HISTORICAL BACKGROUND

1.  The Philippine Corporate Law

When the Philippines came under American sovereignty, attention was drawn to the fact that there was no

entity in Spanish law exactly corresponding to the notion “corporation” in English and American law; the

Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation

into the Philippines as the standard commercial entity and to hasten the day when the sociedad anónima of

the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law.  Harden

v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).

2.  The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had

various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adapted to

the changing times.

3.  The Corporation Code

The present Corporation Code, or Batas Pambansa Blg. 68, became effective on 1 May 1980. It adopted

various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the

obligations of corporate directors and officers, expressed in statutory language established principles and

doctrines, and provided for a chapter 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 principles, Corporate Law is essentially, and continues to

be, the product of commercial developments. Much of this development can be expected to happen in the

world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate

principles into the changing concepts and mechanism of the commercial world.

II.  CONCEPTS

See opening paragraphs of Villanueva, Corporate Contract Law,38 Ateneo L.J. 1 (No. 2, June 1994).

1.  Definition:  Corporation is an artificial being created by operation of law, having the right of succession

and the powers, attributes and properties expressly authorized by law or incident to its existence. [Sec. 2. BP

68] ( See also Section 2; Articles 44(3), 45, 46, and 1775, Civil Code. )

2.  Tri-Level Existence of Corporation

(a) Aggregation of Assets and Resources

(b) Business Enterprise or Economic Unit

(c) Juridical Entity

3.  Relationships Involved in Corporate Setting

(a) Juridical Entity Level, which views the State-corporations relationship

(b) Contractual Relationship Level, which considers that the corporate setting is at once a contractual

relationship 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 the Law on Agency;

-  Between the corporation and its shareholders or members;

-  Between and among the shareholders in a common venture; and

-  Between the corporation and third-parties or “outsiders”, which is essentially governed by Contract Law.

4.  Theories on Formation of Corporation:

(a) Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968])

To organize a corporation that could claim a juridical personality of its own and transact business as such, is

not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may

deem necessary to impose (x-cf.Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]).

Before a corporation may acquire juridical personality, the State must give its consent either in the form of a

special law or a general enabling act, and the procedure and conditions provided under the law for the

acquisition of such juridical personality must be complied with. The failure to comply with the statutory

procedure and conditions does not warrant a finding that such association achieved the acquisition of a

separate juridical personality, even when it adopts sets of constitution and by-laws. xInternational 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 Corporation Code, then even a simple

family corporation cannot claim an exemption nor can it have rules and practices other than those

established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997).

(b) Theory of Enterprise Entity (Berle, Theory of Enterprise Entity, 47 Col. L. Rev. 343 [1947])

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 inequity, such as the use of separate personality to avoid the

execution of the property of a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and

with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional

immunities and perquisites appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of

Appeals, 281 SCRA 232 (1997).

5.  Four Attributes of Corporation from Statutory Definition:

(a) A corporation is an artificial being

(b) Created by operation of law

(c) With right of succession

(d) Only has powers, attributes and properties expressly authorized by law or incident to its existence

6.  Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) Strong Legal Personality

- Entity attributable powers

- Continuity of existence

- Purpose

The corporation was evolved to make possible the aggregation and assembling of huge amounts of capital

upon which big business depends; and has the advantage of non-dependence on the lives of those who

compose it even as it enjoys certain rights and conducts activities of natural persons.  Reynoso, IV v. Court of

Appeals,G.R. No. 116124-25, 22 November 2000.

(ii) Centralized Management.

(iii) Limited Liability to Investors

One advantage of a corporate business organization is the limitation of an investor’s liability to the amount

of the investment, which flows from the legal theory that a corporate entity is separate and distinct from its

stockholders. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

(iv) Free Transferability of Units of Ownership for Investors

(b) Disadvantages:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) Cost of maintenance

(iv) Double taxation

Dividends received by individuals from domestic corporations are subject to final 10% tax (Sec. 24(B)(2),

NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporate dividends between domestic

corporations, however, are not subject to any income tax (Sec. 27(D)(4), NIRC of 1997).

In addition, there has been a re-imposition of the “improperly accumulated earnings tax,” under Section 29

of the NIRC of 1997 for corporations at the rate of 10% annually.

7.  Compared With Other Media of Business Endeavors

- Distribution of Risk, Profit and Control

(a) Sole Proprietorships

(b) Business Trusts (Article 1442, Civil Code)

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

-  Can a defective attempt o form a corporation result at least in the formation of a partnership? Pioneer

Insurance v. Court of Appeals, 175 SCRA 668 (1989).

(d) Joint Ventures

Joint venture is defined as an association of persons or companies jointly undertaking some commercial

enterprise; generally all contribute assets and share risks. It requires a community of interest in the

performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty,

which may be altered by agreement to share both in profit and losses. the acts of working together in a joint

project. xKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), citing Black’s Law Dictionary, Sixth ed.,

839.

(e) Cooperatives (Art. 3, R.A. No. 6938)

(f) Sociedades Anónimas

A sociedad anónima was considered a commercial partnership, a sort of a corporation, “where upon the

execution of the public instrument in which its articles of agreement appear, and the contribution of funds

and personal property, becomes a juridical person—an artificial being, invisible, intangible, and existing only

in contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a corporation—

not a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the

commercial register was not necessary to make it a juridical person—a corporation. Such inscription only

operated to show that it partook of the form of a commercial corporation.” xMead v. McCullough, 21 Phil.

95,106 (1911).

The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension

to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles

contained the features of limited liability and centralized management granted to a juridical entity. But they

were more similar to the English joint stock companies than the modern commercial corporations.xBenguet

Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956)

Our Corporation Law recognizes the difference between sociedades anónimas and corporations and will not

apply legal provisions pertaining to the latter to the former xPhil. 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 a manner that its

existence was only known to those who had an interest in the same, there being no mutual agreement

between the partners, and without a corporate name indicating to the public in some way that there were

other people besides the one who ostensibly managed and conducted the business, governed under article

239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en

participacion is conducted, shall have only a right of action against such person and not against the other

persons interested, and the latter, on the other hand, shall have no right of action against third person who

contracted with the manager unless such manager formally transfers his right to them. xBourns v. Carman, 7

Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)

2.  Corporation as a Person:

(a) Entitled to due process

The due process clause is universal in its application to all persons without regard to any differences of race,

color, or nationality. Private corporations, likewise, are “persons” within the scope of the guaranty insofar as

their property is concerned.” xSmith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920).

(b) Equal protection clause (xSmith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).

(c) Unreasonable Searches and Seizure

Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but

that the officers of a corporation from which documents, papers and things were seized have no cause of

action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of

each of them in said corporation, and whatever the offices they hold therein may be, because the

corporation has a personality distinct and separate from those of said officers. The legality of a seizure can

be contested only by the party whose rights have been impaired thereby; and the objection to an unlawful

search is purely personal and cannot be availed of by such officers of the corporation who interpose it for

their personal interests. xStonehill v. Diokno, 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In

organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its

property cannot be taken without compensation; can only be proceeded against by due process of law; and

is protected against unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837

(1971), quoting fromxHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.

(d) But a corporation is not entitled to privilege against self incrimination

“It is elementary that  the right against self-incrimination has no application to juridical persons.” Bataan

Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-235 (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 with special privileges and franchises may refuse to

show its hand when charged with an abuse of such privilege. xHale v. Henkel, 201 U.S. 43  (1906); xWilson v.

United States, 221 U.S. 361 (1911); xUnited States v. White, 322 U.S. 694 (1944).

3. Liability for Torts

A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking,

the rules governing the liability of a principal or master for a tort committed by an agent or servant 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 principal or master is liable for every tort which he expressly directs

or authorizes, is just as true of a corporation as a natural person. PNB v. CA, 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of “corporate tort.”  Essentially, “tort” consists in the

violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal

duty.  When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283

of the Labor Code which mandates that the employer to grant separation pay to employees in case of

closure or cessation of operations of establishments or undertaking not due to serious business losses or

financial reverses; consequently, its stockholder who was actively engaged in the management or operation

of the business should be held personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its

officers or agents within the course and scope of their employment. A bank will be held liable for the

negligence of its officers or agents when acting within the course and scope of their employment, even as

regards that species of tort of which malice is an essential element. In this case, we find a situation where

the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own

management employees had participated. Philippine Commercial International Bank vs. Court of Appeals,

G.R. No. 121413, 29 January 2001.

4. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914);People v. Tan

Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).

No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971).

When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board

of directors, and to each director separately and individually.xPeople v. Concepcion, 44 Phil. 129 (1922).

5. Recovery of Moral Damages and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright,

serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages

under 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 damages.xMambulao Lumber Co. v. Philippine National Bank, 22

SCRA 359 (1968).

Even when the corporation’s reputation and goodwill have been prejudiced, “there can be no award for

moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the Civil

Code in favor of a corporation.” xPrime White Cement Corp. vo Intermediate Appellate Court, 220 SCRA 103,

113-114 (1993).

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,

besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation,

being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no

senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be

experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—all of

which cannot be suffered by respondent bank as an artificial person. xLBC Express, Inc. v. Court of

Appeals, 236 SCRA 602 (1994);xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714

(1996); xSolid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).

In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court seemed to have

gone back to the original doctrine that “[u]nder Article 2217 of the Civil Code, moral damages include

besmirched reputation which a corporation may possibly suffer.”

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person

and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot,

therefore, experience physical suffering and mental anguish, which can be experienced only by one having a

nervous system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB

[130 Phil. 366 (1968)], that a corporation may recover moral damages if it “has a good reputation that is

debased, resulting in social humiliation” is an obiter dictum. . .” The possible basis of 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.xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

While it is true that a criminal case can only be filed against the officers of a corporation and not against the

corporation itself, it does not follow from this, however, that the corporation cannot be a real-party-in-

interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the

corporation for the criminal proceedings brought against its officer. xCometa v. Court of Appeals, 301 SCRA

459 (1999).

6. Nationality of Corporation: Country Under Whose Laws Incorporated (Sec. 123).

Exceptions:  The Test of Controlling Ownership Applies In:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution;Roman Catholic

Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]).

The donation of land to an unincorporated religious organization, whose trustees are foreigners, cannot be

allowed registration for being violation of the constitutional prohibition and it would not be violation of the

freedom of religion clause. The fact that the religious association “has no capital stock does not suffice to

escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. The

purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed

to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit of

the Constitution demands that in the absence of capital stock, the controlling membership should be

composed of Filipino citizens.” xRegister of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955)

(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution; People v. Quasha, 93 Phil. 333 [1953]).

The primary franchise of a corporation, that is, the right to exist as such, is vested in the individuals who

compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a

legislative authority so to do. But the special or secondary franchises of a corporation are vested in the

corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to

dispose of its property, except such special or secondary franchises as are charged with a public use. xJ.R.S.

Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility; however, it

does not requires a franchise before one can own the facilities needed to operate a public utility so long as it

does not operate them to serve the public. In law there is a clear distinction between the “operation” of a

public utility and the ownership of the facilities and equipment used to serve the public. Tatad v. Garcia, Jr.,

243 SCRA 436 (1995)

“A distinction should be made between shares of stock, which are owned by stockholders, the sale of which

requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee

thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of

stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property

of a corporation, like its franchise. In other words, even if the original stockholders had transferred their

shares to another group of shareholders, the franchise granted to the corporation subsists as long as the

corporation, as an entity, continues to exist. The franchise is not thereby invalidated by the transfer of the

shares. A corporation has a personality separate and distinct from that of each stockholder. It has the right of

continuity or perpetual succession Corporation Code, Sec. 2).” Philippine Long Distance Telephone Co. v.

National Telecommunications Commission, 190 SCRA  717, 732 (1990).

(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)

Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of 1982;Section 2, P.D. 576; SEC

Opinion dated 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC

QUARTERLY BULLETIN, (No. 4—December, 1991), at p. 31.

Cable Industry

The National Telecommunications Commission (NTC), which regulates and supervises the cable television

industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has provided under NTC

Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that “Cable TV operations shall be

governed by E.L. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be

treated just like a public telecommunications entity.”

Under DOJ Opinon 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, theefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations,

wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.”

(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54

[1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; xHaw Pia v. China Banking Corp., 80 Phil.

604 [1948]).

(f) Investment Test as to “Philippine Nationals” (Sec. 3(a),(b), R.A. 7042, Foreign Investment Act of 1992)

(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC Opinion, dated 6

November 1989, XXIV SEC Quarterly Bulletin (No. 1- March 1990); SEC Opinion, dated 14 December 1989,

XXIV SEC Quarterly Bulletin (No. 2 -June 1990)

Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]).

(h) Special Classifications (Sec. 140)

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING VEIL OF CORPORATE FICTION

A.  Main Doctrine: A Corporation Has A Personality  Separate and Distinct from its Stockholders

or Members.

Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its

stockholders or members—by legal fiction and convenience it is shielded by a protective mantel and imbued

by law with a character alien to the persons comprising it.  xLim v. Court of Appeals, 323 SCRA 102 (2000).

1. Sources: Sec. 2; Article 44, Civil Code

2. Importance of Protecting Main Doctrine:

The “separate juridical personality” includes: right of succession; limited liability; centralized management;

and generally free transferability of shares of stock. Therefore, 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 attributes.

One of the advantages of a corporate form of business organization is the limitation of an investor’s liability

to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate

and distinct from its stockholders. However, the statutorily 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 to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve

as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another

corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

3. Applications:

(a) Majority Ownership of or Dealings in Shareholdings: Ownership of a majority of capital stock and

the fact that majority of directors of a corporation are the directors of another corporation creates no

employer-employee relationship with the latter’s employees. DBP v. NLRC, 186 SCRA 841 (1990); Francisco,

et al. v. Mejia, G. R. No. 141617, 14 August 2001.

The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a

collection case against the corporation, does not make such stockholder personally liable for the corporate

debt, since the disposing stockholder has 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. xRemo, Jr. v. Intermediate Appellate

Court, 172 SCRA 405, 413-414 (1989).

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a

corporation is not of itself sufficient ground for disregarding the separate corporate personality. xSunio v.

NLRC , 127 SCRA 390 (1984); xAsionics Philippines, Inc. v. National Labor Relations Commission, 290 SCRA

164 (1998); xLim v. Court of Appeals, 323 SCRA 102 (2000); xManila Hotel Corp. v. NLRC, 343 SCRA 1

(2000); xFrancisco v. Mejia, G. R. No. 141617, 14 August 2001.

Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor

warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show

that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are

to be rightly treated as distinct and separate from each other. xLaguio v. NLRC, 262 SCRA 715 (1996).

(b) Dealings Between the Corporation and Stockholders: 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. Stockholders of

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

As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those

of the legal entities which it may be connected and vice-versa.xARB Constructions Co., Inc. v. Court of

Appeals, 332 SCRA 427 (200)

(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation do not extend to its

stockholders. “A corporation has a personality distinct from that of its stockholders, enabling the taxing

power to reach the latter when they receive dividends from the corporation. It must be considered as settled

in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign

corporations as stockholders are subject to the payment of the income tax, the exemption clause to the

charter [of the domestic corporation] notwithstanding.”xManila Gas Corp. v. Collector of Internal Revenue, 62

Phil. 895, 898 (1936).

(d) Being a Corporate Officer: Being an officer or stockholder of a corporation does not by itself make

one’s property also of the corporation, and vice-versa, for they are separate entities, and that shareholders

are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal

person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)

The mere fact that one is president of the corporation does not render the property he owns or possesses

the property of the corporation, since that president, as an individual, and the corporation are separate

entities. xCruz v. Dalisay, 152 SCRA 487 (1987).

(e) Properites, Obligations and Debts: Likewise, a corporation has no legal standing to file a suit for

recovery of certain parcels of land owned by its members in their individual capacity, even when the

corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347

[1976]).

The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder’s debt or credit

that of the corporation. xTraders Royal Bank v. CA, 177 SCRA 789 (1989).

Stockholders have no personality to intervene in a collection case covering the loans of the corporation on

the ground that the interest of shareholders in corporate property is purely inchoate. xSaw v. CA, 195 SCRA

740 [1991])

The interests of payees in promissory notes cannot be off-set against the obligations between the

corporations to which they are stockholders absent any allegation, much less, even a scintilla of

substantiation, that the parties interest in the corporation are so considerable as to merit a declaration of

unity of their civil personalities. xIndustrial and Development Corp. v. Court of Appeals, 272 SCRA 333

(1997).

It is a basic postulate that a corporation has a personality separate and distinct from its stockholders.

Therefore, even when the foreclosure on the assets of the corporation was wrongful and done in bad faith,

the stockholders of the corporation have no standing to recover for themselves moral damages. Otherwise, it

would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation’s

assets before the dissolution of the corporation and the liquidation of its debts and liabilities. xAsset

Privatization Trust v. Court of Appeals, 300 SCRA 579, 617 (1998).

Where real properties included in the inventory of the estate of a decedent are in the possession of and are

registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate

fiction, the presumption of conclusiveness of said titles in favor of said corporations should stand

undisturbed. xLim v. Court of Appeals, 323 SCRA 102 (2000).

(f) Third-Parties: The fact that respondents are not stockholders of the disputed corporations does not

make them non-parties to the case, since the jurisdiction of a court or tribunal over the subject matter is

determined by the allegations in the Complaint. In this case, it is alleged that the aforementioned

corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties

sought to be reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of

corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if,

as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as

a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the

stockholders.  Gochan v. Young, G.R. No. 131889, 21 March 2001.

B.  Piercing the Veil of Corporate Fiction:

1.   Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 [1905]).

xSee also Francisco v. Mejia, G. R. No. 141617, 14 August 2001.

2.   Nature of the Piercing Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997])

Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts

its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from

a seemingly separate one, were it not for the existing corporate fiction. xLim v. Court of Appeals, 323 SCRA

102 (2000).

This Court has pierced the veil of corporate fiction in numerous cases where it was used, among others, to

avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to avoid

liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues,

or to promote unfair objectives or otherwise to shield them.  xReynoso, IV v. Court of Appeals, G.R. No.

116124-25, 22 November 2000; also xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

3.   When Piercing Doctrine Not Applicable:

(a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other  remedies

are still available. Umali v. CA, 189 SCRA 529 (1990).

(b) Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily

liable for corporate debts. Umali v. CA, 189 SCRA 529 (1990);Indophil Textile Mill Workers Union-PTGWO v.

Calica, 205 SCRA 697 (1992).

(c) Piercing is not available when the personal obligations of an individual are sought to be enforced against

the corporation. xRobledo 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 shield for undertaking certain proscribed activities. However, in the case at bar,

instead of holding certain individuals or person responsible for an alleged corporate act, the situation has

been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability

of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine

has been turned upside down because of its erroneous invocation.” Francisco Motors Corp. v Court of

Appeals, 309 SCRA  72, 83 (1999).

(d) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and

convincingly established. It cannot be presumed. This is elementary. The organization of the corporation at

the time when the relationship between the landowner and the developer were still cordial cannot be used

as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under

the mere allegation that the corporation is being used to evade the performance of obligation by one of its

major stockholders. xLuxuria Homes, Inc. v. Court of Appeals,302 SCRA 315 (1999); xDevelopment Bank of

the Philippines vs. Court of Appeals,G.R. No. 126200, 16 August 2001.

(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted

to justify under a theory of co-ownership the continued use and possession by stockholders of corporate

properties. Boyer-Roxas v. Court of Appeals, 211 SCRA 470 [1992]).

The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC a the petition

for suspension of payments filed under Section 5(e) of Pres. Decree No. 902-A, on the ground that the

petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate

debtor. “The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely

misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience,

justify wrong, protect fraud or defend crime.” xUnion Bank of the Philippines v. Court of Appeals, 290 SCRA

198 (1998).

Changing of the petitioners’s  subsidiary liabilities by converting them to guarantors of bad debts cannot be

done by piercing the veil of corporate identity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December

2000.

(f) Piercing doctrine is meant to prevent fraud, and cannot be employed 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. xVillanueva v. Adre, 172 SCRA 876 (1989).

(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff.  Cruz v.

Dalisay, 152 SCRA 482 (1987).

3.  Consequences and Types of Piercing Cases: Umali v. CA, 189 SCRA 529 [1990])

(a) The application of the doctrine to a particular case does not deny the corporation of legal personality for

any and all purposes, but only for the particular transaction or instance for which the doctrine was

applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); xTantoco v. Kaisahan ng Mga Manggagawa sa La

Campana, 106 Phil. 198 (1959).

(b) Classification of the Piercing Cases:

(i) When the corporate entity is used to commit fraud or to do a wrong (“fraud cases”);

(ii) When the corporate entity is merely a farce since the corporation is merely the alter ego, business

conduit or instrumentality of a person or another entity (“alter ego cases”); and

(iii) When the piercing the corporate fiction is necessary to achieve justice or equity (“equity cases”).

The three cases may appear together in one application. R.F. Sugay & Co., v. Reyes, 12 SCRA 700 (1964).

4. Fraud Cases:

(a) Acts by the Controlling Shareholder:  Where a stockholder, who has absolute control over the

business and affairs of the corporation, entered into a contract with another corporation through fraud and

false representations, such stockholder shall be liable jointly and severally with his co-defendant corporation

even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated

Finance Co., 19 SCRA 962 (1967).

The tests in determining whether the corporate veil may be pierced are: (1) the defendant must have control

or complete domination of the other corporation’s finances, policy and business practices with regard to the

transaction attached; (2) control must be used by the defendant to commit fraud or wrong; and (3) the

aforesaid control or breach of duty must be the proximate cause of the injury or loss complained of. Manila

Hotel Corporation v. NLRC, 343 SCRA 1 (2000); xAlsoLim v. Court of Appeals, 323 SCRA 102 (2000).

(b) One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation

Co., 5 SCRA 1011 (1962).

(c) The veil of corporation fiction may be pierced when used to avoid a contractual commitment against non-

competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).

(d) The Supreme Court found the following facts to be legal basis to pierce: One company was merely an

adjunct of the other, by virtue of a contract for security services, the former provided with security guards to

safeguard the latter’s premises; both companies have the same owners and business address; the purported

sale of the shares of the former stockholders to a new set of stockholders who changed the name of the

corporation appears to be part of a scheme to terminate the services of the security guards, and bust their

newly-organized union which was then beginning to become active in demanding the company’s compliance

with Labor Standards laws.  De Leon v. NLRC, G.R. No. 112661, 30 May 2001.

(e) Parent-Subsidiary Relations; Affiliates (Reynoso, IV v. Court of Appeals,G.R. No. 116124-25, 22

November 2000; Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao

Construction v. NLRC, 278 SCRA 716 [1997]).

-  Why is there inordinate showing of alter-ego elements?

Guiding Principles in Fraud Cases:

(i) There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of

the corporation by itself would not authorize piercing; and

(ii) The main action should seek for the enforcement of pecuniary claims pertaining to the corporation

against corporate officers or stockholders.

5.  Alter-Ego Cases:

(a) Where the stock of a corporation is owned by one person whereby the corporation functions only for the

benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v.

Willets and Patterson, Ltd., 44 Phil. 634 (1923).

(b) When the corporation is merely an adjunct, business conduit or alter ego of another corporation, the

fiction of separate and distinct corporation entities should be disregarded. xTan Boon Bee & Co. v.

Jarencio, 163 SCRA 205 (1988).

The corporation veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-

shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit,

cannot be allowed to trifle with court processes, particularly where, as in this case, the corporation itself has

not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies

available to it. xFirst Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).

(c) Employment of same workers; single place of business, etc. La Campana Coffee Factory v. Kaisahan ng

Manggagawa, 93 Phil. 160 (1953).

The doctrine that a corporation is a legal entity or a person in law distinct from the persons composing it is

merely a legal fiction for purposes of convenience and to subserve the ends of justice. This fiction cannot be

extended to a point beyond its reason and policy. Where, as in this case, the corporation fiction was used as

a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues,

it would be discarded and the two (2) corporations would be merged as one, the first being merely

considered as the instrumentality, agency conduit or adjunct of the other. In this case, because of the

actions of management of the two corporations, there was much confusion as to the proper employment of

the claimant. xAzcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).

(d) Use of nominees. xMarvel Building v. David, 9 Phil. 376 (1951).

(e) Avoidance of tax. Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); xLiddell & Co. v.

Collector of Internal Revenue, 2 SCRA 632 (1961).

(f) Mixing of bank deposit accounts. xRamirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).

(g) Where it appears that two business enterprises are owned, conducted, and controlled by the same

parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal

fiction that two corporations are distinct entities and treat them as identical. xSibagat Timber Corp. v. Garcia,

216 SCRA 70 (1992).

(h) Thinly-capitalized corporations. McConnel v. Court of Appeals, 1 SCRA 722 (1961).

(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);xPhilippine Veterans

Investment Development Corporation v. CA, 181 SCRA 669 (1990).

(j) Affiliated companies.  xGuatson International Travel and Tours, Inc. v. NLRC,230 SCRA 815 (1990).

(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group, Inc., et al., G.R. No.

142616, 31 July 2001; xConcept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).

Whether the existence of the corporation should be pierced depends on questions of facts, appropriately

pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The

presumption is that the stockholders or officers and the corporation are distinct entities. The burden of

proving otherwise is on the party seeking to have the court pierce the veil of corporate entity. xRamoso v.

Court of Appeals, G.R. No. 117416, 8 December 2000.

(l) Guiding Principles in Alter-Ego Cases:

(i) The doctrine applies in this case even in the absence of evil intent; it applies because of the direct

violation of a central corporate law principle of separating ownership from management.

(ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others

cannot also be expected to be bound by the separate juridical entity.

(iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against

the stockholders or officers of the corporation.

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. xEmilio Cano Ent. v. CIR, 13 SCRA 291 (1965).

7.  Piercing Doctrine and  Due Process Clause

(a) The need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723 (1961).

(b) When corporate officers are sued in their official capacity when the corporation was not made a party,

the corporation is not denied due process. Emilio Cano Enterprises v. Court of Industrial Relations, 13 SCRA

291 (1965).

(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine.  Jacinto v.

Court of Appeals, 198 SCRA 211 (1991); xArcilla v. Court of Appeals, 215 SCRA 120 (1992).

V.  CLASSIFICATIONS OF CORPORATIONS1.  In Relation to the State:

(a) Public corporations (Sec. 3, Act No. 1459)

§         Organized for the government of the portion of the state (e.g., barangay, municipality, city and

province)

§         Majority shares by the Government does not make an entity a public corporation.xNational Coal Co., v.

Collector of Internal Revenue, 46 Phil. 583 (1924).

(b) Quasi-public corporations xMarilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991)

Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the

Government, and that its funds and assets are not considered government in nature and not subject to audit

by the COA, the fact that it received a special charter from the government, that its governing board are

appointed by the Government, and that its purpose are of public character, for they pertain to the

educational, civic and social development of the youth which constitute a very substantial and important

part of the nation, it is not a public corporation in the same sense that municipal corporation or local

governments are public corporation since its does not govern a portion of the state, but it also does not have

proprietary functions in the same sense that the functions or activities of government-owned or controlled

corporations such as the National Development Company or the National Steel Corporation, is may still be

considered as such, or under the 1987 Administrative Code as an instrumentality of the Government.

Therefore, the employees are subject to the Civil Service Law. xBoy Scouts of the Philippines v. NLRC, 196

SCRA 176 (1991).

(c) Private Corporation (Sec. 3, Act 1459)

A government-owned or -controlled corporation when organized under the Corporation Code is still a private

corporation.  But being a government-owned or -controlled corporation makes it liable for laws and

provisions applicable to the Government or its entities and subject to the control of the

Government. xCervantes v. Auditor General, 91 Phil. 359 (1952).

A private corporation is created by operation of law under the Corporation while a government corporation is

normally created by special law referred to often as a charter. xBliss Dev. Corp. Employees Union v.

Calleja, 237 SCRA 271 (1994).

The doctrine that employees of government-owned and -controlled corporations, whether created by special

law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and

not by the Labor Code, has been supplanted by the 1987 Constitution. The present doctrine in determining

whether a government-owned or -controlled corporation is subject to the Civil Service Law is the manner of

its creation, such that government corporations created by special charter are subject to the Civil Service

Law, while those incorporated under the general corporation law are governed by the Labor Code. xPNOC-

Energy Development Corp. v. NLRC, 201 SCRA 487 (1991); xDavao City Water District v. Civil Service

Commission, 201 SCRA 593 (1991).

The test to determine whether a corporation is government owned or controlled, or private in nature is

simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the

general corporation law? Those with special charters are government corporations subject to its provisions,

and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members

of the Government Service Insurance System. xCamparedondo v. NLRC, 312 SCRA 47 (1999).

Section 31 of the Corporation Code (Liability of Directors and Officers) is applicable to corporations which

have been organized by special charters since Sec. 4 of the Corporation Code renders the provisions of

thereof applicable in a supplementary manner to all corporations, including those with special or individual

charters, such as cooperatives organized under Pres. Decree No. 269, so long as those provisions are not

inconsistent with such charters. xBenguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).

2.  As to Place of Incorporation:

(a) Domestic Corporation

(b) Foreign Corporation (Sec. 123)

3.  As to Purpose of Incorporation:

(a) Municipal or Public corporation

(b) Religious corporation (Secs. 109 and 116)

(c) Educational corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)

(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; xRoman Catholic Apostolic Administrator of Davao, Inc. v. LRC and

the  Register of Deeds of Davao City, 102 Phil. 596 (1957).

xDirector of Land v. IAC, 146 SCRA 509 (1986), which held that a corporation sole has no nationality,

overturned the previous doctrine (xRepublic v. Villanueva, 114 SCRA 875 [1982] and Republic v. Iglesia Ni

Cristo, 127 SCRA 687 [1984]) that a corporation sole is disqualified to acquire or hold alienable lands of the

public domain, because of the constitutional prohibition qualifying only individuals to acquire land of the

public domain and the provision under the Public Land Act which applied only to Filipino citizens or natural

persons. xRepublic v. Iglesia ni Cristo, 127 SCRA 687 (1984); xRepublic v. IAC, 168 SCRA 165 (1988).

5.  As to Legal Status:

(a) De Jure Corporation

(b) De Facto Corporation (Sec. 20)

(c) Corporation by Estoppel (Sec. 21)

6.  As to Existence of Shares (Secs. 3 and 5)

(a) Stock Corporation

(b) Non-Stock Corporation

Pre-Incorporation Contracts

(a) Who Are Promoters?

Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the

business or enterprise of the issuer and receives consideration therefor.(Sec. 3.10, Securities Regulation

Code [R.A. 8799])

(b) Nature of Pre-incorporation Agreements (Secs. 60 and 61; Bayla v. Silang Traffic Co., Inc., 73 Phil.

557 [1942])

(c) Theories on Liabilities for Promoter’s Contracts (Cagayan Fishing Development Co., Inc. v. Teodoro

Sandiko, 65 Phil. 223 [1937]; Rizal Light & Ice Co., Inc. v. Public Service Commission, 25 SCRA 285

[1968]; Caram, Jr. v. CA, 151 SCRA 372 [1987]).

2.  De Facto Corporation (Sec. 20)

(a) Elements for Existence of De Facto Corporation:

(1) Valid law under which incorporated;

(2) Attempt in good faith to incorporate; “colorable compliance;”

(3) Assumption of corporate powers; and

(4) Issuance of certificate of incorporation. Arnold Hall v. Piccio, 86 Phil. 634 (1950).

3. Corporation by Estoppel Doctrine (Sec. 21; Salvatierra v. Garlitos, 103 Phil. 757 [1958];Albert v.

University Publishing Co., 13 SCRA 84 [1965]; International Express Travel & Tour Services, Inc. v. Court of

Appeals, 343 SCRA 674 (2000); xAsia Banking Corporation v. Standard Products, 46 Phil. 145

[1924]; xMadrigal Shipping Co., Inc. v. Ogilvie, Supreme Court Advanced Decision, 55 O.G. No. 35, p. 7331).

An individual should be held personally liable for the unpaid obligations of the unincorporated association in

whose behalf he entered into such transactions, under the principle that “any person acting or purporting to

act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally

liable for contract entered into or for other acts performed as such agent.” International Express Travel &

Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).

(a) Nature of Doctrine

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

unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter

into business relations with third persons. Where there is no third person involved and the conflict arises only

among those assuming the form of a corporation, who therefore know that it has not been registered, there

is no corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)

A party cannot challenge the personality of the plaintiff as a duly organized corporation after having

acknowledged same when entering into the contract with the plaintiff as such corporation for the

transportation of its merchandise. (Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 [1926]); the same

principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 [1911] but that case pertained to a

commercial partnership which required registration in the registry under the terms of the Code of

Commerce.

(b) Two Levels:   (i) With “fraud”  and (ii)  Without “fraud”

When incorporating individuals represent themselves to be officers of the corporation never duly registered

with SEC, and engages in the name of purported corporation in illegal recruitment, they are estopped from

claiming that they are not liable as corporate officers, since Section 25 of Corporation Code provides that all

persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as

general partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v.

Garcia, 271 SCRA 621 (1997).

An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose incorporation

was not consummated, when he held himself out as officer of the corporation and received money from

applicants who availed of their services. Such individual is estopped from claiming that they are not liable as

corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25 of the

Corporation Code which provides that all persons who assume to act as a corporation knowing it to be

without authority to do so shall be liable as general partners for all the debts, liabilities and damages

incurred or arising as a result thereof. People v. Pineda, G.R. No. 117010, 18 April 1997.

4. Trust Fund Doctrine

(a) Commercial/Common Law Premise on Equity vis-a-vis Debts

(b) Nature of Doctrine

Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as

equity in trust for the payment of the corporate creditors. Commissioner of Internal Revenue v. Court of

Appeals, 301 SCRA 152 (1999).

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine

which means that the capital stock, property and other assets of a corporation are regarded as equtiy in

trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over

the stockholders in the distribution of corporate assets. There can be no distribution of assets among the

stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the

prejudice of creditors is null and void.  Boman Environmental Dev. Corp. v. CA, 167 SCRA 540 (1988).

The “Trust Fund” doctrine considers the subscribed capital as a trust fund for the payment of the debts of

the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no

part of the subscribed capital stock may be turned over or released to the stockholder (except in the

redemption of the redeemable shares) without violating this principle. Thus dividends must never impair the

subscribed capital stock; subscription commitments cannot be condoned or remitted; nor can the corporation

buy its own shares using the subscribed capital as the consideration therefore. NTC  v. Court of Appeals, 311

SCRA 508, 514-515 (1999).

(c) Corporation Purchasing 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])

VII.   ARTICLES OF INCORPORATION1. Nature of Charter – The charter is in the nature of a contract between the corporation and the

Government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).

2.  Procedure and Documentary Requirements (Sec. 14 and 15)

(a) As to Number and Residency of Incorporators (Sec. 10)

(b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549 [1934]).

A corporation may change its name by the amendment of its articles of incorporation, but the same is not

effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34 SCRA 252 (1970)

A change in the corporate name does not make a new corporation, and whether affected by special act or

under a general law, has no effect on the identity of the corporation, or on its property, rights, or

liabilities. Republic Planters Bank v. CA, 216 SCRA 738 (1992).

Similarity in corporate names between two corporations would cause confusion to the public especially when

the purposes stated in their charter are also the same type of business. Universal Mills Corp. v. Universal

Textile Mills Inc., 78 SCRA 62 [1977]).

A corporation has not right to intervene in a suit using a name other than its registered name; if a

corporation legally and truly wants to intervene, it should have used its corporate name as the law requires

and not another name which it had not registered. Laureano Investment and Development Corporation v.

Court of Appeals, 272 SCRA 253 (1997).

There would be no denial of due process when a corporation is sued and judgment is rendered against it

under its unregistered trade name, holding that a corporation may be sued under the name by which it

makes itself known to its workers. Pison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312

(1997)

(c) Purpose Clause (Secs.  14(2) and 42; Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541

[1919])

(d) Corporate Term (Sec. 11).

No extension can be effected once dissolution stage has been reached. Alhambra Cigar v. SEC, 24 SCRA 269

(1968).

(e) Principal Place of Business

Place of residence of the corporation is the place of its principal office. Clavecilla 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 and stockholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367

(1982).

(f) Minimum Capitalization (Sec. 12)

- Why is maximum capitalization required to be indicated?

(g) Subscription and Paid-up Requirements (Sec. 13)

(h) Steps and Documents Required in SEC

3.  Grounds for Disapproval (Sec. 17)

When the proposed articles presented show that the object of incorporation is to organize a barrio of a given

municipality into a separate corporation for the purpose of taking possession and having control of all

municipal property within the barrio so incorporated 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]).

4.  Amendments to Articles of Incorporation (Sec. 16)

5.  Commencement of Corporate Existence (Sec. 19)

VIII.  BY-LAWS1.  Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Peña v. CA, 193 SCRA 717 [1991])

As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its

own actions, affairs and concerns and its stockholders or members and directors and officers with relation

thereto and among themselves in their relation to it,” by-laws are indispensable to corporations in this

jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an

orderly governance and management of corporations. Nonetheless, failure to file them within the period

required by law by no means tolls the automatic dissolution of a corporation. Loyola Grand Villas

Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

(a) Common Law Limitations on By-Laws

(i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation

A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary

to the Corporation Code requiring all members of the Board to be elected by the stockholders or members.

Even when the members of the association may have formally adopted the provision, their action would be

of no avail because no provision of the by-laws can be adopted if it is contrary to law.Grace Christian High

School v. Court of Appeals, 281 SCRA 133 (1997).

Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of

management prerogative or business judgment, such right cannot impair the obligation of existing contracts

or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an

employer to remove any employee from employment by the simple expediency of amending its by-laws and

providing the position shall cease to exist upon occurrence of a specified event. Salafranca v. Philamlife

(Pamplona) Village Homeowners Association, Inc., 300 SCRA 469, 479 (1998).

(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws.   Government of the

Philippine Islands v. El Hogar Filipino, 50 Phil. 399  (1927).

Authority granted to a corporation to regulate the transfer of its stock does not empower corporation to

restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as

to the formalities and procedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA

280 (1998).

By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions;

they are always subject to the charter of the corporation. Rural Bank of Salinas, Inc. v. CA, 210 SCRA 510

(1992), quoting fromThompson on Corporation Sec. 4137, cited in xFleischer v. Nolasco, 47 Phil. 583.

(iii) By-Laws Cannot Discriminate

(b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA 503 [1997]).

“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.” PMI Colleges v. NLRC, 277 SCRA 462 (1997).

2.  Adoption Procedure (Sec. 46)

Section 46 of the Corporation, which requires the filing of by-laws, does not expressly provide for the

consequence of their non-filing within the period provided therein; however, Pres. Decree 902-A allows the

SEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of

corporations which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution simply

because the incorporators failed to abide by the required filing of by-laws, and there is no outright “demise”

of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic

institution, agency or society, which would require that the incorporators must be given the chance to

explain their neglect or omission and remedy the same. Loyola Grand Villas Homeowners (South)

Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

3.  Contents (Sec. 47)

4.  Amendments (Sec. 48)

§   Power to amend may be delegated to the board of directors

IX.  CORPORATE POWERS, AUTHORITY AND ACTIVITIES1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v.

COA, 190 SCRA 154 [1990])

A corporation has no power except those expressly conferred on it by the Corporation Code and those that

are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of

directors and/or its duly authorized officers and agents, since the physical acts of the corporation, like the

signing of documents, can be performed only by natural persons duly authorized for the purpose of by

corporate by-laws or by a specific act of the board of directors. Reynoso, IV v. Court of Appeals, G.R. No.

116124-25, 22 November 2000.

Precisely because the corporation is such a prevalent and dominating factor in the business life of the

country, the law has to look carefully into the exercise of powers by these artificial persons it has created.

(a) Classification of Corporate Powers:  Express; Implied; and Incidental

There is basis to rule that the act of issuing the checks on behalf of the corporation was well within the ambit

of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not

an ultra vires act. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001.

(b) Where Corporate Power is Lodged (Sec. 23)

Unless otherwise provided by the Corporation Code, corporate powers, such as the power to enter into

contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either

an executive committee or officials or contracted managers, which delegation, except for the executive

committee, must be for specific purposes. The delegated officers makes the latter agents of the corporation,

and rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully

clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do

so. ABS-CBN Broadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999).

2. Ultra Vires Acts

(a) Concept and Types (Sec. 45)

An ultra vires act is one committed outside the object for which a corporation is created as define by the law

of its organization and therefore beyond the power conferred upon it by law.” The term “ultra vire” is

“distinguished from an illegal act from the former is merely voidable which may be enforced by performance,

ratification, or estoppel, while the latter is void and cannot be validated. Atrium Management Corporation vs.

Court of Appeals, G.R. No. 109491, 28 February 2001.

(b) Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335

[1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932];Republic  v. Acoje Mining Co., 3 SCRA 361

[1963]; Crisologo Jose v. CA, 177 SCRA 594 [1989];

(i) Theory of Estoppel or Ratification

In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown

that the governing body or officer authorized to ratify had full and complete knowledge of all the material

facts connected with the transaction to which it relates. Ratification can never be made on the part of the

corporation by the same person who wrongfully assume the power to make the contract, but the ratification

must be by the officer or governing body having authority to make such contract. The act or conduct for

which the corporation may be liable under the doctrine of estoppel must be by those of the corporation, its

governing body or authorized officers, and not those of the purported agent who is himself responsible for

the misrepresentation. Vicente v. Geraldez, 52 SCRA 210 (1973).

When the counsel representing the corporation in a collection suit admits on behalf of the corporation that

the latter admitted culpability for personal loans obtained by its corporate officers, such admission cannot be

given legal effect to the detriment of the corporation. The admission made in the answer by the counsel for

the corporation was “without any enabling act or attendant ratification of corporate act,” as would authorize

or even ratify such admission. In the absence of such ratification or authority, such admission does not bind

the corporation. Also, the letter issued by the corporate officers who obtained the loan “as indicating the

corporate liability of the corporation,” cannot also serve to make the corporation liable. The documents and

admissions cannot have the effect of  a ratification of an unauthorized act. Ratification can never be made on

the part of the corporation by the same persons who wrongfully assume the power to make the contract, but

the ratification must be by the officers as governing body having authority to make such contract. Aguenza

v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

(ii) Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate Appellate Court, 220

SCRA 103, 113-114 [1993]; Francisco v. GSIS, 7 SCRA  577 [1963])

A contract signed by the President/Chairman without authority from the Board of Directors is void. Although

the by-laws grant authority to the President “to execute and sign for and in behalf of the corporation all

contracts and agreements which the corporation may enter into,” the same presupposes a prior act of the

corporation exercised through its Board of Directors. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992).

Although an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of

an apparent authority with which the corporation has clothed him by holding him out or permitting him to

appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in

good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular

authority with respect to the business, or a particular branch of it, continuously and publicly, for a

considerable time. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992).

Persons who deal with corporate agents within circumstances showing that the agents are acting in excess

of corporate authority, may not hold the corporation liable.Traders Royal Bank v. Court of Appeals, 269 SCRA

601 (1997); also Art. 1883, Civil Code.

The authority of a corporate officer in dealing with third persons may be actual or apparent. . . the principal

is liable for the obligations contracted by the agent. The agent’s apparent representation yields to the

principal’s true representation and the contract is considered as entered into between the principal and the

third person. First Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996).

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an

apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the

corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from

denying the agent’s authority.  Soler v. Court of Appeals, G.R. No. 123892, 21 May 2001.

Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do no bind the

principal unless the latter ratifies the same expressly or implied. It also bears emphasizing that when the

third person knows that the agent was acting beyond his power or authority, the principal can not be held

liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame,

and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal’s

ratification. In the case of the corporation as the principal, there was no such ratification. Therefore, when

the officer entered into the speculative contracts without securing the Board’s approval, nor did he submit

the contracts to the Board after their consummation nor were they recorded in the books of the corporation,

there was, in fact, no occasion at all for ratification.  Safic Alcan & Cie. V. Imperial Vegetable Co., G.R. No.

126751, 28 March 2001.

(iii) Theory of No State Damage (Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).

3.  Specific (Express) Powers

(a) Enumerated Powers (Secs. 36)

Example of Poor Draftsmanship:

When the article of incorporation expressly provides that the purpose of the corporation was to “engage in

the transportation of person by water,” such corporation cannot engage in the business of land

transportation, which is an entirely different line of business, and, for which reason, may not acquire any

certificate of public convenience to operate a taxicab service. Luneta Motor Co. v. A.D. Santos, Inc., 5 SCRA

809 [1962]).

Power to Sue

Under section 36 of the Corporation Code, in relation to Section 23, it is clear that where a corporation is an

injured party, its power to sue is lodged with its board of directors or trustees. A minority stockholder and

member of the Board, who fails to show any proof that he was authorized by the Board of Directors, has no

such power or authority to sue on the corporation’s behalf. Nor can we uphold this as a derivative suit. For a

derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the

corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the

corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now

showing that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, G.R. 122452,

29 January 2001.

(b) Power to Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

(c) Power to Increase or Decrease Capital Stock (Sec. 38)

Prior to SEC approval of the increase in the authorized capital stock, and despite the Board resolution

approving the increase in capital stock, and the receipt of payment on the future issues of the shares from

the increased capital stock, such funds do not constitute part of the capital stock of the corporation until

approval of the increase by SEC.  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 union members, amounts to

nothing but a premature and plain distribution of corporate assets to obviate a just hearing to labor of the

vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor

practice.  Madrigal & Co. v. Zamora, 151 SCRA 355 [1987]);

(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

(e) Sell or Dispose of Assets (Sec. 40).

Sale by the Board of the only property of the corporation without compliance with the provisions of Sec. 40 of

the Corporation Code requiring the ratification of members representing at least two-thirds of the

membership, would make the sale null and void. Islamic Directorate of the Philippines v. Court of Appeals,

272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).

(f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose (Sec.

42; De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]).

(g) Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]).

Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital

account. It is the same amount that can loosely be terms as the “trust fund” of the corporation. National

Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%,

cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of

right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43

of the present Corporation Code prohibit the issuance of any stock dividend without the approval of

stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or

special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends

to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks”,

on which the corporation agrees absolutely to pay interest before dividends are paid to the common

stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or

surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).

(i) Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26

SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247, at pp. 266-267 [1991]). Why the difference in rule

between entity and individual?

(j) Other Powers

-  To Sell Land and Other Properties

A corporation whose primary purpose is to market, distribute, export and import merchandise, the sale of

land is not within the actual or apparent authority of the corporation acting through its officers, much less

when acting through the treasurer. Likewise Article 1874 and 1878 of the Civil Code requires  that when land

is sold through an agent, the agent’s authority must be in writing, otherwise the sale is void. San Juan

Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

- To Borrow Funds

The power to borrow money is one of those cases where even a special power of attorney is required under

Art. 1878 of the New Civil Code. There is invariably a need of an enabling act of the corporation to be

approved by its Board of Directors. The argument that the obtaining of loan was in accordance with the

ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing

practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the

corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

- To Provide Gratuity Pay for Employees

Providing gratuity pay for its employees is one of the express powers of a corporation under the Corporation

Code, and cannot be considered to be ultra viresto avoid any liability arising from the resolution granting

such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

- To Donate

- To Enter Into Partnership, Joint Venture.  Tuason & Co. v. Bolanos, 95 Phil. 106 (1954).

X.  DIRECTORS, TRUSTEES AND OFFICERS1.  Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40 [1979]).

(a) Two Theories on Source of Power of Board of Directors (Angeles v. Santos, 64 Phil. 697 [1937]).

(b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987

[1967]; Ramirez v.  Orientalist Co. and Fernandez, 38 Phil. 634 [1918]; Acuña v. Batac Producers Cooperative

Marketing Association, 20 SCRA 526 [1967]).

The general rule is that a corporation, through its broad of directors, should act in the manner and within the

formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a

meeting called pursuant to the law or the corporation’s by-laws, otherwise, any action taken therein may be

questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action

of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either

expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation’s

subseqeunt course of conduct. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

(c) Effects of a “Bogus” Board

The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of the Civil Code

because of the lack of “consent”. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454

(1997).

(d) Executive Committee (Sec. 35)

2. Business Judgment Rule (Montelibano v. Bacolod-Murcia  Miling Co., Inc., 5 SCRA 36 [1962]; Philippine

Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 [1997])

Board members and officers who purport to act for and in behalf of the corporation, keep within the lawful

scope of their authority in so acting and act in good faith, do not become liable, whether civilly or otherwise,

for the consequences of their acts. Those acts, when they are such a nature and are done under such

circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such

officers and Board members. Benguet Electric  Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992)

3.  Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA 336

[1979]).

(a) A director must own at least one share of stock (Peña v. CA, 193 SCRA 717 [1991]; xDetective &

Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 [1969])

(b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v. CA, 205 SCRA 752

[1992]).

4.  Election of Directors and Trustees

(a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11 [1996]).

(b) Trustee (Secs. 92 and 138)

(c) Cumulative Voting (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the

Equation, 35 South Carolina L. Rev. 295)

5.  Vacancy in Board (Sec. 29)

By-law provision or the practice giving a stockholder a permanent seat in the Board of Directors would be

against the provision of Sections 28 and 29 of the Corporation Code which requires member of the board of

corporations to be elected. In addition, Section 23 of the Corporation Code which provides for the powers of

the Board of Directors or Trustees expressly requires them “to be elected from among the holders of stock,

or where there is no stock, from among the members of the corporation.Grace Christian High School v. Court

of Appeals, 281 SCRA 133 (1997).

6. Term of Office, Hold-over Principle

Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original

directors, hold until qualification of their successors. Government  v. El  Hogar Filipino, 50 Phil. 399 (1927).

The remedy is quo warranto to question the legality and proper qualification of persons elected to the

board. Ponce v. Encarnacion, 94 Phil. 81 (1953).

7. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]).

8. Directors’ or Trustees’ Meetings (Secs. 49, 53, 54 and 92)

In a board meeting, an abstention is presumed to be counted as an affirmative voteinsofar as it may be

construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being

merely prima facie would not hold in the face of clear evidence to the contrary. xLopez v. Ericta, 45 SCRA

539 [1972]).

9. Compensation of Directors (Sec. 30)

Directors and trustees are not entitled to salary or other compensation when they perform nothing more

than the usual and ordinary duties of their office, founded on the presumption that directors and trustees

render service gratuitously, and that the return upon their shares adequately furnishes the motives for

service, without compensation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997).

Under Section 30 of the Corporation Code, there are two (2) ways by which members of the board can be

granted compensation apart from reasonable per diems: (a) when there is a provision in the by-laws fixing

their compensation; and (b) when the stockholders representing a majority of the outstanding capital stock

at a regular or special meeting agree to give them compensation. From the language of Section 30, it may

also be deduced that members of the board may also receive compensation,when they render services to

the corporation in a capacity other than as directors or trustees of the corporation.

The position of being Chairman and Vice-Chairman, like that of Treasurer and Secretary, were considered by

the officers as not mere directorship position, but officership position that would entitle the occupants to

compensation. Likewise, the limitation placed under Section 30 of the Corporation that directors cannot

receive compensation exceeding 10% of the net income of the corporation, would not apply to the

compensation given to such positions since it is being given in their capacity as officers of the corporation

and not as board members.

10. Role of Directors

(a) Directors as Fiduciaries.

-   Pre-Corporation Code. Palting v. San Jose Petroleum, Inc., 18 SCRA 924 (1966).

-  Nature of Duties of Directors and Officers. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).

(b) Duty of Obedience

A corporation, through its board of directors, should act in the manner and within the formalities, if any,

prescribed by its charter or by the general law. xLopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995)

(c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser, 251 U.S. 524, 64

L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985)..

(d) Duty of Loyalty (Secs. 31 to 34; Mead v.  McCullough, 21 Phil. 95 [1911]).

- Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]; SeeAnnotations: Doctrine

of Corporate Opportunity, 89 SCRA 412).

-  Self-dealings (Secs. 32 and 33)

- Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]).

When a director, who also owns ¾ of the equity of the corporation, who has also been designated as the

administrator of corporate affairs, and who was directly negotiating the sale of the corporations large

landholdings to the Government at great prices, purchases the shares of stock of a shareholder without

informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the

shareholdings by way of deceit practiced by means of concealing his knowledge of the state of the

negotiations and their probable successful result. xStrong v. Repide, 41 Phil. 947 [1909];

-  Applies to confidential employees (cf. xSing Juco v. Llorente, 43 Phil. 589 [1922])

(e) Duty to Creditors and Outsiders

[xVillanueva, The Fiduciary Duties of Directors and Officers Representing the Creditor Pursuant to a Loan

Workout Arrangement: Parameters Under Philippine Corporate Setting, 35 Ateneo L.J.  (No. 1, Feb. 1991)]

(f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336

[1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]).

(g) Contracts Between Corporations with  Interlocking Directors (Sec. 33)

11. Who Is an “Officer” of the Corporation (Sec. 25; Gurrea v. Lezama, 103 Phil. 553 [1958];Mita Pardo

de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v. Leaño, 127 SCRA 778 [1984]; Dy v. NLRC,

145 SCRA 211 [1986]; xVisayan v. NLRC, 196 SCRA 410 [1991]).

Corporations act only through their officers and duly authorized agents. All acts within the powers of a

corporation may be performed by agents of its selection; except so far as limitations or restrictions imposed

by special charter, buy-laws, or statutory provisions. xBA Savings Bani v. Sia, 336 SCRA 484 (2000).

An “office” is created by the charter of the corporation and the officer is elected by the directors or

stockholders. . . Note that a corporate officer’s removal from his office is a corporate act. If such removal

occasions an intra-corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof,

with which the Board of Directors might have in taking such action. When petitioner, as Executive Vice-

President allegedly diverted company funds for his personal use resulting in heavy financial losses in the

company, this matter would amount to fraud. Such fraud would be detrimental to the interest not only of the

corporation but also of its members. This type of fraud encompasses controversies in a relationship within

the corporation covered by the SEC jurisdiction [now with the regular courts]. Perforce, the matter would

come within the area of corporate affairs and management, and such a corporate controversy would call for

the adjudicative expertise of the SEC, not the Labor Arbiter or the NLRC.” De Rossi v. NLRC, 314 SCRA 245

(1999).

When the by-laws of the condominium corporation specifically includes the position of

“Superintendent/Administrator” in is roster of corporate officers, then such position is clearly a corporate

officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the

NLRC.  Ongkingco v. NLRC, 270 SCRA 613 (1997).

When the by-laws provide that one of the powers of the Board of Trustees is “[t]o appoint a Medical Director,

Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and

prescribe their powers and duties,” then such specifically designated positions should be considered

“corporate officers” position. The determination of the rights and the concomitant liability arising from any

ouster from such positions, would be intra-corporate controversy subject to the jurisdiction of the SEC (now

RTC).

An “office” is created by the charter of the corporation and the officer is elected by the directors or

stockholders (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other hand, an “employee” usually occupies no

office and generally is employed not by action of the directors or stockholders but by the managing officer of

the corporation who also determines the compensation to be paid to such employee. (Ibid) . . . A corporate

officer’s dismissal is always a corporate act, or an intra-corporate controversy, and the nature is not altered

by the reason or wisdom with which the Board of Directors may have in taking such action.

The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive

officers of a corporation, and modern corporation statutes usually designate them as the officers of the

corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the

board of directors may be empowered under the by-laws of a corporation to create additional offices as may

be necessary. Tabang v. NLRC, 266 SCRA 462 (1997).

12.  Powers of Corporate Officers:

(a) The Rule on Corporate Officer’s Power to Bind Corporation

An officer’s power as an agent of the corporation must be sought from the statute, charter, the by-laws or in

a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied

from a habit or custom of doing business.Vicente v. Geraldez, 52 SCRA 210 [1973]; reiterated in xBoyer-

Roxas v. CA, 211 SCRA 470 (1992).

(b) When Corporation Bound by Act of Its President.  People’s Aircargo v. Court of Appeals, 297 SCRA 170

(1998)

(c) Corporate Secretary

In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate records—

he keeps the stock and transfer book and makes proper and necessary entries therein. It is the duty and

obligation of the corporate secretary to register valid transfers of stock in the books of the corporation; and

in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to

compel performance. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).

When a Secretary’s Certificate is regular on its face, it can be relied upon by a third party who does not have

to investigate the truths of the facts contained in such certification; otherwise business transactions of

corporations would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267

SCRA 380 (1997).

(d) Corporate Treasurer

A corporate treasurer’s function have generally been described as “to receive and keeps funds of the

corporation, and to disburse them in accordance with the authority given him by the board or the properly

authorized officers.” Unless duly authorized, a treasurer, whose power are limited, cannot bind the

corporation in a sale of its assets. Selling is obviously foreign to a corporate treasurer’s function. When the

corporation categorically denies ever having authorized its treasurer to sell the subject parcel of land, the

buyer had the burden of proving that the treasurer was in fact authorized to represent and bind the allegedly

selling corporation in the transaction. And failing to discharge such burden, and failing to show any provision

of the articles of incorporation, by-laws or board resolution to prove that the treasurer possessed such

power, the sale is void and not binding on the alleged selling corporation. San Juan Structural and Steel

Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

(e) Other “Officers” for Service of Summons on Corporation

For purposes of determining proper service of summons to a corporation in a quasi-judicial proceeding

before the NLRC, a bookkeeper can be considered as an agent of the corporation within the purview of the

Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such

service must be made to an agent or a representative so integrated with the corporation sued as to make

it a priori supposable that he will realize his responsibilities and know what he should do with any legal

papers served on him. The bookkeeper’s task is one under consideration that his regular recording of the

corporation’s “business accounts” and “essential facts about the transactions of a business or enterprise”

safeguards the corporation from possible fraud being committed adverse to its own corporate

interest. Pabon v. NLRC, 296 SCRA 7 (1998).

In spite of provisions of the Rules of Court on service of process to bind corporate entities, service made to a

representative so integrated with the corporation sued as to make it a priori supposable that he will realize

his responsibilities and know what he should do with any legal papers served on him, has been considered

proper service to bind the corporation. (Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298

[1078], overturning xDelta Motor Sales Corp. v. Mangosing, 70 Phil. 598 [1976]; reiterated in xR. Transport

Corp. v. CA, 24a SCRA 77 [1995]).

Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term “general manager” and unlike the old

provision in the Rules of Court, it does not include the term “agent”. Consequently, the enumeration of

persons to whom summons may be served is “restricted, limited and exclusive” following the rule on

statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service

of summons upon a construction project manager; a corporation’s assistant manager; ordinary clerk of a

corporation; private secretary of corporate executives; retained counsel; officials who had charge or control

of the operations of the corporation, like the assistant general manager; or the corporation’s Chief Finance

and Administrative Officer;no longer apply since they were decided under the old rule that allows service of

summons upon an agent of the corporation.  E.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65

(1999).

(f) Coverage of Corporate “Agents”

Black’s Law Dictionary defines an “agent” as “a business representative, whose function is to bring about,

modify, affect, accept performance of, or terminate contractual obligations between principal and third

persons.” To this extent, an “agent” may also be shown to represent his principal in some one or more of his

relations to others, even though he may not have the power to enter into contracts. The rules on service of

process make service on “agent” sufficient. It does not in any way distinguish whether the “agent” be

general or special, but is complied with even by a service upon an agent having limited authority to

represent his principal. As such, it does not necessarily connote an officer of the corporation. However,

though this may include employees other than officers of a corporation, this does not include employees

whose duties are not so integrated to the business that their absence or presence will not toll the entire

operation of the business. Pabon v. NLRC, 296 SCRA 7 (1998).

13. Liabilities of Corporate Officers: (Sec. 31; Vazquez v. Borja, 74 Phil. 560 (1944); Palay, Inc. v. Clave,

124 SCRA 638 [1093];  Tramat Mercantile, Inc. v. CA, 238 SCRA 14 [1994]; Pabalan v. NLRC, 184 SCRA 495

[1990]; xSulo ng Bayan, Inc. v. Araneta, Inc.  Inc., 72 SCRA 347 [1976]; xMindanao Motors Lines, Inc. v. Court

of Industrial Relations, 6 SCRA 710 (1962);

The general rule is that corporate officers  are not personally liable for their official acts unless it is shown

that they have exceeded their authority. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427

(200)

Jurisprudential Enumeration of Officer Liabilities – MAM Realty v. NLRC, 244 SCRA 797, (1995);

reiterated in xNational Food Authority v. Court of Appeals, 311 SCRA 700 (1999); xUichico v. NLRC, 273 SCRA

35 (1997).

The hornbook law is that corporate personality is a shield against personal liability of its officers. Thus, when

the trust receipt sued upon was clearly entered into in behalf of the corporation by its Executive Vice-

President, then such officer and his spouse cannot be made personally liable; the personality of the

corporation is separate and distinct from the persons composing it. xThe Consolidated Bank and Trust Corp.

v. Court of Appeals, G.R. No. 114286, 19 April 2001. 

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the

corporation may so validly attach, as a rule, only when:

(a) He assents to a patently unlawful act of the corporation;

(b) Guilty of bad faith or gross negligence in directing its affairs;

(c) for conflict on interest resulting in damages to the corporation, its stockholders or other persons;

(d) He consents to the issuance of watered down stocks or who, having knowledge thereof, does not

forthwith file with the corporate secretary his written objection thereto;

(e) He agrees to hold himself personally and solidarily liable with the corporation; or

(f) He is made, by a specific provisions of law, to personally answer for his corporate action.  Atrium

Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001

The finding of solidary liability among the corporation and its officers and directors would patently be

baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed

by said officers and members of the Board of Directors that show them to have been individually guilty of

unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate

officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be

held liable personal for the judgment rendered against the corporation. National Power Corp. v. Court of

Appeals, 273 SCRA 419 (1997).

When corporate officers are sued in their official capacity, the suit is equivalent to a suit against the

corporation, and judgment may be enforced against corporate assets. xEmilio Cano Enterprises, Inc. v. CIR,

13 SCRA 291 (1965).

An attempt by the corporation to avoid liability by distancing itself from the acts of the its President was

struck down with the Court holding that a corporation may not distance itself from the acts of a senior

officer: “the dual roles of Romulo F. Sugay should not be allowed to confuse the facts.” R.F. Sugay v. Reyes,

12 SCRA 700 (1961).

Generally, officers or directors under the old corporate name bear no personal liability for acts done or

contracts entered into by officers of the corporation, if duly authorized.Republic Planters Bank v. CA, 216

SCRA 738 (1992).

An officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot

claim the benefit of separate juridical entity: “Thus, being a party to a simulated contract of management,

petitioner Uy cannot be permitted to escape liability under the said contract by using the corporate entity

theory. This is one instance when the veil of corporate entity has to be pierced to avoid injustice and

inequity.” Paradise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).

(a) Special Provisions in Labor Laws. – In the Labor Code since a corporate employer is an artificial

person, it must have an officer who can be presumed to be the employer, being the “person acting in the

interest of (the) employer” as provided in the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142

SCRA 269 (1986).

Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of

the labor pay laws.  Villanueva v. Adre, 172 SCRA 876 (1989).

For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and

convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990).

A corporate officer cannot be held personally liable for a corporate debt simply because he had executed the

contract for and in behalf of the corporation. It held that when a corporate officer acts in behalf of a

corporation pursuant to his authority, is “a corporate act for which only the corporation should be made

liable for any obligations arising from them.” Western Agro Industrial Corporation v. Court of Appeals, 188

SCRA 709 (1990).

Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be

held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC,189 SCRA 767

(1990); reiterated in xGudez v. NLRC, 183 SCRA 644 (1990) and xChua v. NLRC, 182 SCRA 353 (1990).

The case of Ransom v. NLRC is not in point because there the debtor corporation actually ceased operations

after the decision of the Court of Industrial Relations was promulgated against it, making it necessary to

enforce it against its former president. When the corporation is still existing and able to satisfy the judgment

in favor of the private respondent, the corporate officers cannot be held personally liable.  Lim v. NLRC, 171

SCRA 328 (1989).

The aforecited cases will not apply to the instant case, however, because the persons who were there made

personally liable for the employees’ claims were stockholders-officers of the respondent corporation.  In the

case at bar, the petitioner while admittedly the highest ranking local representative of the corporation, is

nevertheless not a stockholder and much less a member of the board of directors or an officer thereof. De

Guzman v. NLRC, 211 SCRA 723 (1992)

A mere general manager cannot be held solidarily liable with the corporation for unpaid labor claims,

especially when he is neither a stockholder or a member of the board of the corporation.

A president cannot be held solidarily liable personally with the corporation absent evidence of showing that

he acted maliciously or in bad faith. EPG Constructions Co. v. CA, 210 SCRA 230 (1992).

A judgment rendered against a person “in his capacity as President” of the corporation was enforceable

against the assets of such officer when the decision itself found that he merely used the corporation as his

alter-ego or as his business conduit. Arcilla v. Court of Appeals, 215 SCRA 120 (1992).

The President and General Manager of a corporation who entered into and signed a contract in his official

capacity cannot be made liable thereunder in his individual capacity in the absence of stipulation to that

effect due to the personality of the corporation being separate and distinct from the persons composing

it.  Rustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992), citing xBanque Generale Belge v. Walter Bull

and Co., 84 Phil. 164 (1949).

Reahs Corporation v. NLRC, 271 SCRA 247 (1997), reviewed the A.C.  Ransom doctrine of imposing

solidarily liability on the highest officers of the corporation for judgment on labor claims rendered against the

corporation pursuant to Art. 283 of the Labor Code, and reviewed its application in subsequent cases

of  Maglutac, Chua, Gudezand Pabalan. It reiterated the main doctrine of separate personality of a

corporation which should remain as the guiding rule in determining corporate liability to its employees, and

that at the very least, to justify solidary liability, “there must be an allegation or showing that the officers of

the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its

employees,” or a showing that the officers indiscriminately stopped its business to perpetuate an illegal act,

as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse legitimate

issues.

Corporate officers are not personally liable for money claims of discharged employees unless they acted with

evident malice and bad faith in terminating their employment.AHS/Philippines v. Court of Appeals, 257 SCRA

319 (1996).

The finding of solidary liability among the corporation and its officers and directors would patently be

baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed

by said officers and members of the Board of Directors that show them to have been individually guilty of

unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate

officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be

held liable personal for the judgment rendered against the corporation. National Power Corp. v. Court of

Appeals, 273 SCRA 419 (1997).

In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the

termination of employment of corporate employees done with malice or in bad faith. In this case, it is

undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They

were the one, who as high-ranking officers and directors of the corporation, signed the Board Resolution

retrenching the employees on the feigned ground of serious business losses that had no basis apart from an

unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever.

This is indicating of bad faith on the part of the corporate officers for which they can be held jointly and

severally liable with the Corporation for all the money claims of the illegally terminated employees. Uichico

v. NLRC, 273 SCRA 35 (1997).

A corporation, being a juridical entity, may act only through its directors, officers and employees and

obligations incurred by them, acting as corporate agents, are not theirs but the direct accountabilities of the

corporation they represent. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).

The manager of a corporation are not personally liable for their official acts unless it is shown that they have

exceeded their authority. There is nothing on record to show that the manager deliberately and maliciously

evaded the corporation’s financial obligation to the employee; hence, there appearing to be no evidence on

record that the manager acted maliciously or deliberately in the non-payment of benefits to the employee,

the manager cannot be held jointly and severally liable with the corporate employers. [CLV – Nothing was

shown to determine whether the corporate employer had no assets with which to pay the claims of the

employee]. Nicario v. NLRC, 295 SCRA 619 (1998).

In Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999), the Supreme Court had apparently returned to

the A.C. Ransom principle that “[a]lthough as a rule, the officers and members of a corporation are not

personally liable for acts done in the performance of their duties, this rule admits of exceptions, one of which

is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the

employee, the officers should be held liable for acting on behalf of the corporation.” In that case, the

restaurant business had to be closed down because possession of the premises had been lost through an

adverse decision in an ejectment case.  The Court held: “In the present case, the employees can no longer

claim their separation benefits and 13th month pay from the corporation because it had already ceased

operation. To require them to do so would render illusory the separation and 13tj month pay awarded to

them by the NLRC. Their only recourse is to satisfy their claim from the officers of the corporation who were,

in effect, acting in behalf of the corporation.”

The A.C. Ransom doctrine has been reiterated in Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990),

xValderrama v. NLRC, 256 SCRA 466 (1996).