmn or president of thecompany as a joint debto r ofthe loan) -A trade-off to the abdication made by the investor of hisright to manage the propertyhe had invested in the ownership. Control will be vested with the BoD, thus investors

have no say over the use of their investment and little voice in the conduct of the business (ii) Abuse of limited liability feature -this feature had been abused and may hurt innocent creditors. (ii) Cost of maintenance -the formation and incorporationof a corp. entails a lot of difficulties and costs, particularlythe requirementsmade by the law so as to qualify for incorporation. (iv) Double taxation Dividends received by individuals from domestic corporations are subject tofinal 10% tax for income earned on or after 1 January 1998 (Sec. 24(B) (2), 1997 NIRC) Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), 1997 NIRC)

Revised Bagtas Reviewer by Ve and Ocfe 2A company. Under propertylaw, a person exercises fullownership over his propertybu t when he invests it in a corporation, the owner abdicated the six jus of ownership (iii) Free Transferability of shares -A legal relationship is created which is more stable for there are laws which govern, and the corp. and the stockholders are bound by the law. (iv) Centralized Management -One of the advantages of a corp. is the limitation of an investor s liability, this flowsfrom the legal theory that a corp. entity is separate anddistinct from its stockholders In addition, there is reimposition of the 10% improperly accumulated earnings tax for holdingcompanies (Sec. 29, 1997NIRC) Q. Is a corp. in our jurisdiction given the feature of limited liability? A. No. The feature of limited liability is given to the stockholder and not to the corporation. Q. Is limited liability a normal run of things? A. No. It is only there because in this case, it comes with the separate juridical personality. Q. If limited liability as shown in a corporation setting good for the investors, d oes it mean thatdelectus personarum is a bad thing? A. No. It is good in one way, since persons are bound by the contracts they enter i nto. 7. COMPARED WITH OTHER BUSINESS MEDIA 4 Distribution of Risk, Profit and Control 3 a) Sole Proprietorships Sole Proprietorship Corporation Free from many requirements and Heavily regulated; a lot of regulations in its operation requirements imposed for registration and incorporation Owner has full control of his business Control of business is done by the

and fiat. Just because the BoD an that the former derives its BoD Owner stands to lose more than BoD Owner stands to lose more than what he puts into the venture

are to be elected by the stockholders does not me powers fro Investors have limited liabilty Investors have limited liabilty

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) Art. 1768 The partnership has a juridical capacity separate and distinct from th at of each ofthe partners, even in case of failure to comply with requirements o f Art. 1772 first paragraph. Art. 1775 Association and societies, whose articles are kept secret among the me mbers, andwherein any pone of the members may contract in his own name with thir d persons, shallhave no juridical personality, and shall be governed by the prov isions relating to co ownership Corporation Separate legal personality Investors limited liability Free transfer of shares Centralized management Partnership Separate legal personality Contractual limited liability ( when a limited partnership is created) Transfer with consent of partner Every partner is agent Q. How does the contractual management of a corp. compare with the management of a partnership? A. Every partner, in the absence of a stipulation in the articles of partnership , binds thepartnership as every partner is an agent of the others (delectus pers onarum). In a corporation, only the BoD and not the stockholders can bind the corporation. Q. What are the 2 types of partnerships? A. Regular and Joint venture Q. Can a corporation be a partner in a regular partnership? A. No. Because a partner must be a natural person. It is against public policy f or corporation to be a partner in a regular partnership. Q. If limited liability is something that can be contracted in a partnership, wh y did the legislature putsuch limited liability as an attribute of a corporation ? If the feature of limited liability cots moneythen why not take it out? Why no t eave it up to the investors who can decide if they want limitedliability or no t? A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have

Pioneer insurance & Surety corp. vs. CA ( 175 SCRA 668) Revised Bagtas Reviewer by Ve and Ocfe 2A P100M, it would be foolish to put all my eggs in one basket (if the basket falls , all eggs break). So, Imerely put P10M in one corporation and then borrow the P 90M while the rest of my money I ptsomewhere else. If the corporation fails, I d o not lose all my P100M, I lose only my P10M. But if the corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from theP90M paid up loan. This is the concept of LEVERAGING, using oth er people s money to make a profit for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors tomake a diligent appraisal of the credit standing of th e corp. Q. What is the main distinction between a corporation and a partnership? A. A corp. is an intermingling of corporation law and contract law. On the other hand, a partnership is purely a contractual relationship and so every time a partner dies, the contr act is actually extinguished. Q. What is Corporation Law all about? A. It is all about jurisprudence actually built around the 4 attributes of a cor poration Q. Can a defective attempt to form a corporation result at least in a partnershi p? A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); Lim Tong Lim v. P hilippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999). Facts: -In 1965, Jacob S. Lim was engaged in the airline business as owner of SouthernA irlines, a single proprietorship. -On May 17, 1965, he bought from Japan Domestic Airlines for the sale of 2 aircr aftsand one set f necessary spare parts for the total price of $109,00. Both arr ived in Manila -On May, 22 1965, Pioneer Insurance Corp, as surety executed and issued its sure tybond in behalf of Lim, principal, for the balance price for the aircrafts and spare parts. -Border Machinery and Heavy Equipment (BORMAHECO), the Cervanteses and Constancia Maglana contributed some funds in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to anew corporation proposed by Lim to expand his airline business. They executed indemnity agreements in favor of Pioneer, one signed by Maglana and the otherjoi ntly signed SAL, BORMAHECO and Cervantes: where they principally agree andbind t hemselves jointly and severally to indemnify pioneer. -On June 10, 1965 Lim for SAL executed in favor of Pioneer a deed of chattel mortgage as security for the suretyship in favor of Pioneer. The deed was dulyre gistered with the Manila RoD and with the Civil Aeronautics Administration. -Lim defaulted on his subsequent installments prompting JDA to request paymentfr om the surety. Pioneer paid about P298,000 -Pioneer filed for an extra-judicial foreclosure of the mortgage but the Cervant eses

and Maglana filed a third party complaint claiming that they are co-owners of th eaircraft. Pioneer later filed a petition for judicial foreclosure and an applic ation for a writ of preliminary attachment against Lim, the Cervanteses, BORMAHECO and Maglana. -In their answer, the Cervanteses, BORMAHECO and Maglana alleged they were notpr ivy to the contracts signed by Lim. -The RTC ruled in favor of Pioneer, holding Lim liable but dismissing the case a s to theother defendants. On appeal, the CA affirmed. ISSUE: whether or not the Cervanteses, BORMAHECO and Maglana are entitled to rei mbursement ofamounts given by Lim? HELD: Lim s assertions: The failure of respondents to incorporate, a de facto partnershi pamong them was created, and that as a consequence of such relationship all must share inthe losses and/or gains of the venture in proportion to their contribut ion. PRINCIPLES: Persons who attempt, but fail, to form a corporation and who carry o n business underthe corporate name occupy the position of PARTNERS INTER SE. Thu s, 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 corp. w/n the statut e, they become in legaleffect partners inter se, and their rights as members of the company to the property acquired by thecompany will be recognized. However, such a relationship does not exist, for ordinary persons cannot be made to assumethe relation of partners, as between themselves, when their purpose is that no partnership shall existand 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 l egally formed doesnot become a partner with other subscribers who engage in busi ness under the name of the pretended corp., so as to be liable as such in an action for settlement of the a lleged partnership andcontribution. -the records show that Lim received the amount of P151,000 representing the participation of BORMAHECO and Maglana -it was clear that Lim never intended to form a corp with them but they were dup edinto giving their money -no de facto corp. was created Q. In cases where there is a defective attempt to form a corp. which is the prev ailing rule, a partnership inter se is created or a corporation by estoppel? A. It depends wholly on the extent of the participation of the party on who a cl aim is being mind. In the case at bar, there was no intent on the other parties to enter into a partne rship but a corporation. As to the Cervanteses & BORMAHECO, they cannot be considered to have entered eve n into apartnership inter se, since there was no intention to do so and to be he ld liable as such.

But if it were the Cervanteses or BORMAHECO, who entered into the contracts usin g thecorporate name and actively participated in the activities of the corporati on, then they are to be heldliable as partners. Q. Why are we taking up Pioneer? Why were they not liable? A. Because Pioneer shows us that for a person to be liable as a partner, he shou ld have activelyparticipated in the conduct of the business, the SC held in this case that to be able to be held liablethe person should possess powers of manag ement.

Revised Bagtas Reviewer by Ve and Ocfe 2A Q. What is the difference between Pioneer and Lim Tong Lim? A. In the case of Pioneer, the SC stopped when it declared that to be liable, yo u have to possesspowers of management. In Lim tong Lim, it continues its pronoun cement, by saying that if you havebeneficial ownership over the business, then y ou are also liable as a partner. LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered i nto a contract withPhil. Fishing Gear Industries Inc. for the purchase of fishin g nets and floats. They claimed that theywere a fishing venture with Lim Tong Li m who was however not a signatory to the contract. Theyfailed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case was filed against Chua, Yao and Lim because it was found that Ocean Que st was a nonexistent corporation as shown by the certification from SEC. Chua admitted liability and Yao waivedhis right to cross-examine and present evidence because he failed to a ppear while Lim filed acounterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Saleof the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writand Chua, Yao and Lim were jointly liable as general partners. Held: 1.) Lim was contesting that the CA ruled that there was a partnership in the Com promiseAgreement and alleges that he had no direct participation in the negotiat ions and was merely leasing F/B Lourdes to Chua and Yao Facts found by the TC and CA showed that the re wasa partnership formed by the three of them. They initially purchased two bo ats through a loanfrom Lim s brother and as security, was placed in the name of Li m Tong Lim. The repairs andsupplies were shouldered by Chua and Yao. A civil cas e was filed by Chua and Yao against Limfor nullity of commercial documents, refo rmation of contracts and declaration of ownership offishing boats which was settle d amicably. In the Compromise Agreement, it was revealedthat they intended to pa y the loan from Jesus Lim by selling the boats and to divide amongthem the exces s or loss. Therefore it was clear that a partnership existed which was not solel ybased on the agreement. It was merely an embodiment of the relationship among p arties. 2.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration papers of the boats, including F/B Lourdes where the nets were found As found by thelower courts, the boats were registered to Lim only as security for the loan that was grantedto the partnership by the brother of Lim, which was not an unco mmon practice. Aside fromthe fact that it was absurd for Lim to sell the boats t o pay the debt he did not incur, if neededhe was merely leasing the boats to Chu a and Yao. 3.) Lim contests his liability by saying that only those who dealt in the name o f the ostensiblecorporation should be held liable. His name was not in any of th e contracts and never dealt with PFGI Sec. 21 All persons who assume to act as a corporation knowing it to b e withoutauthority to do so shall be liable as general partners for all debts, l iabilities and damagesincurred or arising as a result thereof; Provided however that when any such ostensiblecorporation is sued, on any transaction entered by it as a corporation or ant tort committedby it as such, it shall not be allowed to use as a defense its lack of corporate personality. Evenif the ostensible cor porate entity is proven to be non-existent, a party may be estopped fromdenying

its corporate existence because an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attribu tes of acorporation as provided by law. It cannot create agents or confer author ity on another to acton its behalf. Thus, those who act or purport to act as its representatives do so withoutauthority and at their own risk. Clearly, Lim bene fited from the use of the nets found insideF/B Lourdes which was proved to be an asset of the partnership. He in fact questioned theattachment because it has ef fectively interfered with the use of the vessel. Thoughtechnically, he did not d irectly act on behalf of the corporation, however, by reaping thebenefits of the contract entered into by persons he previously had an existing relationship

with, he is deemed part of said association and is covered by the doctrine of co rporation byestoppel. CLV: Pioneer case actors who knew of corporation s non-existence are liable as gen eral partnerswhile actors who did not know are liable as limited partners, passi ve investors are not liable; Limteaches us that even passive investors should be held liable provided they benefited from suchtransactions. (c) Joint Ventures Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requi res a community of interest in the performance of the subject matter, a right to direc t andgovern the policy in connection therewith, and duty, which may be altered b y agreementto share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr. , 232 SCRA 110 (1994). Q. What is the difference between a joint venture and a partnership? A. A joint venture is by law a partnership because it follows the same definitio n as having two ormore persons binding themselves together under a common fund w ith the intention of dividing theprofits between themselves. Therefore, every jo int venture is a partnership. The distinction between the two is that a joint venture is for a limited purpose only while a partnershi p involves an arrangement or an on-going concern. Q. Is it possible for a joint venture not to be a partnership? A. Yes. When the joint venture forms a corporation, it then becomes a joint vent ure corporation. Q. Does the requirement of registration needed in a partnership also required in a joint venture? A. No. Only in a partnership is registration required (Art. 1772, Civil Code) (d) Cooperatives (Art. 3, R.A. No. 6938) A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepti ng a fairshare of the risks and benefits of the undertaking in accordance with u niversally acceptedcooperative principles. Cooperatives are established to provide a strong social and economic organizatio n to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agr arian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000). Cooperative Separate Juridical Personality Governed by principles of democratic control where the members have equal voting rightson a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membershipthat exercises all the rights and performs all of the obligations of the Corporation

SH vote their percentage share of the stocks subscribed by them BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or

Revised Bagtas Reviewer by Ve and Ocfe 2A coop. Under the supervision of the coop. Development Authority Organized for the purpose of providing goods and services to itsmembers and thus to enable them to attain increased income and saving, etc. ratification by the SH Under the Supervision of the SEC Stock Corp. for profit; Non-Stock Corp eleemosynary (charitable, philantrophic) purpose e) Business Trusts (Article 1442, Civil Code) Art. 1442 Q. What is the difference between a business trust and a corporation? A. The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor or the trustee/beneficiary. T he concept of a separate juridical personality is absent from a business trust. (f) Sociedades Annimas A sociedad annima was considered a commercial partnership where upon the execution of the public instrument in which its articles of agreement appear, an d thecontribution of funds and personal property, becomes a juridical person an ar tificial being, invisible, intangible, and existing only in contemplation of law with power to hold, buy, and sell property, and to sue and be sued a corporation not a generalcopartners hip nor a limited copartnership . . . The inscribing of its articles of agreemen t inthe commercial register was not necessary to make it a juridical person a corp oration. Such inscription only operated to show that it partook of the form of a commerci al corporation. Mead v. McCullough, 21 Phil. 95 (1911). The sociedades annimas were introduced in Philippine jurisdiction on 1 December18 88 with the extension to Philippine territorial application of Articles 151 to 1 59 of theSpanish Code of Commerce. Those articles contained the features of limi ted liability andcentralized management granted to a juridical entity. But they were more similar to theEnglish joint stock companies than the modern commercial corporations. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). Our Corporation Law recognizes the difference between sociedades annimas and corporations and will not apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965). (g) Cuentas En Participacion

A cuentas en participacion as a sort of an accidental partnership constituted in such amanner that its existence was only known to those who had an interest in the same, therebeing no mutual agreement between the partners, and without a cor porate name indicating to the public in some way that there were other people besides the on e whoostensibly managed and conducted the business, governed under Article 239 o f the Codeof Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of actionagainst such person and not against the other persons interested, and the latter, on theother hand, shall have no right of action against third person wh o contracted with the

manager unless such manager formally transfers his right to them. Bourns v. Carm an,7 Phil. 117 (1906). III. NATURE AND ATTRIBUTES OF A CORPORATION 1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitut ion) The Congress shall not except by general law, provide for the formation, organiz ation orregulation of private corporations, Government-owned or controlled corpo rations may becreated or established by special charters in the interest of the common good and subject tothe test of economic viability. P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibi ts the formation of a private corporation by special legislative act which is neither o wned nor controlled by the government, since NDC was merely required to extend a loan to the newcorporation, and the new stocks of the corporation were to be issued to t he old investors andstockholders of the insolvent Agrix upon proof of their clai ms against the abolished

Revised Bagtas Reviewer by Ve and Ocfe 2A corporation. NDC v. Philippine Veterans Bank, 192 SCRA 257 (1990). Congress cannot enact a law creating a private corporation with a special charte r, and it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Feliciano v. Commission on Audit, 419 SCRA 3 63 (2004). Q: What distinguishes a public corporation from a private corporation owned by t he government? A: It is not ownership which distinguishes a publiccorporation from a private corporation. It is the civil service eligibility of its employees and ifthe financial records are subject to the examination of the Commission on Audi t. A publiccorporation is created by its charter whereas a private corporation i s created under theCorporation Code. 2. CORPORATION AS A PERSON: (a) Entitled to Due Process The due process clause is universal in its application to all persons without re gard toany differences of race, color, or nationality. Private corporations, lik ewise, are persons within the scope of the guaranty insofar as their property is concerned. Smith B ell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Equal Protection Clause (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]) . (c) Unreasonable Searches and Seizure A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers have no cause of action to assail the le gality of theseizures, regardless of the amount of shares of stock or of the int erest of each of them insaid corporation, and whatever the offices they hold the rein may be, because the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967). A corporation is but an association of individuals under an assumed name and wit h adistinct legal entity. In organizing itself as a collective body it waives no constitutionalimmunities appropriate for such body. Its property cannot be take n without compensation; can only be proceeded against by due process of law; and is protected against un lawfuldiscrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971) , quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why is a corporation entitled to the rights of due process and equal protecti on? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the s ame protectionthe law grants to an individual. A corporation is entitled to due process and equal protectionby virtue of the juridical personality given by the State through the primary franchise of thecorporation. The constitution did not distinguish whether the term person in Sec. 1 Art. III ofthe Constitution refers t o an individual or a juridical entity, which therefore extends to privatecorpora tions within the scope of the guaranty.

Q: Why is the corporation entitled to the protection against unreasonable search es and seizures? A: The corporation being entitled to due process and equalprotection i s the consequence of the State s grant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the government recognizes not on ly theseparate juridical personality of the corporation but also grants unto it all the rights andprotections that a natural individual would possess which incl udes the right to due processand equal protection. However, a corporation is also entitled to protection against unreasonable searc hesand seizures. This right however does not emanate from the grant of the State by way ofprimary franchise but is sourced through the Theory of Enterprise Enti ty which recognizes thatregardless of Section 2 of the Corporation Code, a corpo ration is still for all intents andpurposes an association of individuals under an assumed name and with a distinct legalpersonality. In organizing itself as a collective body, it waives no constitutional immunities forsuch body. (1) Its pr operties cannot be taken without just compensation (2) it can only beproceeded a gainst by due process of law (3) it is protected against unlawful discrimination .

In the same line of reasoning, although a corporation is a legal fiction, a sear ch andseizure involves physical intrusion into the premises of the corporation, and therefore alsointrudes into the personal and business privacy of the stockho lders or members who composeit. It can be seen that the right of the individual against unreasonable searches and seizures isextended to corporations upon whom they are members. (d) But Not Entitled to Privilege Against Self incrimination It is elementary that the right against self-incrimination has no application to juridicalpersons. Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987). While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested withspecial privileges and franchises, may refuse to show its hand when charged with anabuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. Un ited States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944). Q: Why is a corporation entitled to equal protection but not the right against s elfincrimination? A: Any individual is entitled to equal protection whetherthey be juridical or natural. The corporation being in the same class should be treated equally. However, the right to self-incrimation is not extended to corporation because: 1. The right is meant to prevent individuals from having to lie under oath in order to protecthis interest. It is to protect the individual from having to commit p erjury just to keephimself from going to jail. However, if a corporation lies un der oath, who would you bringto jail when in fact, a corporation is just a legal fiction. 2. The corporation is subject to the reportorial requirements of the law. The corpo rationbeing a mere creature of the State is subject to the whims of its Creator. The corporationpowers are limited by law. CLV: Beats me! Perhaps such right is attributable to the moral dimension of an i ndividual, andsince the corporation is of an amoral personality, such right may not be attributable to it. 3. Practice of Profession Corporations cannot engage in the practice of a profession since they lack the m oral andtechnical competence required by the PRC. A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo Interna tional Corp., 270 SCRA 298 (1997); Alfafara v. Acebedo Optical Company, 381 SCRA 293 (2 002). 4. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts, because therules governing the liability of a principal or master for a tort co mmitted by an agent orservant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a princ ipal or master isliable for every tort which he expressly directs or authorizes, is just as true of a corporation as

a natural person. aPNB v. Court of Appeals, 83 SCRA 237 (1978). PNB v COURT OF APPEALS Facts: Rita Gueco Tapnio had an export sugar quota of 1,000 piculs for the agricultural year 19561957. Since, she did not need it, she agreed to allow Mr. Jacobo Tuazon to use the sai d quotafor consideration of 2,500. Her sugar cannot be exported without sugar qu ota allotments. Sometimes, however a planter harvests less sugar than her quota so her excess qu ota is usedby her mother who pays for it. This is her arrangement with Mr. Tuazo n. At the time of theagreement, she was indebted to PNB of San Fernando, Pampang a. Her indebtedness was known as a crop loan and was secured by her sugar crop, and since her quota was mortgagedto PNB, her arrangement with Mr. Tuazon had to be approved by the bank. Upon presentmentof the lease arrangement, the PNB branch manager revised it by increasing the lease amount

Revised Bagtas Reviewer by Ve and Ocfe 2A to P2.80 per picul for a total of P2,800. Such increase was agreed to by both Ri ta and Jacobo. However, when it was presented to the Board of Directors for approval, they furt her increasedthe amount to P3.00 per picul. Jacobo asked for the reconsideration but he was denied thesame. The matter stood as it was until Jacobo informed Rit a and PNB that he had lost interest in pursuing the deal. In the meantime, the debt of Rita with the PNB matured. Si nce she had asurety agreement with the Philippine American General Insurance Co. Inc. (Philamgen), thelatter paid her outstanding debt. Philamgen in turn demand ed from Rita the amount whichthey paid the bank. Instead of paying the bank, Rit a claimed that she told Philamgen that shedid not consider herself indebted to t he bank since she had an agreement with JacoboTuazon. When such was discontinued , she failed to realized the income with which she could have paid her creditors. Philamgen filed a complaint for the collection of sum o f moneyagainst Rita. Rita implicated PNB as a third party defendant claiming tha t her failure to paywas due to the fault or negligence of PNB. Issue: WON PNB is liable for the damage caused to Rita. Held: . There is no question that Rita s failure to utilize her sugar quota was due to the disapproval of the lease by the Board of Directors of the petitioner, thus PNB s hould beheld liable. . The Board justified the increase to P 3.00 per picul by saying that it was the p revalent rateat that time. However, there was no proof that any other person was willing to lease thesugar quota allotment of Rita for a price higher than P2.80 per picul. Just because thereare isolated transactions where the lease price wa s P3.00 per picul does not mean thatthere are always ready takers. . While PNB had the ultimate authority of approving or disapproving the proposed l easesince the quota was mortgaged to the bank, the latter certainly cannot escap e its responsibility of observing precaution and vigilance which the circumstances of the casejustly demanded in approving or disapproving the lease of said sugar quo ta. . According to Art. 19 of the Civil Code, [e]very person must in the exercise of hi s rightsand the performance of his duties, act with justice, give everyone his d ue and observehonesty and good faith. This the petitioner failed to do. As a cons equence, Art. 21 states, [a]ny person who willfully causes loss or injury to another in a manner that is contrary tomorals, good customs or public policy shall compensate the latter for the damage. . On the liability of the corporation, the court ruled that, [a] corporation is civ illy liable inthe same manner as natural persons for torts, because generally sp eaking, the rulesgoverning the liability of a principal or master for a tort com mitted by an agent or servantare the same whether the principal or master be a n atural person or artificial person. All ofthe authorities agree that a principal

or master is liable for every tort which he expresslydirects or authorizes, this is just as true of a corporation as of a natural person. Acorporation, liable therefore, whenever a tortuous act is committed by an officer oragent er express direction or authority from the stockholders or members acting as dy, or generally, from the directors as the governing body.

and is und abo

NOTE: CLV tells us that it is clear from the ruling of the Court in this case th at not everytortuous act committed by an officer can be ascribed to the corporat ion as its liability, for it isreasonable to presume that in the granting of aut hority by the corporation to its agent, such agrant did not include a direction to commit tortuous acts against third parties. Only when thecorporation has expr essly directed the commission of such tortuous act, would the damagesresulting t herefrom be ascribable to the corporation. And such a direction by the corporati on, is manifested either by its board adopting a resolution to such effect, as in th is case, orhaving taken advantage of such a tortuous act the corporation, throug h its board, expresslyor impliedly ratifies such an act or is estopped from impu gning such an act. Our jurisprudence is wanting as to the definite scope of corporate tort. Essential ly, tort consists in the violation of a right given or the omission of a duty imposed by law; abreach of a legal duty. The failure of the corporate employer to comply with the law-imposedduty under the Labor Code to grant separation pay to employ ees in case of cessation of

operations constitutes tort and its stockholder who was actively engaged in the managementor operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997). Q: When is a corporation liable for tort? A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) underexpress direction of authority from the stockholders or membe rs acting as a body or through theBoard of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such effect (b) by having takien advantage of such a tortious act, the corporationthrough its board, has expressly or impliedly ratified such an a ct or estopped from impugning the same. Q: What is a derivative suit? A: Since, the act of the board is essentially that of the corporation and theref ore corporate assets cannot escape enforcement of the award of damage to the tort victim. As a remedy , the stockholders may institute a derivative suit against the responsible board membe rs and officersfor the damages suffered by the corporation as a result of the to rt suit. 5. Corporate Criminal Liability (aWest Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); aPeople v. Tan Boon Kong, 54 Phil. 607 [1930]; aSia v. Court of Appeals, 121 SCRA 655 [1 983]; Articles 102 and 103, Revised Penal Code). WEST COAST LIFE INS. CO. v HURD Facts: The petitioner (West Coast) is a life-insurance corporation, organized under the laws of California, doing business regularly and legally in the Philippines. An information was file d against theplaintiff corporation as well as John Northcott and Manue Grey char ging the said corporation andsaid individuals with the crime of libel. The contr oversy started when Northcott, as generalmanager for the Philippines of said com pany and John Grey who was an agent and employee ofthe company, conspired to rel ease certain circulars containing foul statements against Insular LifeCompany cl aiming that the Insular Life was then and there in a dangerous financial conditi on onthe point of going into insolvency, to the detriment of the policy holders of the said company, andof those with whom said company have and had business tr ansactions. The plaintiffs then filed amotion to quash summons sent by the Judge , on the ground that the court had no jurisdictionover said company, there being no authority in court for the issuance of the processes. Moreover, plaintiffs alleged that under the laws of the Philippines, the court has no powe r or authority toproceed against a corporation, criminally, to bring it into cou rt for the purpose of making itamenable to criminal laws. Issue: WON corporations can be held criminally liable. Held: No. While the courts have inherent powers which usually go with courts of genera l jurisdiction, itwas held that under circumstances of their creation, they have only such authority in criminalmatters as is expressly conferred upon them by s tatute or which is necessary to imply from suchauthority in order to carry out f

ully and adequately the express authority conferred. The SC didnot feel that Cou rts have authority to created new procedure and new processes of criminal law. Although, there are various penal laws in the Philippines which the corporation may violate, stillthe SC does not believe that the courts are authorized to go t o the extent of creating specialprocedure and processes for the purpose of carry ing out the penal statutes, when the legislativeitself has neglected to do so. T his is true since the courts are creatures of the statute and haveonly powers co nferred upon them by statute. Philippines courts have no common law jurisdiction

Revised Bagtas Reviewer by Ve and Ocfe 2A or powers. PEOPLE v TAN BOON KONG Facts: During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply C o. engaged inthe purchase and sale of sugar, bayon, copra, and other native prod ucts and as such must payinternal revenue taxes upon is sales. However, he only declared 2.3 million in sales but in actuality the sales amounted to 2.5 million, therefore failing to declare for th e purpose of taxationabout 200,000, not having paid the government 2,000 in taxe s. Upon filing by the defendant of ademurrer, the lower court judge sustained sa id motion on the ground that the offense chargedmust be regarded as committed by the corporation and not its officials. Issue: WON the defendant as manager may be held criminally liable. Held: Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because it is contr ary to a greatweight of authority. The court pointed out that, a corporation can act only through its officers and agents where the business itself involves a violation law, the correct rule is t hat all who participate in it are criminally liable. In the present case, Tan Boon Kong alle gedly made a falsereturn for purposes of taxation of the total amount of sales f or year 1924. As such, the filing offalse returns constitutes a violation of law . Him being the author of the illegal act must be heldliable. SIA v PEOPLE Facts: The facts reveal that in 1963, the accused Jose Sia was the general manager of M etal Manufacturing Company of the Philippines engaged in the manufacturing of steel o ffice equipment. When the company was in need of raw materials to be imported from abr oad, Siaapplied for a letter of credit to import steel sheets from Tokyo, Japan, the application beingdirected to Continental Bank and was opened in the amount of $18,300. According to the Continental Bank, the delivery of the steel sheets was only permitted upon the e xecution of thetrust receipt. While according to Sia, the steel sheets were alre ady delivered and were even converted to equipment before the trust receipt was signed by him. However, ther e is no question that when the bill of exchange became due, neither the accused nor his company madepayments, despite demands of the bank. On appeal, Sia contends that he should not be heldliable. Issue: WON petitioner Sia may be liable for the crime charged, having acted only for and in behalfof his company. Held: NO. The Court disputed the reliance of the lower court and the CA on the general principle that fora crime committed by a corporation, the responsible officers thereof would personally bear thecriminal liability, as enunciated in Tan Boon K ong. The latter provides that: [t]he corporation wasdirectly required by law to d

o an act in a given manner and the same law makes the person whofails to perform the act in the prescribed manner expressly liable criminally. The performance o fan act is an obligation directly imposed by the law on the corporation. Since i t is a responsibleofficer or officers of the corporations who actually perform t he act for the corporation, they mustof necessity be the ones to assume the crim inal liability; otherwise this liability as created by thelaw would be illusory, and the deterrent effect of the law, negated. The Court concluded that the cited case does not fall squarely with the circumst ances surrounding Sia since the act alleged to be a crime is not in the performance of an act directlyordained by law to be performed by the corporation. The act is i mposed by the agreement of theparties in pursuit of the business. The intention of the parties is therefore a factor determinant ofwhether a crime or a civil ob ligation alone is committed. The absence of a provision of the law

even in the RPC making Sia criminally liable as the president of his company cre ated a doubt thatmust be ruled in his favor according to the maxim, that all dou bts must be resolved in favor of theaccused. CONTRASTING THE THREE CASES . In the case of West, the court in effect enunciated that for a person to proceed criminallyagainst a corporation, it was necessary that express provisions of la w be enacted, specificallyproviding that a corporation may be proceeded against criminally and brought to court. . But since a corporation is a legal fiction that cannot be handcuffed and brought to court, thecase of Tan Boon Kong provided that since a corporation acts throu gh its officers and agents, any violation of law by any of the actors of the corporation in the conduct of i ts businessinvolves a violation of law, the correct rule is that all who partici pate in it are liable. In makingactors liable, the court here said attaching cri minal liability to the fiction cannot be donesince: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to abeing since it la cks its own mind. . To apply the doctrine of separate juridical personality would allow criminals to use the corporation as a shield or cloak to hide their criminal activities behind such. . However, the liability of officers were delineated in case of Sia where the cour t held that theresponsible officer is personally liable is personally liable for crimes committed by the corporation only in a situation where the corporation was directly required by l aw to do an actin a given manner, and the same law makes the person who fails to perform the act in theprescribed manner expressly liable criminally. NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the law is currently undergoing changes such that juridical persons are also def ined as offendersof criminal acts, as with the case of the Anti-Money Laundering Act. . Art. 102 of the RPC: Subsidiary civil liability of innkeepers, tavern-keepers an d proprietors ofestablishments In default of the persons criminally liable, innk eepers, tavern-keepers and any other person or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some g eneral orspecial police regulation shall have been committed by them or their em ployees. Innkeepers are also subsidiarily liable for the restitution of goods taken by ro bbery or theft within their houses from guests lodging therein, or for the payment of the value therefore, provided that such guests shall have notified in advance the innkeepe r himself, orthe person representing him, of the deposit of such goods within th e inn; and shall

furthermore have followed the directions which such innkeeper or his representat ive mayhave given them with respect to the care of and vigilance over such goods . No liability shallattach in case of robbery with violence against or intimidat ion of persons unless committedby the innkeeper s employees. . Art. 103 of the RPC: Subsidiary civil liability of other persons The subsidiary liabilityestablished in the next preceding article shall also apply to employers , teachers, persons andcorporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of duties. No criminal suit can lie against an accused who is a corporation. Times, Inc. v. Reyes, 39 SCRA 303 (1971). When a criminal statute forbids the corporation itself from doing an act, the pr ohibitionextends to the board of directors, and to each director separately and individually. People v. Concepcion, 44 Phil. 129 (1922). While it is true that a criminal case can only be filed against the officers and not againstthe corporation itself, it does not follow that the corporation cann ot be a real-party-in-interestfor the purpose of bringing a civil action for mal icious prosecution for the damages incurredby the corporation for the criminal p roceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).

Revised Bagtas Reviewer by Ve and Ocfe 2A Q: Why can the corporation be held liable for tortuous acts done by its agent bu t not forcriminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligen ce could bepart of every transaction. It is an integral part of corporate transa ctions. For as long as peoplecomprise the corporation, it is within the contempl ation of every corporate act. 6. Recovery of Moral and Other Damages A corporation, being an artificial person, cannot experience physical sufferings , mentalanguish, fright, serious anxiety, wounded feelings, moral shock or socia l humiliation which arebasis for moral damages under Art. 2217 of the Civil Code . However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral d amages. Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Cour t of Appeals, 300 SCRA 579 (1998). A corporation, being an artificial person and having existence only in legal con templation, has no feelings, emotions nor senses; therefore, it cannot experience physical s uffering andmental anguish. Mental suffering can be experienced only by one havi ng a nervous systemand it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by anartificial person. Prime White Cement Corp. v. IA C, 220 SCRA 103 (1993); LBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. Cour t of Appeals, 260 SCRA 714 (1996); Solid Homes, Inc. v. Court of Appeals, 275 SCRA 26 7 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001). The statement in People v. Manero and Mambulao Lumber Co. v. PNB, that a corpora tionmay recover moral damages if it has a good reputation that is debased, result ing in socialhumiliation is an obiter dictum. Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. A BS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999). 7. CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123) . Section 123: Definition and rights of foreign corporations For the purposes of t his Code, aforeign corporation is one formed, organized or existing under any la ws other than those ofthe Philippines and whose laws allow Filipino citizens and corporations to do business in thePhilippines after it shall have obtained a li cense to transact business in this country inaccordance with this Code and a cer tificate of authority from the appropriate government agency. There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporation that a corporation is of the nationality of the count ry under whoselaws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationality of the majority stock holders, whereincontrol is vested.

. Situation #1: 51% Filipino 49% Japanese Under the control test, the nationalityc annot be determined because for a group of stockholders to exercise control over acorporation it is required by the Corporation Code that they at least control 60% of the corporation. Why 60%? Because under the Corporation Code for a group of personst o incorporate a corporation, at least 5 persons are required by law. A majority of the 5is 3 and converting it into percent, one gets 60%. We can say that in fa ct 51% ismajority but in a group of 5 people 51% is 2 & 1/5, there really is no 1/5 of a person. . Situation #2: 60% Filipino 40% Japanese Under the control test, this is consider ed a

Filipino corporation. 3.) Principal place of business applied to determine whether a State has jurisdi ction over theexistence and legal character of a corporation, its capacity or po wers, internal organizations, capital structure, rights and liabilities of directors. Q: Do all three tests apply in the Philippines? A: Yes. The first test is considered the primary test, the second one is used to determine whethera corporation can engage in nationalized activities in the cou ntry, and the third one is used todetermine the jurisdiction of the State to enf orce for instance taxation laws. Q: What is the importance of determining the nationality of the corporation? A: It is necessary so as to determine whether or not a corporation can enter int o varioustransactions or engage in different industries. And also, the legal fic tion supporting a corporationis valid only within Philippine territory. Q: It was said that the place of incorporation is the primary test to determine the nationality ofthe corporation, why then are there other tests used? A: There are certain aspects of the Philippine economy that require that the con trolling test incorporations engaging in said type of business be that of Filipi nos. The nationalized economicsectors are primarily focused at making Filipino i nterests benefit directly from the bounties of thiscountry. The place of incorpo ration test need not have been expressly provided by theConstitution since it is an integral part of our law specifically the power of Congress to grantprimary franchise to corporations. The place of incorporation test is deemed the primary test. It isa true test of nationality. Being a creature of law of the place whe re it was incorporated, thecorporation cannot escape said law. By providing for the control test, the Constitution is providingfor a secondary test to determine which corporations are entitled to entry in nationalized sectors. Q: What is the implication of having a primary test and a secondary test? A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically it is deemed to be a foreign corporation. However, having passed t he first test, thenationality of the corporation may have been established but t his does not mean that thecorporation is entitled to enter every single economic sector of the Philippines. The control testdetermines now whether the corporati on fulfills the equity requirements of the Constitution. Indoing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Const itution; aRoman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Regist er of Deeds of Davao, 102 Phil. 596 [1957]). . Sec. 140 Stock ownership in certain corporations Pursuant to the duties specifie d byArticle XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has bee nused by any corporation of by business or industry to frustrate the provisions thereofor of applicable laws, and shall submit to the Batasang Pambansa, wheneve r deemednecessary, a report of its findings, including recommendations for their prevention orcorrection. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to the individuals or groups of individual

s relatedto each other by consanguinity or affinity or by close business interes ts, or whenever itis necessary to achieve national objectives, prevent illegal m onopolies or combinationsin restrain or trade, to implement national economic po licies declared in laws, rulesand regulations designed to promote the general we lfare and foster economic development.

Revised Bagtas Reviewer by Ve and Ocfe 2A 25 25 In recommending to the Batasang Pambansa corporations, business or industries to bedeclared vested with a public interest and in formulating proposals for limit ations onstock ownership, the National Economic and Development Authority shall consider thetype and nature of the industry, the size of the enterprise, the eco nomies of scale, thegeographic location, the extent of Filipino ownership, the l abor intensity of the activity, the export potential, as well as the other factors which are germane to the real izationand promotion of business and industry. . Sec. 2 Art. XII All lands of the public domain, waters, minerals, coal, petroleum and other mine raloils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and faunaand other natural resources are owned by the State. With the exc eption of agriculturallands, all other national resources shall under the full c ontrol and supervision of theState. The State may directly undertake such activi ties or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, orcorpor ations or associations at least sixty percentum of whose capital is owned bysuch citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditio nsas may be provided by law. In cases of water rights for irrigation, water supp ly, fisheries, or industrial uses other than the development of water power, benefic ial usemay be the measure and limit of the grant. The State shall protect the nation s marine wealth in its archipelagic waters, ter ritorialsea, and exclusive economic zone, and reserve its use and enjoyment excl usively toFilipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipinocitizens, as well as cooperative fish farming, with priority to subsiste nce fishermen andfishworkers in rivers, lakes, bays and lagoons The President may enter into agreements with foreign-owned corporations involvin geither technical or financial assistance for large-scale exploration, developme nt andutilization of minerals, petroleum and other mineral oils according to the general termsand conditions provided by law, based on real contributions to the economic growthand general welfare of the country. In such agreements, the Stat e shall promote thedevelopment and use of local scientific and technical resourc es. The President shall notify the Congress of every contract entered into in accord ancewith this provision within thirty days from its execution. ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO v THE LRC Facts: Mateo Rodis, a Filipino citizen and resident of Davao, executed a deed of sale o f a parcel ofland located in the same city in favor of the Roman Catholic Admini strator of Davao, a corporation sole organized and existing in accordance with Phil ippine laws. The incumbentadministrator is Msgr. Clovis Thibault, a Canadian cit izen. When the deed was presented tothe Register of Deeds for registration, it r equired them to submit an affidavit stating that theownership of the corporation is 60% Filipino citizens as required under the Constitution. Roman Catholic stated that it was a corporation sole (meaning only one incorpora tor) and thatthe totality of the Catholic population in Davao would become the o

wner of the property. Register of Deeds doubted this and submitted the case for en consulta in the Lan d Registration Commission. LRC ruled that the requirement of the Constitution must be followedand since the 60% cannot be complied with, the registration should b e denied. Hence, thisappeal. Issue: WON the Roman Catholic Apostolic Church, being a corporation sole, can la wfullyacquire lands in the Philippines. Held: YES. . Corporation sole a special form of corporation usually associated with the clerg ydesigned to facilitate the exercise of the functions of ownership of the church which

was registered as property owner. It is created not only to administer the tempo ralitiesof the church or religious society where the corporator belongs, but als o to hold andtransmit the same to his successor in said officer. . The incumbent administrator is not the actual owner of the land but the constitu ents or those that make up the church, thus it is their nationality that has to be ta ken intoconsideration. The corporation sole only holds the property in trust for the benefit ofthe Roman Catholic faithful. Dissenting opinion by Justice JBL Reyes In requiring corporations or association to have60% of their capital owned by Filipino citizens, the constitution manife stly disregarded thecorporate fiction i.e. the juridical personality of such cor poration or associations. It went behind the corporate entity and looked at the natural persons that composed it, and demanded that a clear majority in interest (60%) should be Filipino. Since under the rulesgoverning corporation sole, the members of the religious association c annot overrule or override the decisions of the sole corporator, then it would be wrong to conclud e that thecontrol of the corporation sole would be in the members of the religio us association. NOTE: The Roman Catholic Church is a corporation by prescription, with acknowled gedjuridical personality inasmuch as it is an institution which antedated almost a thousand yearsany other personality in Europe, and which existed when Grecian eloquence still flourished inAntioch and when idiots were still worshipped in t he temple of Mecca. Since it is a corporationby prescription, it has no national ity, and hence, the nationality test does not apply. (But referto below.) Q: Why is this case relevant to us? A: It is relevant because while it tells us that a corporation sole is not subje ct to thenationality test, it must be further qualified to mean that this is the case only insofar as thecontrol test is concerned. Nationality is irrelevant in sofar as this test is concerned. However, itbecomes relevant when the place of i ncorporation comes into play since the case neversought to touch the place of in corporation test. The registration of the donation of land to an unincorporated religious organiza tion, whose trustees are foreigners, would violate constitutional prohibition and the refusalwould not be in violation of the freedom of religion clause. The fact tha t the religiousassociation has no capital stock does not suffice to escape the co nstitutional inhibition, since it is admitted that its members are of foreign nationality. . . and the sp irit of the Constitution demands that in the absence of capital stock, the controlling membe rship should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955). (b) Public Utilities (Sec. 11, Art. XII, Constitution; aPeople v. Quasha, 93 Phi l. 333) . Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation o f publicutility shall be granted except to citizens of the Philippines or to cor porations orassociations organized under the laws of the Philippines at least si

xty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate o rauthorization be exclusive in character or for a longer period than fifty years . Neithershall any such franchise or right be granted except under the condition that it shall besubject to amendment, alteration or repeal by the Congress when the common goodso requires. The State shall encourage equity participation in p ublic utilities by thegeneral public. The participation of foreign investors in the governing body of anypublic utility enterprise shall be limited to their pro portionate share in its capital, andall the executive and managing officers of s uch corporation or association must becitizens of the Philippines. NOTE: Stock ownership must at least be 60% Filipino but management must be 100% Filipino for such corporation to operate in industries concerning public utiliti es.

Revised Bagtas Reviewer by Ve and Ocfe 2A PEOPLE v QUASHA Facts: William Quasha, a member of the Philippine Bar was charged with falsification of public andcommercial documents in the CFI. He was entrusted with the preparatio n and registration ofthe articles of incorporation of Pacific Airways Corporatio n but he caused it to appear thatArsenio Baylon, a Filipino had subscribed to an d was the owner of 60% of subscribed capitalstock. Such was not case because the real owners of said portions were really Americancitizens. The purpose of such false statement was to circumvent the Constitutional mandatethat no corporation shall be authorized to operate as a public utility in the Philippines unless60% of its capital is owned by Filipinos. Held:

The falsification imputed to Quasha consists in not disclosing in the Articles o f Incorporationthat Baylon was a mere trustee of the Americans, thus giving the impression that Baylonsubscribed to 60% of the capital stock. But contrary to th e lower court s assumption, theConstitution does not prohibit the mere formation o f a public utility corporation without therequired proportion of Filipino capita l. What it does prohibit is the granting of a franchise orother form of authoriz ation for the operation of a public utility to a corporation already inexistence but without the requisite proportion of Filipino capital. From the language of thetext, the terms franchise , certificate , and other form of authorization are qualif ed by thephrase for the operation of public utility. As such, these terms cannot a nd do not refer to thecorporation s primary franchise, which vests a body of men w ith corporate existence, but to itssecondary franchise, or the privilege to oper ate as public utility after the corporation hasalready gone into being. Primary franchise refers to that franchise which invests a body of men with corp orateexistence, while the secondary franchise is the privilege to operate as a p ublic utility after thecorporation has already come into being. For the mere formation of the corporation, such revelation was not essential and the corporation law does not require it. Therefore, Quasha was under no obligation t o make it. Inthe absence of such obligation and of the alleged wrongful intent, Quasha cannot be legallyconvicted of the crime with which he is charged. A corpo ration formed with capital that isentirely alien may subsequently change the nat ionality of its capital through transfer of sharesto Filipino citizens. The conv erse may also happen. Thus for a corporation to be entitled tooperate a public u tility, it is not necessary that it be organized with 60% of its capital ownedby Filipinos from the start. Said condition, may at any time be attained through t he necessarytransfer of stocks. The moment for determining whether a corporation is entitled to operate aspublic utility is when it applies for a franchise, cer tificate or any other form of authorization forthat purpose and that can only be done after the corporation has already come into being notwhile being formed. Q: Why are we studying Quasha? A: This case makes a distinction with the grant by the government of primary and secondaryfranchise. As far as doctrinal pronouncements are concerned, any and a ll type of corporationsmay be incorporated, so long as the requirements for inco rporation are fulfilled and that itspurpose is lawful and not contrary to law or public policy. The violation of equity requirementswith regard to entry into na tionalized sectors as provided by the Constitution come only intoplay when the s econdary franchise is granted. In granting the secondary franchiseconsiderations of equity are now made.

CLV: Note that while Quasha makes such doctrinal pronouncements, in practice, th is is not thecase. SEC will refuse to register the Articles of Incorporation if it is not 60% owned by Filipinos. In fact, Quasha lied in order to have the articles registered.

The primary franchise, that is, the right to exist as such, is vested in the ind ividualswho compose the corporation and not in the corporation itself and cannot be conveyed inthe absence of a legislative authority so to do. The special or s econdary franchises arevested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special o r secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964). The Constitution requires a franchise for the operation of a public utility; how ever, itdoes not require a franchise before one can own the facilities needed to operate a publicutility so long as it does not operate them to serve the public . There is a clear distinctionbetween operation of a public utility and the owners hip of the facilities and equipment used to serve the public. aTatad v.Garcia, Jr., 243 SCRA 436 (1995). TATAD v GARCIA Facts In 1989, DOTC planned to construct a light railway transit along EDSA. Initially , Eli LevinEnterprise Inc. was supposed to construct the LRT III on a Build-Oper ate-Transfer (BOT) basis. Subsequently, RA 6957 was enacted which provides for two schemes for the financi ng, construction and operation of government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT). DOTC issued a Department Or ders creating the Pre-qualification Bids and Awards Committee. EDSA LRT Consortium co mposed of10 foreign and domestic corporations, was one of the five groups who re sponded to theinvitation. And being the sole complying bidder, it was awarded th e contract. DOTC and EDSALRT Corp., Ltd. in substitution of the EDSA LRT Consort ium entered into an Agreement to Build, Lease and Transfer an LRT system for EDSA under the terms of the BOT Law. Agreement was subsequently revised and another Supplemental Agreement was also contracted. According to the agreements, the EDSA LRT III (MRT) will use light rail vehicles from abroad(Czech and Slovak Federal Republics) and will have a maximum carryin g capacity of 450,000passengers a day. It will have its own power facility and w ill have 13 passenger stations. Theprivate respondent will finance the entire pr oject required for a complete operational LRTsystem. Upon full or partial comple tion and viability, private respondent shall deliver the useand possession of th e completed portion to DOTC which shall operate the same. DOTC shall pay respondent monthly rentals, which is to be determined by an independent and internationally accredited inspection firm. As agreed upon, private respondent s c apital shallbe recovered from the rentals to be paid by DOTC, which in turn, sha ll come from theearnings of the MRT. After 25 years and after the DOTC shall hav e completed payment of therentals, ownership of the project shall be transferred to the latter. Petitioners argue that the Agreements, insofar as it grants EDSA LRT Corp. Ltd., a foreigncorporation the ownership of MRT, a public utility, violate the Consti tution. They claim thatsince the MRT is a public utility, its ownership and oper ation is limited by the Constitution toFilipino citizens and domestic corporatio n, not foreign corporations, like private respondent.

DOTC Secretary and private respondent on the other hand, contend that the nation ality requirement for public utilities mandated by the Constitution does not apply to private respondent. Also, these Agreements were already approved by President Ramos. Issue: WON the Agreements violated the Constitution (re: ownership/operation of a publicutility by a foreign corporation). Held: No. It is to be noted that what the private respondents own are the rail tracks, rol ling stocks likethe coaches, rail stations, terminals and power plant, which do not fall under public utility . While a franchise is needed to operate these facilities to serve the public, the y do not bythemselves constitute a public utility. What constitutes a public uti lity is not their ownershipbut their use to the public. While the Constitution r equires a franchise for the operation of

Revised Bagtas Reviewer by Ve and Ocfe 2A public utility, it does not however require a franchise before one can own the f acilities neededto operate a public utility so long as it does not operate them to serve the public. There mustbe a clear distinction between the operation of a p ublic utility and the ownership of thefacilities and equipments used to serve th e public. The right to operate a public utility mayexist independently and separ ately from the ownership of the facilities without operatingthem as a public uti lity, or conversely, one may operate a public utility without owning thefaciliti es used to serve the public. In the case, while private respondent is the owner of the facilities necessary t o operate theMRT, it admits that it is not enfranchised to operate a public util ity. In view of the incapacity, private respondent EDSA Corp. and DOTC agreed that on completion date, private r espondentwill deliver possession of the LRT system by way of lease of 25 years, during which periodDOTC shall operate the same as common carrier and private res pondent shall provide thetechnical maintenance and repair services to DOTC. In sum, private respondent will not run the light rail vehicles and collect fees from the ridingpublic. It will have no dealings with the public and the public will have no right to demand anyservices from it. A mere owner and lessor of the facilities used by a public utility is not apublic utility. Even the mere forma tion of a public utility corporation does not ipso factocharacterize the corpora tion as one operating a public utility. The moment for determining therequisite Filipino nationality is when the entity applies for a franchise certificate or a ny otherform of authorization for that purpose. Q: How does the case of Quasha differ from the case of Tatad? A: Quasha tells us that we have to look at the secondary franchise, i.e. to whom such is givenwhile Tatad tells us that it does not matter to whom the franchise is given but what matters iswho actually operates the utility. The latter case tells us that restrictions are not on the assetsof the corporations but on the e nterprise itself, thus control determines nationality and notthe beneficiaries. CLV: The Constitution restricts the juridical person as it controls theenterpris e. Note, that assets are different from the juridical person and from the busine ssenterprise itself. (c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution) . Sec. 11(1) Art. XVI The ownership and management of mass media shall be limited to citizens of thePh ilippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combination in restraint of trade or unfair competition shall be allowed. . Mass media includes the gathering, transmission of news, information, messages, signals and forms of written, oral and all visual communication and shall embrac e theprint medium, radio, television, films, movies, advertising in all its phas es and theirbusiness managerial. It does not include commercial telecommunicatio ns because such is a public utility. . The Constitutional requirements are much stricter for it requires that socks are

100% Filipino owned and managed. Sources: P.D. 36, amended by P.D.s 191 and 197; DOJ Opinion No. 120, s. of 1982; Sec. 2, P.D. 576; SEC Opinion, 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion, 15J uly 1991, XXV SEC QUARTERLY BULLETIN, (No. 4 December, 1991), at p. 31. Cable Industry: Cable TV operations shall be governed by E.O. No. 205, s. 1987. I fCATV operators offer public telecommunications services, they shall be treated just like apublic telecommunications entity. (NTC Memo Circular No. 8-9-95) Cable TV as a form of mass media which must, therefore, be owned and managed byFi lipino citizens, or corporations, cooperatives or associations, wholly-owned and managedby Filipino citizens pursuant to the mandate of the Constitution. (DOJ Op inion No. 95, s.

1999, citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70). . The National Telecommunications Commission which regulates and supervises thecab le television industry in the Philippines under Sec. 2 of EO 436 series of 1997 hasprovided under the NTC Memorandum Circular No. 8-9-95 under item 920(a) there ofprovides that [c]able TV operations shall be governed by E.L. No. 205 series of 1987. If CATV operators offer public telecommunications services, they shall be treate d justlike public telecommunications industry. . Under DOJ opinion No. 95 series of 1999, the Secretary of Justice taking its cue from Allied Broadcasting Inc. v. Federal Communications Commission 435 F.2d 70 considered CATV as a form of mass media, which must therefore be owned and managed by Filipinos, or corporations, cooperatives or associations, wholly-owne d andmanaged by Filipino citizens pursuant to the mandate of the Constitution. (d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution) . Sec. 11(2) Art. XVI The advertising industry is impressed with public interest and shall be regulate d by law forthe protection of consumers and promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy percentu m of thecapital of which is owned by such citizens shall be allowed to engage in the advertisingindustry. The participation of foreign investors in the governing body of entities in such industryshall be limited to their proportionate share in the capital thereof, a nd all the executiveand managing officers of such entities must be citizens of t he Philippines. . Only Filipino citizens or corporations or associations at least seventy percent of the capitalshall be allowed to engage in the advertising industry. It also pr ovides that the participation of foreign investors in the governing body shall be limited to the ir proportionate share in the capital thereof, and all the executive and managing o fficers ofsuch entities must be citizens of the Philippines. (e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951]; Davis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; Haw Pia v. China Banking Corp., 80 Phil. 604 [1948]). . In Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., the Court held that in times of war, the nationality of a private corporation is determined by the char acter orcitizenship of its controlling stockholders The court considered the jur idical entity as anenemy based on the fact that the majority of the stockholders of the respondent corporation were German subjects. It ruled that the control test was applicable o

nly inwar-time. It refused the sole application of the place of incorporation te st during the wartime to determine the nationality of an enemy corporation. (f) Investment Test as to Philippine Nationals (Sec. 3(a) & (b), R.A. 7042, Foreign Investments Act of 1991) . Under Sec. 3a of the FIA of 1991, the term Philippine national as it refers to a c orporateentity shall mean a corporation organized under the laws of the Philippi nes of which atleast 60% percent of the capital stock outstanding and entitled t o vote is owned and heldby citizens of the Philippines. NOTE: In this aspect, FI A is more liberal than the Constitutionwhich did not specify as to what type of share the 60% Filipino-ownership requirementpertained to. FIA, in this aspect, o nly referred to voting shares. . However, it provides that were a corporation and its non-Filipino stockholders o wn stocksin a SEC-registered enterprise, at least 60% of the capital stock outst anding and entitledto vote of both corporations must be owned and held by citize ns of the Philippines and atleast 60% of the members of the Board of Directors o f both corporations must be citizensof the Philippines, in order that a corporat ion shall be considered a Philippine national. Thelaw therefore limits the test to voting shares, but however makes it more stringent when it

Revised Bagtas Reviewer by Ve and Ocfe 2A comes to actual control by making a double 60% rule requirement as to both holdi ng andheld company, as well as their Board of Directors. Q: Why should not we infer that the 60% Filipino ownership requirement of the Co nstitution aspertaining to voting shares? A: Elementary rule of Statutory Construction that when the law does not distingu ish, neithershould we. Moreover, the right to vote is not the only right granted to stockholders, as theright to file suits against the Board of Directors is gr anted to them. Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign i nvestorswith respect to voting stocks and 40% Foreign investors with respect to non-voting stocks, under the FIA, is it a Philippine national? A: Yes, since FIA limits its scope to voting stocks. Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Fili pino (16) and 20% Foreign (4), is it a Philippine national? Can it therefore own land unde r theConstitution? A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects that FIA runs cont rary to theConstitution, which is the supreme law of the land, the former shall not apply. (g) Grandfather Rule (Opinion of DOJ No. 18, s. 1989, 19 January 1989; SEC Opinion, 6 November 1989, XXIV SEC QUARTERLY BULLETIN (No. 1-March 1990); SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990) . Shares belonging to corporations or partnerships at least 60% of the capital of which isowned by Filipino citizens shall be considered as of Philippine national ity, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, onlythe number of shares corresponding to such percentage shall be counted as of Philippinenationality. Example: partnership between ABC and X companies. A BC owns 60% with40% foreign and 60% Filipino-owned shares while X companie own 4 0% with 100% Filipino-owned shares. Under the SEC DOJ Rule, such partnership is Filipino-owne d. Moreover, under this rule once the 60% requirement is reached, there is no more need fortierring. . It must be stressed however that the aforequoted SEC rule applies only for purpo ses ofresolving issues on investments. The SEC was quick to add: [h]owever, while a corporation with 60% Filipino and 40% foreign equity ownership is considered a P hilippinenational for purposes of investment, it is not qualified to invest in o r enter into a jointventure agreement with corporations or partnerships, the cap ital or ownership of whichunder the constitution of other special laws are limit ed to Filipino citizens only. A jointventure arrangement would mean that such co rporation has become a partner and isdeemed then to be acting or involving itsel f in the operations of a nationalized activity bythe acts of the local partners by virtue of the principle of mutual agency applicable topartnerships. . There seems to be a conflict as to the applicability of the SEC Rule and to that of theForeign Investments Act but each in itself has advantages and disadvantag es, since bothrequire stringent requisites for a corporation to avail of its pri vileges. But under the

present scenario, the FIA is believed to be the default rule having been enacted morerecently that the SEC Rule. . GRANDFATHER RULE a method by which the percentage of Filipino equity in corporat ionsengaged in nationalized or partly nationalized areas of activity provided fo r under theConstitution and other national laws is accurately computed, in cases where corporateshareholders are part of the ownership structure by considering the nationality of thesecond or even subsequent tier of ownership to determine t he nationality of the corporateshareholder. Q: When is the GFR applied? A: The GFR is applied in cases where the corporation has corporate stockholders with alienstockholdings, otherwise, if the rule is not applied, the presence of such corporatesrockholders could diminish the effective control of Filipinos.

. SITUATION #1 Silahis International Hotel, the capital stock of which is 69% owne d byanother corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties inturn is 53% alien-owned and 47% Filipino-owned. The SEC through the GFR stated thatSilahis International Hotel can engage in partly nationalized bu siness because the Filipinoequity in said corporation is 63.43% while the foreig n equity in said corporation is 36.57%. SILAHIS INTERNATIONAL HOTEL Hotel Properties Inc. 69% 1.) 53% Foreign 47% Filipino Filipino stockholdings 31% 47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in Silahis) TOTAL: 63.43% . SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a corporatio nregistered in the Philippines 60% of which is owned by Maria, a Filipino, while 40% isowned by George, a German. Q: Can Pinoy, Inc. enter into the operation of a television station? A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqu alified since 24% of Pinoy is owned by George. But under the present investment regime of the Phil ippines, theFIA provides that corporations which are 60% owned by Filipino citiz ens shall be considered ofPhilippine nationality. It is defined under said law t hat for the purposes of investment such acorporation of 60% Filipino and 40% for eign equity is allowed to invest in a corporationengaged in a nationalized secto r. Q: Does this not contradict the very provisions of the Constitution? A: It does not because the main purpose of such provision of the law is to spur investmentsinto the Philippine economy. What it specifically prohibits is for a corporation with a foreignequity to engage in nationalized industries. Note the difference in the use of terms, namely to engage as opposed to to invest. Engaging in nationalized industries involve directparticipation in the exploitation or use of natural resources or entry into protected industriesvested with public intere st. This is what is prohibited from being entered into by nonnationals. Q: When should the GFR be applied? A: It should be applied when two requisites are met: (1) when there is involved a nationalizedor partly nationalized sector of Philippine economy and (2) when t here is tierring, meaning thecorporation is partly-owned by another corporation. Up to what level do you apply the grandfather rule? (aPalting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]) PALTING v. SAN JOSE PETROLEUM

Facts: San Jose Petroleum filed with the SEC a sworn registration statement for the reg istration andlicensing for sale in he Philippine voting trust certificate repres enting 2 million shares of itscapital stock of a par value of $0.35/share at P1/ share. It was alleged that the proceedsthereof will be used to finance the opera tions of San Jose Oil Co. which has 14 petroleumexploration concessions in vario us provinces. It was expressly conditioned that instead ofstock certificates, re gistered or bearer-voting trust certificates from voting trustees (Americans) will be given. San Jose Petroleum amended the application from P2M t o P5M at

Revised Bagtas Reviewer by Ve and Ocfe 2A reduced offering at P0.70/share. Palting, et.al filed with the SEC an opposition to said registration on the foll owing grounds: (1) the tie-up between SJP, a Panamanian corporation and SJO, a domestic corporation violatesthe Constitution, the Corp. Law and the Petroleum Act of 1949 (2) the i ssuer is not licensed totransact business in the Philippines (3) the sale of sha res is fraudulent (4) the issuer is basedon unsound business principles (sic). SJP claimed that it was a business to mineral resources in the Philippines, which leyAgreement, through a medium, the ssistance didconstitute transaction enterprise enjoying parity rights, with respect

may be exercised pursuant to the Laurel-Lang SJO. It contends that giving SJO financial a of business in the Philippines.

SJO is a domestic corporation 90% of which is owned by SJP, a Panamanian Corp. t he majorityinterest of which is owned by Oil Investments, Inc. another Panamania n Corp. The latter is inturn owned by Pantepec Oil Co. & PanCoastal Petroleum, b oth organized and existing underthe laws of Venezuela. Under the Constitution, the exploitation of natural resources shall be limited t o citizens of thePhilippines or to corporations or associations at least 60% of the capital of which is owned bysuch citizens. However, this right was earlier e xtended to US citizens by virtue of the ParityAgreement. Said US citizens can ei ther directly or indirectly own or control the business enterprise. Held: San Jose Petroleum is not entitled to Parity Rights: (1) It is not owned or cont rolled directly byUS citizens because it is owned and controlled by Panamanian c orporation; (2) Neither can itbe said that it is indirectly owned and controlled by US citizens because the controllingcorporation is in turn owned by two Venez uelan corporations; (3) Although the two Venezuelan corporations claim to be owned by stockholders residing in the US, th ere is noshowing that said stockholders were US citizens; (4) Even granting that these stockholdersare US citizens, it is still necessary to establish that thei r different states allow Filipinocorporations and citizens to engage in the expl oitation of natural resources. However, there isno such proof to this; (5) The w ord indirectly should not be unduly stretched in application. Q: Why are we studying Palting? A: It is because Palting enunciated the doctrine that for a corporation to compl y to thenationalization requirements of the Constitution, the equity requirement s establishing thenationality of the controlling interest in the corporation sho uld not be stretched to absurdity. The application of the GFR to determine the nationality of the ultimate controll er of a subjectcorporation cannot go beyond the level of what is reasonable. (h) Special Classifications (Sec. 140) . Sec. 140 Stock ownership in certain corporations Pursuant to the duties specifie d byArticle XIV of the Constitution, the National Economic Development Authority shall, from time to time, make a determination of whether the corporate vehicle has bee nused by any corporation of by business or industry to frustrate the provisions thereofor of applicable laws, and shall submit to the Batasang Pambansa, wheneve r deemednecessary, a report of its findings, including recommendations for their

prevention orcorrection. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to the individuals or groups of individual s relatedto each other by consanguinity or affinity or by close business interes ts, or whenever itis necessary to achieve national objectives, prevent illegal m onopolies or combinationsin restrain or trade, to implement national economic po licies declared in laws, rulesand regulations designed to promote the general we lfare and foster economic development. In recommending to the Batasang Pambansa corporations, business or industries to bedeclared vested with a public interest and in formulating proposals for limit ations on

stock ownership, the National Economic and Development Authority shall consider thetype and nature of the industry, the size of the enterprise, the economies of scale, thegeographic location, the extent of Filipino ownership, the labor inte nsity of the activity, the export potential, as well as the other factors which are germane to the real izationand promotion of business and industry. IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION See relevant portions of VILLANUEVA, Restatement of the Doctrine of Piercing The Veil of Corporate Fiction, 37 ATENEO L.J. 19 (No. 2, June 1993). IV. A. MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS 1. Sources: Sec. 2; Article 44, Civil Code . Sec. 2 Corporation defined A corporation is an artificial being created by opera tion oflaw, having the right of succession, and the powers, attributes, and prop erties expresslyauthorized by law or incident to its existence. . Article 44 The following are juridical persons: (2) other corporations, institutions and entities for public interest or purpose , created by law, their personality begins as soon as they have been constitutedac cording to law; (3) corporations, partnerships and associations for private interest or purposet o which the law grants a juridical personality, separate and distinct from thato f each shareholder, partner or member. 2. Importance of Protecting Main Doctrine: . The separate juridical personality includes the right of succession, limited lia bility, centralized management, and generally free transferability of shares of stock. T herefore, an undermining of the separate juridical personality of the corporation such as the application of the piercing doctrine, necessarily dilutes any or all of those at tributes. . FROM WHICH ATTRIBUTE OF THE CORPORATION DOES THE DOCTRINE OF PIERCING THE

Revised Bagtas Reviewer by Ve and Ocfe 2A VEIL OF CORPORATE FICTION FOCUS ON? 1) Centralized management Centralized management is not a natural occurrence. It is acreation of statute under Sec. 23 of the Corporation Code Compared to partners hips, partnerships have mutual agency under delectus personarum. Mutual agency is more of anatural occurrence since here the partner is a co-owner of the assets of th e partnership, maintaining his control over his property. In property law, there is what is cal led the sevenjuses of ownership. In partnership however, a partner retains all t his seven juses, albeit asa co-owner, through mutual agency. However, in a corpo ration, a stockholder abdicateshis jus dispossidendi, jus abutendi, etc. as to t he property he is placing inside a corporation retaining only to himself his jus fruendi, as to the dividends of hi s stocks. Thisis unnatural since a person is entitled to full use, enjoyment or dispossession of his property. But since under the Corporation Code, centralized management is provid edtherefore it is the means by which a corporation acts and conducts it business . As such, the piercing doctrine is not directed at the attribute of centralized management , becausein most instances, investors in a corporation hand the management of th e business of thecorporation to professionals. To do away with the central manag ement would place theinvestors who had taken no active part in the conduct of th e corporation to be liable aspartners with mutual agency. 2) Free transferability of assets Shares of stock represent (1) right to profits/di vidends (2) voting right (3) contingent right which recognizes a proprietary right of a mere aliquotshare in the proceeds after dissolution and distribution of corporate as sets. Therefore astockholder is neither owner nor co-owner of assets of a corpor ation. The assets of a stockholder are distinct from the assets of a corporation. The stockholders have no controlin the dispossession or acquisition of assets (only as to their votin g capacity in the management of the corporation). The stockholders however have the right to freel y dispose of his shares of stock to any and all person who may purchase it. There the corporation has no control. Applying the piercing doctrine as to the free transf erability ofhis assets cannot be done since jurisprudence points out that the pi ercing doctrine is aremedy of last resort. If a third party claimant has a claim as to the assets to be disposedof or acquired by a corporation can be afforded in other remedies whether it be intra orinter corporate. 3) Limited Liability and Separate Legal Personality Therefore it can be concluded t hat the piercing doctrine is directed at the limited liability attribute of the corporat ion (inconsonance with the separate juridical personality attribute).The piercin g doctrine in away undermines the separate juridical personality of a corporatio n allowing a party to lookbehind the veil of corporate fiction to remedy a claim or fraud. In looking behind the veil, aplaintiff seeks to make somebody liable for a claim either based on tort, breach of contract, etc. Since a corporation can only act through its agents; it is the sa me agentsthat are to be held liable. Therefore the attribute of limited liabilit y cannot be availed of ina piercing case since it is this attribute that is unde

rmined so as a wrong can be remedied. CLV: In viewing the main doctrine of separate juridical personality as to the pi ercing doctrine, the main doctrine actually pertains to equity. Equity refers to the part of the rights or interest an individual has in a corporation. Equity is comprised of two main parts which is (1) enterprise and (2)assets. It is the enterprise or the conduct of the business wh ich in effectundermines equity. Assets are those brought in by the stockholders during the formation ofthe corporation or may have been acquired during its exis tence. They are inanimate objectsthat require human intervention to move or be u sed. Thus, it can be said that it is not theassets that undermine equity which b ring about piercing. When an enterprise is conducted infraud or in perpetuation of a wrong the equity of the corporation is undermined. Since, a corporation must act through its agents, so the corporation being the principal, commissionsthese agents to act under that special commission. If an agent acts beyond the commission ofthe principal (as provided under its by-laws) it is the actor that should be held liable not thecorporation, since the corporation for a ll of its juridical existence is still abstract and a corporeal actor acts for it. Also a corporation cannot undermine equity, only th e actors. Sowhen these actors undermine equity, they lose limited liability and may be held liable. Therefore, the basis of piercing is on the enterprise not on equity or its asset s. Piercingregulates the enterprise of the corporation.

A corporation, upon coming into existence, is invested by law with a personality separateand distinct from those persons composing it as well as from any other legal entity to whichit may be related. This separate and distinct personality i s, however, merely a fiction created by law for conveyance and to promote the ends of justice. LBP v. Court o f Appeals, 364 SCRA 375 (2001). One of the advantages of a corporate form of business organization is the limita tion ofan investor s liability to the amount of the investment. This feature flows from the legaltheory that a corporate entity is separate and distinct from its stockholders. However, thestatutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield tocommit fraud, illegality or inequity; defeat public convenience; conf use legitimate issues; orserve as a mere alter ego or business conduit of a pers on or an instrumentality, agency or adjunct of another corporation. aSan Juan Structural v. Court of Appeals, 296 SC RA 631 (1998). SAN JUAN STRUCTURAL AND STEEL FABRICATORS v. CA Facts: San Juan entered into an agreement with Motorich for the transfer of a parcel of land. SanJuan paid a downpayment of 100,000, balance to be paid on or before Ma rch 2, 1989. SanJuan requested for the recomputation of the balance, Motorich s br oker Linda Aduca wrote thecomputation. San Juan and Motorich were supposed to me et in the office of San Juan butMotorich treasurer Mrs. Gruenberg did not appear . Despite repeated demands and in utterdisregard of its commitments had refused toe execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title (title was tr ansferred to spouses Gruenberg from ACL Corporation) Defendants, president and chairman of Mo torichdid not sign the agreement. Mrs. Gruenberg s signature as treasurer is insuf ficient. San Juanknew of this infirmity that is why it did not pay on time. The RTC and CA held that Mrs. Gruenberg did not have the authority as she did not obtain the signatures of pre sident andchairman, as such it was not ratified by the corporation. Issue: WON the doctrine of piercing the corporate veil may be applied. Held: The Court finds no reason to pierce the corporate veil of Respondent Motorich. P etitioner utterly failed to establish that said corporation was formed, or that it is oper ated, for thepurpose of shielding any alleged fraudulent or illegal activities o f its officers or stockholders, or that the said veil was used to conceal fraud, illegality or inequity at the e xpense of thirdpersons like petitioner. Veil can only be disregarded when it is utilized as a shield to commitfraud, illegality or inequity, defeat public conve nience, confuse legitimate issues or serve as amere alter ego or business condui t of a person or an instrumentality, agency or adjunct ofanother corporation. In Dulay, the sale of real property was contracted by the President of a close c orporation withthe knowledge and acquiescence of its board of directors. In the present case, Motorich is nota close corporation as previously discussed and the agreement was entered into by the

corporate treasurer without the knowledge of the Board of Directors. The Court i s not unaware that there are exceptional cases where an action by a director who singl y is thecontrolling stockholder, may be considered a binding corporate act and a board action isnothing more than a mere formality. The present case is not of t hem. Granting arguendo thatthe corporate veil of Motorich may be pierced, said p arcel of land would then be treated asconjugal property of the spouses Gruenberg , because the same was acquired during themarriage. There being no indication th at said spouses who appear to have been marriedbefore the effectivity of the Fam ily Code have agreed to different property regime, theirproperty relations would be governed by a conjugal partnership of gains. Neither spouse canalienate in f avor of another his interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the partnership has beenlegally dissolved. 3. Applications:

Revised Bagtas Reviewer by Ve and Ocfe 2A 37 37 (a) Majority Equity Ownership and Interlocking Directorship: Ownership of a majority of capital stock and the fact that majority of directors of acorporation are the directors of another corporation creates no employer-em ployee relationship with the latter's employees. aDBP v. NLRC, 186 SCRA 841 (1990) DBP v NLRC Facts: Philippine Smelter Corporation obtained a loan in 1983 from DBP to finance its i ron smeltingand steel manufacturing business. To secure the loan, PSC mortgaged to DBP real propertiesand chattels with its President Marcelo as co-obligor Beca use of this DBP became the majoritystockholder of PSC with stockholdings of P 31 M out of P 60 M subscribed and paid up capitalstock and took over PSC s management . PSC failed to pay and DBP foreclosed on the mortgaged realties and chattels. 40 alleged unpaid employees filed a petition fo r involuntaryinsolvency in the RTC against PSC and DBP. Said employees were empl oyed by Olecram Mining Corp., Jose Panganiban Ice Plant and Cold Storage, Inc. all impleaded as corespondent. They filed another complaint with the DOLE against PSC for non-payment of salaries, 13th month pay, incentive leave and separation pay. DBP was impleaded because theemployees considered DBP as the parent company of PSC. Since the DBP was the biggestcreditor of PSC, it held majority of stock and involved in manage ment through Board ofDirectors, DBP was considered to be by the employees as the ir employer. DBP was invokedabsence of E-E relationship in its Answer. The labor arbiter held DBP as liable for unpaidwages due to PSC s foreclosure which it caus ed as foreclosing creditor. NLRC sustained this, hence, this petition. Held: DBP as foreclosing creditor could not be held liable for unpaid wages, etc. of t he employees ofPSC. The fact that DBP is a majority stockholder of PSC and PSC a re from DBP does notsufficiently indicate the existence of an E-E relationship b etween the terminated employees ofPSC and DBP. Said workers have no cause of act ion against DBP and the labor arbiter doesnot have jurisdiction to take cognizan ce of said case. Hence, ownership of a majority of capital stock and the fact the majority of dir ectors of acorporation are the directors of another corporation creates no E-E r elationship with thelatter s employees. Mere ownership by a single stockholder or by another corporation of all or nearl yall of the capital stock of a corporation is not of itself sufficient ground fo r disregardingthe separate corporate personality. Sunio v. NLRC , 127 SCRA 390 ( 1984); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina Integrated Wood Products, Inc. v. CA, 263 SCRA 490 (1996); Mani la Hotel Corp. v. NLRC, 343 SCRA 1 (2000). Mere substantial identity of incorporators of two corporations does not necessar ilyimply fraud, nor warrant the piercing of the veil of corporate fiction. In th e absence ofclear and convincing evidence to show that the corporate personaliti es were used toperpetuate fraud, or circumvent the law, the corporations are to

be rightly treated asdistinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996). Having interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or otherpublic policy considerations. Velarde v. Lopez, 419 SCRA 422 (2004); Sesbr eno v. Court of Appeals, 222 SCRA 466 (1993). (b) Being Corporate Officer: Being an officer or stockholder of a corporation do es notby itself make one's property also of the corporation, and vice-versa, for they areseparate entities, and that shareholders are in no legal sense the owne rs of corporate

property which is owned by the corporation as a distinct legal person. Good Eart h Emporium, Inc. v. CA, 194 SCRA 544 (1991). The mere fact that one is president of the corporation does not render the prope rtyhe owns or possesses the property of the corporation, since that president, a s anindividual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001). It is hornbook law that corporate personality is a shield against personal liabi lity ofits officers a corporate officer and his spouse cannot be made personally l iable undera trust receipt where he entered into and signed the contract clearly in his officialcapacity. Intestate Estate of Alexander T. Ty v. Court of Appeal s, 356 SCRA 61 (2001); Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001). (c) Dealings Between Corporation and Stockholders: The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. It is understandab le that a shareholder would want to help his corporation and in the process, assure thathis stakes in the said corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 (2001). Use of a controlling stockholder s initials in the corporate name is not sufficien treason to pierce the corporate veil, since by that practice alone does it mean that thesaid corporation is merely a dummy of the individual stockholder. A corp oration mayassume any name provided it is lawful, and there is nothing illegal i n a corporationacquiring the name or as in this case, the initials of one of its shareholders. LBP v. Court of Appeals, 364 SCRA 375 (2001). The mere fact that a stockholder sells his shares of stock in the corporation du ring the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockh olderhas no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v . IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001). Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction. Marubeni Corp . v. Lirag, 362 SCRA 620 (2001). The creation by DBP as the mother company of the three miningcorporations to man age and operate the assets acquired in the foreclosuresale lest they deteriorate from non-use and lose their value, does not indicate fraud or wrongdoing and will not constitute application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001). The facts that two corporations may be sister companies, and that theymay be sha ring personnel and resources, without more, is insufficient toprove that their s eparate corporate personalities are being used to defeatpublic convenience, just

ify wrong, protect fraud, or defend crime. Padilla v. Court of Appeals, 370 SCRA 208 (2001). [CLV: In past decisions, such situation would generally warrant alter-ego piercing.] (d) On Privileges Enjoyed: The tax exemption clause in the charter of a corporat ioncannot be extended to nor enjoyed by even its controlling stockholders. Manil a Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895 (1936). (e) Obligations and Debts: Corporate debt or credit is not the debt or credit of thestockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989). A corporation has no legal standing to file a suit for recovery of certain parce ls of land owned by its members in their individual capacity, even when the corporatio n is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCR A 347

Revised Bagtas Reviewer by Ve and Ocfe 2A (1976). Stockholders have no personality to intervene in a collection case covering thel oans of the corporation since the interest of shareholders in corporate property ispurely inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa Francisco Mot ors Corp. v. Court of Appeals, 309 SCRA 72 (1999). The majority stockholder cannot be held personality liable for the attorney s fees charged by a lawyer for representing the corporation. Laperal Dev. Corp. v. Cour t of Appeals, 223 SCRA 261 (1993). Even when the foreclosure on the corporate assets was wrongful done, stockholders have no standing to recover for themselves moral damages; otherwise , itwould amount to the appropriation by, and the distribution to, such stockhol ders ofpart of the corporation s assets before the dissolution of the corporation and theliquidation of its debts and liabilities. APT v. Court of Appeals, 300 SC RA 579 (1998). The obligations of a stockholder in one corporation cannot be offset from the obligation of the stockholder in a second corporation, since the corporation has aseparate juridical personality. CKH Industrial and Dev. Corp v. Court of Appea ls, 272 SCRA 333 (1997). B. PIERCING THE VEIL OF CORPORATE FICTION: 1. Source of Incantation: United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905). The notion of corporate entity will be pierced or disregarded and the individual s composing it will be treated as identical if the corporate entity is being used as a cloak orcover for fraud or illegality; as a justification for a wrong; or a s an alter ego, an adjunct, or abusiness conduit for the sole benefit of the sto ckholders. Gochan v. Young, 354 SCRA 207 (2001); DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001) . 2. Nature of Doctrine (aTraders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997]) TRADERS ROYAL BANK v COURT OF APPEALS Facts: Filriters Guaranty Assurance Corporation (Filriters) is the registered owner of Central BankCertificate of Indebtedness (CBCI) with a face value of 500,000. Suc h was then transferred toPhilippine Underwriters Finance Corporation (Philfinanc e) under a Detached Assignment. Philfinance entered into a repurchase agreement with Traders Royal Bank over the CBCIwhereby TRB buys the CBCI and Philfinance will repurchase it on April 27, 1 981 for 519,361.11 Upon the default of Philfinance TRB sought to register the CBCI in it s name. CBrefused to register and transfer the CBCI due to the adverse claim of Filriters. (Filriters interjected the defense that Alfredo Banaria Senior VP of Filriters without any board

resolution, knowledge or consent of the board of directors executed the detached assignmentin favor of Philfinance. Subsequently, Alberto Fabella, Senior VP Com ptroller and Pilar JacobeSenior VP Treasury, of Filriters and of Philfinance exe cuted similar forms transferring the CBCIto TRB. As such the transfers were null and void.) TRB then went to the RTC of Manila and filed for mandamus to compel CB to regist er. Petitioner argued that the CBCI was a negotiable instrument and that it was a ho lder in due course. It also contended that Philfinance owned 90% of Filriter s equity and the two corporations have identical officers, this demanding the application of the doct rine of piecingthe veil of corporate fiction as to give validity to the transfer of the CBCI. Issue: WON the doctrine of piercing the veil of corporate fiction applicable in this case.

Held: The CBCI is not a negotiable instrument because it lacks the words of negotiabil ity. It is payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to T RB should haveput the latter on guard as to the title of Philfinance to dispose of the CBCI. Also the assignment of Filriters toPhilfinance was fictitious as the same is without cons ideration andwas contrary to the rules of CB Circular 70 which provides that any assignment shall not bevalid unless made by the registered owner in person or b y a duly authorized representative inwriting. Philfinance merely borrowed the CB CI from Filriters a sister corporation to guaranteefinancing corporations. The doctrine of piecing the corporate veil is an equitable remedy which may only be awardedin cases when the corporate fiction is used to defeat public convenie nce, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or busi ness conduitof a person. It requires the court to see through the protective shr oud which exempts itsstockholders from liabilities that ordinarily, they could b e subject to or distinguishes onecorporation from a seemingly separate one, were it not for the existing corporate fiction. Thecourt must be sure that the corpo rate fiction was misused.. It is the protection of innocent 3rd parties dealing with corporate entity that the law seeks to protect by this doct rine. In thiscase, other than the allegation that Filriters is 90% owned by Phil finance and the identity ofone shall be maintained as to the other, there is not hing else which could lead the court underthe circumstances to disregard their s eparate corporate personalities. There is no showingthat TRB was defrauded at al l when it acquired the subject certificate of indebtedness fromPhilfinance. The fact that Philfinance owns a majority share in Filriters is not by itself a ground to disregardtheir independent corporate entities. In Liddel & Co. Inc. v. CIR mere ownership by a singlestockholder or by another corporation of all or n early all of the capital stock of a corporation isnot itself a sufficient reason to disregard the fiction of separate corporate personalities. TRB being a commercial bank which deals with corporate entities with circumstanc es showingthat the agents are acting in excess of corporate authority may not ho ld the corporationliable. This is only fair as everyone must in the exercise of his rights and in the performance ofhis duties, act with justice, give everyone his due and observe honesty and good faith. When the legal fiction of separate corporate personality is abused, such as when thesame is used for fraudulent or wrongful ends, the courts have not hesitated to pierce thecorporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). Piercing the veil of corporation fiction is warranted only in cases when the sep arate legalentity is used to defeat public convenience, justify wrong, protect f raud, or defend crime, such that in the case of two corporations, the law will regard the corporation a s merged into one. Velarde v. Lopez, 419 SCRA 422 (2004). The legal fiction of separate corporate existence is not at all times invincible and thesame may be pierced when employed as a means to perpetrate a fraud, conf use legitimateissues, or used as a vehicle to promote unfair objectives or to sh ield an otherwise blatantviolation of the prohibition against forum-shopping. Wh ile it is settled that the piercing ofthe corporate veil has to be done with cau tion, this corporate fiction may be disregardedwhen necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176

(2002). The nature of the piercing doctrine is to disregard the separate juridical perso nality of a corporationand to hold the actors or the stockholders of the corpora tion liable for a wrong committed or aliability avoided. In our lessons in corpo ration law, we distinguish the cause of the piercing because itwould explain of piercing is properly done. The Supreme Court does not go into an explanation ord irect attribution as to cause of the piercing which at times cause confusion, so to clarify matters weclassify the piercing case into three namely: (1) fraud (2 ) alter ego and (3) remedy. In the cases of fraud, the piercing is done because there is a wrong committed. Therefore, a personbehind the wrong must be held liable which in a corporation a re the directors, since the corporationacts through them. A piercing of the corp orate veil in fraud cases is for the purpose of making thedirectors directly lia ble. In fraud cases, the SC looks into the circumstances of the case searching f or

Revised Bagtas Reviewer by Ve and Ocfe 2A 41 41 elements of malice or evil motive. An absence of such an evil motive, the courts will not allow piercing. An example would be the case of TRB v. CA where the Court did not allo w piercing becausethere was no injury caused. Also in the Umali case, the court did not allow piercing because the mainintent was to annul a real estate mortgag e under an allegation of fraud and not to hold the Directorsliable. In both case s, piecing was not the proper remedy, even if fraud was actually alleged because the fraud committed was not attributed directly to the acts of the agents of the corporation. In alter ego cases, the allegation does not go into fraud or malicious intent bu t a disrespect for thecorporate fiction. Here, the corporation is being used as a conduit or front for the activities of aperson, whether natural or juridical, in order to avoid liability or gain advantage over another withoutreally employi ng fraud. Here, if piercing is allowed then the corporate existence of the condu itcorporation is disregarded and the person or corporation behind the corporatio n shall be consideredas one and the liability of one is the liability of the oth er. The main intent here is not to make theboard of directors of the conduit cor poration liable but to make the corporation behind the existenceof the conduit l iable. It is the objective of the Corporation Code to foster public convenience insanctioning the creation of a corporation not as a means or private convenienc e where it is to beused by other corporations or individuals as a means to circu mvent liability or cause a disruption ofnormal business practice in dealing with corporations. Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercingas an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alterego cases. As such it is of purely judicial discretion. The three cases may appear together in one application: FRAUD to prevent wrong disrespect for the corporate fiction and to defeat p

PIERCING DOCTRINE ALTER EGO ublic convenience EQUITY to do justice

The application of the doctrine to a particular case does not deny the corporati on of legalpersonality for any and all purposes, but only for the particular tra nsaction or instance forwhich such doctrine was applied. (a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitabl e doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. aPNB v. Ritratto Group, Inc ., 362 SCRA 216 (2001). (b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when other remedies are still available. aUmali v. Court of Appeals, 1 89 SCRA 529 (1990). UMALI v. COURT OF APPEALS Facts:

The Castillo family is the owner of a parcel of land which was given as security for a loan from theDBP. For failure to pay the amortization, foreclosure of the property was initiated. This was madeknown to Santiago Rivera, the nephew of pl aintiff Mauricia Meer vda. De Castillo and president ofSlobec Realty Dev. Corp. Rivera proposed to them the conversion into a subdivision lot of the fourparcels of land adjacent to the mortgaged property to raise the money. The Castillos ag reed so aMOA was executed between Slobec represented by Rivera and the Castillos . Rivera obliged himselfto pay the Castillos P70T after the execution of the con tract and P400T after the property had beenconverted into a subdivision. Rivera armed with the agreement approached Cervantes, president ofBormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180Tpayable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mor tgageover the said equipment as security for the unpaid balance. As further secu rity, Slobec obtained

through the Insurance Corporation of the Philippines a Surety Bond in favor of C ounter-Guaranty withREM executed by Rivera as president of Slobec and the Castil los as mortgagors and ICP as mortgagee. The Caterpillar Tractorwas delivered to Slobec. Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, theproperties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale wasissued in its favor and TCTs over the parcels o f land were issued by the Register of Deeds in favor ofICP. The mortgagors had o ne year from the registration of the sale to redeem the property but theyfailed to do so. ICP consolidated its ownership over the parcels of land. Later on ICP sold to PhilippineMachinery Parts Mfg. Co. the parcels of land and by virtue of said sale, PM transferred unto itself thetitle of the lots. PM parts through its President, Cervantes sent a letter to the Castillos to vacate theproperty. The Castillos refused to do so. Subsequently, Umali the administratix of the propert ies ofCastillos filed an action for annulment of titles. They countered that all the transaction starting fromthe Agreement of Counter-Guaranty with REM are voi d for being entered into in fraud. They seek topierce the veil of corporate enti ty of Bormaheco, ICP and PM Parts alleging that these corporationsemployed fraud in causing the foreclosure and subsequent sale of their land. The lower court r uled infavor of Umali. This was reversed by the CA. Held: The SC is not convinced that the contract entered into by the parties are fraudu lent. Under the doctrine of piecing the veil of corporate entity, when valid ground ex ists , the followingeffects would be produced: (1) legal fiction that a corporat ion is an entity with a juridical personalityseparate and distinct from its memb ers or stockholders may be disregarded (2) in such cases, thecorporation will be considered as a mere association of person (3) the members or stockholders ofth e corporation will be considered as the corporation, making them liable directly . It is onlyapplicable when corporate fiction is: (1) used to defeat public conv enience, justify wrong, protectfraud, or defend crime (2) made as a shield to co nfuse legitimate issued (3) where a corporation isthe mere alter ego or business conduit of a person (4) where the corporation is so organized andcontrolled and its affairs are so conducted as to make it merely an instrumentality., agency , conduitor adjunct of another corporation. The SC is of the opinion that piecing the veil is not the proper remedy in order that the foreclosureproceedings may be declared a nullity under the circumstanc es in the case at bar. Petitioners aremerely seeking the declaration of the null ity of the foreclosure sale, which relief may be obtainedwithout having to disre gard the aforesaid corporate fiction attaching to the respondent corporations. Petitioners also fail to establish by clear and convincing evidence that private respondents werepurposely formed and operated, with the sole intention of defra uding the latter. The facts showedthat the surety of ICP is good only for 12 mon ths therefore the surety had already expired. Thefailure of ICP to give notice r enders ICP to have no right to foreclosure. In this case, piercing need notbe re sorted to. Q: Why is Umali seeking to pierce the corporate entity? A: Umali is seeking to have the veil pierced because it would have shown that th e contracts enteredinto were fictitious and simulated, there being a fraudulent intent on the part of Bormaheco, ICP & PM parts to acquire the property of Umali through the foreclosure of the mortgag e by ICP. However, the court belied such allegation because the mere fact that the business of two

or more corporationsare interrelated is not a justification for disregarding the ir separate personalities, absent a sufficientshowing that the corporate entity was purposely used as a shield to defraud creditors and thirdpersons of their ri ghts. Q: Why are we studying Umali? A: The allegations made by Umali were based on fraud and yet the main objective of the suit was toannul the foreclosure of the mortgage. The Court found no reas on to pierce since the main objectivewas not in consonance with the remedy of pi ercing in a fraud case would do, which was to hold theBoard of Directors liable. Piercing is not allowed unless the remedy sought is to make the officer oranoth er corporation pecuniary liable for corporate debts. Q: What if it was based on alter ego? A: The probative factor show that no alter ego existed since there was no disres pect of the corporatefiction, the corporations each having its own way of conduc ting business. Even if it may be that theycompliment one another in their busine ss conduct, it does not form enough basis for their

Revised Bagtas Reviewer by Ve and Ocfe 2A circumvention of any liability. (c) Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make theofficer or another corporation pecuniarily liable for corporate debts (? ). Umali v. CA, 189 SCRA 529 (1990); aIndophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992). INDOPHIL TEXTILE MILL WORKERS UNION v CALICA Facts: Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusivebargaining unit of all rank and file employees of Indophil Text ile Mills. On April 1987, the Union andIndophil excecuted a CBA effective April 1, 1987 to March 31, 1990. On November 1987, IndophilAcrylic was formed and regi stered with the SEC. In 1998, Acrylic became international and hired workers according to its criteria and standards. Sometime in July 1989, the work ers of Acrylicunionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilitiesbuilt and set up by Acyrlic should be consider ed as an extension or expansion of Indophil pursuant toSec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, andinstall ations and to any extension and expansion thereat. The union sough that Acrylic be consideredpart of the bargaining unit. Their contention is that the articles of incorporation of the two corporation es tablish that the twoentities are engaged in the same kind of business, which is the manufacture and sale of yarns ofvarious counts and kinds and of other materi als of kindred character or nature. Furthermore, theyemphasize that the two corp orations have practically the same incorporators, directors and officers. Also the two corporation have their facilities in the same compound. That many o f Indophil s ownmachineries such as dyeing machines, reeler, broiler, were transfe rred to and are now being used bythe Acrylic plant. That services of a number of units, departments or sections of private respondentsare provided by Acrylic an d that the employees of Indophil are the same persons manning andservicing the u nits of Acrylic. Both parties submitted the issue to LA Calica. Calica ruled for Indophiland stated that Acrylic is not extension of Indophil an hence their CBA does not extend to theemployees of Acrylic. Issue: WON Acrylic is a separate and distinct entity from Indophil for purposes of union representation. WON the operations in Acrylic are an extension or expansion of I ndophil. Held: Acrylic is not an alter ego or an adjunct or a business conduit of Indophil beca use it has a separatelegitimate business purpose. Indophil engages in the manufa cture of yarns while Acrylic is to manufacture, buy, sell at wholesale basis, barter, import, export and otherwise deal in various kindsof yarns. Two corporations cannot be treated as single barg aining unit just because they haverelated businesses. The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade theapplication of the CBA. However the CA held that said doctri ne is only used on the existence of validgrounds. In the case at bar, the fact t

hat the business of Indophil and Acrylic are related thatsometimes the employees of Indophil are the same persons manning and providing for auxiliaryservices to the units of Acrylic, and that the physical plants, offices, and facilities are situated in thesame compound. It is the SC s considered opinion that these facts are not sufficient to justify thepiercing of the corporation veil of Acrylic. Fu rthermore, the legal entity is disregarded only if soughtto hold the officers an d stockholders liable. In the instant case, the Union does not seek relief from Indophil. LA CAMPANA COFFEE FACTORY v KAISAHAN NG MANGGAGAWA Facts: Tan Tong since 1932 has been engaged in the buying and selling gawgaw under the tradename La Campana Gawgaw Packing. In 1950, Tan Tong and members of his family organizedthe family corporation. La Campana Coffee Factory with its principal o ffice located in GawgawPacking. Prior to said information, Tan Tong entered into a CBA with the labor union of LaCampana Gawgaw. Later on, his employees formed Kaisahan ng mga Manggagawa ng LaCampana with an authorization from the DOLE to b ecome an affiliate of the larger union.

Kaisahan with 66 members presented a demand for higher wages and more privileges to LaCampana Starch and Coffee Factory. The demand was not granted and the DOLE certified theissue to the CIR. La Campana filed a motion to dismiss alleging th at the action was directedagainst two different entities with distinct personali ties. This was denied, hence this petition. Held: La Compana Gawgaw and La Campana Factory are operating under one single manageme nt or asone business though with two trade names. The coffee factory is a corpor ation and by legal fiction, an entity separate and apart from the persons composing it namely, Tan Tong and his family. However, the concept of separate corporate personality cannot be extended to a p oint beyondreason and policy when invoked in support of an end subversive of thi s policy and will be disregardedby the courts. A subsidiary company which is created merely as an agent for the latter may some timesbe regarded as identical with the parent corporation especially if the stoc kholders or officersof the two corporations are substantially the same or their systems of operation unified. Thefacts showed that they had one management, one payroll prepared by the same person, laborers were interchangeable, there is only one entity as shown by the signboar d ad intrucks, packages and delivery forms and the same place of business. The attempt to make the two factories appear as two separate businesses when in realitythey are but one, is but a device to defeat the ends of the law and shoul d not be permitted toprevail. WHY PIERCE? So that La Campana cannot evade the jurisdiction of CIR since La Cam pana Gawgawhas only 14 employees and only 5 are members of Kaisahan. CONTRASTING THE TWO CASES Q: Why did the court not also pierce Indophil Acrylic and declare that it is a m ere alter ego of Indophilwhen in fact the same circumstances in La Campana exist ? A: It may seem that the facts and circumstances are nearly the same between the two cases but theremedies are different. La Campana sought the protection of sep arate juridical personality so as itmay not fall under the jurisdiction of the C IR, there being a clear intent to be excused from thecoverage of Labor Laws whic h conferred the CIR s jurisdiction over the issue at hand. Although therewas no in tent to defraud, the creation of La Campana Coffee Factory was meant to excuse i tself fromCIR jurisdiction. However, in Indophil the facts of the case show that there was no clear showing thatIndophil meant to use Acrylic as a means of circ umventing Labor Laws. Altough the CBA betweenIndophil and its union provides tha t any expansion of Indophil s operations would also be covered bythe CBA, Acrylic is an altogether different business. What showed that there was no intent byIndo phil or Acrylic to circumvent labor laws is when Acrylic entered into a CBA with its ownemployees. There was clear independence of action between the relation o f Indophil and Acrylic as totheir respective employees, each constituting its ow n bargaining unit. Q: Could Indophil be considered as have superseded La Campana? A: CLV pointed out that were no mention of La Campana in the ruling in Indophil whether in supportor in contravention of this doctrine. It can be seen that actu ally there are no points where Indophilhad substantially changed the ruling in L a Campana. La Campana, in fact is being cited in casesdecided by the SC after In dophil, in the same way that Indophil continues to be cited. The criteriathat wh en it is established that between two corporations which have one set of manager

s or boardof directors; that there is a common stock ownership of both corporati ons; similarity of keepingcorporate books and in conducting their businesses are mere probative factors that are to beconsidered when the corporate mask may be lifted and the corporate veil pierced. It does not meanthat if these factors exi st, piercing is automatically required. There is for one no hard and fast ruleth at can be laid down. So that in La Campana, the factors weighed heavily for pier cing and inIndophil, against piercing.

Revised Bagtas Reviewer by Ve and Ocfe 2A Piercing is not available when personal obligations of an individual are to be e nforcedagainst the corporation (?) Robledo v. NLRC, 238 SCRA 52 (1994). The rationale behind piercing a corporation s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a s hield forundertaking certain proscribed activities. However, in the case at bar, instead of holdingcertain individuals or person responsible for an alleged corp orate act, the situation hasbeen reversed. It is the petitioner as a corporation which is being ordered to answer forthe personal liability of certain individua l directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. aFrancisco Motors Corp. v Court of Appeals, 309 SCRA 72 (19 99). Piercing doctrine is meant to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952). The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. Villanueva v. Adre, 172 SCRA 876 (1989). (d) Basis Must Be Clear Evidence: To disregard the separate juridical personalit y of acorporation, it is elementary that the wrongdoing cannot be presumed and m ust beclearly and convincingly established. The organization of the corporation at the timewhen the relationship between the landowner and the developer were st ill cordial cannotbe used as a basis to hold the corporation liable later on for the obligations of thelandowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999). The mere assertion by a Filipino litigant against the existence of a tandem between two Japanese corporations cannot be the basis for piercing, which can on ly beapplied by showing wrongdoing by clear and convincing evidence. Marubeni Co rp. v. Lirag, 362 SCRA 620 (2001). To disregard the separate juridical personality of a corporation, the wrongdoing mustbe clearly and convincingly established. It cannot be presumed. In this cas e, the Courtfinds that the Remington failed to discharge its burden of proving b ad faith on the partof Marinduque Mining and its transferees in the mortgage and foreclosure of the subjectproperties to justify the piercing of the corporate v eil. DBP v. Court of Appeals, 363 SCRA 307 (2001). The party seeking for the piercing of the corporate veil has the burden of prese nting clear and convincing evidence to justify the setting aside of the separate corpo rate

personality rule. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002) . Application of the doctrine of piercing the corporate veil should be done with c aution. A court should be mindful of the milieu where it is to be applied. It must be ce rtain thatthe corporate fiction was misused to such an extent that injustice, fr aud, or crime wascommitted against another, in disregard of its rights. The wron gdoing must be clearlyand convincingly established; it cannot be presumed. Other wise, an injustice that wasnever unintended may result from an erroneous applica tion. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002). (e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is n ot allowed when it is resorted under a theory of co-ownership to justify continued use and possession by stockholders of corporate properties. aBoyer-Roxas v. Court of App eals, 211 SCRA 470 (1992). . The piercing doctrine is an equitable remedy available only to persons outside t he corporation. It cannot be availed of stockholders within the corporation forming part of thecorporation. In comparison, CLV uses the Story of the Wall. This wal l is the main doctrine, designed both to protect the stockholders by virtue of the attribute of limited liability and tohide from prying eyes the inner workings of the corporation. Sto ckholders are inside these

walls. Piercing the veil of corporate fiction is like a battering ram that creat es a hole throughthis wall to allow third persons to look into the corporation t o see if there is a wrongcommitted inside those walls. A stockholder being insid e the fort are afforded other remedies, they have intra-corporate remedies to avail of. The piercing doctrine cannot be availed of to dislodge from SEC s jurisdiction ape tition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusi on of thepetitioning corporate debtor. The doctrine of piercing the veil of corpo rate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine on ly applieswhen such corporate fiction is used to defeat public convenience, just ify wrong, protectfraud or defend crime. Union Bank v. Court of Appeals, 290 SCRA 198 (1998). (f) Applicable to Third-Parties : That respondents are not stockholders of the sister corporations does not maketh em non-parties to this case, since it is alleged that the sister corporations ar e merealter egos of the directors-petitioners, and that the sister corporations acquired theproperties sought to be reconveyed to FGSRC in violation of director s-petitioners fiduciary duty to FGSRC. The notion of corporate entity will be pierced and the individuals composing it will be treated as identical if the corporate entity is being usedas a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. aGoc han v. Young, 354 SCRA 207 (2001). (g) Piercing is a power belonging to the court and cannot be assumed improvident ly by asheriff (?). Cruz v. Dalisay, 152 SCRA 482 (1987). 3. Consequences and Types of Piercing Cases:(Umali v. CA, 189 SCRA 529 [1990]) (a) Application of the doctrine to a particular case does not deny the corporati on of legalpersonality for any and all purposes, but only for the particular tra nsaction or instance, or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001). (b) Classification of Piercing Cases: Rundown on Piercing Application: This Court pierced the corporate veil to wardof f a judgment credit, to avoid inclusion of corporate assets as part of the estat e of thedecedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuselegitimate issues either to promote or to shield unfair objective s to cover up an otherwise blatant violation of the prohibition against forum shopping. Only is t hese andsimilar instances may the veil be pierced and disregarded. PNB v. Andrad a Electric & Engineering Co., 381 SCRA 244 (2002). (i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong (ii) Alter-ego Piercing: When corporate entity merely a farce since the corporat ionis merely the alter ego, business conduit, or instrumentality ofa person or a nother entity (iii) Equity Cases: When piercing the corporate fiction is necessary to achieve justiceor equity. The three cases may appear together in one application. See R.F. Sugay & Co., v.

Reyes, 12 SCRA 700 (1964). 4. Fraud Cases: When the legal fiction of the separate corporate personality is abused, such as when thesame is used for fraudulent or wrongful ends, the courts have not hesita ted to pierce the corporate veil. aFrancisco v. Mejia, 362 SCRA 738 (2001). In accordance with the foregoing rule, this Court has disregarded the separate

Revised Bagtas Reviewer by Ve and Ocfe 2A personality of the corporation were the corporate entity was used to escape liab ility to thirdparties. In this case, however, we do not find any fraud on the pa rt of the MarinduqueMining and its transferees to warrant the piercing of the co rporate veil. DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001). a) Acts by Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with a nothercorporation through fraud and false representations, such stockholder shal l be liablesoidarily with co-defendant corporation even when the contract sued u pon was entered into on behalf of the corporation. aNamarco v. Associated Finance Co., 19 SCRA 9 62 (1967). . CLV: As a general rule, an agent acting within the scope of his authority cannot be held liablefor acts done in behalf of the principal. However, when a wrong d one by a corporation isthrough a person in its behalf, piercing makes both of th em liable. In fact, an agents whocommits a crime or fraud can be held liable des pite the agency relation. Where the corporation is used as a means to appropriate a property by fraud whic h property was later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000). (b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegationthat the corporations true purpose is to avoid payment by the incorpor ating spouses ofthe estate taxes on the properties transferred to the corporatio ns: With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reducethe amount of what otherwise could be his taxes or altogether avoid the m, by meanswhich the law permits, cannot be doubted. Gala v. Ellice Agro-Industri al Corp., 418 SCRA 431 (2003). (c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liabil ity by incorporating properties or the business. aPalacio v. Fely Transportation Co., 5 SCRA 1011 (1962). . Q: Why should a case be classified as a fraud case, an alter ego case, etc.? A: In fraud cases, it is necessary that the petitioners seek to enforce the clai m against thestockholders or corporate officers. Since, in fraud cases only one act of fraud is necessary tohold them liable whereas in an alter ego case, a ser ies of transaction has to proven beforethey may be held liable. When used to avoid a contractual commitment against non-competition. aVilla Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968). (e) Avoiding Legal Restrictions: The corporate veil cannot be used to shield an otherwise blatant violation of th eprohibition against forum-shopping. Shareholders, whether suing as the majority

indirect actions or as the minority in a derivative suit, cannot be allowed to trifle withcourt processes, particularly where the corporation itself has not be en remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. First Philippine International Bank v. Court of Appeal s, 252 SCRA 259 (1996). (d) Parent-Subsidiary Relations; Affiliates: (Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]). . Q: Why is there an inordinate showing of the alter ego elements? A: In cases of parent-subsidiary relations, it is necessary that the factual cir cumstances beconsidered in order to distinguish between a case of fraud or alter ego. There may be aninordinate showing of alter ego elements but that does not necessarily make it an alter egocase. Therefore, alter ego in fraud cases must b e distinguished from pure alter ego. In fraudcases, the alter ego concept pertai ns to employing the corporation even for a singletransaction to do evil while in pure alter ego cases, the courts go into systematic findings of

utter disregard and disrespect of the separate juridical personality of the corp oration. (e) Guiding Principles in Fraud Cases: 4Why is there inordinate showing of alter-ego elements? 3

There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation byitself would not authorize piercing; and The main action should seek for the enforcement of pecuniaryclaims pertaining to the corporation against corporate officers orstockholders. 5. Alter-Ego Cases: (a) Factual Basis: The question of whether a corporation is a mere alter ego is a purelyone of fact, and the burden is on the party who alleges it. PNB v. Andra da Electric & Engineering Co., 381 SCRA 244 (2002); MR Holdings,Ltd. V. Bajar, 380 SCRA 617 (2002); Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996). (b) Using Corporation as Conduit or Alter Ego: Where the capital stock is owned by one person and it functions only for the ben efitof such individual owner, the corporation and the individual should be deeme d the same. aArnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923). When corporation is merely an adjunct, business conduit or alter ego of anotherc orporation, the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988). Where a debtor registers his residence to a family corporation in exchange ofsha res of stock and continues to live therein, then the separate juridical personal itymay be disregarded. PBCom v. CA, 195 SCRA 567 (1991). Neither has it been alleged or proven that Merryland is so organized and control ledand its affairs are so conducted as to make it merely an instrumentality, age ncy conduit or adjunct of Cardale. Even assuming that the businesses of Cardale andM erryland are interrelated, this alone is not justification for disregarding thei r separatepersonalities, absent any showing that Merryland was purposely used as a shield todefraud creditors and third persons of their rights. Francisco v. Me jia, 362 SCRA 738 (2001). Use of nominees to man the corporation for the benefit of the controlling stockholder. Marvel Building v. David, 9 Phil. 376 (1951). (c) Mixing-up Operations; Disrespect to the Corporate Entity: Employment of same workers; single place of business, etc., may indicate alter e go situation. aLa Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); aShoemart v. NLRC, 225 SCRA 311 (1993). Where two business enterprises are owned, conducted, and controlled by the samep arties, both law and equity will, when necessary to protect the rights of third

persons, disregard the legal fiction that two corporations are distinct entities and trea t them asidentical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992). Where corporate fiction was used to perpetrate social injustice or as a vehicle toevade obligations or confuse the legitimate issues (as in this case where the actions ofmanagement of the two corporations created confusion as to the proper employer ofclaimants), it would be discarded and the two corporations would be m erged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999). Mixing of personal accounts with corporate bank deposit accounts. Ramirez

Revised Bagtas Reviewer by Ve and Ocfe 2A Telephone Corp. v. Bank of America, 29 SCRA 191 (1969). 49 49 (d) Avoidance of taxes: aYutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961). YUTIVO & SONS INC. v CTA Facts: Yutivo is a domestic corporation engaged in the importation and sale of hardware supplies andequipment. It bought a number of cars and trucks from General Motor s Overseas Corporation. GMpaid sales tax on original sales on the basis of its s elling price to Yutivo. Yutivo paid no further tax onits sales to the public. So uthern Motors was then organized to engage in the business of selling cars, trucks, and spare parts with capital stock of 10,000 shares, 2,500 of which were subscribed in equalproportion by the children of Yutivo s incorporators. Under th is set-up, Yutivo would purchase thecars and tucks from GM then sell the same to SM which in turn sold them to the general public. ThenGM withdrew its operation s from the Philippines. Yutivo took over the importation of trucks and cars. It likewise continued to have the previous arrangement of selling exclusively to SM which in turn paidno such sales tax on its sales to the general public. The CIR made an assessment upon Yutivo anddemanded a sum representing deficiency sal es tax plus surcharges claiming that the taxable saleswere the retail sales shou ld be between SM to the general public and not the sale at wholesale madeby Yuti vo to SM since the two were one and the same corporation, SM being a mere subsid iary ofYutivo. CTA affirmed such a ruling and further stated that there was no l egitimate purpose in theorganization of SM apparently organized to evade the pay ment of taxes and that it was owned and controlled by Yutivo and is a mere branch, adjunct, conduit, instrumentality or alter ego ofYutivo. Issue: WON SM is a mere alter ego of Yutivo meant to defraud government of lawfu l tax revenues? Held: SM was not organized for the purpose of defrauding the government of lawful tax revenues because: (1) The intention to minimize taxes as in tax evasion when used in the context o f fraud, must beproven to exist by clear and convincing evidence amounting to mo re than the mere preponderanceof evidence. The evidence of the collector falls s hort of such standard. (2) SM was organized at a time when there was not yet tax to evade, when GM was still the importerand was the one paying the sales tax. (3) The transactions between Yutivo and SM were and have always been in the open , embodied inprivate and public documents, constantly subject to inspection by t ax authorities. (4) A taxpayer has the legal right to decrease the amount of what otherwise woul d be his taxesaltogether avoid them by means which the law permits. (5) However, SM was actually owned and controlled by Yutivo to make it a mere su bsidiary or branchof the latter. SM was organized by the leading stockholders of Yutivo. Yutivo was at all times in control if the majority stock of SM. The principal officers of both corporations are identical. Thus, thebusiness, financial and management policies of both cor porations could be directed towards commonends. The funds of SM are directly rem itted to Yutivo and subject to withdrawal only of Yutivo, SM sresources being unde r Yutivo s control. The accounting system maintained by Yutivo shows that itmainta ined a high degree of control over SM accounts. All transactions between Yutivo

and SM arerecorded and effected by mere debit or credit entries against the reci procal account maintained intheir respective books of accounts and indicate the dependency of SM as a branch of Yutivo. (6) Thus, SM being a mere instrumentality of Yutivo, the CTA correctly disregard ed the technicaldefense of separate corporate entity in order to arrive at the t rue liability of Yutivo. Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rath er than an alterego case? A: The Court had in this case ruled as to the legitima cy of acorporation to act as to seek means to decrease its tax liability. The di fference between Yutivo andTan Boon Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond thescope of his authority. In the forme r, evidence was seen to be insufficient as to establish a willfuldesire to evade taxes.

(e) Thinly-capitalized corporations: aMcConnel v. CA, 1 SCRA 722 (1961). . The fact that a corporation has no adequate capital enough basis for piercing. S uch pronouncement limits the advantage of creating a corporation. For example, in ca ses whereleveraging is undertaken which is considered as a legitimate business p ractice. (f) Parent-subsidiary; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 P hil. 97 (1946); PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990). . The person who invokes the doctrine must always be the injured party. Absence of proof that control over a corporation is being used by a mother company to commit fraud or wrong, there would be no basis to disregard their separate juridical personalities. Ramoso v. Court of Appeals, 347 SCRA 463 (2000 ); Guatson Int l Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990). If used to perform legitimate functions, a subsidiary s separate existence shall b erespected, and the liability of the parent corporation as well as the subsidiar y will beconfined to those arising in their respective businesses. Even when the parentcorporation agreed to the terms to support a standby credit agreement in favor of thesubsidiary, does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002). (g) Summary of Probative Factors: aConcept Builders, Inc. v. NLRC, 257 SCRA 149 (1996); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004). CONCEPT BUILDERS Inc. v NLRC Facts: Concept Builders is engaged in the construction business. Private respondents ar e employed by thecompany as laborers, carpenters and riggers. In November of 198 1, private respondents were servedindividual notices of termination by the compa ny. It stated that their contract had already expired. The NLRC discovered that the project for which they were hired was not yet even finished. In additionto this, Concept had to hire subcontractors whose works are the same as private respondents. A writof execution was issued which was partia lly satisfied through the garnishment of money from MWSSwhich is a debtor of Con cept and the balance was to be collected from Concept directly. But thesheriff r eported that when the writ was to be served the guard on duty refused it on the ground thatConcept no longer owned the premises and was now occupied by Hydro Pi pes, which had the sameBoard of Directors as Concept. Held: The veil may be pierced when it its just the alter ego of a person of another co rporation. The conditions under which the juridical entity may be disregarded vary accordin g to the peculiarfacts and circumstances of each case. No hard and fast rule can be laid down, but there are some probative factors of identity that will justify the application of the doctrine.

Summary probative factors: (1) stock membership by one ore common ownership of b oth (2) identityof directors and officers (management) (3) manner of keeping cor porate books and records (management) (4) methods of conducting business (management). While petitioners claimed that it ceased operations in 1986, it filed an Informa tion Sheet with the SECin 1987 stating that its office address is their old addr ess. Both information sheets were filed byVirgilio Casino, the same corporate se cretary. They had the same President, Board of Directors andsubstantially the sa me subscribers. (h) Guiding Principles in Alter-Ego Cases: Doctrine applies even in the absence of evil intent, because ofthe direct violat ion of a central corporate law principle of separating ownership from management; Doctrine in such cased is based on estoppel: if stockholders donot respect the s eparate entity, others cannot also be expected

Revised Bagtas Reviewer by Ve and Ocfe 2A to be bound by the separate juridical entity;

Piercing in alter ego cases may prevail even when no monetaryclaims are sought t o be enforced against the stockholders orofficers of the corporation. (i) Distinction Between Fraud Piercing and Alter-ego Piercing: aLipat v. Pacific Banking Corp., 402 SCRA 339 (2003). 6. Equity Cases: (a) When used to confuse legitimate issues. Telephone Engineering and Service Co ., Inc. V. WCC, 104 SCRA 354 (1981). (b) When used to raise technicalities. Emilio Cano Ent. v. CIR, 13 SCRA 291 (196 5). 7. Due Process Clause (a) Need to bring a new case against the officer. aPadilla v. Court of Appeals, 370 SCRA 208 (2001); McConnel v. Court of Appeals, 1 SCRA 723 (1961). A suit against individual shareholders in a corporation is not a suit against th ecorporation. Failure to implead the corporations as defendants and merely annex ing alist of such corporations to the complaints is a violation of due process f or it would ineffect be disregarding their distinct and separate personality wit hout a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001). Although both lower courts found sufficient basis for the conclusion that PKA an dPhoenix Omega were one and the same, and the former is merely a conduit of theo ther the Supreme Court held void the application of a writ of execution on a jud gmentheld only against PKA, since the RTC obtained no jurisdiction over the pers on ofPhoenix Omega which was never summoned as formal party to the case. The gen eralprinciple is that no person shall be affected by any proceedings to which he is astranger, and strangers to a case are not bound by the judgment rendered by the court. Padilla v. Court of Appeals, 370 SCRA 208 (2001). (b) When corporate officers are sued in their official capacity when the corpora tion wasnot made a party, the corporation is not denied due process. Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965). (c) Provided that evidential basis has been adduced during trial to apply the pi ercing doctrine. aJacinto v. Court of Appeals, 198 SCRA 211 (1991); Arcilla v. Court of Appeals, 215 SCRA 120 (1992).

V. xCLASSIFICATIONS OF CORPORATIONS 1. In Relation to the State: a) Public Corporation (Sec. 3, Act No. 1459). -one formed or organized for the government or a portion of the state -its purpose is for general good and welfare b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991); -marriage of both a public and a private corp. -it is granted the same powers as a private corp. but they have no incorporators, SH s or members -example: A water district, although established as a corporation, it wasestabli shed for the greater good and with no stockholders. They are also placed under the jurisdiction of the LWUA not the SEC c) Private Corporation (Sec. 3, Act 1459). -one formed for some private purpose, benefit or end. Government s majority shares does not make an entity a public corporation. Nationa l Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924). A corporation is created by operation of law under the Corporation Code while ag overnment corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994). The test to determine whether a corporation is government owned or controlled, o rprivate in nature is simple. Is it created by its own charter for the exercise of a publicfunction, or by incorporation under the general corporation law? Thos e with specialcharters are government corporations subject to its provisions, an d its employees areunder the jurisdiction of the Civil Service Commission, and a re compulsory members ofthe GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999) While public benefit and public welfare may be attributable to the operation of theBases Conversion and Development Authority (BCDA), yet it is certain that the functions itperforms are basically proprietary in nature the promotion of economi c and social development of Central Luzon, particularly, and the country s goal for enhancement . Therefore, the rule that prescription does not run against the State will not ap ply to BCDA, it being said that when title of the Republic has been divested, its grantees, a lthoughartificial bodies of its own creation, are in the same category as ordina ry persons. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Although Boy Scouts of the Philippines does not receive any monetary or financia lsubsidy from the Government, and its funds and assets are not considered govern ment innature and not subject to audit by the COA, the fact that it received a s pecial charter fromthe government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of thenation, it is not a public corporation in the same sense that municipal co

rporation or localgovernments are public corporation since its does not govern a portion of the state, but it

Revised Bagtas Reviewer by Ve and Ocfe 2A also does not have proprietary functions in the same sense that the functions or activitiesof government-owned or controlled corporations, is may still be consi dered as such, orunder the 1987 Administrative Code as an instrumentality of the Government, and itemployees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991). But being a GOCC makes it liable for laws and provisions applicable to the Gover nmentor its entities and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952). Beyond cavil, a GOCC has a personality of its own, distinct and separate from th at of the government, and the intervention in a transaction of the Office of the Presi dent through the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity. PUP v. Court of Ap peals, 368 SCRA 691 (2001). The doctrine that employees of GOCCs, whether created by special law or formed a ssubsidiaries under the general corporation law are governed by the Civil Servic e Law andnot by the Labor Code, has been supplanted by the 1987 Constitution. Th e present doctrine in determining whether a GOCC is subject to the Civil Service Law is th e manner of its creation, such that government corporations created by special charter ar e subjectthe Civil Service Law, while those incorporated under the general corpo ration law aregoverned by the Labor Code. PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission, 201 SCRA 593 (199 1). Section 31 of Corporation Code (Liability of Directors and Officers) is applicab le tocorporations which have been organized by special charters since Sec. 4 of CorporationCode renders the provisions supplementarily applicable to all corpora tions, including thosewith special or individual charters, such as cooperatives organized under P.D. 269, so longas those provisions are not inconsistent with s uch charters. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992). Water districts can validly exists as corporate entities under PD 198, and provi ded theyare government-owned or controlled, and their board of directors and oth er personnel are government employees subject to civil service laws and anti-graft laws. Felician o v. Commission on Audit, 419 SCRA 363 (2004). 2. As to Place of Incorporation: (a) Domestic Corporation -incorporated in the Philippines (b) Foreign Corporation (Sec. 123) -Sec. 123 Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws otherthan those of the Philippines and whose laws allow Filipino citizens and co rporationsto do business in its own country or state. It shall have the right to

do business in itsown country or state. It shall have the right to transact bus iness in the Philippinesafter it shall have obtained a license to transact busin ess in this country inaccordance with this Code and a certificate of authority f rom the appropriategovernment authority. -incorporated in another country and that country grants the same rights to Fili pinos interms of doing business there; it shall have the right to transact busin ess in the Philippinesafter it shall have obtained a license to transact busines s in this country in accordancewith this code & a certificate of authority from the appropriate government agency ( SEClicense after obtaining BOI certificate ) 3. As to Purpose of Incorporation:

(a) Municipal Corporation LGU s -can sue be sued without their consent ( as provided for by the LGC) -in certain instances considered as an adjunct to the national government but ha s been recognized to have a personality separate and distinct from the national governm ent. (b) Religious Corporation (Secs. 109 and 116) Section 109. Classes of religious corporations. -Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable. Section 116. Religious societies. -Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect or church, setting forth the following: 1. That the religious society or religious order, or diocese, synod, or district organization is a religious organization of a religious denomination, sect or church; 2. That at least two-thirds (2/3) of its membership have given their written consent or have voted to incorporate, at a duly convened meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or district organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a)

Since in matters purely ecclesiastical the decisions of the proper church tribun als areconclusive upon the civil tribunals, then a church member who is expelled from the membership by the church authorities, or a priest or minister who is by them dep rived of hissacred office, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).

Revised Bagtas Reviewer by Ve and Ocfe 2A (c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232) Section 106. Incorporation. -Educational corporations shall be governed by special laws and by the general provisions of this Code. (n) Section 107. Pre-requisites to incorporation. -Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve thearticles of in corporation and by-laws of any educational institution. (168a) Section 108. Board of trustees. -Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) normore than fifteen (15): Provided, however, That the number of trusteesshall be in multipl es of five (5). Unless otherwise provided in the articles of incorporation on the bylaws, the board of trustees of incorporated schools, colleges, or otherinstitutions of learning shall, as soon as organized, so classifythemselves that the term of of fice of one-fifth (1/5) of their numbershall expire every year. Trustees thereaf ter elected to fill vacancies, occurring before the expiration of a particular term, shall hold officeonly for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for thetransaction o f business. The powers and authority of trustees shall bedefined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporations. (169a) (d) Charitable, Scientific or Vocational Corporations (e) Business Corporation 4. As to Number of Members: (a) Aggregate Corporation (b) Corporation Sole (Secs. 110 to 115; Roman Catholic Apostolic Administrator o f Davao, Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 [1957]). Section 110. Corporation sole. -For the purpose of administering andmanaging, as trustee, the affairs, property and temporalities of anyreligious denomination, sect or church, a corporation sole may beformed by the chief archbishop, bishop, priest, minister, rabbi or otherpresiding elder of such religious denomination, sect or church. (154a) Section 111. Articles of incorporation. -In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi orpresid ing elder of any religious denomination, sect or church must filewith the Securi ties and Exchange Commission articles of incorporationsetting forth the followin g: 1. That he is the chief archbishop, bishop, priest, minister, rabbi orpresiding elder of his religious denomination, sect or church and thathe desires to become a corporation sole; 2. That the rules, regulations and discipline of his religiousdenomination, sect

or church are not inconsistent with his becoming acorporation sole and do not f orbid it;

3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and propertiesof his rel igious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chiefarchbishop, b ishop, priest, minister, rabbi of presiding elder is requiredto be filled, accor ding to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to beestablis hed and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (n) Section 112. Submission of the articles of incorporation. -The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi orpresiding elder, as the case may be, and accompanied by a copy of thecommission, certific ate of election or letter of appointment of suchchief archbishop, bishop, priest , minister, rabbi or presiding elder, dulycertified to be correct by any notary public. From and after the filing with the Securities and Exchange Commissionof the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or churchtheretofore a dministered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trustby him as a corporation sole, for the use, purpose, behalf and solebenefit of his relig ious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n) Section 113. Acquisition and alienation of property. -Any corporationsole may pu rchase and hold real estate and personal property for itschurch, charitable, ben evolent or educational purposes, and mayreceive bequests or gifts for such purpo ses. Such corporation may sellor mortgage real property held by it by obtaining an order for thatpurpose from the Court of First Instance of the province where theproperty is situated upon proof made to the satisfaction of the courtthat not ice of the application for leave to sell or mortgage has beengiven by publicatio n or otherwise in such manner and for such time assaid court may have directed, and that it is to the interest of thecorporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi orpresid ing elder acting as corporation sole, and may be opposed by anymember of the rel igious denomination, sect or church represented bythe corporation sole: Provided , That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporationsole regulat e the method of acquiring, holding, selling and mortgagingreal estate and person al property, such rules, regulations and discipline shall control, and the intervention of the courts shall not benecessa ry. (159a)

Revised Bagtas Reviewer by Ve and Ocfe 2A Section 114. Filling of vacancies. -The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accessionto office a nd shall be permitted to transact business as such on thefiling with the Securit ies and Exchange Commission of a copy of theircommission, certificate of electio n, or letters of appointment, duly certified by any notary public. During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect orchurch incorporated as a corporation sole, the person or personsauthorized and empowere d by the rules, regulations or discipline of thereligious denomination, sect or church represented by the corporationsole to administer the temporalities and ma nage the affairs, estate andproperties of the corporation sole during the vacanc y shall exercise allthe powers and authority of the corporation sole during such vacancy. (158a) Section 115. Dissolution. -A corporation sole may be dissolved and itsaffairs se ttled voluntarily by submitting to the Securities and ExchangeCommission a verif ied declaration of dissolution. The declaration of dissolution shall set forth: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise thewinding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities andExchange C ommission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Igle sia ni Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/ holdalienable lands of the public domain, because of the constitutional prohibit ion qualifyingonly individuals to acquire land and the provision under the Publi c Land Act which appliedonly to Filipino citizens or natural persons, has been e xpressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986).3 5. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20) Section 20. De facto corporations. -The due incorporation of anycorporation clai ming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired intocollateral ly in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quowarranto procee ding. (c) Corporation by Estoppel (Sec. 21) 3Overturning affirmed in Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Rep ublic v. IAC, 168 SCRA 165 (1988).

Section 21. Corporation by estoppel. -All persons who assume to actas a corporat ion knowing it to be without authority to do so shall beliable as general partne rs for all debts, liabilities and damages incurredor arising as a result thereof : Provided, however, That when any suchostensible corporation is sued on any tra nsaction entered by it as acorporation or on any tort committed by it as such, i t shall not beallowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in factno corpora tion. Q. Why is there piercing in a de facto corporation? A. Piercing is allowed because the intention of the law is to protect the contra cts entered into by thecorporation. 6. As to Existence of Shares (Secs. 3 and 5): Sec. 3 Classes of Corporation Corporations formed or organized under this Code m ay bestock or non-stock corporations. Corporations which have capital stock divi ded into sharesand are authorized to distribute to the holders of such shares di vidends or allotments of the surplus profits on the basis of the shares held are stock corporations. All othe r corporationsare non-stock corporations. Sec. 5 Corporations and incorporators, stockholders and members Corporators are thosewho compose a corporation, whether as stockholders or as members. Incorpora tors are thosestockholders or members mentioned in the articles of incorporation as originally forming andcomposing the corporation and who are signatories ther eof. Corporators in a non-stock corporation are called stockholders or shareholders. Corporators ina non-stock corporation are called members. (a) Stock Corporation (b) Non-Stock Corporation

Revised Bagtas Reviewer by Ve and Ocfe 2A VI. CORPORATE CONTRACT LAW See relevant portion of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No . 2, June 1994) INTRODUCTION: Corporate Contract Law contracts shaped by corporate law. . Form v. substance substance prevails . In the levels of the legal relationship, corporate contract law is used to resol veissues between the different levels between the juridical entity level, the co ntractrelationship level and the business entity level. Q: Why is there a need to distinguish corporate contract law from contract law? A: There is a need to distinguish between the two because there are certain inst anceswhere an application of corporate contract law principles are in direct con flict with contract law principles. An example would be in the situation where a corporatio n is beingincorporated, the corporation code in certain instances recognize the binding effect ofcontracts entered into in the pre-incorporation stage. But if c ontract law was strictlyapplied such a contract would be void since it lacks one vital element which is consent ofthe contracting parties. How does a corporatio n that does not exist yet give consent? Thisis where corporate contract law find its relevance. The conflict between the juridical entitylevel is reconciled wit h the contractual relationship level. (DOCTRINE: to validate the contract entered into by the supposed corporation) PROMOTER S CONTRACT C. BY ESTOPPEL DE FACTO or DE JURE DISSOLUTION Q: In order to reach the level of corporation by estoppel, what is the essential ingredient ofsuch doctrine? A: When there is a representation that a corporation exists when in fact there i s none andat least one party thought that there was a corporation. Q: Distinguish promoter s contract principles from the corporation by estoppel doc trine? A: In both the corporation does not exist. But in promoter s contracts there is no misrepresentation that the corporation does not yet exist. When the contracts ar e enteredinto by persons who in behalf of the corporation, acknowledging that th e corporation doesnot yet exist and is still in the process of incorporation, yo u do not apply the doctrine ofcorporation by estoppel. It is still what one may call as the promoter s contract. (Themoment there is no corporation and contracts are entered into under the representationthat the corporation does exist then th at is the only time you apply the doctrine ofcorporation by estoppel.) 1. Pre-Incorporation Contracts (a) Who Are Promoters? Promoter is a person who, acting alone or with others, takes initiative in foundin g andorganizing the business or enterprise of the issuer and receives considerat ion therefor. (Sec. 3.10, Securities Regulation Code [R.A. 8799]) CLV: The definition of promoter is important to determine the liability for prom oter s contract. Before you can make a promoter liable, you must be able to determine who is the promoter. Hemust be the one who takes initiative on the founding and organizatio

n of the business venturewhich eventually ends up as the corporation being organ ized. Q: At the promoter s stage there is no juridical personality until the SEC issues the certificate ofincorporation. Until the certificate is issued, the stage of t he de facto corporation has not yetbeen reached. Prior to the de facto corporati on stage what then is the status of the contractentered into by a promoter for a nd in behalf of the person or agent who had undertaken thetransaction? A: Unenforceable. It is not binding upon the corporation because it has not give n consent to theauthority of the person or agent who had undertaken the transact ion.

Q: How can ratification be done? A: Ratification can be done in two ways: (1) express ratification a mere board r esolutionmaking the corporation liable by accepting the contract and (2) implied ratification byaccepting of benefits (b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Tra ffic Co., Inc., 73 Phil. 557 [1942]). . Sec. 60 Subscription contract Any contract for the acquisition of unissued stock s in anexisting corporation or a corporation still to be formed shall be deemed as subscription withinthe meaning of this Title, notwithstanding the fact that t he parties refer to it as a purchase orsome other contract. . Sec. 61 Pre-incorporation subscription A subscription f or shares of stock of a corporationstill to be formed shall be irrevocable for a period of at least six months from the date ofsubscription unless all the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or wit hin a longerperiod as may be stipulated in the contract of subscription: Provide d, that no preincorporation subscription may be revoked after the submission of the articles o f incorporation to the SEC. CLV: Sec. 61 of the Corp. Code governs a pre-incorporation subscription agreemen t. Sec. 61 saysthat a pre-incorporation subscription agreement is irrevocable. T he only manner by which youcan revoke it is if ALL of the other subscribing stoc kholders consent to the revocation. Sec. 61 is aclear demonstration of the fact that a promoter s contract can be valid and even irrevocable. Inthe case of a preincorporation subscription agreement that contract is valid because there are in fact two parties. The party subscribed and all of the other parties who have sub scribed to theother incorporators and all of them bind themselves together to fo rm the corporation. That is whyit is irrevocable unless the other party which is all of the other subscribers, agree. (c) Theories on Liabilities for Promoter's Contracts (aCagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 [1937]; aRizal Light & Ice Co., Inc. v. Public Ser vice Comm., 25 SCRA 285 [1968]; aCaram, Jr. v. CA, 151 SCRA 372 [1987]). CAGAYAN FISHING DEVELOPMENT CO. INC. v. TEODORO SANDIKO Facts: Manuel Tabora , as owner of four parcels of land in Cagayan mortgaged the said properties to 1st secure his loan mortgage to PNB: P8000; 2nd mortgage to PNB: P7000; and 3rd mort gage toBauzon: P2900 which was registered and annotated on the titles of the pro perty. In 1930 Tabora soldsaid parcels to Cagayan Fishing Development Co., said to be under process of incorporation, subjectto the mortgages and with the condi tion that title will not be transferred until the corporation haspaid Tabora s ind ebtedness. Cagayan Fishing filed its Articles of Incorporation with the Bureau o fCommerce. The Board of Directors adopted a resolution authorizing its President Ventura to sell thefour parcels of land to Sandiko with the condition that he w ould shoulder the mortgage debts. Sandiko issued promissory notes to that effect. When Sandiko failed to comply wi th the obligation, the corporation filed a recovery suit. The lower court held that the contract is

void since it was entered into with a corporation that has no corporate existence at the time the properties weretransferred to it. Issue: WON Sandiko can be held liable for the mortgage debt? Held: The SC affirmed the decision of the TC. The fact of the matter is Sandiko cannot be held liable for the mortgage debt since there was no valid sale of the property, since at th e time when Cagayansupposedly acquired the property, it still had no juridical p ersonality to acquire property. There wasno transfer of lots from Tabora to Caga yan since Cagayan was only incorporated five months afterthe sale. 1.) A corporation should have full and complete organization and existence as an entity before it canenter into any kind of contract or transact any business. A corporation until organized has no being, franchises or faculties nor do those engaged in bringing it into being have no p ower to bind it bycontract, unless so authorized by the charter.

Revised Bagtas Reviewer by Ve and Ocfe 2A 61 61 2.) The contract entered into was not between Tabora and the corporation instead it was betweenTabora, as owner and Tabora, wife, plus others, as promoters of a corporation, since the corporationwas still non-existent. These promoters could not have acted as agents for a projected corporationsince that which had no leg al existence could have no agent. Although a corporation has no life untilorgani zed, it does not mean that under no circumstances may the act of promoters of a corporationbe ratified by the corporation if and when subsequently organized. Bu t said doctrine of ratification isnot applicable here. 3.) Cagayan could not have ows that it did notpossess diko. It was not even a de corporation at the time of enter into contracts. and did not acquire the four parcels of land. It foll any reluctant right to dispose of them by sale to San facto transfer so that it does not have the personality to

4.) Some peculiar circumstances: (a) Tabora formed a corporation by himself, wif e and others butsubscribed to P45,000 of P48,700 (capital stock subscribed); (b) the lands remained in Tabora sname despite the sale to the corporation and Sandik o regarded Tabora as the owner; (c) Venturasigned the contract in behalf of Tabo ra; (d) P/N issued by Sandiko was payable to the corporation toavoid being attac hed by Tabora s creditors. Q: Why are we studying Cagayan? A: This case espouses the element of contract law which is the lack of the eleme nt of consent; there being one party, the corporation, lacking a juridical personality; the con tract was thusdeclared void. Cagayan and Rizal provides us the doctrine that pro moter s contract must beadopted and ratified by the corporation. If the act of the promoter s is ratified then that act isbinding on the corporation. CLV: The court here dismissed the action against Sandiko on the basis that at th e time the propertieswere sold to the corporation, it had no legal existence, th erefore, it could not purchase anything. Having bought nothing when it sold the said properties to Sandiko, it had in fac t nothing to sell therefore there was no valid assumption of loans and neither were there promisso ry notes supportedby valid consideration. Q: What if Sandiko was aware at the time that the contract was entered that the corporation did notexist? What if the corporation invokes the doctrine of the co rporation by estoppel so that Sandikocould not raise the defense that at the tim e the fraud was committed, the corporation has no juridicalpersonality? A: Remem ber that the doctrine of corporation by estoppel is only applicable if at least one of the parties knew thata corporation existed when in fact it did not. In this c ase, the doctrine cannot apply because nobodywas in the belief that it existed a t the time when fraud was being committed. Even Tabora himselfknew from the star t that at the time of the transfer, the corporation did not exist. RIZAL LIGHT & ICE CO. INC. v. MUNICIPALITY OF MORONG Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Pub lic Service Commission, a certificate of public convenience for the installation, operation and management of anelectric light, heat, and power service in Morong, Rizal. PS C required Rizal light to show cause why itshould not be penalized for violation of the conditions of its CPC and for failure to comply withdirections to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancella tionand revocation of Rizal s CPC and forfeiture of its franchise. The order of re vocation was set aside when it was known that the company representative failed to appear due to illnes

s. The municipality of Rizal formally asked the PSC to revoke Rizal s CPC and forfeit ure of its franchise. PSC found that Rizal failed to comply with its directive and violated the condit ions of the CPC. PSCordered the cancellation and revocation of Rizal s CPC and the forfeiture of its franchise. Later, Morong Electric, having been granted a franchise by the Municipality of M orong, filed with thePSC an application for CPC. It later brought up the issue t hat Morong Electric had no legal personalitybecause its certificate of incorpora tion was issued only on October 17, 1962, while the applicationwas filed on Sept ember 10,1962. The motion to dismiss was denied on the ground that MorongElectri c is a de facto corporation. Thus, the PSC granted Morong Electric a CPC. Thus, this petition. Held: Decision affirmed.

Under the law, before any CPC may be granted, three requisites must be present: (1) citizen of thePhilippines or the US or a corporation, co-partnership, associ ation or joint-stock co. constituted andorganized under the laws of the Philippi nes, 60% at least of the stock or paid up capital of whichbelongs entirely to ci tizens of the Philippines or the US; (2) financially capable of undertaking thes ervice; (3) prove that the operation of the public service proposed will promote public interest. Petitioner contend that until a corporation has come into being, by the issuance of a certificate ofincorporation by the SEC, it cannot enter into any contract as a corporation and that its applicationwas null and void for being done prior to said issuance. Its contention that Morong ranchise did not yethave a Morong Electric began upon id time, the incorporators Electric, at the moment of application and grant of f legal personality is correct. The legal existence of issuance of thecertificate of incorporation before sa cannot be considered as de factocorporation.

But the fact that Morong Electric at the moment of the application and grant of franchise wasgranted does not render the franchise invalid because Morong later obtained its certificate of incorporation and accepted the franchise in accordance with the terms and condit ions thereof. While a franchise cannot take effect until the grantee corporation is organized, the f ranchise, may, nevertheless be applied for before the company is fully organized. The incorporation of Morong and its acceptance of the franchise as shown by its action in prosecutingthe application filed with the PSC for the approval of said franchise, not only perfected a contractbetween the Municipality of Morong and Morong Electric. CLV: The theory used here by the SC to validate the contract is the continuing o ffer theory. A grant ofthe franchise according to the SC, prior to the time that the corporation actually existed is like aconditional grant that will be effect ive upon the corporation s becoming a legal entity. Prior to that, itis merely a c ontinuing offer (on the part of the government). CARAM Jr. v CA Facts: Baretto and Garcia contracted the services of plaintiff Arellano to prepa re a project study forthe organization of Filipinas Orient Airways. For failure to pay such services, Arellano sued thecorporation, Baretto and Garcia and petit ioner Fermin and Rosa Caram as stockholders. They wereheld solidarily liable wit h their co-defendants. Hence, this petition. Peitioner Canson claims that said decision finds no support because they were me re investors in thecorporation later created. They should not be held solidarily liable with the corporation, who has aseparate juridical personality. Held: Petition granted. The services were acquired by virtue of the request of Baretto and Garcia so tha t a report can berepresented to financiers. Petitioners are not really involved in the initial steps that finally led to theincorporation of Filipinas Orient Ai rways which were being directed by Baretto. Petitioners were merely among the financiers whose interest was to be invited and who were persua ded to invest inthe airline. There was no showing that Filipinas was a fictitious corporation and did not hav

e a separate juridicalpersonality to justify making the petitioner, as principal stockholders, responsible for its obligations. As a bona fide corporation, Filipinas should alone be liable for its corporate a cts as duly authorized byits officers and directors. Thus, petitioner could not have been personally liable for the compensationclaimed by Arellano. CLV: The case tried to distinguish participation of a promoter from that of a pr omotee, in a venturethat actually becomes a corporation late on. Not every perso n, who participates in a venture that willlater become a corporation is a promot er. Q: How do you distinguish a participation of a promoter from that of a promotee who actstogether to form a corporation? A: The promotees are merely passive investors. A plan is given to them and if th ey like it, theyinvest. Promoters are the active participants. They found and th ey organize the corporation. According to Caram only the promoters should be liable. The SC held that a mere promotee(those who merely subscribe to the shares of stock) should not be held l iable for a promoter s

Revised Bagtas Reviewer by Ve and Ocfe 2A contract (just as an ordinary stockholder after a corporation has already been i ncorporatedcannot be held liable for more that beyond his investment). CLV: Remember that once a corporation is formed, it usually follows that all pro moter s contracts getratified because the corporation actually arises out of these contracts. The corporation usually has nochoice. It rarely rejects the contract s for such would be commercial suicide. Once the corporation isformed, the promo ter s contract of the corporation (if the latter accepts) and not the promoter s. Th isis why the promoter, once the corporation accepts, escapes liability. Remember that a promoter in apromoter s contract signs not in his own name but always for and in behalf of the corporation. Q: What are the three theories in pre-incorporation contracts? Theory #1 Therefore, since a promoter s contract is really the promoter s own, the o nly reason whythe corporation, once it is organized becomes liable is when the c orporation adopts it as its own. Thepromoter s real contract theory is one of the three theories by which to validate a contract prior toincorporation. Theory #2 The 2nd theory as adopted by Jurisprudence is what is termed as a cont inuing offer. Thecontinuing offer that exists as to the time of the issuance of the certificate of incorporation. And if itis accepted, then the offer means the acceptance, and there arises a contract. Theory #3 Once the istent principal, the promoter becomes from the principal. The contract entered . But it is possible it. promoter enters into a contract for and in behalf of a non-ex personally liable like an agent who acts without authority into then is valid unless the agent acted without authority forthe contract to be adopted by the principal by accepting

In all three instances, there is deemed to be a valid contract of a valid offer. That is the basis of the promoter s contract so that the people will be willing to risk without much fear, investing theirmoney into a venture prior to the incorporation of a company or a corporation. Q: Promoter v. Agent A: The promoters are not the corporation itself, and although they may be regard ed, forcertain purposes as sustaining to the corporation a relationship similar to that of an agent, strictly speaking they cannot be regarded as such, there being at that time no e xistingprincipal. Q: Promoter v. Trustee A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirelydisinterested, while persons engaged in promotion expect to receiv e and seek to obtain a liberalaward or profit for their initiative. 3. De Facto Corporation (Sec. 20) . Sec. 20 De Facto Corporations The due incorporation of any corporation claiming in goodfaith to be a corporation under this Code, and its right to exercise corp orate powers, shall notbe inquired into collaterally in any private suit to whic h such corporation may be a party. Suchinquiry may be made by the Solicitor Gene ral in a quo warranto proceeding. . Every corporation is deemed de jure until proven otherwise.

. De Jure Corporation formed in accordance with law; perfectly incorporated; conse quences: separate juridical personality and perfect liability. . De Facto Corporation formed also in accordance with law but falls short of the r equirementsprovided by law. Such is awarded a separate juridical personality, it may thus enter intocontracts, it may sue and be sued (note: third parties may s ue the corporation, incorporators may sue but the corporation cannot sue). Note also that such has imperfect liabi lity onlythe actors will be held liable. In proceeding against such, compliance with due process mustbe had. . The doctrine of de facto corporation applies as to the first level relationship (as between theState and corporations) and also to the third level of relationsh ip (as between third personsand corporations). If it primarily concerns the firs t level, why does it draw its vitality from thethird level? Because without such , transactions shall have no effect but with such, despite thedefects, the contr acts are valid and enforceable. But because of its primary relation to thefirst level, third persons cannot question the legal personality of such de facto corp oration.

Only the State through a quo warranto proceeding may do such. . Not all corporations which lack elements are de facto corporations. . Elements for Existence of De Facto Corporation: 1) Valid law under which it is incorporated: The Corporation Code 2) Attempt in good faith to incorporate colorable compliance: The corporation must have filedits Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. The minimum requirement for this requisite is the issuance of a certificate such tha t even if youhonestly believed that you incorporated (and all the other requisit es are present), it is still nota de facto corporation. . The above is need to prove reliance in good faith. . If any of the above element is absent can the principle be invoked by third pers ons? No, but they may have a remedy under the principle of corporation by estoppel. C ansuch be used in all instances? No, when both parties knew that no corporation existed, such may not be invoked. . Issuance of certificate of incorporation minimum requirement under this number.

3) Assumption of corporate powers: Minimum requirement: election of the Board of Di rectors. Q: Why must there be an election of the BoD? A: The basic principle is a de facto corporation is a mutual going about of the transaction in goodfaith. Since the corporation has a juridical personality, the only way by which it can be said thatthere was good faith in entering a transac tion is that there must be a BoD by which a corporationcan act. If there is no B oD there is no good faith on the part of the corporation because it knowsthat it can only act through the BoD not on the part of the parties dealing with the co rporationbecause it knows that there must be BoD for the corporation to bind its elf. This is also importantbecause this is by which the corporation manifests it self. (Remember: notion of a ghost A ghostmanifest itself through signs, in the same manner, a corporation manifests its existence throughthe existence of the B oD). (a) Elements: aArnold Hall v. Piccio, 86 Phil. 634 (1950). ARNOLD HALL v. PICCIO Facts: Petitioner Arnold Hall and Bradley Hall and respondent Fred Brown, Emma B rown, HipolitaChapman and Ceferino Abella signed and acknowledged the Articles o f Incorporation of the FarEastern Lumber and Commercial Co., Inc. a general lumb er business. 23,428 shares of stock weresubscribed and fully paid for and certai n properties were transferred to the corporation. The Articles of Incorporation were filed with the SEC for the issuance of the co

rresponding certificatesof incorporation. The corporation proceeded to do busine ss. Pending the issuance of the certificates by SEC, the respondents Brown et. al. f iled before the CFI ofLeyte a civil case entitled Fred Brown v. Arnold Hall allegi ng among others, that the Far EasternLumber and Commercial Co. was an unregister ed partnership; that they wish to have it dissolvedbecause of a bitter dissensio n among the members, mismanagement and fraud by the managers andheavy financial losses. Hall, et. al. filed a motion to dismiss alleging the lack of jurisdictio n by thecourt. Judge Piccio ordered the dissolution of the company. Held: The SEC had not issued the corresponding certificate of incorporation. All of them know or ought to know that the personality of a corporation begins to exist only from th e moment suchcertificate is issued, not before. Here, the complaining associate have not represented to the othersthat they were incorporated any more than the defendant had made similar representations. Sincenobody was led to believe anyth ing to his prejudice and damage, the principle of estoppel does notapply. The section on de facto corporations does not apply in this case: (1) First, Far Eastern Lumber, evenits stockholders, may not probably claim in good faith to be a corporation not having obtained thecertificate of incorporation. Thus the immu nity of collateral attack granted to corporations claiming in

Revised Bagtas Reviewer by Ve and Ocfe 2A good faith to be a corporation does not apply here. (2) Second, this suit is not one in which thecorporation is a party. This is a litigation between stockholde rs of the alleged corporation for thepurpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated ina private suit for it s dissolution between stockholders, without intervention of the State. CLV: The de facto doctrine was formulated to safeguard the security of commercia l transactionswhenever they involve the corporation. Parties dealing with said c orporation are secured by the factthat the transactions entered into with said c orporations may be sued upon and they can recover. That is why aside from the other two requisites there must be a set of officers (i.e. assumption ofcorporate powers) or directors because of the principle that a corporation can only act through itsofficers. . Effect as to both parties: (1) cannot deny its existence (2) liable as general p artners. . Not applicable to intra-corporate disputes, why? (1) it is a third level doctrin e (2) public is notexpected to know, while the above are expected to know. . If the other party knows of the non-existence of the corporation there is no est oppel. 3. Corporation by Estoppel (Sec. 21; aSalvatierra v. Garlitos, 103 Phil. 757 [19 58]; aAlbert v. University Publishing Co., 13 SCRA 84 [1965]; Asia Banking Corp. v. Standard Pro ducts, 46 Phil. 145 [1924]; Madrigal Shipping Co., v. Ogilvie, 55 O.G. No. 35, p. 7331) . Sec. 21 Corporation by estoppel All persons who assume to act as a corporation k nowing it tobe without authority to do shall be liable as general partners for a ll debts, liabilities and damagesincurred or arising as a result thereof: Provid ed, however, that when any such ostensible corporation is sued on any transaction entered by it as a corporation or any tor t committed by itas such, it shall not be allowed to use as a defense its lack o f corporate personality. SALVATIERRA v. GARLITOS Facts: Salvatierra owned a parcel of land in Leyte. She entered into a contract of lease with PhilippineFibers Producers Co., Inc. allegedly a corporation duly organized and existing under the Philippinelaws, as represented by its President Refuerzo. The land will be leased for ten years and the lessorwould be entitled to 30% of the net income accruing from the harvest of any crop. The alleged corporation did not comply with said obligation. Salvatierra filed w ith the CFI a complaintagainst PFPC for accounting, rescission and damages. The corporation defaulted and the court rendered judgment in favor of Salvatierra. The court issued a writ of execution and the three parcelsof land under the name of Refuerzo were attached because no property of PFPC was found available. Refuerzo filed a motion claiming that the decision was null and void since there was no allegation ofhis personal liability. The court granted the motion and re leased his land from attachment. Hence,

this petition by Salvatierra. Held: The failure of Salvatierra to specify Refuerzo s personal liability was due to the fact thatSalvatierra was under the impression that PFPC, represented by R efuerzo was a duly registeredcorporation, but subsequently, inquiry with the SEC yielded otherwise. While as a general rule, aperson who has contracted or dealt with an association in such a way as to recognize its existence asa corporate b ody is estopped from denying the same in an action arising out of such transacti on ordealing. Yet, this doctrine is inapplicable where fraud takes a part in sai d transaction. Here Refuerzogave no confirmation of denial as to PFPC s juridical personality and Salvatierra was made to believethat the corporation was duly org anized. The grant of separate juridical personality to corporations refer merely to regi stered corporations andcannot be made applicable to the liability of members of an unincorporated association. Since anorganization which, before the law, is no n-existent and has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corp oration, it cannotcreate agents or confer authority on another to ct in its beha lf, thus, those who act or purport to actas its representatives or agents do so without authority and at their own risk. A person acting or purporting to act in behalf of a corporation which has no val id existence assumessuch privileges and obligations and becomes personally liabl e for contracts entered into or for other

acts performed as such agent. Here, Refuerzo as president of the unregistered corporation was the spirit behin d the consummationof the lease contract, thus, his liability cannot be limited o r restricted to that imposed upon corporateSH s. In acting on behalf of a corporat ion, which he knew to be unregistered, he assumes the risk ofreaping the consequ ential damages or resultant rights, if any arising from the transaction. ALBERT v. UNIVERSITY PUBLISHING CO. Facts: The University Publishing Co. Inc. through its President Jose Aruego ente red into a contractwith Mariano Albert whereby the corporation agreed to pay a c ertain sum in installments for theexclusive right to publish his revised comment aries in the RPC and for his share in the previous saleof the book s first edit ed ition. The corporation failed to pay the second installment thereby makingthe wh ole amount due and demandable (i.e. there was an acceleration clause). Albert th en sued thecorporation. The lower court rendered judgment in favor of Albert and a writ of execution was issued against thecorporation. Albert however, petitioned for a writ of executi on against Aruego, as the real defendant, stating that there is no such entity as University Publishing Co. Inc. Albert an nexed to his petition acertification from the SEC saying that their records cont ain no such registered corporation. The corporation countered by saying that Aruego is not a party to this case and that, therefore, Albert s petition should be denied. The corporation countered by saying that Arueg o is not a party tothis case, and that therefore, Albert s petition should be deni ed. The corporation, actually did notwant Aruego to be declared a party to the p resent case is because there would be no need toinstitute a separate action agai nst Aruego to be declared a party to the present case is becausethere would then be a need to institute a separate action against Aruego; and if this is done, A ruegocan set up the defense of prescription under the Statute of Limitations. Held: 1.) The corporation cannot invoke the doctrine of estoppel. The fact of non-regi stration of thecorporation has not been disputed because the corporation only ra ised the point that it andnot Aruego is the party defendant thereby assuming tha t the corporation is an existingcorporation with an independent juridical person ality. HOWEVER, precisely on account of nonregistration, it cannot be considered a corporation not even a corporation de fa cto. It hastherefore no personality separate from Aruego; it cannot be sued inde pendently. The estoppeldoctrine has not been invoked and even if it had been, it is not applicable to the case at bar: (a) Aruego had represented a non-existing entity and induced not only Albert but also the court to believe in such representation (b) He signed the contract as president of the corporation stating that this was a corporation duly organized and existing unde r the laws ofthe Philippines. One who induced another to act upon his willful mi srepresentation that acorporation was duly organized and existing under the law, cannot thereafter set up againsthis victim the principle of corporation by esto ppel. 2.) Aruego is the real defendant as he had control over the proceedings. Had Aru ego been namedas party defendant instead of or together with the corporation, th ere would be no room fordebate as to his personal liability. Since he was not so

named, matters of due process havearisen. Parties to a suit are persons who hav e a right to control the proceedings, to makedefense, to adduce and cross-examin e witnesses and to appeal from a decision. In the case atbar, Aruego, was and in reality, the one who answered and litigated through his own firm ascounsel. He was in fact, if not on name, the defendant. Clearly then Aruego had his day inco urt as the real defendant and due process of law has been substantially observed . 3.) Aruego is the real party in interest because he reaped the benefits from the contract. (a) Nature of Doctrine Founded on principles of equity and designed to prevent injustice and unfairness , thedoctrine applies when persons assume to form a corporation and exercise cor porate

Revised Bagtas Reviewer by Ve and Ocfe 2A 67 67 functions and enter into business relations with third persons. Where no third p erson is involved in the conflict, there is no corporation by estoppel. A failed consolid ation therefore cannot result in a consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997) A party cannot challenge the personality of the plaintiff as a duly organizedcor poration after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. Ohta De v. Co. v. Steamship Pompey, 49 Phil. 117 (1926).4 A person who accepts employment in an unincorporated charitable association is estopped from alleging its lack of juridical personality. Christian Children s Fun d v. NLRC, 174 SCRA 681 (1989). One who deals with an organization which is not duly incorporated is not estoppe d to deny its corporate existence when his purpose is not to avoid liability. aInt l Ex press Travel v. Court of Appeals, 343 SCRA 674 (2000). INTERNATIONAL EXPRESS TRAVEL v. CA Facts: Philippine Football Federation got tickets from petitioner travel agency for the SEA games andtrips to China and Brisbane. Two partial payments were made . Petitioners wrote to Kahn (presidentof the federation) demanding the completio n of the payment. Federation, through Project GintongAlay paid the amount of P 3 1,000. Then Kahn issued a personal check for P 50,000. After that, nofurther pay ments were made. Petitioner then sued Kahn in his personal capacity and as president of the feder ation for the unpaidbalance for the purchased tickets as Kahn allegedly guarante ed the said obligation. Kahn maintainedthat he did not guarantee the payment but merely acted as an agent of the Federation which has aseparate and distinct jur idical personality. RTC: Kahn is personally liable because neither the travel agency nor Kahn adduce any evidenceproving the corporate existence of the federation. Being the presid ent, its corporate existence iswithin the knowledge of Kahn and could have easil y denied specifically the assertions of petitionerthat it is a mere sports assoc iation. Voluntary unincorporated associations have no power to enterinto, or to ratify, a contract. The contract entered into by its officers or agents in behal f of the association is not binding or enforceable against it. Agents and officers person ally liable. CA: reversed. Held: RA 3135 and PD 604 recognized the juridical existence of national sports a ssociations. Thepower to adopt a constitution, raise funds, acquire property, et c. indicate that the associations mayacquire juridical personality. However, suc h does not automatically take place by the passage of thelaws. Before a corporat ion may acquire juridical personality, the state must give its consent either in the form of a special law or a general enabling act. Nowhere can it be found in the 2 above

mentioned laws any provision creating the Philippine Football Federation. Before an entity may be considered as a national sports association, such entity must be recognizedby the accrediting organizations Philippine Amateur Athletic Federation (RA 3135) and Dept. of Youth and Sports Development (PD 604). Although a copy of the constitution of th e federation waspresented in court, thye same does not prove that it had been re cognized. Therefore, the federationis not a national sports association within t he purview of the laws and that Kahn is personallyresponsible for the obligation . Under the law on estoppel including that under Sec. 21 of Corporation Code, thos eacting on behalf of an ostensible corporation and those benefited by it, knowin g it to be without valid existence, are held liable as general partners. aLim Tong Lim v. P hilippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999). LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES 4The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that casepertained to a commercial partnership which required regist ration in the registry under the terms of the Code ofCommerce).

Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered i nto a contract withPhil. Fishing Gear Industries Inc. for the purchase of fishin g nets and floats. They claimed that theywere a fishing venture with Lim Tong Li m who was however not a signatory to the contract. Theyfailed to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case was filed against Chua, Yao and Lim because it was found that Ocean Que st was a nonexistent corporation as shown by the certification from SEC. Chua admitted liability and Yao waivedhis right to cross-examine and present evidence because he failed to a ppear while Lim filed acounterclaim and a cross-claim. Court granted the writ of attachment and ordered the Auction Saleof the F/B Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writand Chua, Yao and Lim were jointly liable as general partners. Held: 4.) Lim was contesting that the CA ruled that there was a partnership in the Com promiseAgreement and alleges that he had no direct participation in the negotiat ions and was merely leasing F/B Lourdes to Chua and Yao Facts found by the TC and CA showed that the re wasa partnership formed by the three of them. They initially purchased two bo ats through a loanfrom Lim s brother and as security, was placed in the name of Li m Tong Lim. The repairs andsupplies were shouldered by Chua and Yao. A civil cas e was filed by Chua and Yao against Limfor nullity of commercial documents, refo rmation of contracts and declaration of ownership offishing boats which was settle d amicably. In the Compromise Agreement, it was revealedthat they intended to pa y the loan from Jesus Lim by selling the boats and to divide amongthem the exces s or loss. Therefore it was clear that a partnership existed which was not solel ybased on the agreement. It was merely an embodiment of the relationship among p arties. 5.) Lim alleges that he was merely a LESSOR by showing the Contract of Lease and registration papers of the boats, including F/B Lourdes where the nets were found As found by thelower courts, the boats were registered to Lim only as security for the loan that was grantedto the partnership by the brother of Lim, which was not an unco mmon practice. Aside fromthe fact that it was absurd for Lim to sell the boats t o pay the debt he did not incur, if neededhe was merely leasing the boats to Chu a and Yao. 6.) Lim contests his liability by saying that only those who dealt in the name o f the ostensiblecorporation should be held liable. His name was not in any of th e contracts and never dealt with PFGI Sec. 21 All persons who assume to act as a corporation knowing it to b e withoutauthority to do so shall be liable as general partners for all debts, l iabilities and damagesincurred or arising as a result thereof; Provided however that when any such ostensiblecorporation is sued, on any transaction entered by it as a corporation or ant tort committedby it as such, it shall not be allowed to use as a defense its lack of corporate personality. Evenif the ostensible cor porate entity is proven to be non-existent, a party may be estopped fromdenying its corporate existence because an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attribu tes of acorporation as provided by law. It cannot create agents or confer author ity on another to acton its behalf. Thus, those who act or purport to act as its representatives do so withoutauthority and at their own risk. Clearly, Lim bene fited from the use of the nets found insideF/B Lourdes which was proved to be an asset of the partnership. He in fact questioned theattachment because it has ef fectively interfered with the use of the vessel. Thoughtechnically, he did not d irectly act on behalf of the corporation, however, by reaping thebenefits of the

contract entered into by persons he previously had an existing relationshipwith , he is deemed part of said association and is covered by the doctrine of corpor ation byestoppel. CLV: Pioneer case actors who knew of corporation s non-existence are liable as gen eral partnerswhile actors who did not know are liable as limited partners, passi ve investors are not liable; Limteaches us that even passive investors should be held liable provided they benefited from suchtransactions. (b) Two Levels: (i) With Fraud; and (ii) Without Fraud

Revised Bagtas Reviewer by Ve and Ocfe 2A When the incorporators represent themselves to be officers of the corporation wh ich was never duly registered with the SEC, and engage in the name of the purportedc orporation in illegal recruitment, they are estopped from claiming that they are not liableas corporate officers under Sec. 25 of Corporation Code which provide s that all personswho assume to act as a corporation knowing it to be without au thority to do so shall beliable as general partners for all the debts, liabiliti es and damages incurred or arising as aresult thereof. People v. Garcia, 271 SCR A 621 (1997); People v. Pineda, G.R. No. 117010, 18 April 1997 (unpub). 4. TRUST FUND DOCTRINE See VILLANUEVA, "The Trust Fund Doctrine Under Philippine Corporate Setting," 31 ATENEO L.J. (No. 1, Feb. 1987). The capital stock of the corporation especially its unpaid subscriptions is a tr ust fund forthe benefit of the general creditors of the corporation. a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code) . Art. 2236 The debtor is liable with all his property, present and future, for th e fulfillment ofhis obligations, subject to the exceptions provided by law. b) Nature of Doctrine: aOng Yong v. Tiu, 401 SCRA 1 (2003). ONG YONG v. TIU Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink AsiaDevelopment Corporation (FLADC) owned by the Tiu family was threat ened by the foreclosure by thePNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ongfamily agreed to restructure FLAD C and created a pre-subscription agreement and each were tomaintain equal shareh oldings. The Ong family invested a total sum of P 190 M to the corporationwhile the Tiu family included several real estate properties as added capital for the restructuredcorporation. The Ong and Tiu families now owned 1,000,000 shares eac h of FLADC. After all thedebts were paid, the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by Ong upon the pre-subscription agreement. Ong, on the other hand maintainedthat it was Tiu who committed the breach because one of the prop erties that they were supposed toinclude in the agreement was in fact already in the real estate owned by FLADC. The SEC approvedthe rescission (both parties we re return to status quo, P 190 M to the Ong family and all theremaining FLADC as sets to the Tiu family, which included the now finished mall valued at more than P 1B) and the CA affirmed the decision with slight modifications. Held: 1.) Is rescission the proper remedy for an intra-corporate dispute No, the Corpo ration Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra -corporateremedies, other than rescission, in situations like this. Rescission i s certainly not one of them, specially if the party asking for it has no legal personality to do so (because

it is a corporation, Tiu family is not the corporation) and the requirements of the law therefore hav e not beenmet. A contrary doctrine will tread on extremely dangerous ground beca use it will allow justany stockholder, for just about any real or imagined offen se, to demand rescission of hissubscription and call for the distribution of som e part of the corporate assets to him withoutcomplying with the requirements of the Corp. Code. 2.) Granting rescission is a proper remedy, does it violate the TFD Yes it will violate the TFD and the procedures for valid distribution of assets and property under the Corp. Code. TheTFD provides that subscription to the capital stock of a corporation c onstitute a fund to whichthe creditors have a right to look for the satisfaction of their claims. The doctrine is theunderlying principle in the procedure for t he distribution of capital assets, in the Corp. Codewhich allows the distributio n of corporate capital only in three instances: (1) amendments ofthe Articles of Incorporation to reduce the authorized capital stock (requires Board Resolution and stockholders s meeting) (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings and (3) dissolutio n and eventualliquidation of the corporation. In the instant case, the rescissio n of the pre-subscription

agreement will effectively result in the unauthorized distribution of the capita l assets andproperty of the corporation, thereby violation the TFD and the Corp. Code, since the rescissionof a subscription agreement is not one of the instanc es when distribution of capital assets andproperty of the corporation is allowed . Under the trust fund doctrine, the capital stock, property and other assets of t hecorporation are regarded as equity in trust for the payment of the corporate c reditors. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999). The trust fund doctrine considers the subscribed capital stock as a trust fund for thepayment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital stoc k may beturned over or released to the stockholder (except in the redemption of the redeemableshares) without violating this principle. Thus dividends must neve r impair the subscribedcapital stock; subscription commitments cannot be condone d or remitted; nor can thecorporation buy its own shares using the subscribed ca pital as the consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999). The requirement of unrestricted retained earnings to cover the shares is based o n thetrust fund doctrine which means that the capital stock, property and other assets of acorporation are regarded as equtiy in trust for the payment of corpor ate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among t he stockholders without first paying corporate creditors. Hence, any disposition of corporatefunds to the prejudice of creditors is null and void. Boman Environmen tal Dev. Corp. v. CA, 167 SCRA 540 (1988). c) To Purchase Own Shares (Secs. 8, 41, 43 and 122, last paragraph; Phil. Trust Co. v. Rivera, 44 Phil. 469 [1923]; Steinberg v. Velasco, 52 Phil. 953 [1929]) . Sec. 8 Redeemable Shares Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken upby the corporation upon the expiration of a fixed period, regardless of the existence ofunrestricted retained earnings in the books of the corporation, and upon such terms andconditions as may be stated in the articles of incorpora tion, which terms and conditionsmust also be stated in the certificate of stock representing said shares. . Sec. 41 Power to acquire own shares A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purpose s, including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: (1) to eliminate fractional shares arising out of stock dividends; (2) to collect orcompromise an indebtedness to the corporation, arising out of unpa id subscription, in adelinquency sale, and to purchase delinquent shared sold du

ring said sale; and 3) to paydissenting or withdrawing stockholders entitled to the payment for their shares under theprovisions of this Code. . Sec. 43 Power to declare dividends The board of directors of a stock corporation maydeclare dividends out of the unrestricted retained earnings which shall be p ayable in cash, in property, or in stock to all stockholders on the basis of outstanding stock h eld by them: Provided, That any cash dividends due on delinquent stocks shall first be applie d to theunpaid balance on the subscription plus costs and expenses, while stock dividends shallbe withheld from the delinquent stockholder until his unpaid subs cription is fully paid: Provided further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds of the outstanding capital st ock at aregular or special meeting duly called for that purpose. Stock corporations are prohibited from retaining surplus profits in excess of on e hundred

Revised Bagtas Reviewer by Ve and Ocfe 2A (100%) per cent of their paid-in capital stock, except: (1) when justified by de finitecorporate expansion projects or programs approved by the board of director s; or (2) whenthe corporation is prohibited under any loan agreement with any fi nancial institution orcreditor, whether local or foreign, from declaring dividen ds without his/her consent andsuch consent has not yet been secured; or (3) when it can be clearly shown that suchretention is necessary under special circumsta nces obtaining in the corporation, such aswhen there is need for special reserve for probable contingencies. . Sec. 122 Corporate Liquidation Every corporation whose charter expires by its ow nlimitation or is annulled by forfeiture or otherwise, or whose corporate existe nce for otherpurposes is terminated in any other manner, shall nevertheless be c ontinued as a bodycorporate for three (3) years after the time when it would hav e been dissolved, for thepurpose of prosecuting and defending suits by or agains t it and enabling it to settle andclose it affairs, to dispose of and convey its property and to distribute its assets, but notfor the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empow ered toconvey all of its property to trustees for the benefit of stockholders, m embers, creditors, and other persons in interest. From and after any such conveyance by the corpora tion ofits property in trust for the benefit of its stockholders, members, credi tors and others ininterest, all interest which the corporation had in the proper ty terminates, the legalinterest vests in the trustees, and the beneficial inter est in the stockholders, members, creditors or other persons in interest. Upon the winding up of corporate affairs, any asset distributable to any credito r or stockholder or member who is unknown or cannot be found shall be escheated to th e cityor municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no co rporationshall distribute any of its assets or property except upon lawful disso lution and afterpayment of all its debts and liabilities. (d) Rescission of Subscription Agreement Based on Breach The violation of terms embodied in a subscription agreement, with are personalco mmitments, do not constitute legal ground to rescind the subscription agreements ince such would violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. In the instant ca se, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, therebyviolating the Trust Fund Doctrine and the Corporation Code, since the re scission of asubscription agreement is not one of the instances when distributio n of capital assetsand property of the corporation is allowed. Ong Yong v. Tiu, 4 01 SCRA 1 (2003). (e) Distribution of Corporate Assets The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation , or even, for that matter, on the earnest desire of the court a quo to prevent further squa bbles andfuture litigations unless the indispensable conditions and procedures fo r the protection ofthe corporate creditors are followed. Otherwise, the corporate

peace laudably hoped forby the court will remain nothing but a dream because thi s time, it will be the creditors turn to engage in squabbles and litigations should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. Ong Yong v. Tiu, 40 1 SCRA 1 (2003). . The trust fund doctrine applies in the following cases: (1) where the corporatio n has distributed its capital among the stockholders without providing for the payment of creditors (2) where it had released subscribers to capital stock from their subscription r eceivables (3) where it had transferred corporate property in fraud of its creditors and (4) wh ere the corporation is insolvent. . Statutory references: (1) Sec. 122 of the Corp. Code governing dissolution of co rporations and

their liquidation when it provides that except by decrease of capital stock and a s otherwiseallowed by this Code, no corporation shall distribute any of its asse ts or property except uponlawful dissolution and after payment of all its debts and liabilities. (2) SEC Rules governingRedeemable and Treasury Shares expressly adopts the doctrine as follows, the outstandingcapital stock of a corporation, in cluding unpaid subscriptions, shall constitute a trust fund forthe benefit of it s creditors which shall not be returned to the stockholders by repurchase ofshar es or otherwise, except in the manner as provided for under the Corporation Code andthis rules. . Coverage of Trust Fund Doctrine adopted the two trine whichis the a.) capital impairment rule and apital must be preserved forprotecting the claims distributions to stockholders should belimited to by the corporation. In a solvent corporation, the only the capital stock. precursors of the trust fund doc the b.) profit rule. A fixed c of creditors so that dividend profits earned or accumulated trustfund doctrine encompasses

1.) Coverage of capital stocks covers capital stock; the protection by the doctrin e uponcorporation not in a state of insolvency but only up to the extent of the c apital stock of thecorporation. 2.) Retained earnings although part of the stockholder s equity, do not constitute part of the capital stock. It is not covered by the doctrine. The corporation is a t liberty to declare andpay out dividends from its assets. 3.) Outstanding capital stock total shares of stock issued to subscribers or sto ckholders whether or not fully or partially paid (as long as there is a binding subscripti on agreement) except treasury shares (Sec. 137 ). 4.) Par value stock capital stock represented by aggregate par value of all shar es issued and subscribed. If par value shares are sold at premium, excess is not treated as le galcapital/capital stock but can be declared as stock dividends. This stock divi dends fall withinthe ambit of the Trust Fund doctrine. 5.) No par value stock legal capital = total consideration received for the shar es of stock. Entireconsideration for no par value stock treated as capital and n ot available for distribution asdividends. Funds received by a corporation to cover subscription payment on increase in aut horized capitalstock prior to approval thereof of the SEC would not be covered b y the TFD. As a TF, this money isstill withdrawable by any of the subscribers at any time before issuance of the corresponding sharesof stock, unless there is a pre-subscription to the contrary. VII. ARTICLES OF INCORPORATION See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (N o. 2, June 1994). The article of incorporation is: 1.) A CONTRACT an agreement that gives rise to obligations:

a.) Between the corporation and the state (because it is under the AI by which t he

state grants the primary franchise.) state manifests its consent through the SEC while the corporation manifests its consent by the filing of the AI, through the incorporators and eventually through the Board of Directors. b.) Between the state and stockholders c.) Between the corporation and stockholders the stockholders manifest their

Revised Bagtas Reviewer by Ve and Ocfe 2A 73 73 consent through their subscription of stocks and through voting as against theco rporation, the stockholders do not have individual standing but only standing as a group. d.) Among stockholders in this situation they now have individual standing. e.) Between the stockholders and the Board of Directors f.) Between the corporation and the public (since the AI is a public document.) 2.) A PUBLIC DOCUMENT because it is registered with the SEC. Such works with the doctrineof public notice that when the public deals with the corporation, the c ontents of AI bindsthem whether they in fact have seen the AI or not. When a per son enters into a contractor any transaction with a corporation whether or not h e has checked with the SEC theterms and conditions of the AI, he will be bound b y it. He cannot claim ignorance of thecharter of the corporation. 1. Nature of Charter: The charter is in the nature of a contract between the cor poration and the government. aGovernment of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929). GOVERNMENT OF P.I. v. MANILA RAILROAD CO. Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Rail road and JosePaez, its manager to provide and equip the telegraph poles of the c ompany in Tarlac and LaUnion with crosspieces for 6 telegraph wires belonging to the government which, it alleged, arenecessary for public service between certa in municipalities. Petitioner relies on Sec. 84 of Act No. 1459 which provides that the railroad company shall establish a telegraph line f or the use of therailroad and that such posts may be used for government wires a nd shall be sufficient for crosspieces to carry the number of wires which the government may consider neces sary forpublic service. Petitioner contends that since 6 crosspieces are now nec essary for public service, the company should provide sufficient crosspieces. Respondent answers by saying that theCharter of Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 a nd contended that theGovernment is entitled to only 4 wires. Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Rai lroad Co. constitutes a contract between the corporation and the government, it would seem that thecorporation is governed by its contract and not by the provisions of th e general law. But from areading of the charter it will be seen that there is no indication that the government intended toimpose upon said company any other co nditions or obligations not expressly found in the saidcontract or charter. Sect ion 84 of the Corp. Law was intended to apply to all railways in thePhilippines which did not have a special charter or contract. Act No. 1510 applies only to M anilaRailroad and being a special charter, its adoption had the effect of supers eding the provisions ofthe corporation law which are applicable to railroads in general. The charter of a corporation is a contract between three parties: (1) it is a co ntract between thestate and the corporation to which the charter is granted (2) it is a contract between stockholdersand the state (3) it is a contract between the corporation and its stockholders. A special charterconstitutes a contract be tween the corporation and the government and as such are both equallybound by it s provisions. For the State to impose an obligation or a duty upon the responden

tcorporation, not expressly provided in the charter would amount to a violation of said contract. The provisions of Act 1459 relate to the number of wires which the government ma y place uponpoles of the company are different and more onerous than the provisi ons of the charter. NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such c annot overcomethe law. However in the case of GPI, its special charter overruled the Gen. Law on the ground thatthe former is both a contract and a law. Thus, i ts charter as a law creates an amendment to all other laws. In the same manner, if the former were a mere contract then the case would have been decided differently. 2. Procedure and Documentary Requirements (Sec. 14 and 15)

. Sec. 14 Contents of the Articles of Incorporation All corporations organized und er this codeshall file with the SEC articles of incorporation in any of the offi cial languages duly signed andacknowledged by all of the incorporators, containi ng substantially the following matters, except as otherwise prescribed by this Code or by special law. 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated . Where acorporation has more than one stated purpose, the articles of incorpora tion shall statewhich is the primary purpose and which is/are the secondary purp ose or purposes: Provided, that a non-stock corporation may not include a purpose which would cha nge orcontradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must bewithin the Philippines; 4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the incorporators; 6. The number of directors and trustees which shall not be less than five nor more than fifteen; 7. The names, nationalities and residences of persons who shall act as directors or trusteesuntil the first regular directors or trustees are duly elected and qual ified in accordancewith this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawf ul money ofthe Philippines, the number of shares to which it is divided, and in case the share are parvalue shares, the par value of each, the names, nationalit ies and residences of the originalsubscribers, and the amount subscribed and pai d by each on his subscription, and if someor all of the shares are without par v alue, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, national ities andresidences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporat ors maydeem necessary and convenient. The SEC shall not accept the articles of incorporation of any stock corporation unlessaccompanied by a sworn statement of the Treasurer elected by the subscribe rs showing thatat least twenty-five percent (25%) of the authorized capital stoc k of the corporation has beensubscribed and at least twenty-five percent (25%) o f the total subscription has been fully paidto him in actual cash and/or in prop erty the fair valuation of which is equal to at least twentyfive percent (25%) of said subscription, such paid-up capital being not less tha n P5,000. . Sec. 15 Forms of Articles of Incorporation Unless otherwise prescribed by specia l law, articles of incorporation of all domestic corporations shall comply substantiall y with the following form:

NOTE: The form goes into the validity and enforceability of the Articles of Inco rporation. a) As to Number and Residency of Incorporators (Sec. 10); . Sec. 10 Number and Qualifications of Incorporators Any number of natural person not lessthan five but not more than fifteen, all of legal age and a majority of whom are residents ofthe Philippines, may form a private corporation for any law ful purpose or purposes. Each ofthe incorporators of a stock corporation must ow n or be a subcriber to at least one share ofthe capital stock of the corporation . NOTE: Incorporators must be warm-blooded individuals for purposes of accountabil ity. They mustnot be more than fifteen for pragmatic reasons, and they must be l ess than five because two andfour create a deadlock, while three is not as effic ient as five. (Institution of the Board of Directorsis a clear embodiment of the corporation s centralized management.) b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phi l. 549 [1934]).

Revised Bagtas Reviewer by Ve and Ocfe 2A . Sec. 18 Corporate Name No corporate name may be allowed by the SEC if the propos edname is identical or deceptively confusing or similar to that of any existing corporation or toany other name already protected by law or is patently deceptiv e, confusing or contrary toexisting laws. When a change in the corporate name is approved, the Commission shall issuean amended certificate of incorporation und er the amended name. . Sec. 42 Power to invest corporate funds in another corporation or business or fo r any otherpurpose Subject to the provisions of this Code, a private corporation may invest its funds inany other corporation or business or for any other purpo se other than the primary purpose forwhich it was organized when approved by a m ajority of the board of directors or trustees andratified by the stockholders re presenting 2/3 of the outstanding capital stock or at least 2/3 ofthe members in case of non-stock corporations, at a stockholders or members meeting dulycalled for the purpose. Written notice of the proposed investment and the time and plac e ofthe meeting shall be addressed to each stockholder or member at his place of residence asshown on the books of the corporation and deposited to the addresse in the post office withpostage prepaid, or served personally: Provided: That an y dissenting stockholder shall haveappraisal right as provided in this Code: Pro vided, however, That where the investment by thecorporation is reasonably necess ary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. Parties organizing a corporation must choose a name at their peril; and the use of aname similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure the exercise of its corporate fu nctions, regardless of intent, may be prevented by the corporation having a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372 SCRA 171 (2001). Similarity in corporate names between two corporations would cause confusion to thepublic especially when the purposes stated in their charter are also the same type ofbusiness. Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977). Section 18 of Corporation Code expressly prohibits the use of a corporate name w hich is identical or deceptively or confusingly similar to that of any existing corpor ation or to any other name already protected by law or is patently deceptive, confusing or c ontrary to existing laws. The policy behind the foregoing prohibition is to avoid fraud u pon thepublic that will occasion to deal with the entity concerned, the evasion of legal obligationsand duties, and the reduction of difficulties of administrat ion and supervision over corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2 002); Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993). A corporation has no right to intervene in a suit using a name, not even its acr

onym, other than its registered name, as the law requires and not another name which i t had notregistered. Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997). There would be no denial of due process when a corporation is sued and judgment isrendered against it under its unregistered trade name, holding that [a] corpora tion maybe sued under the name by which it makes itself known to its workers. Pis on-Arceo Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997). A corporation may change its name by the amendment of its articles of incorporat ion, but the same is not effective until approved by the SEC. Philippine First Insura nce Co. v. Hartigan, 34 SCRA 252 (1970). A change in the corporate name does not make a new corporation, and has no effec ton the identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992). . The name of a corporation is very important, the incorporators constituting as b ody politicand corporate under the name stated in the articles of incorporation for the period of timementioned therein. Such name is fatal in commercial transa ctions. The public may only knowthe corporation through its name.

. The name of a corporation is (1) essential to its existence (2) it cannot change its nameexcept in the manner provided by the statute (3) by that name alone is it authorized totransact business and (4) it is through its name that a corporat ion can sue and be sued andperform all other legal acts. . SEC reserves the right to order a corporation to change name when it appears tha t there is anidentical name. . Guidelines on Corporate Names: 1.) Name must contain Corp. or Inc.

2.) Name must not tend to mislead or confuse the public and must not contain suc h descriptive words as excellent fair good , etc. 3.) Name must not be similar to a name already used by another partnership or co rporation. 4.) If proposed name contains a word similar to a word already used as a part of the firmname of a registered corporation, proposed name must contain two other words differentfrom the name of the company already registered. 5.) If name or surname used as part of corporate name, the incorporators must ha ve a basisfor such surname; it being one of the incorporators: Otherwise, consen t of the person whosename is being used must be submitted. 6.) If it contains initials, it must contain an explanation of the meaning and r elevance orreason thereof. 7.) The use of the words State the government. Maharlika and Baranggay

are prohibited and reserved fo

The following words when used must at least relate to the line of business namel y: Financingand Investment. The following words are prohibited from being used n amely: National, Engineer, Architect. c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and I ndustry, 40 Phil. 541 [1919]) . Sec. 42 Power to invest corporate funds in another corporation or business or fo r any otherpurpose Subject to the provisions of this Code, a private corporation may invest its funds inany other corporation or business or for any other purpo se other than the primary purpose forwhich it was organized when approved by a m ajority of the board of directors or trustees andratified by the stockholders re presenting 2/3 of the outstanding capital stock or at least 2/3 ofthe members in case of non-stock corporations, at a stockholders or members meeting dulycalled for the purpose. Written notice of the proposed investment and the time and plac e ofthe meeting shall be addressed to each stockholder or member at his place of residence asshown on the books of the corporation and deposited to the addresse in the post office withpostage prepaid, or served personally: Provided: That an y dissenting stockholder shall haveappraisal right as provided in this Code: Pro vided, however, That where the investment by thecorporation is reasonably necess

ary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. The best proof of the purpose of a corporation is its articles of incorporation a nd bylaws. The articles of incorporation must state the primary and secondary purposes ofth e corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed to insure or facilitate the accomplishm ent ofsaid purpose. Therefore, the Court brushed aside the contention that the co rporations were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as being prohibited collateral attack. Gala v. Ellice A groIndustrial Corp., 418 SCRA 431 (2003). . Significance: It confers as well as limits the powers which a corporation may ex ercise. Otherreasons: (1) prospective investors shall know the kind of business the corporation deals with (2) management shall know the limits of its action (3) a third party can know wh ether hisdealing with the corporation is within the corporate functions and powe rs (4) also, for the

Revised Bagtas Reviewer by Ve and Ocfe 2A administrative supervision and monitoring of the State, to determine which parti cular agencyshall have jurisdiction over the operations of the corporation. . The purpose must be lawful, having only one primary purpose and many secondary p urposes. d) Corporate Term (Sec. 11) . Sec. 11 Corporate Term A corporation shall exist for a period not exceeding fift y years (50) from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be exte nded forperiods not exceeding fifty years (50) in any single instance by an amen dment of the articlesof incorporation in accordance with this Code; Provided, th at no extension can be madeearlier than five years (5) prior to the original or subsequent expiry dates unless there arejustifiable reasons for an earlier exten sion as may be determined by the SEC. . The purpose of the limit emphasizes the contractual nature of the corporation e extensionmust be approved by the State. No extension of term can be effected once dissolution stage has been reached, as itconstitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968). e) Principal Place of Business (Sec. 51) . Sec. 51 Place and time of meetings of stockholders or members Stockholders or mem bers meetings, whether regular or special, shall be held in the city or municipali ty where theprincipal office of the corporation is located and if practicable in the principal office of thecorporation: Provided, That Metro Manila shall, for purposes of this section, be considered acity or municipality. Notice of meetings shall be in writing, and the time and place thereof stated th erein. All proceedings had and rs ormembers, if within d even if themeeting be or members of the corporation are present any business transacted at any meeting of the stockholde the powers or authority of the corporation shall be vali improperly held or called, provided all the stockholders or duly represented at the meeting. th

. IMPORTANCE: For jurisdictional purposes. The corporation cannot be allowed to fi le an actionin a place other than that place or in the place of residence of the defendant. Place of residence of the corporation is the place of its principal office. Clav ecilla Radio System v. Antillon, 19 SCRA 379 (1967) The residence of its president is not the residence of the corporation because a

corporation has a personality separate and distinct from that of its officers an d stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982). f) Minimum Capitalization (Sec. 12) . Sec. 12 Minimum capital stock required of stock corporation Stock corporations i ncorporatedunder this Code shall not be required to have any minimum authorized capital stock except asotherwise specifically provided for by special law, and s ubject to the provisions of the following section. . Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of in corporation At least twenty-five percent (25%) of the authorized capital stock as stated in the articles ofincorporation must be subscribed at the time of incorporation and at least twenty-five percent(25%) of the total subscription must be paid upon s ubscription, the balance to be payable ona date or dates fixed in the contract o f subscription without need of call, or in the absence ofa fixed date or dates, upon call for payment by the Board of Directors: Provided however, thatin no cas e shall the paid-up capital be less than five thousand pesos (P5,000). . Q: Does the Corp. Code expressly provide for a minimum requirement of the author ized capital stock? A: Under Sec. 12 there is no minimum requirement but the Code says that in no cas e shallthe paid up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is the minimum.

. Q: Why is the maximum capitalization required to be indicated? A: (1) To protect the stockholders and also it limits the issuance of capital st ock and theextent of the voting power or capacity of a stockholder (2) Because o f accountability. Whethera corporation is going to do good or bad will depend up on the assets its holds. The only wayby which the State can look at the accounta bility of a corporation in terms of assets itreceives is to get a maximum so tha t if the corporation wants to go beyond that, it has to goback to the State. g) Subscription and Paid-up Requirements (Sec. 13) . Sec. 13 Amount of capital stock to be subscribed and paid for the purposes of in corporation At least twenty-five percent (25%) of the authorized capital stock as stated in the articles ofincorporation must be subscribed at the time of incorporation and at least twenty-five percent(25%) of the total subscription must be paid upon s ubscription, the balance to be payable ona date or dates fixed in the contract o f subscription without need of call, or in the absence ofa fixed date or dates, upon call for payment by the Board of Directors: Provided however, thatin no cas e shall the paid-up capital be less than five thousand pesos (P5,000). . Q: What is the 25%-25% rule? A: It means that of the authorized capital stock applied for, 25% thereof must b e subscribed. Of the 25% subscribed thereof must be paid up. Example, a corporation is by 5 in dividualsand they ask for an authorized capital stock of P2M, how much must each subscribe to? P125,000. RATIONALE: The purpose of such a requisition is that the State may be assured ofthe successful prosecution of the work and that creditors of the compa ny may have to theextent, at least, of the required subscription, the means of o btaining satisfaction for theirclaims. . Q: Must each subscribe equally? A: No. . NOTES: 1.) Capital Stock the amount fixed in the AI procured to be subscribed and paid up. It issettled that shares issued in excess of the authorized capital stock ar e void. 2.) Capital the actual property or estate of the corporation whether in money or property. Itmay be higher or lower than the capital stock. 3.) Subscribed Capital Stock ed to be paid) whether or not fully paid. the portion of the capital stock subscribed (procur

4.) Subscription the mutual agreement of the corporation and the subscriber to t ake and payfor the stock of the corporation. 5.) Pre-incorporation the stage in which each incorporator or stockholder agrees to contribute to a proposed corporation.

6.) Par value share one in the certificate of stock of which appears an amount i n pesos asthe nominal value of shares; must be stated in the AI and par value sh are cannot be issued atless than such par value, which may only be changed by am endment. 7.) No par value share stated in the AI that it would be issued by the corporati on and itsconsideration cannot be less than the issued value, which cannot be le ss than five pesos (P5). Value may be fixed in any of the three ways: (1) by the articles of incorporatio n (2) by theboard of directors when so authorized by said articles or by the bylaws (3) by the stockholders representing at least a majority of the controlling stockholders. h) Steps and Documents Required in SEC . In addition to the AI, documents required are: 1.) Treasurer s Affidavit accompanied by a sworn statement of the Treasurer that a tleast 25% of the capital stock authorized is subscribed and at least 25% of suc h havebeen fully paid in cash or property fair valuation of which is equal at le ast to 25% ofthe said subscription, such paid-up capital not being less than P5, 000.

Revised Bagtas Reviewer by Ve and Ocfe 2A 2.) Certificate of deposit 3.) Letter of authority for the SEC authorizing it to examine the bank deposit, books ofaccount and supporting records as to the existence and utilization of th e paid-upcapital stock 4.) Written undertaking to change their partnership or corporate name in case th ere isanother person, firm, entity wit a prior right to use of the said income o r one similar toit. 1. Grounds for Disapproval (Sec. 17) . Sec. 17 Grounds when articles of incorporation or amendment may be rejected or disapproved The SEC may reject the articles of incorporation or disapprove any a mendmentthereto if the same is not in compliance with the requirements of this C ode: Provided, that theCommission shall give the incorporators a reasonable time within which to correct or modifythe objectionable portions of the articles or amendment. The following are grounds for suchrejection or approval 1.) That the articles of incorporation or any amendment thereto is not substanti ally in accordance with the form prescribed herein; 2.) That the purpose or purposes of the corporation are patently unconstitutiona l, illegal, immoral or contrary to government rules and regulations; 3.) That the Treasurer s Affidavit concerning the amount of capital stock subscrib ed and/orpaid is false. 4.) That the percentage of ownership of the capital stock to be owned by the cit izens of thePhilippines has not been complied with as required by existing laws or the Constitution. No articles of incorporation or amendment to articles of incorporation of banks, banking andquasi-banking institutions, building and loan associations, trust co mpanies and other financialintermediaries, insurance companies, public utilities , educational institutions and other corporations governed by special laws shall be accepted or approved by the Commi ssionunless accompanied by a favorable recommendation of the appropriate governm ent agencyto the effect that such articles or amendment is in accordance with la w. When the proposed articles show that the object is to organize a barrio into a s eparatecorporation for the purpose of taking possession and having control of al l municipal propertywithin the incorporated barrio and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914). It is well to note that, if a corporation s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes otherthan those stated, and mandamus will lie to compel it to issue the certificate of

incorporation. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). . SEC s duty is not merely ministerial It has been granted by PD 902-A the powers to examineand approve or disapprove the articles of incorporation and registration of a corporation. 4. Amendments to the Articles of Incorporation (Sec. 16). . Sec. 16 Amendment of Articles of Incorporation Unless otherwise prescribed by th is Code orby special law and for legitimate purposes, any provision or matter st ated in the articles ofincorporation may be amended by a majority vote of the bo ard of directors or trustees andthe vote or written assent of the stockholders r epresenting at least 2/3 of the outstandingcapital stock, without prejudice to t he appraisal right of dissenting stockholders in accordancewith the provisions o f this Code, or the vote or written assent of at least 2/3 of the members ifit b e a non-stock corporation.

The original and amended articles together shall contain all provisions required by law to set out in the articles of incorporation. Such articles, as amended shall be indicat ed byunderscoring the change or changes made, and a copy thereof duly certified under oath bythe corporate secretary and a majority of the directors or trustees stating the fact that saidamendment or amendments have been duly approved by th e required vote of the stockholders or members shall be submitted to the SEC. The amendments shall take effect upon their approval by the SEC or from the date of thefiling with the said Commission if not acted upon within six (6) months f rom the date of filingfor a cause not attributable to the corporation. . NOTES: The matter to be amended, even if it does not concern the Board, must alw ays beconcurred with by the Board. More importantly, the impetus to amend must a lways comefrom the Board. The stockholders merely ratify such amendment. Such is the case becausethe Board constitutes the centralized management. The impetus o f the Board comprises theobligatory force of the contracts entered into. . 2/3 votes are needed in AI while a majority is needed in amending by laws Such i s the case to make it easier to amend by-laws. 5. Commencement of Corporate Existence (Sec. 19). A private corporation formed or orga Sec. 19 Commencement of corporate existence nizedunder this Code commences to have corporate existence and juridical persona lity and is deemedincorporated from the date the SEC issues a certificate of inc orporation under its official seal andthereupon the incorporators, stockholders/ members and their successors shall constitute a bodypolitic and corporate under the name stated in the articles of incorporation for the period of timementioned therein, unless said period is extended or the corporation is sooner dissolved inaccordance with law.

Gokongwei vs. SEC Revised Bagtas Reviewer by Ve and Ocfe 2A VIII. BY-LAWS See relevant portions of VILLANUEVA, "Corporate Contract Law," 38 ATENEO L.J. 1 (No. 2, June 1994). 1. Nature and Functions (aGokongwei v. SEC, 89 SCRA 337 [1979]; aPea v. CA, 193 SCRA 717 [1991]) FACTS: In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 197 2 also, Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongw ei, the presidne tand controlling stockholder of URC & CFC purchased 5,000 SMC shares. G okongwei triedto get a seat in the SMC BoD but was rejected by the SH s n the grou nds that he was engaged in acompetitive business and his securing a seat in the BoD would subject SMC to great disadvantages. On September 18, 1976 repondent SH s amended the by-laws of SMC, Gokongwei contend s that: 1. the BoD acted without authority & in usurpation of the power of the SH s since the computation of 2/3 vote was based on the authorized capital stock as of 1961 & n ot as of1976 2. The authority granted in 1961 was also extended in 1962 & 1963 when said authori ty wassupposed to cease to exist 3. Prior to said amendment, petitioner had all the qualifications as Director & tha t as asubstitute SH he has the right to vote & be voted as director & that in am ending the bylaws, the corp. purposely provided for Gokongwei s disqualification& deprived him of his vested right. 4. Gokongwei further alleges that the corp. has no inherent power to disqualify a S H & thatprovision allowing the BoD to consider such factors as business & family relations is

unreasonable & oppressive, thus void. Gokongwei prays that the amended by laws be declared null & void. He also wanted to inspect and get a copy of certain documents pertaining to the corp. The SEC allo wed him to see the minutes of the meeting only. So he filed an MR & a petition with the SC due to t he alleged deliberateinability of the SCE to action on his petition. The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as direct or but heshould not sit as such if elected until there is a decision on the vali dity of the by-laws. The SMC answered by saying that he is engaged in a business antagonistic to SMC & that inallowing him to sit in the BoD, he would have access to SMC trade secre ts and plans. It says that theamended by laws were adopted to preserve & protect SMC from danger which was based in its rightfor self-preservation. ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination orelection to the BoD of SMC are valid and reasonable? HELD: 1. Every corp. has the inherent right to adopt by-laws for its internal government & toregulate the conduct & prescribe the rights and duties of its members toward s itself & among themselves in reference to the management of its affairs. This is expressl yrecognized by Sec. 21 of the Corp. Code & has been enunciated in Gov t vs. El Hog ar. 2. Any person who buys stocks in a corp. does so with the knowledge that its affair s aredominated by a majority of the stockholders & that he impliedly contracts t hat the will ofthe majority shall govern in all matters within the limits of the AoI & By-laws. A stockholder is said to have parted with his right to regulate the disposition of his propertywhich he invested in the corporation. Thus, no contract between the SHs and corp. was infringed. 3. Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or w rittenassent of the Sh s representing at least t 2/3 of the subscribed capital sto ck. If it changes, diminishes or restricts the rights of SHs, the dissenting minority has only the right toobject in writing & demand payment of their share. Petitioner has no ves ted right to be elected director. 4. A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance of corporate affairs & property & hence, of the property interests of SHs. Equit y recognizes that SHs are properties of corporate interest & are ultimately the on ly beneficiaries thereof. Thus, he cannot serve 2 adverse masters without detriment to one of them He cannot utilize his inside information & strategic position to his own preferment.

5. An amendment to the by-laws which renders a SH ineligible to be a director, if h e be also adirector in a competitor corp. has been sustained valid. This is base d on the principle thatwhere the director is employed in the service of a rival corp he cannot serve both butmust betray one or the other. Such an enactment mer ely advances the benefit of the corp & for its own good. Corporate officers are not permitted to use their position o f trust & confidence to further their private interests. 6. DOCTRINE OF CORPORATE OPORTUNITY rests on the unfairness of an officer or direct or taking advantage of an opportunity for his own personal profit where the interes t of thecorporation calls for protection. Here BoD members have access to market ing strategies, pricing structure, budget for expansion, R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The questioned amendment of the y-laws was done to preve nt thecreation or an oppositor for an officer or director of SMC, also an office r of a competing corp. from taking advantage of the information which he as director to promote h is individual corporate interests to the detriment of SMC, it would be hard to avoi d anypossibility of Gokongwei s taking advantage of his position as SMC director. 7. The SC grants the petition regarding Gokongwei s petition to examine the book and records of SMC

Pe?a vs. CA Revised Bagtas Reviewer by Ve and Ocfe 2A 8. However, it sustained the validity of the amendment to the by-laws without preju dice tothe question of actual disqualification of Gokongwei to run if elected to sit as SMC directorbeing decided, after proper hearing by the SMC BoD, whose de cisions shall be appealableto the SEC & to the SC, unless disqualified, the proh ibiton in the said by-laws will not applyto Gokongwei. FACTS: PAMBUSCO original owners of the lots in question, mortgaged the same to DBP in consideration of P935,000. This mortgage was foreclosed and said properties were awarded toRosita Pea as highest bidder in the foreclosure sale. The Board of PAM BUSCO, through three of itsmembers resolved to assign its to one of its members, Atty. Joaquin Briones, to execute and sign adeed of assignment for and in behal f of PAMBUSCO in favor of any interested party. Thus, Briones executed a deed of Assignment of PAMBUSCO s redemption right over the subject lots in favor ofMarelino Enriquez. The latter then redeemed the said properties and a certificate of redemptiondated Aug. 15, 1975 was issued. Enriquez executed a d eed of absolute sale of the subject propertiesin favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue. Pea wrote the sheriff notifying him that the redemption was not valid as it was m ade under avoid deed of assignment. She then requested the recall of the said re demption and a restraint onany registration or transaction regarding the lots. D efendant Pea through counsel wrote the sheriffasking for execution of a deed of f inal sale in her favor on the ground that the one year period ofredemption has l ong elapsed without any valid redemption having been exercised. Plaintiff Yapwro te defendant Pea asking for payment for back rentals in the amount of P42,750.00 for the useand occupancy of the land and house. Later, the spouses Yap were prom pted to file the instant caseon the ground that being registered owners, they ha ve the right to enforce their right to possessionagainst defendant who has been allegedly in unlawful possession thereof. It was contended that plaintiffs could not have acquired ownership over the subj ect propertiesunder a deed of absolute sale executed in their favor by one Marce lino Enriquez who likewise couldnot have become the owner of the properties in q uestion by redeeming the same under a void deedof assignment. The defense was th at since the deed of assignment executed by PAMBUSCO in favorof Enriquez was voi d ab initio for being an ultra vires act of its board of directors and for being without any valuable consideration, it could not have had any legal effect. TC f ound for petitioner. CA reversed. HELD: In order that the SEC can take cognizance of a case, the controversy must pertai n to any ofthe following relationships: a. between corp., partnership or assoc. and the public b. between the corp. and its SH, members, officers c. between corp. and the state in so far as its franchise, permit or license to ope rate is

concerned d. among the stockholders, partners or associates themselves. Neither petitioner nor respondents Yap spouses are stockholders or officers of P AMBUSCO. Consequently, the issue of the validity of the series of transactions may be res olved only bythe regular courts. The by-laws of a corporation are its own private laws which substantially have t he sameeffect as the laws of the corporation. They are in effect written into th e charter. In this sense, they become art of the fundamental law of the corporation which the corporation and itsdirectors and officers must comply with. Only three out of five directors of PAMBUSCOconvened on November 19, 1974 by virtue of a prior notice of a speci al meeting. There was no quorum to validly transact business since, under Section 4 of the amended bylaws herein above reproduced, at least 4 members must be present to constitute a quorum in a specialmeeting of the BoD. The AoI or by-laws of the corp. may fix a greater nu mber than the

majority than the majority of the number of board members to constitute the quor um necessary for the valid transaction f business. Being a dormant corp. for severa l years, it washighly irregular, if not anomalous, for a group of three individu als representing themselves to be the directors of respondent PAMBUSCO to pass a resolution disposing of the on ly remaining asset of the corporation in favor of a former corporate officer. The l atest list of SH of respondent PAMBUSCO on file with the SEC does not show that the said alleged directorswere among the SHs of respondent PAMBUSCO. Since the disposition of sai d redemption rightof PAMBUSCO by virtue of the questions ed resolution was not a pproved by the requirednumber of SHs under the law, the said resolution, as well as the subsequent assignmentexecuted assigning to respondent Enriquez the said right of redemption should be struckdown as null and void. As the rules and regulations or private laws enacted by the corporation to regula te, govern and control its own actions, affairs and concerns and its stockholders or members anddirectors and officers with relation thereto and among themselves in their relation to it, bylaws are indispensable to corporations. These may not be essential to corporate birth butcertainly, these are required by law for an orderly governance and managemen t of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). Q. Distinguish by-laws from AoI A. The AoI is not an internal document that binds the parties to a corporate set ting. It is also a document that binds the State. The BL is an intramural document, its supposed to bind the inner workings of a corp. Q. Are the AoI and BL public documents? A. Yes, both are public documents because they are not valid and binding without the approval ofthe SEC Q. Does the BL have to be approved by the SEC? A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code expresslyrequires the approval of the SEC to be binding upon the SHs and me mbers. Absent the codal provision, it is binding because of a corp. s inherent power to adopt its own by-l aws. Q. Do BL bind the public? A. As a general rule, BL provisions do not bind the public, except if the third person has knowledgeof the BL provision. (a) Common Law Limitations on By-Laws (i) By-Laws Cannot Be Contrary to Law and Charter A by-law provision granting to a stockholder permanent seat in the Board of Directors is contrary to the provision in Corporation Code requiring all members of theBoard to be elected by the stockholders. Even when the members of the ass ociationmay have formally adopted the provision, their action would be of no ava il because noprovision of the by-laws can be adopted if it is contrary to law. G race Christian High School v. Court of Appeals, 281 SCRA 133 (1997). (ii) By-Law Provisions Cannot Be Unreasonable or Be Contrary to the Nature ofBylaws. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927). Authority granted to a corporation to regulate the transfer of its stock does no tempower the corporation to restrict the right of a stockholder to transfer his shares,

but merely authorizes the adoption of regulations as to the formalities and proc edureto be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280

China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997). Revised Bagtas Reviewer by Ve and Ocfe 2A (1998). By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corpo ration. Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992). (iii) By-Law provisions cannot discriminate (b) Binding Effects on By-laws: aChina Banking Corp. v. Court of Appeals, 270 SC RA 503 (1997). FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Ce rtificate to petitioner China Banking. Petitioner wrote VGCCI requesting that the aforemen tioned pledge agreement be recorded in its books. Later, Calapatia obtained a loan of P 20,000 from petitioner, payment of which was secured by the aforestated pledge agreement sti ll existing between Calapatia and petitioner. Due to Calapatia s failure to pay his obligation , petitioner filed a petition for extra-judicial foreclosure. Petitioner informed VGCCI of th e abovementioned foreclosure proceedings and requested that the pledged stock be transf erred to its name. However, VGCCI wrote petitioner expressing its inability to accede to peti tioner s request due to Calapatia s unsettled accounts with the club. Despite the foregoing, Notary Public de Vera held a public auction and petitione r emerged asthe highest bidder, VGCCI sent Calapatia a notice demanding full pay ment of his overdue account inthe amount of P18,783.24. VGCCI caused to be publi shed in the newspaper Daily Express a notice ofauction sale by VGCCI of its subj ect share of stock and thereafter filed a case with the RTC of Makatifor the nul lification. The RTC dismissed the case for lack of jurisdiction over the subject matter onthe theory that it involves an intra-corporate dispute. Petitioner filed a complaint with the SEC. The Commission en banc believed that appellantpetitioner had a prior right over the pledged share and because of pledgor s failu re to pay theprincipal debt upon maturity, appellant-petitioner could proceed wi th the foreclosure sale of thepledged share. The auction sale conducted by appel lee-respondent Club was declared null and void. The CA rendered its decision nullifying and setting aside the orders of the SEC and its hearingofficers on the ground of lack of jurisdiction over the subject. The CA declared that the controversy

between CBC and VGCCI is not intra-corporate. HELD: VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art . VIII of its bylaws which provides that after a member shall have been posted as delinquent, the Boa rd may orderhis/her/its share sold to satisfy the claims of the club. It is purs uant to this provision that VGCCI alsosold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws could prevail. The SEC therefore took pr oper cognizance of the instant case. Moreover, VGCCI completely disregarded petitioner s right as pledgee. It even fail ed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues thatthe G.R. is that third persons are not bound by the by-la ws of a corporation since they are not privyto thereto. The exception to this is when 3rd persons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of priv ate respondent whenpetitioner foreclosed the pledge made by Calapatia and when p etitioner purchased the share foreclosed. Thus, the petitioner purchased the said share subject to the right o f the PR to sell thesaid shares for reasons of delinquency and the right of PR t o have a first lien on said shares as theserights are provided for in the by-law s very clearly. In order to be bound, the 3rd party must have acquired knowledge of the pertinen t by-laws atthe time the transaction or agreement between said 3rd party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. Petitioner s belated notice of said bylaws at the time of the foreclosure will not suffice. By-laws signify the rules and r egulations of

private laws enacted by the corporation to regulate, govern and control its own actions, affairs andconcerns and its stockholders or members and directors and o fficers with relation thereto and amongthemselves in their relation to it. The p urpose of a by-law is to regulate the conduct and define theduties of the member s towards the corporation and among themselves. Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such isnot the case here, knowledge of the by-laws was had only du ring the proceedings, as such, it cannotbind China Bank. However, one may argue in the same way in Land Titles, where banks are requiredto go beyond the face of the title as they are institutions endowed with public interest; in this caseCh ina Bank should have inquired into such by-laws before entering into the transac tions mentioned. Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporation s by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. aPMI Colleges v. NLRC, 277 SCRA 462 (1997). PMI COLLEGES v. NLRC FACTS: PMI is an educational institution offering courses on basic seaman training and other marinerelated courses hired private respondent as contractual instructor with an agree ment that the latter shall be paid at an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR and other instructors were compensated for services rendered during the first three periods of the abovementioned contract. However, for reasons unknown to PR, he stopped receiving pay ment for thesucceeding rendition of services. Repeated demands having likewise failed, PR was soon constrained to file a compl aint seeking payment for salaries earned. PMI contended that classes in the courses o ffered which complainant claimed to have remained unpaid were not held in the school premises of PMI. Only PR knew whether classes were indeed conducted. Later in the proceedings, petitioner manifested thatMr. Tomas Cloma Jr., a member of the petitioners BoD wrote a let ter to the Chairman of the Boardclarifying the case of PR and stating therein th at under PMI s by-laws, only the Chairman is authorized to sign any employment contract. A decision was rendered by the Labor Arbiter finding for PR. The NLRC affirmed. HELD: The contract would be invalid just because the signatory was not the chairman wh ich allegedly violated PMI by-laws but since by-laws operate merely as internal rule s among the stockholders, they cannot affect or prejudice 3rd persons who deal w ith the corporation in good faith unless they have knowledge of the same. No proof appears on record that PR ever knew an ything about the

provisions of said by-laws. Petitioner itself merely asserts the same without ev en bothering to attacha copy or excerpt thereof to show that there is such a pro vision. That this allegation has never been denied by PR does not necessarily signify admission. 2. Adoption Procedure (Sec. 46) Section 46. Adoption of by-laws. -Every corporation formed under thisCode must, within one (1) month after receipt of official notice of theissuance of its cert ificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government notinconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing atleast a majo rity of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the

Revised Bagtas Reviewer by Ve and Ocfe 2A corporation, subject to the inspection of the stockholders or membersduring offi ce hours. A copy thereof, duly certified to by a majority ofthe directors or tru stees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-lawsmay be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together withthe articles o f incorporation. In all cases, by-laws shall be effective only upon the issuance by theSecurities and Exchange Commission of a certification that the by-lawsare not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws o r any amendment thereto of any bank, banking institution, building and loan association, trust company, insuran ce company, public utility, educational institution or other special corporations governed by special laws, unless accom panied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a) There can be no automatic dissolution simply because the incorporators failed to file the required by-laws under Sec. 46 of Corporation Code. There is no outright demise corporate existence. Proper notice and hearing are cardinal components of due pr ocess in anydemocratic institution, agency or society. In other words, the incor porators must be given thechance to explain their neglect or omission and remedy the same. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997). 3. Contents (Sec. 47) Section 47. Contents of by-laws. -Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1. The time, place and manner of calling and conducting regular orspecial meetin gs of the directors or trustees; 2. The time and manner of calling and conducting regular or specialmeetings of t he stockholders or members; 3. The required quorum in meetings of stockholders or members andthe manner of v oting therein; 4. The form for proxies of stockholders and members and the mannerof voting them ; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees andthe mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of allofficers o ther than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and

of

10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a)

4. Amendments (Sec. 48) -Power to amend may be delegated to the BoD Section 48. Amendments to by-laws. -The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of themembers of a non-stock corporation, at a regular or special meetingduly called for the p urpose, may amend or repeal any by-laws or adoptnew by-laws. The owners of two-t hirds (2/3) of the outstanding capitalstock or two-thirds (2/3) of the members i n a non-stock corporationmay delegate to the board of directors or trustees the power to amendor repeal any by-laws or adopt new by-laws: Provided, That any pow erdelegated to the board of directors or trustees to amend or repeal anyby-laws or adopt new by-laws shall be considered as revoked wheneverstockholders owning or representing a majority of the outstandingcapital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws inthe office of the corporation, and a copy thereof, duly certified underoath by the corporat e secretary and a majority of the directors ortrustees, shall be filed with the Securities and Exchange Commissionthe same to be attached to the original articl es of incorporation andoriginal by-laws. The amended or new by-laws shall only be effective upon the issuance by theSecur ities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) Admittedly, the right to amend the by-laws lies solely in the discretion of the e mployer, this being inthe exercise of management prerogative or business judgmen t. However this right, extensive as itmay be, cannot impair the obligation of ex isting contracts or rights. . . If we were to rule otherwise, itwould enable an employer to remove any employee from his employment by the simple expediencyof a mending its by-laws and providing that his/her position shall cease to exist upo n the occurrenceof a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469 (1998). IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES 1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA, 190 SCRA 154 [1990]) . Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incurobligations and bring civil or criminal actions, in conformity with the laws and regulations oftheir organization. . Sec. 36 Corporate powers and capacity Code hasthe power and capacity: Every corporation incorporated under this

1. To sue and be sued in its corporate name;

Revised Bagtas Reviewer by Ve and Ocfe 2A 2. Of succession by its corporate name for the period of time stated in the article s ofincorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporations in accordance with the provisions of thi s Code; 5. To adopt by-laws, not contrary to law, morals or public policy, and to amend or repealthe same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sel l treasurystocks in accordance with the provisions of this Code; and to admit me mbers to thecorporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage andotherwise deal with such real and personal property, including securities an d bonds ofother corporations, as the transactions of the lawful business of the corporation mayreasonably and necessary require, subject to the limitations pres cribed by law and theConstitution; 8. To enter into merger or consolidation with other corporations as provided in thi s Code; 9. To make reasonable donations, including those for the public welfare or hospital orcharitable, cultural, scientific, civic or similar purposes: Provided, That n o corporation, domestic or foreign shall give donations in aid of any political party or candid ate or forpurposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out itspurpose or purposes as stated in the articles of incorporation. . Sec. 45 Ultra vires acts of corporations No corporation under this Code shall po ssess orexercise any corporate powers except those conferred by this Code or by its articles ofincorporation and except such as necessary or incidental to the e xercise of the powers soconferred. A corporation has only such powers as are expressly granted to itsarticles of incorporation, those which may be incidental to wers, thosereasonably necessary to accomplish its purposes and e incident to itsexistence. Pilipinas Loan Company v. SEC, 356 it by law and by such conferred po those which may b SCRA 193 (2001).

a) Classification of Corporate Powers: Express; Implied; and Incidental EXPRESS These powers given to a corporation either: a.) By clear or express provision of the law.

. Some of the other powers expresslygranted under Sec. 36 are considered to be inherent or incidental powers which even ifnot given by express grant are nevertheless deemed to be within the capacity of the foreign entities (suchas the power to adopt IMPLIED Those powers that exist as anecessary consequence of: a.) the exercise of express powers of thecorporation or b.) the pursuit of its purpose as provided for in the article of incorporation . the managementof a corporation, in the absence of expressrestrictions, has INCIDENTAL Those powers that: a.) attach to a corporation at the moment of its creation b.) without regard to its express powers or particular primary purposes and c.) is said to be inherentin it as a legal entity or a legal organization. . Powers that go into the very nature and extent of a

by-laws) b.) By the charter or articlesof incorporation. . Express grant of authority from the board of directors needed to validly bindthe corporation. . Thus the SC held that absent any board resolution authorizing an officer or any person to exercise express powers givento a corporation suchas filing a suit on itsbehalf, such an action is invalid. . The power of a corporation to sue and be sued in any court is lodged with the board of directors that exercise its corporate powers. . By-laws are not a source of powers. . Art. 46 of the Civil Code expressly provides for the powers of a corporation as a juridical personality possesses. . Sec. 36 of the Corporation Code expressly enumeratesthe ten powers which a corporation may exercise. . Sec. 45 of the Corporation Code recognizes other powers provided in the Article of Incorporation. . Generally exercised

by the Board of Directors with exception to certain instances where shareholders assent are needed. discretionaryauthority to enter into contracts or transactions which may bedeemed reasonably necessary or incidental to its business purpose. . Sub-paragraph 11 of Sec. 36 provide that acorporation has the power and capacity to exercise such powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation. . Generally, purelymembers of the Board of Directors exercise this. corporation s juridical entity cannot be presumed to be incidental or inherent powers. This juridical entity is State-grant and cannot be altered or amended without State authority (egs. right of succession, right to merger) Sec. 2 of the Corp. Code provides the corporation as having the powers, attributes and properties expressly authorized by law or incident to its existence. Generally, purely members of the Board of Directors exercise this.

Revised Bagtas Reviewer by Ve and Ocfe 2A . Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent au thority and of (2) estoppel. . One has to look at the corporation as a person before the law because of the (1) issue ofconsent and (2) liability who commits itself to obligation. The state o nly gives a corporationlimited powers and not general powers as an individual ha s because of the consent andliability. (b) Where Corporate Power Lodged A corporation has no power except those expressly conferred on it by the Corpora tionCode and those that are implied or incidental to its existence. In turn, a c orporationexercises said powers through its board of directors and/or its duly a uthorized officers andagents. . . In turn, physical acts of the corporation, lik e the signing of documents, can beperformed only by natural persons duly authori zed for the purpose by corporate by-lawsor by a specific act of the board of dir ectors. Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001). Unless otherwise provided by the Corporation Code, corporate powers are exercise d by the Board of Directors, which they may delegate to either an executive committee , officers or contracted managers. The delegation, except for the executive commit tee, must be for specific purposes, which makes the officers the agents of the corpor ation, andaccordingly the general rules of agency as to the binding effects of t heir acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a po wer of theBoard, the latter must specially authorize them to do so. ABS-CBN Broa dcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999). . PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec. 23) . The source of power of the board of directors is therefore primary and not deleg ated powerfrom the stockholders or members of the corporation. However, there ar e specified instancesin the Corporation Code where the particular exercise of po wer of the corporation by theboard, in order to be binding and effective, requir es the consent and ratification of thestockholders or members, on one hand, and the State, on the other hand. . IN CONSONANCE WITH CONTRACT LAW PRINCIPLES in conformity with the principles ofc ontract law, that a party cannot relieve himself from the contractual terms and conditions, much less amend or alter them, without the consent or approval of the other part y or parties. . EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is requir

ed, majority rules. The consent or dissent of the stockholders is recognized by thei r majority voteor their qualified two-thirds as the case may be which would bind even those who abstainedor dissented. For those who dissented, there is a way o ut for them by way of exercising theirappraisal right (depending on the issue). 2. ULTRA VIRES DOCTRINE See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (N o. 2, June 1994). (a) Concept and Types (Sec. 45) . Sec. 45 Ultra vires acts of corporations No corporation under this Code shall po ssess orexercise any corporate powers except those conferred by this Code or by its articles ofincorporation and except such as necessary or incidental to the e xercise of the powers soconferred. . Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires D octrine thatprovides that the corporation cannot exercise powers beyond what had been granted to it by statute or by its articles of incorporation except such as necessary or incident al to the exercise of powers so conferred. It was meant to control and regulate the action s of corporations.

. BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles) 1. A corporation is a creature of the law and has only such powers and privilege s as aregranted by the State the ultra vires doctrine is a product of the theory of concession as provided in Sec. 2. 2. The doctrine upholds the fiduciary duty of directors and officers to the stoc kholders ormembers such duty dictates that the corporation engage only in transa ctions to which thestockholders and members bind themselves by way of the provis ions of the purposes clause. This is also necessarily include an obligation not to enter into transactions wh ich violate thelaw. . TEST TO DETERMINE ULTRA VIRES Whether the act in question is in direct and immed iate furtherance of the corporation s business, fairly incident to the express powers a nd reasonably necessary to their exercise. The strict terms direct and immediate refe rs to thebusiness of the corporation while the liberal terms fairly incident and re asonablynecessary with reference to the powers of the corporation. With regard to the business of thecorporation as the reference point, much latitude is given t o the corporation to enter intovarious contracts as long as they have logical re lation to the pursuit of such business. On theother hand, when the purpose claus e used limiting words that Court will hold such corporationto such limited busin ess. . POLICIES SUPERVENING IN ULTRA VIRES ISSUES rpretation. Acts not per se illegal, liberal inte

1.) PUBLIC CONVENIENCE if corporation contracts are strictly construed, the publ ic would beinconvenienced by having to verify and enter into contractual safegua rds when entering into contracts with corporations. As such liberal construction is afforded to such co rporate contracts. 2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS setting aside the corporate contrac ton the ground of ultra vires would contravene the expectations of both parties who enteredinto the contract expecting to be bound. 3.) PRINCIPLE OF BUSINESS JUDGMENT the court will not sit in judgment to substit ute theirbusiness judgment for that of the directors; and that as much as possib le, directors in theexercise of their business judgment, should be given leeway to adopt corporate policies andto engage in transactions as they deem best for t he corporation. 4.) NATURE OF BUSINESS OF OPERATIONS it is impossible to anticipate all possible contingencies at the time the Articles are drawn thus there would be a need to a mend orrevise the Articles to keep abreast with the various aspects of the busin ess. . ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE . Illegal acts of a corporation are those acts which are contrary to law, morals, or publicorder or contravenes some rule of public policy or public duty are void

. Such acts orcontracts cannot be the basis of any court action nor acquire vali dity by performance, ratification or estoppel. . Ultra vires acts are those which are not illegal and void ab initio but are with in thescope of the articles of incorporation are merely voidable and may become bindingand enforceable when ratified by stockholders. Said ratification cures th e infirmity ofthe corporate act and makes it valid and enforceable. . TYPES OF ULTRA VIRES CASES 1.) acts or contracts which are per se illegal as being contrary to law VOID 2.) acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation; and VOID or VOIDABLE? 3.) acts or contracts entered into in behalf of the corporation by persons who h ave no corporate authority UNENFORCEABLE . Ultra vires acts of the second type are void as between the corporation and the State or in thefirst level of corporate existence while it is merely voidable in the third level because of public

Revised Bagtas Reviewer by Ve and Ocfe 2A 93 93 policy. The public who deals in good faith with the corporation has the right to expect that theobligation entered into shall be complied with. First Type Ultra Vires: An ultra vires act is one committed outside the object f orwhich a corporation is crated as defined by the law of its organization and th ereforebeyond the power conferred upon it by law. The term ultra vires is distingui shed froman illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. aAtr ium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001). ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS Facts: Hi-Cement through the corporate signatories (De Leon treasurer, Delas Ala s chairman) issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the fourchecks to Atrium for valuable consideration. Upon presen tment for payment, the bank dishonored allfour checks because the payment was st opped. Atrium filed with the RTC an action for collection ofthe proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henryand HiCement pay Atrium jointly and severally the value of the four checks plus intere st. The CA onthe other hand absolved Hi-Cement from liability. Issue: WON De Leon was not authorized to issue the checks WON the issuance of the checks were ULTRA VIRES ACTS Held: De Leon was authorized and such issuance is not an ultra vires act. Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As arule, the act of issuing checks is within the ambit of a va lid corporate act. And securing a loan tofinance the activities of the corporati on is not an ultra vires act. While an ultra vires act is one committed outside the object or which a corporation is created as defined by law of its organizationand therefore beyond the power conferred upon it by law, the act pertained to in the case is not anillegal act. De Leon on the other hand was negligent in confirming that such checks were issu ed to ETHenry as payment for their company s debt with the former. That is why she was held to be personally liable to Atrium. Second Type Ultra Vires: When the President enters into speculative contracts, without prior board approval, and without subsequent submission of those contrac ts to theBoard for approval or ratification, nor were the transactions included in the reports of thecorporation, such contracts do not bind the corporation. It must be pointed out that theBoard of Directors, not the President, exercises co rporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). (b) Ratification of Ultra Vires Acts: (aPirovano v. De la Rama Steamship Co., In c., 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; aCrisologo Jose v. Court of Appeals, 177 SCRA 594 [1989] ;

aHarden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]). PIROVANO DE LA RAMA STEAMSHIP CO. INC. Facts: The story began with Enrico Perovano becoming President of the Dela Rama Corporation. Under his management, the corporation grew into a multi-million company until hi s death. Don Esteban dela Rama who owned and controlled the stock of the corporation, distrib uted his shareholdings among his five daughters including Estefania. The company has a bo nded indebtedness amounting to P7,500 in 1940 but had assets/capitals of P15 M as of 1941 which weremortgaged as security for the debt to the National Development Co rp. This bonded indebtedness wasconverted to non-voting preferred shares of the company under the condition that they would bear afixed cumulative divisor of 6% per annum and this was carried out in 1949. NDC now had the right tobe represen ted by four out of nine members in the Board of Directors. It was in 1946 that t he Boardof Directors adopted the questioned resolution where the corporation ser aside P400,000 to the four

minor children with the sum convertible into shares of stock. Lourdes de la Rama later learned that since the company shares of stock was actually 3.6 times their par value, the co mpany would ineffect be giving them an amount totaling to P1,440,000 and that st ocks if were given to the children, the voting strength of the De la Rama daughters would be adversely affected. Thi s caused Lourdesto ask for the cancellation and waiver of her pre-emptive rights . Don Esteban then advised the corporate secretary that the resolution be nullified due to the misunderstanding as to its implications. In 1947, the Board adopted a resolution changing the form of donation from 4,000 shares to merely arenunciation in favor of the children of the corporate right, titles and interests as beneficiary to theproceeds of the life insurance policy subject to the condition that proceeds be retained by thecompany as a loan with 5% interest ($321,500). Estefania as guardian of the children, accepted thedona tion in their behalf. Said donation was formally ratified in 1949 after Estefani a bought a house inNew York for $75,000. In 1950 Osmena Jr. husband of Lourdes d e la Rama addressed an inquiry tothe SEC asking for an opinion regarding the don ation. SEC opined that the donation was void because the corporation could not dispose of its assets by gifts. Therefore, it acted beyond the scopeof its powers. Thus, the stockholders revoked the donation on this ground. With these revocation, plaintiff as represented by Estefania their mother, seek t enforce this resolutions adopted by the Board of Directors and Stockholders of De la Rama Ste amship Co. givingto said children the proceeds of the insurance policies of the deceased with the company as thebeneficiary. The company contends that the resol ution and the contract executed pursuant theretoare ultra vires and if valid, th e obligation to pay the amount given is not yet due and demandable. Plaintiffs won in the lower court, hence this petition. Issue: WON the said Board of Director s resolution was an ultra vires act? Held: The grant or donation in question is remunerative in nature and was given in con sideration of theservices rendered by the heirs father to the corporation. The do nation has already been perfectedsuch that the corporation could no loner rescin d it. It was embodied in a Board Resolution. Representatives of the corporation and even its creditors as the NDC have given their concurrence. The resolution was actually carried out when the corporation and Estefania enter ed into an agreement that the proceeds will be entered as a loan. Estefania accepted the do nation and suchwas recorded by the corporation. The Board of Directors approved Estefania s purchase of the housein New York. Company stockholders formally ratifi ed the donation. The donation was a corporate act carried out by the corporation not only with th e sanction of theBoard of Directors but also of its stockholders. The donation h as reached a stage of perfection whichis valid and binding upon the corporation and cannot be rescinded unless there exists legal groundsfor doing so. The SEC o pinion nor the subsequent Board Resolution are not sufficient reasons tonullify the donation. The donation is also not an ultra vires act. The corporation was given broad and

unlimited powers tocarry out the purpose for which it was organized which inclu des the power to (1) invest and deal withcorporate money not immediately require d in such manner as from time to time may be determined (2) aid in any other manner to any person, association or corporation of which a ny obligation is heldby this corporation. The donation undoubtedly comes within the scope of this broad power. An ultra vires act is (1) an act contrary to law, morals, or public order or con travene some rules ofpublic policy or duty. It cannot acquire validity by perfor mance, ratification, estoppel. It is essentiallyvoid (2) those within the scope of the Articles of Incorporation and not always illegal. It is merelyvoidable an d may become binding and enforceable when ratified by stockholders. Since it is not contended that the donation is illegal or contrary to any of the expressed provisions ofthe Articles of Incorporation nor prejudicial to the cre ditors of the corporation, said donation even ifultra vires is not void and if v oidable, its infirmity has been cured by ratification and subsequent atcsof the corporation. The corporation is now estopped or prevented from contesting the va lidity of thedonation. To allow the corporation to undo what it has done would b e most unfair and contravene thewell-settled doctrine that the defense of ultra vires cannot be se up or availed of in any completedtransaction. NOTE: The ratification of the stockholders of the donation made is the key in th is case. Because such

Revised Bagtas Reviewer by Ve and Ocfe 2A 95 95 ratification is meant to protect the contractual relationship or interest of sto ckholders. CRISOLOGO-JOSE v. COURT OF APPEALS Facts: Atty. Benares was the President of Movers Enterprise while Ricardo Santos Jr. was the VicePresident. On April 1980 Atty. Benares in accommodation of his clients, the spou ses Jaime and ClaritaOng issued a check drawn against Traders Royal Bank in the amount of 45,000 payable to CrisologoJose. Since the check was under the account of the corporation, the president an d the treasurershould sign the check. But since the treasurer was not available, Benares asked Santos to be thealternate signatory. The check was issued to Cris ologo-Jose in consideration of the waiver of Crisologo over a certain property which the GAIA agreed to sell to the clients o f Benares (spousesOng) with the understanding that upon approval of the compromi se agreement with the spousesOng, the check will be encashed accordingly. Howeve r, the compromise agreement was not approved within the expected period. So Benares replaced the check with another one with the sameamount also payable to Jose. When petitioner deposited the chec k, it was dishonored for insufficiencyof fund. Petitioner filed criminal complai nt for violation of BP 22. Meanwhile, during the preliminaryinvestigation, Santo s tendered cashiers check in payment of the dishonored check but petitionerrefus ed to accept it. Santos then encashed the check and deposited the money to the C lerk of Court. Incidentally, Benares purchased the cashier s check and gave it to the plaintiff t o be applied aspayment of the dishonored check. RTC held that it was not persuad ed to believe that consignation isapplicable here. So the complaint was dismisse d. CA reversed and set aside such decision. Petitionercontends that the accommod ation party in this case is Mover Enterprises and not private respondentwho mere ly signed the check in a representative capacity. Issue: Assuming that Mover Enterprises is the accommodation party, WON it may be held liable onthe accommodation instrument. Held: No. Corporation is not liable. The provisions of the NIL which holds an ac commodation partyliable on the instrument to a holder for value, although such h older at the time of taking theinstrument knew him to be only an accommodation p arty, it does not apply to corporations which areaccommodation parties This is b ecause issue or endorsement of negotiable paper by a corporationwithout consider ation and for the accommodation is an ultra vires act. By way of a corporation, an officer or agent may do so ONLY IF specifically auth orized to do so. Butwhere the facts show that the accommodation involved was for their personal account, undertakingor purpose and the creditor was aware thereo f. NOTE: That while the public is not required to know that one is authorized or no t to bind thecorporation for a certain obligation and that while the contract ma y be enforced even without authority because the public dealing in good faith has the right to expect that the obligation enteredinto shall be complied with, such doctrine does not apply when the dealing public in the first place isin bad faith, as in this case; that is why the corporation was not bound to such accommodation agreement. HARDEN v. BENGUET CONSOLIDATED MINING

Facts: Benguet Consolidated Mining and Balatoc Mining Co. are entities organized for thepurpose of engaging in the mining of gold in the Philippines and their r espective properties lieonly a few miles apart. The original stockholders of Bal atoc were unable to supply the meansfor profitable operation thus, its board ord ered a suspension of all work. A general meeting ofthe stockholders approved to establish a committee to find investors. The committee in turnapproached Bean, P resident and General manager of Benguet to secure the necessary capitalfor the d evelopment of the Balatoc properties. The management of both companies executeda contract where Benguet was to proceed with the development and construction of a millingplant for the mine and to erect a power plact. In return, Benguet would receive from Balatocshares of par value of P600,000 in payment of the first 600 ,000 to be advanced to it.

By 1929, Benguet had spent P1,417,952,15 in pursuance of the contract. Balatoc s tockholders havebeen receiving large dividends. Harden and two other stockholder s filed a suit against Benguet, Balatoc and the officers to annul the certificate covering P600,000 shares of Ba latoc issued toBenguet and to recover a large sum of money alleged to have been unlawfully collected by Benguetand to annul the contract. The trial court dismis sed the complaint, hence this petition. Issue: WON it is lawful for Benguet to hold any interest in another mining corpo ration? Held: No. Section 75 of the Philippine Bill of 1902 prohibits corporation engage d in mining from beinginterested in any other corporation engaged in mining. Thi s was amended by Act No. 3518 which now provided that a corporation is prohibited to hold more than 15% of the OCS o f another corporation. The Corp. Law did not contain any clause directly penalizing the ac ts of a corporation ormember in an interest contrary to Sec. 13 of Act 1459. The penalties imposed by the Corp. Law areof such nature that they can be enforced only by a criminal prosecution or by an action of quowarranto which can only be maintained by the Atty. General. Benguet Co. has committed no civilwrong against the plaintiff stockholders and if a public wrong is committed, the directors of Balatocand plaintiff Harden himself were the active inducers of the commission of that wrong. The contractshave been performed on both sides and there is no po ssibility of undoing what has been done. Plaintiffs then invoke Art. 1305 which declares that an innocent party to an ill egal contract mayrecover anything that he may have given while he is not bound t o fulfill any promise he may havemade. Supposing this is applicable, the general remedy provided by Art. 1305 cannot be invokedwhere a special remedy is supplie d in special law. In as much as the corporation law prohibits the acquisition by one mining corpor ation of any interestin another and that these were enacted in the exercise of g eneral police power of the government, itresults that where a corporation does s o, the stockholders cannot maintain an action to annul thecontract by which such interest was acquired. The remedy must be sought in a criminal proceedingor quo warranto action instituted by the government. Until thus assailed in a direct p roceeding, thecontract by which the interest was acquired will be treated as val id as between the parties. NOTE: We are studying Harden because of the pronouncement that even where corpor ate contractsare illegal per se, when only public or government policy is at sta ke and no private wrong iscommitted, the courts will leave the parties as they a re in accordance with their original contractualexpectations. (The only contract s that the courts will touch are contracts which are void for beingillegal per s e.) (i) Theory of Estoppel or Ratification The principle of estoppel precludes a corporation and its Board of Directors fro mdenying the validity of the transaction entered into by its officer with a thir d party whoin good faith, relied on the authority of the former as manager to ac t on behalf of the corporation. aLipat v. Pacific Banking Corp., 402 SCRA 339 (2003). In order to ratify the unauthorized act of an agent and make it binding on theco rporation, it must be shown that the governing body or officer authorized to rat ifyhad full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of t

hecorporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having a uthorityto make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973). The admission by counsel on behalf of the corporation of the latter s culpabilityf or personal loans obtained by its corporate officers cannot be given legal effec t whenthe admission was without any enabling act or attendant ratification of cor porate act, as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997). Doctrine of Laches or Stale Demands : The principle of laches or stale demands provides that the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should hav e been

Revised Bagtas Reviewer by Ve and Ocfe 2A done earlier, or the negligence or omission to assert a right within a reasonabl e time, warrants a presumption that the party entitled to assert it either has abandoned it ordeclined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2 002). . PRINCIPLE OF ESTOPPEL It being merely voidable, an ultra vires act can be enforc ed or validated if there are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel. . Ratification (a) the act must be consummated and not executory (b) creditors are not prejudiced or all of them have given their consent (c) rights of the public or t he State are notinvolved (d) all the stockholders must give their consent. (ii) Theory of Apparent Authority (Art. 1883, Civil Code;aPrime White Cement Cor p. v. IAC, 220 SCRA 103, 113-114 [1993]; aFrancisco v. GSIS, 7 SCRA 577 [1963]; aYao K a Sin Trading v. CA, 209 SCRA 763 [1992]). . Outward appearance, the agent s apparent representation yields to the principal s tr ue representation and the contract is considered as entered into between the princi pal and thethird person. . Due what seems to be and what happens otherwise. . Q: Upon whom is placed the burden of discovering that the agent has no authority ? A: In view of the authority of apparent authority, the third person dealing with the corporationis not given the burden of discovering whether the agent has aut hority or not. It is alsotherefore reasonable in a case where an officer of a co rporation has made a contract in itsname, that the corporation should be require d, if it denies the authority of the officer, to statesuch defense in its answer , since it allows the plaintiff to be appraised of the fact that theagent s author ity is contested; and he is given an opportunity to adduce evidence showingeithe r that the authority existed or that the contract was ratified and approved. . NOTE: The theory of apparent authority is classified into two types by which suc h may bemanifested or proved, which are by position and by circumstance. The bur den of proof mentioned above applies to the second classification. PRIME WHITE CEMENT CORP. v INTERMEDIATE APPELLATE COURT Facts: A director (Te) entered into an agreement of Dealership agreement with PW CC, signed by itschairman and president of the corporation to supply 20,000 bags of white cement per month for fiveyears at a fixed price of P9.70 per bag. Subs equently, the Board refused to abide by the contractunless new conditions are ac

cepted providing for a new price formula. The dealing director sued forspecific performance on the contract. Held: The Court held that under both the Corporation Law then and the present Co rporation Code, the doctrine is that all corporate powers shall be exercised by the Board of Dir ectors, except as thoseprovided by law. Although it cannot completely abdicate i ts powers and responsibility to act for thejuridical entity, the Board may expre ssly delegate specific powers to its president or any of itsofficers. In the abs ence of such express delegation, a contract entered into by its President on beh alfof the corporation may still bind the corporation if the Board should ratify the same expressly orimpliedly. Implied ratification takes various forms (1) silence or acquiescence (2) by acts showing approval oradoption of the contract or (3) by acceptance and retention of the benefits flowing therefrom. Even in the absence of express or implied authority by ratification, the Preside nt as a general rulemay bind the corporation by a contract in the ordinary cours e of business, provided the same isreasonable under the circumstances. These rul es are basic but general and flexible. Applies wherethe President is dealing wit h third persons but different where a director is dealing with his owncorporatio n. The court herein held that the director holds a position of trust and as such he owes a duty of loyaltyto his corporation and his contracts with the corporation must always be at reasonable terms,

otherwise the contract is void or voidable at the instance of the corporation. T he court here found theterms of the Dealership Agreement were unreasonable for t he corporation and that the unfairness inthe contract was a basis which renders a contract entered into the President without authority fromthe Board, void or v oidable, although it may have been in the ordinary course of business. NOTE: The President as the highest office of the corporation, by practice and ju risprudence embodiesapparent authority. On the other hand, the general manager o n its own may or may not embodysuch authority depending on the circumstances tha t go with it. The corporate secretary and lawyerenjoy no such presumption becaus e their positions do entail much commercial significance. FRANCISCO v. GSIS Facts: Trinidad Francisco mortgaged to GSIS a parcel of land with 21 bungalows ( Vic-Mari Compound) for a P400,000 loan of which P336,100 was released payable within 10 years with 7% interest perannum compounded monthly. In 1959 GSIS extrajudicially foreclosed the mortgage on the ground ofdefault of payment in the amount of P32,000 ( tota l payment amounted to P130,000) where GSISwas also the buyer. Atty. Francisco, t he father of Trinidad proposed to the General Manager of GSISto pay P30,000 of t he P52,000 and asked that the foreclosure be set aside and for GSIS to take over the administration of the mortgaged property and to collect installments due on the unpaid purchaseprice for more than 31 house and lot payees to be applied to the arrearage and the loan. The GSISapproved this and Atty. Francisco was notife d by telegram. GSIS accepted a check for P30,000 andremittances totaling to P44, 121.29 for which the corresponding OR s were issued. GSIS then sent 3letters signe d by the GM asking a proposal for the payment of the debt since the 1yr. Period forredemption had expired. Atty. Francisco protested and brought to the attention of GSIS the concluded con tract and its acceptance by telegram. GSIS replied asking payment for various expenses and tha t the telegramshould be disregarded for its failure toe express the content of a board resolution due to error of itsminor employees in the sending of the teleg ram. The approval was apparently conditioned on Atty. Francisco s agreement to pay all expenses incurred in foreclosure. GSIS held that the remittanceswere insufficient so that GSIS consolidated title to the compound in its name. Hence, this suit forspecific performance and damages. The lower co urt ruled in favor of Francisco. Held: The SC finds no reason for altering the conclusion that the offer of compr omise made byFrancisco had been validly accepted and was binding on the defendan t GSIS. The terms of the offerwere clear and the acceptance of the proposal was signed by the GM Andal. The telegram hinted onno anomaly and was within Andal s ap parent authority. Corporation transactions would speedily come to a standstill where every person dealing with acorporation held duty-bound to disbelieve every act of its respons ible officers, no matter how regularthey should appear on their face. If a corporation knowingly permits one of its officers or any other agent within the scope of anapparent and thus holds him out to the public as possessing powe r to do those acts, the corporationwill as against any one who has in good faith dealt with the corporation through such agent beestopped from denying such auth ority. Hence, even if it were the Board Secretary who sent the telegram, the corporation could not evade the binding effect produced by the tel egram. The corporation had sufficient notice of the allegedly unauthorized telegram when it pocketed the

P30,000 but kept silent about it. Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course of hisemployment and in relation to matters within the scope of h is authority is notice to the corporation, whether he communicates such knowledge or not. The silence taken together with the unconditional acceptance of 3 other substant ial remittances ofthe original agreement constitute a binding ratification of th e original agreement. Ratification may beeffected expressly or tacitly. There is tacit ratification if with knowledge of the reason which rendersit voidable and such reason having ceased, to a person who has a right to invoke it should exec utean act which necessarily implies an intention to waive his right. As between two innocent parties, the one who made it possible for the wrong to b e done should be

Revised Bagtas Reviewer by Ve and Ocfe 2A the one t bear the resulting loss. YAO KA SIN TRADING v. COURT OF APPEALS Facts: Maglana, the president and chairman of PWCC sent a letter to Yao Ka Sin Trading represented by itsmanager Yao. It quoted the following P24.30/94 lbs. Bag net FO B CEBU; P24.30/94 lbs. Bag FOBAsturias; 45,000 bags (15,000/month). On June 30, 1973 Mr. Yao accepted the letter offer and issueda check for P243,000, PWCC Boar d of Directors disapproved the same. On July 5, 1973 PWCCinformed YKS of the dis approval. However with respect to the 10,000 bags of cement. YKS acceptedwithout protest. On August 4, 1973 PWCC wrote a letter to YKS stating that it is withdr awing or takingdelivery of not less than 10,000 bags of cement. On September 10, 1973 YKS insisted on the deliveryof the 45,000 bags of cement. On December 7, 1 973 PWCC only delivered 9,775 bags. YKS filed anaction for specific performance with the CFI. It was discovered that PWCC by-laws give the Chairmanand the Presi dent the power to execute and sign for and in behalf of the corporation all cont racts oragreements which the corporation enters into subject to the qualificatio n that all his actuations shallbe given to the Board of Directors of the corpora tion. PWCC contends that Mr. Maglana was notauthorized to make any offer and sig n a contract in behalf of the corporation and only the Board hasthe power to do so. The lower court ruled in favor of YKS but the CA reversed. Hence, this peiti on. Issue: WON the contract originally entered into by PWCC through President Maglan a, binds thecorporation despite the rejection of the Board of Directors. Held: The by-laws do not confer upon the President, the authority to enter into contra cts independently ofthe Board of Directors. The fact that contracts are signed t hrough the President was only meant toexpedite its execution but still presuppos es a prior act of the corporation, through the Board ofDirectors. No greater aut hority can be implied from such express, but limited, delegated authority. Itmay be presumed that the President has authority to make contracts if he is given g eneral controland supervision over affairs of the corporation. But here, there i s a general manager charged withdirect management of the business which Mr. Magl ana was not involved in. The doctrine on apparent authority provide that if a private corporation intenti onally or negligentlyclothes its officers or agents with apparent power to perfo rm acts for it, the corporation will beestopped to deny that such apparent autho rity is real, as to innocent 3rd persons dealing in good faithwith such officers or agents. This apparent authority may result from: (1) the general manager byw hich the corporation holds out an officer or agents as having power to act (2) t he acquiescence inhis acts of a particular nature, with actual or constructive k nowledge thereof, whether with or withoutthe scope of power. However, YKS failed to prove that PWCC indeed clothed Mr. Maglana withapparent power. PWCC also sho wed that no contract can be signed by the President without theBoard of Director s approval (and clearance from the NIDC representative and legal counsel). Thefir st contract is at most unenforceable. The first contract was disapproved and rejected by the Board of Directors which at the same timeconsidered the P243,000 received by Maglana as payment for 10,00 0 bags of cement, treated as anentirely different contract. YKS had in fact agre ed to this by accepting the delivery receipt without protest.

NOTE: Under the doctrine of apparent authority and under the sub-classification of apparent authority by circumstance, the first contract is unenforceable because PWCC effe ctively provedthrough clear and convincing evidence that their President cannot bind the corporation withoutauthorization from the Board of Directors, so not th e burden shifted upon YKS for him to provide forsuch circumstances which have le d him to believe that the President has such apparent authority tobind the corpo ration; however such was not effectively discharged by YKS, that is why the firs tcontract is unenforceable. Also, it is most important to note, that the contrac t for 10,000 bags ofcement is enforceable because such is a contract of sale ent ered into by the President in the regularcourse of business of the corporation. However, the 45,000 bags contract is unenforceable because itis a contract of de alership which is in the extraordinary course of the business of the corporation ., hence, not within the purview of the apparent authority of the President.

NOTE: By-laws can bind third parties only when they have knowledge of such, othe rwise, such maynot bind third parties. In the same manner, knowledge of a third person of such by-laws may bind thecorporation. If a corporation knowingly permits one of its officers to act within the scope o f anapparent authority, it holds him out to the public as possessing the power t o do thoseacts, the corporation will, as against anyone who has in good faith de alt with it throughsuch agent, be estopped from denying the agent s authority. Sol er v. Court of Appeals, 358 SCRA 57 (2001). The authority of a corporate officer dealing with third persons may be actual or apparent . . . the principal is liable for the obligations contracted by the age nt. Theagent apparent representation yields to the principal's true representatio n and thecontract is considered as entered into between the principal and the th ird person. First Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996). Persons who deal with corporate agents within circumstances showing that theagen ts are acting in excess of corporate authority, may not hold the corporation lia ble. Traders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997). Apparent authority may be ascertained through (1) the general manner in which th ecorporation holds out an officer or agent as having the power to act, or, in ot her wordsthe apparent authority to act in general with which is clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or constructive kno wledgethereof, within or beyond the scope of his ordinary powers. Inter-Asia Inv estment Industries v. Court of Appeals, 403 SCRA 452 (2003). When a banking corporation, when an officers arranges a credit line agreement an dforwards the same to the legal department at its head officer, and the bank did nodisaffirm the contract, then it is bound by it. Premier Dev. Bank v. Court of Appeals, G.R. No. 159352, 14 April 2004. A corporation cannot disown its President s act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by th e lackof any formal board resolution. The following placed the corporation and i ts Board of Directors in estoppel in pais: Firstly, the by-laws provides for the powers of t he President, which includes, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks; secondly, there were already previoust ransaction of discounting the checks involving the same personalities wherein an yenabling resolution from the Board was dispensed with and yet the bank was able to collect from the corporation. aNyco Sales Corp. v. BA Finance Corp., 200 SCRA 63 7 (1991). NYCO SALES CORPORATION v BA FINANCE CORPORATION Facts: Rufino Yao was the President and General Manager of Nyco Sales Corporation which was engaged inthe business of selling construction materials. Nyco Sales throug

h Yao was approached by Santiagoand Renato Fernandez on behalf of Sanshell Corpo ration requesting for credit accommodation sinceNyco had discounting privileges with BA Finance. The Fernandezes wen to Yao for the purpose ofdiscounting their post-dated BPI check worth P60,000 made payable to Nyco. The discountingprocess agreed upon was that Nyco through Yao endorsed the check to BA Finance then BA F inancewould issue a check payable to Nyco for which Nyco would then endorse it t o Sanshell. With theexchange of checks, the parties agreed to a Deed of Assignme nt executed by Nyco in favor of BAFinance the subject of which was the check. Th e Deed contained a Continuing Suretyship Agreementat the back whereby the Fernan dezes unconditionally guaranteed to BA Finance full and prompt payment and discharge of any and all indebtedness of Nyco. BPI check was dishono red which therefore led BA Finance to report it to the Fernadezes. They then issued anothe r check, this timefrom Security Bank which was also dishonored. Despite repeated demands, Nyco and Fernandezesfailed to settle their obligation which prompted B A Finance to file an action in court. TC ruled againstNyco and the Fernandezes t o pay jointly and severally. Nyco s cross-claim against the Fernadezes

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 was denied they were not declared in default in connection with the cross-claim and that no10 was denied they were not declared in default in connection with the cross-claim and that no1 evidence was presented (it was also mentioned that Nyco should have impleaded Sa nshell by way ofa third party complaint and not a cross-claim). CA affirmed the TC with modifications. Issue: WON Nyco can be held liable for its President unauthorized acts. Held: Nyco as an assignor-vendor warranted that both the credit itself (its existence and legality) and theperson of the debtor (his solvency) according to Article 16 28of the NCC. Therefore, any breach of thewarranties, the assignor should be hel d answerable. It is of no question that the assignor is liable forthe invalidity of whatever he assigned. The deed of assignment executed by Nyco in favor of BA Finance with Sanshell as debtor. BA Finance is actually enforcing the assignment . The check is merely an incidental matter and so Nyco is not being held liable for both the BP I and the SecurityBank check but rather the deed of assignment. The issue on no notice of dishonor was given is beliednot only by the formal demand letter but a lso the findings of the TC that Yao and the Fernandezeshad frequent contacts bef ore, during and after dishonor. There is no novation because there was noexpress agreement that BA Finance;s acceptance with Security Bank check will discharge Nyco fromliability. Neither is there incompatibility because both checks were gi ven precisely to terminate asingle obligation. Nyco disowned the President s acts claiming that it had not authorized Yao to appl y to BA Finance forcredit accommodation saying that it did not issue a board res olution giving such authority. However, the by-laws clearly provide for the power of its President, which include execut ing contracts and agreements, borrowing money, signing, indorsing and delivering checks, all in be half of the corporation. Also, there was already a prior transaction of discounting checks i nvolving the sameparties wherein any enabling resolution from Nyco was dispensed with and yet BA was still able tocollect from Nyco and Sanshell was able to dis charge of its liabilities. Therefore, that places Nycounder estoppel in pais whi ch arises when one, by his acts, representations or admissions, or by hissilence when he ought to speak out, intentionally or through culpable negligence, induc e another tobelieve certain facts to exist and such other rightfully relies on s uch belief, so that he will beprejudiced if the former is permitted to deny the existence of such fact.. Per its Secretary s Certificate, the foundation had given its President ostensible and apparent authority to inter alia deal with the respondent Bank, and therefore th e foundation is estopped from questioning the President s authority to obtain the su bjectloans from the respondent Bank. Lapulapu Foundation, Inc., v. Court of Appe als, G.R. No. 126006, 29 January 2004. 3. Express Powers a) Enumerated Powers (Secs. 36)

. Sec. 36 Corporate powers and capacity Code hasthe power and capacity:

Every corporation incorporated under this

1.) To sue and be sued in its corporate name; 2.) Of succession by its corporate name for the period of time stated in the art icles ofincorporation and the certificate of incorporation; 3.) To adopt and use a corporate seal; 4.) To amend its articles of incorporations in accordance with the provisions of thisCode; 5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend orrepeal the same in accordance with this Code; 6.) In case of stock corporations, to issue or sell stocks to subscribers and to selltreasury stocks in accordance with the provisions of this Code; and to admi t members to the corporation if it be a non-stock corporation; 7.) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mort gage andotherwise deal with such real and personal property, including securitie s and bondsof other corporations, as the transactions of the lawful business of the corporation

may reasonably and necessary require, subject to the limitations prescribed by l awand the Constitution; 8.) To enter into merger or consolidation with other corporations as provided in thisCode; 9.) To make reasonable donations, including those for the public welfare or hosp ital orcharitable, cultural, scientific, civic or similar purposes: Provided, Th at no corporation, domestic or foreign shall give donations in aid of any political pa rty orcandidate or for purposes of partisan political activity; 10.)To establish pension, retirement, and other plans for the benefit of its dir ectors, trustees, officers and employees; and 11.)To exercise such other powers as may be essential or necessary to carry out itspurpose or purposes as stated in the articles of incorporation. b) Extend or Shorten Corporate Term (Secs. 37 and 81 [1]) Sec. 37 Power to extend or shorten corporate term A private corporation may exte nd orshorten its term as stated in the articles of incorporation when approved b y majority vote ofthe board of director or trustees and ratified at a meeting by the stockholders representing atleast 2/3 of the outstanding capital stock or b y at least 2/3 of the members in case of nonstock corporation. Written notice of the proposed action and of the time and pla ce of themeeting shall be addressed to each stockholder or member at his place o f residence as shownon the books of the corporation and deposited to the address ee in the post office with postage prepaid or served personally. Provided, that in case of extension of cor porate term, any dissenting stockholder may exercise his appraisal right under the conditions provided inthis code. Sec. 81[1] Instances of appraisal right Any stockholder of a corporation shall h ave the rightto dissent and demand payment of all the fair value of his shares i n the following instances: Incase any amendment to the articles of incorporation has the effect of changing or restrictingthe rights of any stockholders or righ ts of any stockholder class of shares, or of authorizingpreferences in any respe ct superior to those outstanding shares of any class, or of extendingor shorteni ng the term of the corporate existence. . Such power only concerns the Juridical Entity Level such extending or shortening of the termof the corporation tampers with the powers given the corporation by the State. . Q: Why should such extension or shortening require the ratificatory vote of stoc kholders whenthis does not concern the business enterprise level but the juridic al entity level? A: Such in effect is an amendment of the articles of incorporation, and any amen dment tosuch would always require the consent of the State and of the corporatio n s stockholders. They also have a say in this because the extension or shortening of the corporat e termaffects these stockholder s investments.

. Q: Why do stockholders not have appraisal right with respect to the shortening o f thecorporate term whereas they do in the extension of the corporate term? A: Actually, there is a seeming conflict between Sec. 37 which makes no mention ofstockholder s appraisal right with respect to the shortening of the corporate te rm while Sec. 81(1) refers to such. CLV tells us that stockholders should be afforded an appra isal right evenin the case of the shortening of the corporate term because it is not enough to talk of freetransferability of interests when you dissent to the decrease because such concerns onesexpectations with respect to the business ent erprise. c) Increase or Decrease Capital Stock (Sec. 38) Sec. 38 Power to increase or decrease capital stock; incur, create or increase b onded indebtedness No corporation shall increase or decrease its capital stock or incu r, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder s meeting duly called for the purpose, 2/3 of the outstandingcapital stock shall favor the increase or diminution of the capital s tock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed increase or

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 diminution of the capital stock or of the incurring, creating, or increasing of any bonded10 diminution of the capital stock or of the incurring, creating, or increasing of any bonded3 indebtedness and of the time and place of the stockholders meeting at which the proposedincrease or diminution of the capital stock or the incurring or increasi ng of any bondedindebtedness is to be considered, must be addressed to each stoc kholder at his place ofresidence as shown on the books of the corporation and de posited to the addressee in thepost office with postage prepaid, or served perso nally. A certificate in duplicate must be signed by a majority of directors of the corp oration andcountersigned by the chairman and the secretary of the stockholders me eting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number o f shares ofno-par stock thereof actually subscribed the names, nationalities, re sidences of thepersons subscribing, the amount of capital stock or number of nopar stock subscribedby each., and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock divide ndthereof authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating, or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or incr easing anybonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the cor poration and theother shall be filed with the Securities and Exchange Commission and attached to the originalarticles of incorporation. From and after approval by the Securities and Exchange Commissionand the issuance by the Commission of i ts certificate of filing, the capital stock shall standincreased or decreased an d the incurring, creating or increasing any bonded indebtednessauthorized, as th e certificate of filing may declare Provided, That the Securities and ExchangeCo mmission shall not accept for filing any certificate of increase of capital stoc k unless accompanied by the sworn statement of the treasurer of the corporation lawfully holdingoffice at the time of the filing of the certificate, showing that at leas t 25% of such increasedcapital stock has been subscribed and that at least 25% o f the amount subscribed has beenpaid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription: Providedfurther, that no decrease of the capital stock shall be approved by the Commission if its effectshall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness or increase the s ame withthe approval by a majority vote of the board of trustees and of at least 2/3 of the members ina meeting duly called for that purpose. Bonds issued by a corporation shall be registered with the Securities and Exchan

geCommission, which shall have the authority to determine the sufficiency of the terms thereof. . The policy behind the non-granting of appraisal right with respect to the increa se and decrease of the capital of the corporation is the fact that every stockholder sh ould come intothe corporation setting aware that the expediencies of corporate l ife may require that eventually the corporation may need to increase capitalization to fund its opera tions or expansions, and needs to look primarily into its equity investors to fund the sa me. . In the increase, a stockholder may always sell his stock if he dissents to the i ncrease of thecapital stock. Moreover, such appraisal right may defeat the purpo se of the corporation inincreasing the funds; by increasing the funds for surviv al, if you grant the appraisal right in

effect you pay out capital when you seek to keep more money inside. . In the decrease of capital stock, why appraise when in effect you will be return ing capital toyour stockholders. Despite the board resolution approving the increase in capital stock and the rec eipt ofpayment on the future issues of the shares from the increased capital sto ck, such funds donot constitute part of the capital stock of the corporation unt il approval of the increase bySEC. Central Textile Mills, Inc. v. National Wages and Productivity Commission, 260 SCRA368 (1996). A reduction of capital to justify the mass layoff of employees, especially of un ionmembers, amounts to nothing but a premature and plain distribution of corpora te assetsto obviate a just sharing to labor of the vast profits obtained by its joint efforts with capitalthrough the years, and would constitute unfair labor p ractice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987). . Why do you need the consent of the stockholders when you increase or decrease ca pitalstock? When you increase the capital stock, stockholders have to put in mor e money tomaintain their proportionate interest in the corporation, as such the increase dilutes the valueof the stock they have prior to such increase. Moreove r, such increase affects their rights asin their voting capacity, their sharing in the dividends, their participation in the management, the extent of their participation in the dissolution of the corporation, etc. Th e consent of thestockholders is needed because such change once again affects th eir contractual expectationwhen they first entered into the corporation. . But in decreasing capital stock, why do you again need the consent of the stockh olderswhereas in effect they will be receiving part of their investment? Such on ce again affects theircontractual expectation when they first entered into the c orporation. d) Incur, Create or Increase Bonded Indebtedness (Sec. 38) Sec. 38 Power to increase or decrease capital stock; incur, create or increase b onded indebtedness No corporation shall increase or decrease its capital stock or incu r, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder s meeting duly called for the purpose, 2/3 of the outstandingcapital stock shall favor the increase or diminution of the capital s tock, or the incurring, creating, or increasing ant bonded indebtedness. Written notice of the proposed increase ordiminution of the capital stock or of the incurring, creating, or inc reasing of any bondedindebtedness and of the time and place of the stockholders meeting at which the proposedincrease or diminution of the capital stock or the incurring or increasing of any bondedindebtedness is to be considered, must be a ddressed to each stockholder at his place ofresidence as shown on the books of t he corporation and deposited to the addressee in thepost office with postage pre paid, or served personally. A certificate in duplicate must be signed by a majority of directors of the corp

oration andcountersigned by the chairman and the secretary of the stockholders me eting, setting forth: 1. That the requirements of this section have been complied with; 2. The amount of the increase or diminution of the capital stock; 3. If an increase of the capital stock, the amount of capital stock or number of sh ares ofno-par stock thereof actually subscribed the names, nationalities, reside nces of thepersons subscribing, the amount of capital stock or number of no-par stock subscribedby each., and the amount paid by each on his subscription in cas h or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock divide ndthereof authorized; 4. Any bonded indebtedness to be incurred, created or increased; 5. The actual indebtedness of the corporation on the day of meeting; 6. The amount of stock represented at the meeting; and

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 10 7. The vote authorizing the increase or diminution of the capital stock, or the 5 incurring, creating, or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or incr easing anybonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the cor poration and theother shall be filed with the Securities and Exchange Commission and attached to the originalarticles of incorporation. From and after approval by the Securities and Exchange Commissionand the issuance by the Commission of i ts certificate of filing, the capital stock shall standincreased or decreased an d the incurring, creating or increasing any bonded indebtednessauthorized, as th e certificate of filing may declare Provided, That the Securities and ExchangeCo mmission shall not accept for filing any certificate of increase of capital stoc k unless accompanied by the sworn statement of the treasurer of the corporation lawfully holdingoffice at the time of the filing of the certificate, showing that at leas t 25% of such increasedcapital stock has been subscribed and that at least 25% o f the amount subscribed has beenpaid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription: Providedfurther, that no decrease of the capital stock shall be approved by the Commission if its effectshall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness or increase the s ame withthe approval by a majority vote of the board of trustees and of at least 2/3 of the members ina meeting duly called for that purpose. Bonds issued by a corporation shall be registered with the Securities and Exchan geCommission, which shall have the authority to determine the sufficiency of the terms thereof. . Bond security representing denominated units of indebtedness issued by a corpora tion toraise money or capital obliging the issuer to pay the maturity value at t he end of a specifiedperiod which should be not less than 360 days. That is why not all indebtedness of thecorporation require the ratification of the stockhold ers, only bonded indebtedness require theratification of the stockholders. . A bond in contrast to a promissory note represents a unit of a large indebtednes s, whereas apromissory note represents a single indebtedness and may stand on it s own. Mostly all properties of the corporation i.e. the business enterprise comprise of the secur ity of such bonded indebtedness. . The SEC also require that a company has a minimum net worth of P25 M at the time of thefiling of the application and must have been in operation for three years . (e) Sell or Dispose of Assets (Sec. 40) Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation Code requiring ratification of members representing at least t

wo-thirds of the membership, would make the sale null and void. Islamic Directorate v. Cou rt of Appeals, 272 SCRA 454 (1997); Pea v. CA, 193 SCRA 717 (1991). Sec. 40 Sale or other disposition of assets Subject to the provisions of existin g law on illegalcombination and monopolies, a corporation may by a majority vote of its board of directors ortrustees, sell, lease, exchange, mortgage, pledge o r otherwise dispose of all or substantiallyall of its property and assets includ ing its goodwill, upon such terms and conditions and forsuch consideration, whic h may be money, stocks, bonds or other instruments for the paymentof money or ot her property or consideration as its board of directors or trustees deem expedient, when authorized by the vote of stockholders representing at least 2/3 of theoutstanding capital stock, or in the case of non-stock corporation, by th e vote of at least 2/3of the members, in a stockholders or members meeting duly ca lled for that purpose. Writtennotice of the proposed action and of the time and place of the meeting shall be addressed toeach stockholder or members at his pla ce of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepa id paid, orserved personally: Provided, that any dissenting stockholder may exer cise his appraisal rightunder the conditions provided for in the Code.

A sale or other disposition shall be deemed to cover substantially all the corpo rate propertyand assets if thereby the corporation would be rendered incapable o f continuing the businessor accomplishing the purpose for which it was organized . After such authorization or approval by the stockholders or members, the board o f directors or trustees, may nevertheless, in its discretion, abandon such sale, lease, exch ange, mortgage, pledge or other disposition of property and assets subject to the righ ts of thirdparties under any contracting relating thereto without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, wi thout theauthorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge orotherwise dispose of any of its property and assets if the s ame is necessary in the usual andregular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its r emainingbusiness. In non-stock corporations where there are no members with voting rights, the vot e of at leasta majority of the trustees in office will be sufficient authorizati on for the corporation to enterinto any transaction authorized by this section. . NOTE: When the transaction is in the normal course of business, it only needs th e majority ofthe quorum of the Board of Director to approve such transaction. Ho wever, when such is inthe extraordinary course of the business as in the disposi tion of all or substantially all of theassets of the corporation, such needs the vote of the absolute majority of the Board ofDirectors plus the ratification of 2/3 vote of stockholders representing at least 2/3 of theoutstanding capital st ock of the corporation in case it is a stock corporation, or in the case ofa non -stock corporation, 2/3 of the members. . This case is one of the exceptions to the rule where the stockholders have propr ietaryinterests in the business enterprise. This is also an exception to the rul e that generally theBoard of Directors have the power to bind the, and transact for the corporation. . If transactions are entered into relating to this section without the ratificati on of the stockholders, such transaction is void for it is illegal per se as it runs contr ary to Sec. 40 of theCorporation Code. . Example: San Miguel decides to sell its Pale Pilsen formula, but retains all of its P 4B worth ofinvestment, will such transaction need the ratification of the stockholders and the absolute majority vote of the Board? Yes, since it concerns substantially all of the asse ts of the corporation as such formula pertains to the capacity of the corporation to earn. The absenceof such ratification violates the social compact as between the stoc kholders and the corporation. Such sale violates the contractual expectation of these stockholder s, and assuch, their ratification must be availed of before it may be entered in

to. The same is also thecase, if San Miguel decides to share the P 4B and retain the Pale Pilsen formula. (f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; aDe la Ram a v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]) Sec. 42 Power to invest corporate funds in another corporation or business or fo r any otherbusiness purpose Subject to the provisions of this Code, a private co rporation may invest itsfunds in any other corporation or business or for any pu rpose other than the primary purposefor which it was organized when approved by a majority of the board of directors or trusteesand ratified by the stockholders representing at least 2/3 of the outstanding capital stock, orat least by 2/3 o f the members in the case of non-stock corporations, at a stockholders ormembers m eeting duly called for that purpose. Written notice of the proposed investmentan d the time and place of the meeting shall be addressed to each stockholder or me mber athis place of residence as shown on the books of the corporation and depos ited to the addressee in the post office with postage prepaid or served personally: Provided , That anydissenting stockholder shall have appraisal right as provided in this Code: Provided however, That where the investment by the corporation is reasonably necessary to accompli sh itsprimary purpose as stated in the articles of incorporation, the approval o f the stockholders ormembers shall not be necessary.

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 7 DE LA RAMA v. MA-AO SUGAR CENTRAL CO. Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscr ibed P300,000 worthof capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first twopayments were made there was no board resolution authorizing the investment and that it was onlybefore the third payme nt that the President was so authorized by the Board of Directors. De la Ramaals o contends that even assuming, arguendo, that the said Board Resolutions are val id, the transaction is still wanting in legality, no resolution having been approved by the affirmative vote ofthe stockholders holding shares in the corporation, entit ling them to at least 2/3 of the voting power. Issue: WON the investment of corporate funds of Ma-ao were in violation of corpo ration law. Held: Investment of corporate funds in another corporation if done in pursuance of the corporate purpose, does not need the approval of the stockholders, but where the purchase of the sh ares of anothercorporation is done solely for investment and not to accomplish t he purpose of its incorporation, thevote of approval of the stockholders is nece ssary. The investment made in Philippine Fiber wasupheld by the SC. Philippine F iber was engaged in the manufacture of bags or investments in anothercorporation engaged in the manufacture of bags. Since the sugar central is engaged in the manufacture of sugars, sugar bags necessarily would come under the purview of it s needs under theregular course of business . Any corporation whatever its primary purpose has a choice of placing such fund e ither in asavings or time deposit account or in money market placements, or trea sury bills, or even inshares of stocks of other corporations which are traded in the stock exchange. The exercise ofsuch business judgment on the part of the bo ard in consistency with the primary purpose, since it is expected even from the stockholders to believe, that it is within th e ordinarybusiness discretion of the Board to place the corporation s investible f und in the form ofinvestment that would yield the best possible return to the co rporation and would not requirethe ratification of the stockholders or members e ach time. . Hotel Corporation invest 2M in 10M Bagoong Company in this case while it contemp lates asituation where the Board exercises ordinary business discretion, such in vestment would run contrary to the relationship of the Board to the stockholders whereby they engag ed tomanage the hotel corporation alone, and whereby they vowed to devote all th eir time and alltheir effort in such corporation. By investing in 20% of another corporation, said Board obtained a very big role in the management of such corporation, hence such would runcontrary to its obligation to the stockholders to take care of the business enterprise of thehotel corporation and not any other corporation s business enterp rise. As such, it would needa ratificatory vote of 2/3 of the stockholders. . Hotel Company invest 2M in 100B San Miguel Corporation in this case, the ratific

atory voteis not needed since such is really within the tion of the Board. And byinvesting only in a relatively ets of another company, it does notreally engage in the nother corporation, hence, they still afford priorityto of the hotel corporation.

ordinary business discre minimal share in the ass business enterprise of a the business enterprise

(g) Declare Dividends (Sec. 43; aNielson & Co. v. Lepanto Consolidated Mining Co., 2 6 SCRA 540 [1968]) Sec. 43 Power to declare dividends The board of directors of a stock corporation , maydeclare dividends out of the unrestricted retained earnings which shall be payable in cash, inproperty or in stock to all stockholders on the basis of outs tanding stock held by them: Provided, That any cash dividend due on delinquent stock shall first be applied to the unpaidbalance on the subscription plus costs and expenses, while stock di vidends shall be withheldfrom the delinquent stockholder until his paid subscrip tion is fully paid: Provided further, thatno stock dividend shall be issued with out the approval of stockholders representing not lessthan 2/3 of the outstandin g capital stock at a regular or special meeting duly called for that purpose.

Stock corporations are prohibited from retaining surplus profits in excess of 10 0% of theirpaid-in capital stock, except: (1) when justified by definite corpora te expansion projects orprograms approved by the board of directors; or (2) when the corporation is prohibited underany loan agreement with any financial instit ution or creditor whether local or foreign, fromdeclaring dividends without its/ his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circ umstancesobtaining in the corporation, such when there is need for special reser ve for probable contingencies. NIELSON & CO. v. LEPANTO CONSOLIDATED MINING CO. Facts: In 1937, Lepanto entered into a management contract with Nielson. In this agreem ent, Nielson wasto manage and operate the Mankayan mining claim of Lepanto in co nsideration for (a) P2,500 amonth and (b) 10% of dividends declared and paid. In 1941, Lepanto declared dividends amountingto P175,000 10%of which Nielson was e ntitled to P17,500. Lepanto however never paid Nielson acent. During the liberat ion in 1945, Lepanto unilaterally terminated the management contract withNielson . In 1958, Nielson instituted an action for its 10% share in the dividends decla red by Lepantoin 1941. The suit reached the SC and it decided against Lepanto in 1941. The suit between Nielsonand Lepanto was suspended in 1942 when the US Arm y bombarded the Mankayan mining claims, thus preventing Nielson from complying with its obligation (i.e. operating and m anaging the claim). The tribunal further said that the contract remained suspended even after the wa r was over in 1945until 1948 when the mines were fully operational; and that the management contract still had five years to go from 1948. Thus, the SC stated that Nielson was entitled to 10% of t he dividend declarations in 1949 and 1950 worth P3M. Lepanto sought reconsideration of SC s de cision in 1966. Itraised two main points at issue namely: (1) What is the nature of the management contract? Is it oneof agency and hence terminable at the prin cipal s will or is it a contract of lease of services whichmay be terminated only upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividendeven tho ugh Lepanto is not a stockholder? Held: The management contract is a contract for lease of service. (1) The theory of ag ency was raised onlyon reconsideration which is a belated move by Lepanto (2) Ag ency is premised on representationwhile lease of service is based on employment. While an agent can execute juridical acts in behalf ofhis principal ; an employ ee under a lease of service can only perform non-juridical acts or onlymaterial acts. (3) Since the acts of Nielson (exploration, purchase, etc.) are subject to general controland approval of the Board of Directors of Lepanto and cannot cre ate, modify, extinguish businessrelations between Lepanto and Nielson, these act s can only be considered as material acts done foran employer for compensation. The contract, is therefore, a contract of lease of services. Being sucha contrac t, it cannot be revocable at the will of the employer. The contract specifically provided thatLepanto can cancel the contract only: a.) upon the 90-day written notice and b.) for Nielson s failureto operate and develop the mining claims for a ny cause except those causes due to the acts of God. (4) Since the war and the bombardment constitute acts of God, they cannot be con sidered asgrounds to terminate the contract. In fact, the contract is deemed sus pended from 1942 to 1948when neither of the parties could comply with their obli

gations under it. Under its terms, the contractis suspended in cases of fortuito us events. And such terms must be interpreted to mean that aperiod equal to the period of suspension must be added to the original term of the contract by way o fextension. Thus, from 1948 the contract still had five more years. And by virtu e of this extension, Nielson is entitled to 10% of the dividends declared in 1949 and 1950. Stock dividend is the amount that the corporation transfers from its surplus pro fitaccount to its capital account. It is the same amount that can loosely be ter med as the trust fund of the corporation. NTC v. CA, 311 SCRA 508 (1999). h) Enter into Management Contracts (Sec. 44; aNielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247 [1991]). Why the difference in rule between entity and individual? Sec. 44 Power to enter into management contracts No corporation shall conclude a

management contract with another corporation unless such contract shall have bee n approved by the board of directors and by stockholders owning at least the major ity of the

Revised Bagtas Reviewer by Ve and Ocfe 2A 10 outstanding capital stock, or by at least a majority of the members in the case of a non10 outstanding capital stock, or by at least a majority of the members in the case of a non-9 stock corporation of both managing and the managed corporation at a meeting duly called forthat purpose: Provided, That (1) where a stockholder or stockholders representing the sameinterest of both the managing and managed corporations own or control more than 1/3 of thetotal outstanding capital stock entitled to vote of the managing corporation; or (2) where amajority of the members of the board of directors of the managing corporation also constitutea majority of the member s of the board of directors of the managed corporation, then themanagement contr act must be approved by the stockholders of the managed corporationowning at lea st 2/3 of the total outstanding capital stock entitled to vote, or by at least 2 /3 of the members in the case of a non-stock corporation. No management contract shall be entered into for a longer period than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract where by a corporation undertakes to mange or operate all or substantially all of the busin ess of anothercorporation, whether such contracts are called service contracts, operating agreements orotherwise: Provided however, That such service contracts or operating agreements whichrelate to exploration, development, exploitation or utilization of natural resources may beentered into for such periods as may be provided by the pertinent laws or regulations. 4. Implied Powers When the articles expressly provide that the purpose of the corporation was to en gage inthe transportation of person by water, such corporation cannot engage in t he business of land transportation, which is an entirely different line of business, and, for w hich reason, maynot acquire any certificate of public convenience to operate a t axicab service. Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 (1962). A corporation whose primary purpose is to generate electric power has no authori ty toundertake stevedoring services to unload coal into its pier since it is not reasonably necessaryfor the operation of its power plant. NPC v. Vera, 170 SCRA 721 (1989). A corporation organized to engage as a lending investor cannot engage in pawbrok er. Philipinas Loan Co. v. SEC, 356 SCRA 193 (2001). A mining company has not power to engage in real estate development. Heirs of An tonio Pael v. Court of Appeals, 372 SCRA 587 (2001). An officer who is authorized to purchase the stock of another corporation has im pliedpower to perform all other obligations arising therefrom such as payment of the shares ofstock. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003). 5. Incidental Powers The act of issuing checks is within the ambit of a valid corporate act, for it a s for securinga loan to finance the activities of the corporation, hence, not an

ultra vires act. Atrium Management Corp. v. CA, 353 SCRA 23 (2001). 6. Other Powers a) Sell Land and Other Properties When the corporation s primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treas urer. Likewise Articles 1874 and 1878 of Civil Code requires that when land is sold th rough anagent, the agent s authority must be in writing, otherwise the sale is voi d. San Juan Structural v. CA, 296 SCRA 631 (1998); AF Realty & Dev., Inc. v. Dieselman Freig ht Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 41 4 SCRA 190 (2003). b) Borrow Funds

The power to borrow money is one of those cases where even a special power ofatt orney is required under Art. 1878 of Civil Code. There is invariably a need of a nenabling act of the corporation to be approved by its Board of Directors. The a rgumentthat the obtaining of loan was in accordance with the ordinary course of businessusages and practices of the corporation is devoid of merit because the p revailingpractice in the corporation was to explicitly authorize an officer to c ontract loans inbehalf of the corporation. China Banking Corp. v. Court of Appea ls, 270 SCRA 503 (1997). a. Power to Sue Under Sec. 36 of Corporation Code, in relation to Sec. 23, where a corporation i s aninjured party, its power to sue is lodged with its Board of Directors. A min ority stockholderwho is a member of the Board has no such power or authority to sue on the corporation sbehalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001); Shi pside Inc. v. Court of Appeals, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002). Where the corporation is real party-in-interest, neither administrator or a proj ectmanager could sign the certificate against forum-shopping without being duly authorizedby resolution of the Board of Directors (Esteban, Jr. v. Vda. De Onori o, 360 SCRA 230 [2001]), nor the General Manager who has no authority to institute a suit on beh alf of thecorporation even when the purpose is to protect corporate assets. (Cen tral Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 [1988]). When the power to sue is delegated by the by-laws to a particular officer, such officermay appoint counsel to represent the corporation in a pre-trial hearing w ithout need of aformal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (19 93). For counsel to sign the certification for the corporation, he must specifically be authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003) ; Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003). (d) Provide Gratuity Pay for Employees Providing gratuity pay for employees is an express power of a corporation under theCorporation Code, and cannot be considered to be ultra vires to avoid any lia bility arising from the issuance of resolution granting such gratuity pay. Lopez Realty v. Font echa, 247 SCRA 183, 192 (1995). (e) Donate (f) Enter Partnership or Joint Venture. aTuason & Co. v. Bolanos, 95 Phil. 106 ( 1954); SEC Opinion, dated 29 February 1980. TUASON & CO. v. BOLANOS Facts: JM Tuason & Co. Inc. represented by its managing partner Gregorio Araneta Inc. f iled a complaint in the CFI for recovery of possession of registered land situated in Tatalon, QC ag ainst Quirino Bolanos. Defendant in his answer claims through prescription and that the registration of said land was

obtained through fraud. The CFI ruled in favor of the plaintiff and declared tha t defendant had no right to the land. Hence, this appeal. Issue: WON the case should have been dismissed on the ground that it was not bro ught by the realparty in interest? Held: No, the rules of court require that an action be brought in the name of but not necessarily by the realparty in interest. In fact,the practice really is for the attorney-at-law to bring the action and file thecomplaint in plaintiff s name whi ch was done her. And while it is true that the complaint also statesthat the pla intiff is represented herein by its managing partner G. Araneta Inc. another cor poration, there is nothing against one corporation being represented by another person, na tural or juridical ina suit in court.

Revised Bagtas Reviewer by Ve and Ocfe 2A 11 11 1 The contention that G. Araneta Inc. cannot act as managing partner on the theory that it is illegal fortwo corporations to enetr into a partnership is without m erit for the true rule is that though acorporation has no power to enter into a partnership, it may nevertheless enter into a joint venturewith another where th e nature of the venture is inline with the business authorized by is charter. There is nothing in the record to show that the venture which plaintiff is repre sented by G. Araneta isnot inline with the corporate business of either corporat ion. . The SEC rule provides in an Opinion, that the right of the corporation to engage as a limitedpartner (not a general partner, meaning that its liability is limit ed to the amount of investment itpours into the partnership). But such a power t o engage in a partnership must be specificallyprovided for in the corporation s ch arter. QUICK REFERENCE ON THE POWERS OF THE CORPORATION POWER Power to shorten or extend corporate term (Sec. 37) Power to increase capital stock and also the power to decreasecapital stock (Sec. 38) Power to incur, create or increase indebtedness (Sec. 38) STATUTORY REQUIREMENT . Approved by a majority vote of theBoard of Directors (majority of the quorum) . Ratified by at least2/3 of the OCS or 2/3 of members in anon-stock corporation. . Approved by a majority vote of theBoard of Directors (majority of quorum) . Ratified by at least2/3 of the OCS

. Approved by a majority vote of theBoard of Directors (majority of quorum) PROCEDURE . Written notice to each stockholder . Written notice to each stockholders . Specialdocumentaryrequirements . Prior approval of the SEC; SEC shall not accept for filingunless with a sworn statement by treasurer that 2525 rule complied with . SEC approvaltriggers effectivity . Written notice . Prior approval of the SEC . Supportingdocuments WITH OR WITHOUT APPRAISAL RIGHT . Extension Yes, such constitutes a novation of the contract. Shortening No, but not because such is inherent, because such is not inherent as it constitutes an alteration of the powers granted it by the State. .

Increase None, dilutes the worth of the stock, defeats the purpose of the increase. Decrease None, because in effect there is a return of part of investments of the stockholders None drains the corporation of financial resources contrary to the purpose for which the power is exercised.

Power to sell, dispose, lease, encumber (Sec. 40) ALL Quantitative Test SUBSTANTIALLY ALL Qualitative Test (purpose for which it was incorporated) Power to purchase ownshares (Sec. 41) Buy back of shares (i) decrease the cost of doing business (ii) perpetuate control of the enterprise. . Ratified by at least2/3 of the OCS SEC INTERIM GUIDELINES Corporation must have: . Minimum net worth of P25 M at the time of the filing ofthe application . Have been in operation for at least 3 years . Must fulfill financial ratio mandated by SEC in interim guidelines 1) Of all or substantially all of its property . Majority vote of Board of Directors (majority of quorum) . Ratified or approved by 2/3 ofthe OCS or 2/3 of the members

. Relates to the primary purpose. 2) Exception to Sec. 40 if the sale is necessary in the usual and regular course of business or if proceeds of the sale or other disposition of such property and assetsbe appropriated forthe conduct of its remainingbusinesses . Majority vote of Board of Directors (business judgment rule . Does not relate to primary or secondary purpose required: 1) trust indenture with a trustee bank 2) underwriting agreement . Bonds registeredwith the SEC (1) Must comply with theBulk Sales Law . Listing the corporate creditors and the amount and nature of their claims . Failure renders transaction void (2) If no ratificatoryvote of stockholders, it is an utra vires act of the third kind . Must be for a legitimate purpose example: (1) eliminate fractional shares arising outof stock dividends (2) collect

or compromise an indebtedness to the corporationarising out of unpaid subscription in adelinquenc y sale, and to purchasedelinquent shares during said sale and (3) to pay dissenting or withdrawing Yes, such a sale does not necessarily leas to a dissolution of the corporation and return of the residual value of the corporation. Such is afforded as a matter of equity and fairness. None

Revised Bagtas Reviewer by Ve and Ocfe 2A 11 3 stockholders exercising their appraisal right . Taken from URE only except redeemable shares Power to invest corporate funds in another corporation orbusiness or for any other purpose (Sec. 42) Power to declare dividends (Sec. 43) . Approved by a majority vote of the Board of Directors (majorityof quorum) . Ratified by at least2/3 of the OCS . As a general rule, section 42 appliesif the investment is for secondary orother than the primary purpose. . Except if the investment is reasonably necessary to accomplish its primary purpose as stated in the Articles of Incorporation, approval of the stockholders is not necessary as it is included in the Business Judgmentof Board of Directors . Cash dividends (1) Absolute majority of Board of Directors in accordance

with the Business Judgment Rule (2) Only declared outof the URE which shall be payable in cash, inproperty or in stock (3) However, cash dividends due on delinquent shares shall be first appliedto the unpaid balancewhile stock dividends shall be withheld until fully paid . Stock dividends approval of 2/3 of . Written notice of the proposedinvestment and the time and placeof meeting shall be addressed to each stockholder or member at his place of residence as shown in the books of the corporation and deposited to the addressee in the Post Office with postage prepaid orserved personally. . Sec. 43 prohibits stock corporation from retaining surplus profits in excess of 100% of their paid-up capital stock, EXCEPT: (1) When justified by definite corporateexpansionprojects or programs as approved by the Board of Directors (2) When corporation is prohibited under any loan agreement from declaring dividends without its consent and such Yes, because minus the ratificatory vote the contract or transaction falls under the realm of ultra

vires transactions of the third type. Yes.

Power to enter into management contracts(Sec. 44) the OCS at a consent has not yet regular or special been secured or (3) When it can be that purpose. meeting called for clearly shown that suchretention is necessary under special circumstances obtaining in the corporation such as when there is need for special reserve for profitablecontingencies. . Approved by absolute majority of the Boardof Directors . Approved by stockholders owning majority ofthe OCS HOWEVER where: (1) Stockholders representing the same interestof both managing and the managed corporationown or control more than 1/3 of the total OCSentitled to vote of the managing corporation OR (2) Where a majority of the members of the Board of Directors of the managing corporationalso constitute a majority of the members of theBoard of Directors of the managed corporation. Then it must be approved by the stockholders ofthe managed corporation owning at least 2/3 ofthe OCS EXCEPT if the corporation is organized primarily as management company. . Not for a period longer than five years for any one term.