CORPORATION CODE

GRANDFATHER RULE SECTION 3. Definitions. - As used in this Act:

1. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners, vs. REDMONT partnership or association wholly owned by the citizens of the Philippines; a
CONSOLIDATED MINES CORP., Respondent. corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos
Grandfather test or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund
will accrue to the benefit of Philippine nationals: Provided, That were a corporation
The main issue in this case is centered on the issue of petitioners nationality, whether and its non-Filipino stockholders own stocks in a Securities and Exchange
Filipino or foreign. In their previous petitions, they had been adamant in insisting that Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital
they were Filipino corporations, until they submitted their Manifestation and stock outstanding and entitled to vote of each of both corporations must be owned
Submission dated October 19, 2012 where they stated the alleged change of and held by citizens of the Philippines and at least sixty percent (60%) of the
corporate ownership to reflect their Filipino ownership. Thus, there is a need to members of the Board of Directors, in order that the corporation shall be considered a
determine the nationality of petitioner corporations. Philippine national. (emphasis supplied)

Basically, there are two acknowledged tests in determining the nationality of a The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion since the definition of a "Philippine National" under Sec. 3 of the FIA does not provide
No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the for it. They further claim that the grandfather rule "has been abandoned and is no
requirement of the Constitution and other laws pertaining to the controlling interests in longer the applicable rule."41 They also opined that the last portion of Sec. 3 of the
enterprises engaged in the exploitation of natural resources owned by Filipino FIA admits the application of a "corporate layering" scheme of corporations.
citizens, provides: Petitioners claim that the clear and unambiguous wordings of the statute preclude the
court from construing it and prevent the courts use of discretion in applying the law.
Shares belonging to corporations or partnerships at least 60% of the capital of which They said that the plain, literal meaning of the statute meant the application of the
is owned by Filipino citizens shall be considered as of Philippine nationality, but if the control test is obligatory.
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
Philippine nationality. Thus, if 100,000 shares are registered in the name of a circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
corporation or partnership at least 60% of the capital stock or capital, respectively, of pronouncement of petitioners that the grandfather rule has already been abandoned
which belong to Filipino citizens, all of the shares shall be recorded as owned by must be discredited for lack of basis.
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded Art. XII, Sec. 2 of the Constitution provides:
as belonging to aliens.
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora
corporations or partnerships at least 60% of the capital of which is owned by Filipino and fauna, and other natural resources are owned by the State. With the exception of
citizens shall be considered as of Philippine nationality," pertains to the control test or agricultural lands, all other natural resources shall not be alienated. The exploration,
the liberal rule. On the other hand, the second part of the DOJ Opinion which development, and utilization of natural resources shall be under the full control and
provides, "if the percentage of the Filipino ownership in the corporation or partnership supervision of the State. The State may directly undertake such activities, or it may
is less than 60%, only the number of shares corresponding to such percentage shall enter into co-production, joint venture or production-sharing agreements with Filipino
be counted as Philippine nationality," pertains to the stricter, more stringent citizens, or corporations or associations at least sixty per centum of whose capital is
grandfather rule. owned by such citizens. Such agreements may be for a period not exceeding twenty-
five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.
Prior to this recent change of events, petitioners were constant in advocating the
application of the "control test" under RA 7042, as amended by RA 8179, otherwise
known as the Foreign Investments Act (FIA), rather than using the stricter grandfather xxxx
rule. The pertinent provision under Sec. 3 of the FIA provides:
 CORPORATION CODE

The President may enter into agreements with Foreign-owned corporations involving The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the
either technical or financial assistance for large-scale exploration, development, and portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the
utilization of minerals, petroleum, and other mineral oils according to the general percentage of Filipino ownership in the corporation or partnership is less than 60%,
terms and conditions provided by law, based on real contributions to the economic only the number of shares corresponding to such percentage shall be counted as of
growth and general welfare of the country. In such agreements, the State shall Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the
promote the development and use of local scientific and technical resources. combined totals in the Investing Corporation and the Investee Corporation must be
(emphasis supplied) traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

The emphasized portion of Sec. 2 which focuses on the State entering into different Moreover, the ultimate Filipino ownership of the shares must first be traced to the
types of agreements for the exploration, development, and utilization of natural level of the Investing Corporation and added to the shares directly owned in the
resources with entities who are deemed Filipino due to 60 percent ownership of Investee Corporation x x x.
capital is pertinent to this case, since the issues are centered on the utilization of our
countrys natural resources or specifically, mining. Thus, there is a need to ascertain xxxx
the nationality of petitioners since, as the Constitution so provides, such agreements
are only allowed corporations or associations "at least 60 percent of such capital is
owned by such citizens." In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule
or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity
ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino
It is apparent that it is the intention of the framers of the Constitution to apply the and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in
grandfather rule in cases where corporate layering is present. other joint venture corporation which is either 60-40% Filipino-alien or the 59% less
Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in
Elementary in statutory construction is when there is conflict between the Constitution doubt, the Grandfather Rule will not apply. (emphasis supplied)
and a statute, the Constitution will prevail. In this instance, specifically pertaining to
the provisions under Art. XII of the Constitution on National Economy and Patrimony, After a scrutiny of the evidence extant on record, the Court finds that this case calls
Sec. 3 of the FIA will have no place of application. As decreed by the honorable for the application of the grandfather rule since, as ruled by the POA and affirmed by
framers of our Constitution, the grandfather rule prevails and must be applied. the OP, doubt prevails and persists in the corporate ownership of petitioners. Also, as
found by the CA, doubt is present in the 60-40 Filipino equity ownership of petitioners
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides: Narra, McArthur and Tesoro, since their common investor, the 100% Canadian
corporationMBMI, funded them. However, petitioners also claim that there is
The above-quoted SEC Rules provide for the manner of calculating the Filipino "doubt" only when the stockholdings of Filipinos are less than 60%. 43
interest in a corporation for purposes, among others, of determining compliance with
nationality requirements (the Investee Corporation). Such manner of computation is The assertion of petitioners that "doubt" only exists when the stockholdings are less
necessary since the shares in the Investee Corporation may be owned both by than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted
individual stockholders (Investing Individuals) and by corporations and partnerships in their petition, only made an example of an instance where "doubt" as to the
(Investing Corporation). The said rules thus provide for the determination of ownership of the corporation exists. It would be ludicrous to limit the application of the
nationality depending on the ownership of the Investee Corporation and, in certain said word only to the instances where the stockholdings of non-Filipino stockholders
instances, the Investing Corporation. are more than 40% of the total stockholdings in a corporation. The corporations
interested in circumventing our laws would clearly strive to have "60% Filipino
Under the above-quoted SEC Rules, there are two cases in determining the Ownership" at face value. It would be senseless for these applying corporations to
nationality of the Investee Corporation. The first case is the liberal rule, later coined state in their respective articles of incorporation that they have less than 60% Filipino
by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the stockholders since the applications will be denied instantly. Thus, various corporate
portion in said Paragraph 7 of the 1967 SEC Rules which states, (s)hares belonging schemes and layerings are utilized to circumvent the application of the Constitution.
to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality. Under the liberal Obviously, the instant case presents a situation which exhibits a scheme employed by
Control Test, there is no need to further trace the ownership of the 60% (or more) stockholders to circumvent the law, creating a cloud of doubt in the Courts mind. To
Filipino stockholdings of the Investing Corporation since a corporation which is at determine, therefore, the actual participation, direct or indirect, of MBMI, the
least 60% Filipino-owned is considered as Filipino. grandfather rule must be used.
 CORPORATION CODE

In ending, the "control test" is still the prevailing mode of determining whether or not a by a single or a small group of stockholders of nearly all of the capital stock of the
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 corporation is not, without more, sufficient to disregard the fiction of separate
Constitution, entitled to undertake the exploration, development and utilization of the corporate personality.23 Thus, obligations incurred by corporate officers, acting as
natural resources of the Philippines. When in the mind of the Court there is doubt, corporate agents, are not theirs but direct accountabilities of the corporation they
based on the attendant facts and circumstances of the case, in the 60-40 Filipino- represent. Solidary liability on the part of corporate officers may at times attach, but
equity ownership in the corporation, then it may apply the "grandfather rule." only under exceptional circumstances, such as when they act with malice or in bad
faith.24 Also, in appropriate cases, the veil of corporate fiction shall be disregarded
SEPARATE PERSONALITY/PIERCING THE VEIL when the separate juridical personality of a corporation is abused or used to commit
fraud and perpetrate a social injustice, or used as a vehicle to evade obligations. 25 In
2. SHRIMP SPECIALISTS, INC., vs. FUJI-TRIUMPH AGRI-INDUSTRIAL this case, no act of malice or like dishonest purpose is ascribed on petitioner Roxas-
CORPORATION del Castillo as to warrant the lifting of the corporate veil.

A corporation is vested by law with a personality separate and distinct from the people The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time
comprising it. Ownership by a single or small group of stockholders of nearly all of the ESHRI defaulted in paying BF's monthly progress bill, was still a director, for, before
capital stock of the corporation is not by itself a sufficient ground to disregard the she could be held personally liable as corporate director, it must be shown that she
separate corporate personality. Thus, obligations incurred by corporate officers, acted in a manner and under the circumstances contemplated in Sec. 31 of the
acting as corporate agents, are direct accountabilities of the corporation they Corporation Code, which reads:
represent.43 In Uy v. Villanueva,44 the Court explained:
Section 31. Directors or trustees who willfully or knowingly vote for or
The general rule is that obligations incurred by the corporation, acting through its assent to patently unlawful acts of the corporation or acquire any
directors, officers, and employees, are its sole liabilities. However, solidary liability pecuniary interest in conflict with their duty as such directors or trustees
may be incurred, but only under the following exceptional circumstances: shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
(Emphasis ours.)
1. When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or
with gross negligence in directing the corporate affairs; (c) are guilty of conflict of 4. PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) vs NLRC
interest to the prejudice of the corporation, its stockholders or members, and other
persons; Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI
employees is whether they can attach the properties (specifically the Pantranco
When a director or officer has consented to the issuance of watered stocks or who, properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims
having knowledge thereof, did not forthwith file with the corporate secretary his written against PNEI.
objection thereto;
We answer in the negative.
When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation; or The general rule is that a corporation has a personality separate and distinct from
those of its stockholders and other corporations to which it may be connected. 39 This
When a director, trustee or officer is made, by specific provision of law, personally is a fiction created by law for convenience and to prevent injustice. 40 Obviously, PNB,
liable for his corporate action.45 PNB-Madecor, Mega Prime, and PNEI are corporations with their own personalities.
The "separate personalities" of the first three corporations had been recognized by
this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty
3. EDSA SHANGRI-LA HOTEL AND RESORT, INC vs. BF CORPORATION and Holdings Corporation v. PNB41 where we stated that PNB was only a stockholder
of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor
The Court notes that the appellate court, by its affirmatory ruling, effectively was the owner of the Pantranco properties. Moreover, these corporations are
recognized the applicability of the doctrine on piercing the veil of the separate registered as separate entities and, absent any valid reason, we maintain their
corporate identity. Under the circumstances of this case, we cannot allow such separate identities and we cannot treat them as one.
application. A corporation, upon coming to existence, is invested by law with a
personality separate and distinct from those of the persons composing it. Ownership
 CORPORATION CODE

Neither can we merge the personality of PNEI with PNB simply because the latter convenience as when the corporate fiction is used as a vehicle for the evasion of an
acquired the former. Settled is the rule that where one corporation sells or otherwise existing obligation; 2) fraud cases or when the corporate entity is used to justify a
transfers all its assets to another corporation for value, the latter is not, by that fact wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is
alone, liable for the debts and liabilities of the transferor. 42 merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
Lastly, while we recognize that there are peculiar circumstances or valid grounds that make it merely an instrumentality, agency, conduit or adjunct of another
may exist to warrant the piercing of the corporate veil, 43 none applies in the present corporation.54 In the absence of malice, bad faith, or a specific provision of law
case whether between PNB and PNEI; or PNB and PNB-Madecor. making a corporate officer liable, such corporate officer cannot be made personally
liable for corporate liabilities.55
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons Assuming, for the sake of argument, that PNB may be held liable for the debts of
undertaking business as a group, disregarding the separate juridical personality of the PNEI, petitioners still cannot proceed against the Pantranco properties, the same
corporation unifying the group.44 Another formulation of this doctrine is that when two being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a
business enterprises are owned, conducted and controlled by the same parties, both subsidiary of PNB. The general rule remains that PNB-Madecor has a personality
law and equity will, when necessary to protect the rights of third parties, disregard the separate and distinct from PNB. The mere fact that a corporation owns all of the
legal fiction that two corporations are distinct entities and treat them as identical or as stocks of another corporation, taken alone, is not sufficient to justify their being
one and the same.45 treated as one entity. If used to perform legitimate functions, a subsidiarys separate
existence shall be respected, and the liability of the parent corporation as well as the
subsidiary will be confined to those arising in their respective businesses.57
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances which are useful in the
disregard the corporate veil when it is misused or when necessary in the interest of determination of whether a subsidiary is but a mere instrumentality of the parent-
justice. After all, the concept of corporate entity was not meant to promote unfair corporation, to wit:
objectives.
1. The parent corporation owns all or most of the capital stock of the
For one, in the said cases, the persons made liable after the companys cessation of subsidiary;
operations were the officers and agents of the corporation. The rationale is that, since
the corporation is an artificial person, it must have an officer who can be presumed to 2. The parent and subsidiary corporations have common directors or
be the employer, being the person acting in the interest of the employer. The officers;
corporation, only in the technical sense, is the employer.49 In the instant case, what is
being made liable is another corporation (PNB) which acquired the debtor corporation 3. The parent corporation finances the subsidiary;
(PNEI).
4. The parent corporation subscribes to all the capital stock of the subsidiary
Moreover, in the recent cases Carag v. National Labor Relations Commission50 and or otherwise causes its incorporation;
McLeod v. National Labor Relations Commission,51 the Court explained the doctrine
laid down in AC Ransom relative to the personal liability of the officers and agents of
the employer for the debts of the latter. In AC Ransom, the Court imputed liability to 5. The subsidiary has grossly inadequate capital;
the officers of the corporation on the strength of the definition of an employer in Article
212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer 6. The parent corporation pays the salaries and other expenses or losses of
includes any person acting in the interest of an employer, directly or indirectly, but the subsidiary;
does not include any labor organization or any of its officers or agents except when
acting as employer. It was clarified in Carag and McLeod that Article 212(e) of the 7. The subsidiary has substantially no business except with the parent
Labor Code, by itself, does not make a corporate officer personally liable for the debts corporation or no assets except those conveyed to or by the parent
of the corporation. It added that the governing law on personal liability. corporation;

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the 8. In the papers of the parent corporation or in the statements of its officers,
corporate veil applies only in three (3) basic areas, namely: 1) defeat of public the subsidiary is described as a department or division of the parent
 CORPORATION CODE

corporation, or its business or financial responsibility is referred to as the or when there is a conflict of interest resulting in damages to the corporation, its
parent corporations own; stockholders, or other persons; (2) he consents to the issuance of watered down
stocks or who, having knowledge thereof, does not forthwith file with the corporate
9. The parent corporation uses the property of the subsidiary as its own; secretary his written objection thereto; (3) he agrees to hold himself personally and
solidarily liable with the corporation; or (4) he is made by a specific provision of law
personally answerable for his corporate action.
10. The directors or executives of the subsidiary do not act independently in
the interest of the subsidiary, but take their orders from the parent
corporation; 7. ERIC GODFREY STANLEY LIVESEY, vs. BINSWANGER PHILIPPINES, INC.
ET. AL
11. The formal legal requirements of the subsidiary are not observed.
It has long been settled that the law vests a corporation with a personality distinct and
separate from its stockholders or members. In the same vein, a corporation, by legal
5. MANUEL C. ESPIRITU, ET. AL vs PETRON CORP., ET. AL fiction and convenience, is an entity shielded by a protective mantle and imbued by
law with a character alien to the persons comprising it. 43 Nonetheless, the shield is
The only point left is the question of the liability of the stockholders and members of not at all times impenetrable and cannot be extended to a point beyond its reason and
the board of directors of Bicol Gas with respect to the charge of unlawfully filling up a policy. Circumstances might deny a claim for corporate personality, under the
steel cylinder or tank that belonged to Petron. The Court of Appeals ruled that they "doctrine of piercing the veil of corporate fiction."
should be charged along with the Bicol Gas employees who were pointed to as
directly involved in overt acts constituting the offense. Piercing the veil of corporate fiction is an equitable doctrine developed to address
situations where the separate corporate personality of a corporation is abused or
Bicol Gas is a corporation. As such, it is an entity separate and distinct from the used for wrongful purposes.44 Under the doctrine, the corporate existence may be
persons of its officers, directors, and stockholders. It has been held, however, that disregarded where the entity is formed or used for non-legitimate purposes, such as
corporate officers or employees, through whose act, default or omission the to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud
corporation commits a crime, may themselves be individually held answerable for the or to carry out similar or inequitable considerations, other unjustifiable aims or
crime.15 intentions,45 in which case, the fiction will be disregarded and the individuals
composing it and the two corporations will be treated as identical. 46
The "owners" of a corporate organization are its stockholders and they are to be
distinguished from its directors and officers. The petitioners here, with the exception 8. GERARDO LANUZA, JR. ET AL. vs. BF CORPORATION, ET AL
of Audie Llona, are being charged in their capacities as stockholders of Bicol Gas. But
the Court of Appeals forgets that in a corporation, the management of its business is A corporation is an artificial entity created by fiction of law. 76 This means that while it
generally vested in its board of directors, not its stockholders. 17 Stockholders are is not a person, naturally, the law gives it a distinct personality and treats it as such. A
basically investors in a corporation. They do not have a hand in running the day-to- corporation, in the legal sense, is an individual with a personality that is distinct and
day business operations of the corporation unless they are at the same time directors separate from other persons including its stockholders, officers, directors,
or officers of the corporation. Before a stockholder may be held criminally liable for representatives,77 and other juridical entities. The law vests in corporations
acts committed by the corporation, therefore, it must be shown that he had knowledge rights,powers, and attributes as if they were natural persons with physical existence
of the criminal act committed in the name of the corporation and that he took part in and capabilities to act on their own.78 For instance, they have the power to sue and
the same or gave his consent to its commission, whether by action or inaction. enter into transactions or contracts. Section 36 of the Corporation Code enumerates
some of a corporations powers, thus:
6. QUEENSLAND TOKYO COMMODITIES INC., ET. AL vs THOMAS GEORGE
Section 36. Corporate powers and capacity. Every corporation incorporated under
Doctrine dictates that a corporation is invested by law with a personality separate and this Code has the power and capacity:
distinct from those of the persons composing it, such that, save for certain exceptions,
corporate officers who entered into contracts in behalf of the corporation cannot be 1. To sue and be sued in its corporate name;
held personally liable for the liabilities of the latter. Personal liability of a corporate
director, trustee, or officer, along (although not necessarily) with the corporation, may
validly attach, as a rule, only when (1) he assents to a patently unlawful act of the 2. Of succession by its corporate name for the period of time stated in the
corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, articles of incorporation and the certificate ofincorporation;
 CORPORATION CODE

3. To adopt and use a corporate seal; Hence, a corporations representatives are generally not bound by the terms of the
contract executed by the corporation. They are not personally liable for obligations
4. To amend its articles of incorporation in accordance with the provisions of and liabilities incurred on or in behalf of the corporation.
this Code;
As a general rule, therefore, a corporations representative who did not personally
5. To adopt by-laws, not contrary to law, morals, or public policy, and to bind himself or herself to an arbitration agreement cannot be forced to participate in
amend or repeal the same in accordance with this Code; arbitration proceedings made pursuant to an agreement entered into by the
corporation. He or she is generally not considered a party to that agreement.
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to However, there are instances when the distinction between personalities of directors,
admit members to the corporation if it be a non-stock corporation; officers,and representatives, and of the corporation, are disregarded. We call this
piercing the veil of corporate fiction.
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including Piercing the corporate veil is warranted when "[the separate personality of a
securities and bonds of other corporations, as the transaction of the lawful corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle
business of the corporation may reasonably and necessarily require, subject for the evasion of an existing obligation, the circumvention of statutes, or to confuse
to the limitations prescribed by law and the Constitution; legitimate issues."85 It is also warranted in alter ego cases "where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
8. To enter into merger or consolidation with other corporations as provided make it merely an instrumentality, agency, conduit or adjunct of another
in this Code; corporation."86

9. To make reasonable donations, including those for the public welfare or When corporate veil is pierced, the corporation and persons who are normally treated
for hospital, charitable, cultural, scientific, civic, or similar purposes: as distinct from the corporation are treated as one person, such that when the
Provided, That no corporation, domestic or foreign, shall give donations in corporation is adjudged liable, these persons, too, become liable as if they were the
aid of any political party or candidate or for purposes of partisan political corporation.
activity;
Among the persons who may be treatedas the corporation itself under certain
10. To establish pension, retirement, and other plans for the benefit of its circumstances are its directors and officers. Section 31 of the Corporation Code
directors, trustees, officers and employees; and provides the instances when directors, trustees, or officers may become liable for
corporate acts:
11. To exercise such other powers asmay be essential or necessary to carry
out its purpose or purposes as stated in its articles of incorporation. (13a) Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who
Because a corporations existence is only by fiction of law, it can only exercise its are guilty of gross negligence or bad faith in directing the affairs of the corporation or
rights and powers through itsdirectors, officers, or agents, who are all natural persons. acquire any personal or pecuniary interest in conflict with their duty as such directors
A corporation cannot sue or enter into contracts without them. or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
A consequence of a corporations separate personality is that consent by a
corporation through its representatives is not consent of the representative, When a director, trustee or officer attempts to acquire or acquires, in violation of his
personally. Its obligations, incurred through official acts of its representatives, are its duty, any interest adverse to the corporation in respect of any matter which has been
own. A stockholder, director, or representative does not become a party to a contract reposed inhim in confidence, as to which equity imposes a disability upon him to deal
just because a corporation executed a contract through that stockholder, director or in his own behalf, he shall be liable as a trustee for the corporation and must account
representative. for the profits which otherwise would have accrued to the corporation. (n)
 CORPORATION CODE

Based on the above provision, a director, trustee, or officer of a corporation may be omissions by the corporation that violated their rights are also the directors acts or
made solidarily liable with it for all damages suffered by the corporation, its omissions.90 They are alleging that contracts executed by the corporation are
stockholders or members, and other persons in any of the following cases: contracts executed by the directors. Complainants effectively pray that the corporate
veilbe pierced because the cause of action between the corporation and the directors
a) The director or trustee willfully and knowingly voted for or assented to a is the same.
patently unlawful corporate act;
9. IRENE MARTEL FRANCISCO, vs. NUMERIANO MALLEN, JR.
b) The director or trustee was guilty of gross negligence or bad faith in
directing corporate affairs; and In Santos v. National Labor Relations Commission,9 the Court held that "A corporation
is a juridical entity with legal personality separate and distinct from those acting for
c) The director or trustee acquired personal or pecuniary interest in conflict and in its behalf and, in general, from the people comprising it. The rule is that
with his or her duties as director or trustee. obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities."10
Solidary liability with the corporation will also attach in the following instances:
To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) complainant must allege in the complaint that the director or
a) "When a director or officer has consented to the issuance of watered officer assented to patently unlawful acts of the corporation, or that the officer
stocks or who, having knowledge thereof, did not forthwith file with the was guilty of gross negligence or bad faith;11 and (2) complainant must clearly
corporate secretary his written objection thereto";87 and convincingly prove such unlawful acts, negligence or bad faith. 12

b) "When a director, trustee or officer has contractually agreed or stipulated xxxx

to hold himself personally and solidarily liable with the corporation";88 and
To hold a director personally liable for debts of the corporation, and thus pierce
c) "When a director, trustee or officer is made, by specific provision of law, the veil of corporate fiction, the bad faith or wrongdoing of the director must be
personally liable for his corporate action."89 established clearly and convincingly. Bad faith is never presumed. Bad faith does
not connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad
When there are allegations of bad faith or malice against corporate directors or faith means breach of a known duty through some ill motive or interest. Bad faith
representatives, it becomes the duty of courts or tribunals to determine if these partakes of the nature of fraud.
persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction should be In McLeod v. NLRC,15 the Court did not hold a director, an officer, and other
pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts or corporations personally liable for corporate obligations of the employer because the
tribunals must first determine whether circumstances exist towarrant the courts or second requisite was lacking. The Court held:
tribunals to disregard the distinction between the corporation and the persons
representing it. The determination of these circumstances must be made by one
tribunal or court in a proceeding participated in by all parties involved, including A corporation is an artificial being invested by law with a personality separate and
current representatives of the corporation, and those persons whose personalities are distinct from that of its stockholders and from that of other corporations to which it
impliedly the sameas the corporation. This is because when the court or tribunal finds may be connected.
that circumstances exist warranting the piercing of the corporate veil, the corporate
representatives are treated as the corporation itself and should be held liable for While a corporation may exist for any lawful purpose, the law will regard it as an
corporate acts. The corporations distinct personality is disregarded, and the association of persons or, in case of two corporations, merge them into one, when its
corporation is seen as a mere aggregation of persons undertaking a business under corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
the collective name of the corporation. piercing the veil of corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
Hence, when the directors, as in this case, are impleaded in a case against a crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation, alleging malice orbad faith on their part in directing the affairs of the corporation is the mere alter ego or business conduit of a person, or where the
corporation, complainants are effectively alleging that the directors and the corporation is so organized and controlled and its affairs are so conducted as to make
corporation are not acting as separate entities. They are alleging that the acts or it merely an instrumentality, agency, conduit or adjunct of another corporation.
 CORPORATION CODE

To disregard the separate juridical personality of a corporation, the wrongdoing connected. But, this separate and distinct personality of a corporation is merely a
must be established clearly and convincingly. It cannot be fiction created by law for convenience and to promote justice. So, when the notion of
presumed.16 (Emphasis supplied) separate juridical personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat the labor laws, this
In Lowe, Inc. v. Court of Appeals,17 the Court did not hold the officers personally liable separate personality of the corporation may be disregarded or the veil of corporate
for corporate obligations because the second requisite was lacking, thus: fiction pierced. This is true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation." 61
It is settled that in the absence of malice, bad faith, or specific provision of law, a
director or an officer of a corporation cannot be made personally liable for corporate "Where one corporation is so organized and controlled and its affairs are conducted
liabilities. so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
xxxx finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must
10. PACIFIC REHOUSE CORPORATION vs. COURT OF APPEALS be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
The Court already ruled in Kukan International Corporation v. Reyes49 that proximately cause the injury or unjust loss for which the complaint is made."62
compliance with the recognized modes of acquisition of jurisdiction cannot be
dispensed with even in piercing the veil of corporate fiction, to wit: The Court has laid down a three-pronged control test to establish when the alter ego
doctrine should be operative:
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given (1) Control, not mere majority or complete stock control, but complete
transaction, is basically applied only to determine established liability; it is not domination, not only of finances but of policy and business practice in
available to confer on the court a jurisdiction it has not acquired, in the first place, over respect to the transaction attacked so that the corporate entity as to this
a party not impleaded in a case. Elsewise put, a corporation not impleaded in a transaction had at the time no separate mind, will or existence of its own;
suit cannot be subject to the courts process of piercing the veil of its corporate
fiction. In that situation, the court has not acquired jurisdiction over the corporation (2) Such control must have been used by the defendant to commit fraud or
and, hence, any proceedings taken against that corporation and its property would wrong, to perpetuate the violation of a statutory or other positive legal duty,
infringe on its right to due process. Aguedo Agbayani, a recognized authority on or dishonest and unjust act in contravention of plaintiffs legal right; and
Commercial Law, stated as much:
(3) The aforesaid control and breach of duty must [have] proximately caused
"23. Piercing the veil of corporate entity applies to determination of liability not of the injury or unjust loss complained of.63
jurisdiction. x x x
The absence of any one of these elements prevents piercing the corporate veil in
This is so because the doctrine of piercing the veil of corporate fiction comes applying the instrumentality or alter ego doctrine, the courts are concerned with
to play only during the trial of the case after the court has already acquired reality and not form, with how the corporation operated and the individual defendants
jurisdiction over the corporation. Hence, before this doctrine can be applied, based relationship to that operation.64 Hence, all three elements should concur for the alter
on the evidence presented, it is imperative that the court must first have jurisdiction ego doctrine to be applicable.
over the corporation. x x x"50 (Citations omitted)
11. HEIRS OF FE TAN UY , ET AL vs. INTERNATIONAL EXCHANGE BANK, ET
"The question of whether one corporation is merely an alter ego of another is purely AL
one of fact. So is the question of whether a corporation is a paper company, a sham
or subterfuge or whether petitioner adduced the requisite quantum of evidence
warranting the piercing of the veil of respondents corporate entity." Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in its
behalf and, in general, from the people comprising it. Following this principle,
"It is a fundamental principle of corporation law that a corporation is an entity separate obligations incurred by the corporation, acting through its directors, officers and
and distinct from its stockholders and from other corporations to which it may be
 CORPORATION CODE

employees, are its sole liabilities. A director, officer or employee of a corporation is While the conditions for the disregard of the juridical entity may vary, the following are
generally not held personally liable for obligations incurred by the some probative factors of identity that will justify the application of the doctrine of
corporation.24 Nevertheless, this legal fiction may be disregarded if it is used as a piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:40
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate (1) Stock ownership by one or common ownership of both corporations;
issues.25 This is consistent with the provisions of the Corporation Code of the
Philippines, which states:
(2) Identity of directors and officers;
Sec. 31. Liability of directors, trustees or officers. Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who (3) The manner of keeping corporate books and records, and
are guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors (4) Methods of conducting the business.41
or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons. 12. PNB vs HYDRO RESOURCES CONTRACTORS CORP

Solidary liability will then attach to the directors, officers or employees of the A corporation is an artificial entity created by operation of law. It possesses the right
corporation in certain circumstances, such as: of succession and such powers, attributes, and properties expressly authorized by
law or incident to its existence.37 It has a personality separate and distinct from that of
1. When directors and trustees or, in appropriate cases, the officers of a its stockholders and from that of other corporations to which it may be
corporation: (a) vote for or assent to patently unlawful acts of the connected.38 As a consequence of its status as a distinct legal entity and as a result
corporation; (b) act in bad faith or with gross negligence in directing the of a conscious policy decision to promote capital formation, 39 a corporation incurs its
corporate affairs; and (c) are guilty of conflict of interest to the prejudice of own liabilities and is legally responsible for payment of its obligations. 40 In other
the corporation, its stockholders or members, and other persons; words, by virtue of the separate juridical personality of a corporation, the corporate
debt or credit is not the debt or credit of the stockholder. 41 This protection from liability
2. When a director or officer has consented to the issuance of watered for shareholders is the principle of limited liability.42
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto; Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
3. When a director, trustee or officer has contractually agreed or stipulated to another corporation. For reasons of public policy and in the interest of justice, the
hold himself personally and solidarily liable with the corporation; or corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.43
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action.26 However, the rule is that a court should be careful in assessing the milieu where the
doctrine of the corporate veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application. 44 Thus, cutting through the
Before a director or officer of a corporation can be held personally liable for corporate corporate cover requires an approach characterized by due care and caution:
obligations, however, the following requisites must concur: (1) the complainant must
allege in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) Hence, any application of the doctrine of piercing the corporate veil should be done
the complainant must clearly and convincingly prove such unlawful acts, negligence with caution. A court should be mindful of the milieu where it is to be applied. It must
or bad faith.27 be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed. x x
Under a variation of the doctrine of piercing the veil of corporate fiction, when two x.45 (Emphases supplied; citations omitted.)
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or Sarona v. National Labor Relations Commission 46 has defined the scope of
one and the same.39 application of the doctrine of piercing the corporate veil:
 CORPORATION CODE

The doctrine of piercing the corporate veil applies only in three (3) basic areas, unless the corporate veil is pierced, it will have been treated unjustly by the
namely: 1) defeat of public convenience as when the corporate fiction is used as a defendants exercise of control and improper use of the corporate form and, thereby,
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate suffer damages.60
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter ego or business To summarize, piercing the corporate veil based on the alter ego theory requires the
conduit of a person, or where the corporation is so organized and controlled and its concurrence of three elements: control of the corporation by the stockholder or parent
affairs are so conducted as to make it merely an instrumentality, agency, conduit or corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or
adjunct of another corporation. (Citation omitted.) damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing the corporate veil. 61
In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality theory, In applying the alter ego doctrine, the courts are concerned with reality and not form,
namely: with how the corporation operated and the individual defendants relationship to that
operation.62 With respect to the control element, it refers not to paper or formal control
(1) Control, not mere majority or complete stock control, but complete by majority or even complete stock control but actual control which amounts to "such
domination, not only of finances but of policy and business practice in domination of finances, policies and practices that the controlled corporation has, so
respect to the transaction attacked so that the corporate entity as to this to speak, no separate mind, will or existence of its own, and is but a conduit for its
transaction had at the time no separate mind, will or existence of its own; principal."63 In addition, the control must be shown to have been exercised at the time
the acts complained of took place.64
(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, 13. KUKAN INTL CORP vs HON. AMOR REYES ET. AL
or dishonest and unjust act in contravention of plaintiffs legal right; and
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
(3) The aforesaid control and breach of duty must have proximately caused Commission,32 the Court revisited the subject principle of piercing the veil of corporate
the injury or unjust loss complained of.50 (Emphases omitted.) fiction and wrote:

The first prong is the "instrumentality" or "control" test. This test requires that the Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
subsidiary be completely under the control and domination of the parent. 51 It corporation as a mere collection of individuals or an aggregation of persons
examines the parent corporations relationship with the subsidiary. 52 It inquires undertaking business as a group, disregarding the separate juridical personality of the
whether a subsidiary corporation is so organized and controlled and its affairs are so corporation unifying the group. Another formulation of this doctrine is that when two
conducted as to make it a mere instrumentality or agent of the parent corporation business enterprises are owned, conducted and controlled by the same parties, both
such that its separate existence as a distinct corporate entity will be ignored. 53 It law and equity will, when necessary to protect the rights of third parties, disregard the
seeks to establish whether the subsidiary corporation has no autonomy and the legal fiction that two corporations are distinct entities and treat them as identical or as
parent corporation, though acting through the subsidiary in form and appearance, "is one and the same.
operating the business directly for itself."54
Whether the separate personality of the corporation should be pierced hinges
The second prong is the "fraud" test. This test requires that the parent corporations on obtaining facts appropriately pleaded or proved. However, any piercing of the
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful.55 It corporate veil has to be done with caution, albeit the Court will not hesitate to
examines the relationship of the plaintiff to the corporation. 56 It recognizes that disregard the corporate veil when it is misused or when necessary in the interest of
piercing is appropriate only if the parent corporation uses the subsidiary in a way that justice. x x x (Emphasis supplied.)
harms the plaintiff creditor.57 As such, it requires a showing of "an element of injustice
or fundamental unfairness."58 The same principle was the subject and discussed in Rivera v. United Laboratories,
Inc.:
The third prong is the "harm" test. This test requires the plaintiff to show that the
defendants control, exerted in a fraudulent, illegal or otherwise unfair manner toward While a corporation may exist for any lawful purpose, the law will regard it as an
it, caused the harm suffered.59 A causal connection between the fraudulent conduct association of persons or, in case of two corporations, merge them into one, when its
committed through the instrumentality of the subsidiary and the injury suffered or the corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
damage incurred by the plaintiff should be established. The plaintiff must prove that,
 CORPORATION CODE

piercing the veil of corporate fiction. The doctrine applies only when such corporate Equally well-settled is the principle that the corporate mask may be removed or the
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend corporate veil pierced when the corporation is just an alter ego of a person or of
crime, or when it is made as a shield to confuse the legitimate issues, or where a another corporation. For reasons of public policy and in the interest of justice, the
corporation is the mere alter ego or business conduit of a person, or where the corporate veil will justifiably be impaled only when it becomes a shield for fraud,
corporation is so organized and controlled and its affairs are so conducted as to make illegality or inequity committed against third persons.
it merely an instrumentality, agency, conduit or adjunct of another corporation.
Hence, any application of the doctrine of piercing the corporate veil should be done
To disregard the separate juridical personality of a corporation, the wrongdoing must with caution. A court should be mindful of the milieu where it is to be applied. It must
be established clearly and convincingly. It cannot be presumed. 33 (Emphasis be certain that the corporate fiction was misused to such an extent that injustice,
supplied.) fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two Otherwise, an injustice that was never unintended may result from an erroneous
related corporations as one and the same juridical person with respect to a given application.
transaction, is basically applied only to determine established liability;34 it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
a party not impleaded in a case. Elsewise put, a corporation not impleaded in a suit and convincing proof that the separate and distinct personality of the corporation was
cannot be subject to the courts process of piercing the veil of its corporate fiction. In purposefully employed to evade a legitimate and binding commitment and perpetuate
that situation, the court has not acquired jurisdiction over the corporation and, hence, a fraud or like wrongdoings. To be sure, the Court has, on numerous
any proceedings taken against that corporation and its property would infringe on its occasions,38applied the principle where a corporation is dissolved and its assets are
right to due process. Aguedo Agbayani, a recognized authority on Commercial Law, transferred to another to avoid a financial liability of the first corporation with the result
stated as much: that the second corporation should be considered a continuation and successor of the
first entity.
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over 1. A first corporation is dissolved;
the corporation. Hence, before this doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have jurisdiction over the 2. The assets of the first corporation is transferred to a second corporation to
corporation.35 x x x (Emphasis supplied.) avoid a financial liability of the first corporation; and

The implication of the above comment is twofold: (1) the court must first acquire 3. Both corporations are owned and controlled by the same persons such
jurisdiction over the corporation or corporations involved before its or their separate that the second corporation should be considered as a continuation and
personalities are disregarded; and (2) the doctrine of piercing the veil of corporate successor of the first corporation.
entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service. 14. TIMOTEO SARONA vs NLRC, ROYALE SECURITY AGENCY, ET AL

As a general rule, courts should be wary of lifting the corporate veil between Royale is a continuation or successor of Sceptre.
corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company37 explains why: A corporation is an artificial being created by operation of law. It possesses the right
of succession and such powers, attributes, and properties expressly authorized by
A corporation is an artificial being created by operation of law. x x x It has a law or incident to its existence. It has a personality separate and distinct from the
personality separate and distinct from the persons composing it, as well as from any persons composing it, as well as from any other legal entity to which it may be
other legal entity to which it may be related. This is basic. related. This is basic.45
 CORPORATION CODE

Equally well-settled is the principle that the corporate mask may be removed or the officers remained as such in Miramar does not by itself warrant a conclusion that the
corporate veil pierced when the corporation is just an alter ego of a person or of two companies are one and the same. As this Court held in Sesbreo v. Court of
another corporation. For reasons of public policy and in the interest of justice, the Appeals, the mere showing that the corporations had a common director sitting in all
corporate veil will justifiably be impaled only when it becomes a shield for fraud, the boards without more does not authorize disregarding their separate juridical
illegality or inequity committed against third persons.46 personalities.37

Hence, any application of the doctrine of piercing the corporate veil should be done Neither can the veil of corporate fiction between the two companies be pierced by the
with caution. A court should be mindful of the milieu where it is to be applied. It must rest of petitioners submissions, namely, the alleged take-over by Miramar of Mar
be certain that the corporate fiction was misused to such an extent that injustice, Fishings operations and the evident similarity of their businesses. At this point, it
fraud, or crime was committed against another, in disregard of rights. The wrongdoing bears emphasizing that since piercing the veil of corporate fiction is frowned upon,
must be clearly and convincingly established; it cannot be presumed. Otherwise, an those who seek to pierce the veil must clearly establish that the separate and distinct
injustice that was never unintended may result from an erroneous application.47 personalities of the corporations are set up to justify a wrong, protect a fraud, or
perpetrate a deception.38 This, unfortunately, petitioners have failed to do. In Indophil
Whether the separate personality of the corporation should be pierced hinges on Textile Mill Workers Union vs. Calica, we ruled thus:39
obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic,
disregard the corporate veil when it is misused or when necessary in the interest of alleging that the creation of the corporation is a devi[c]e to evade the application of
justice. After all, the concept of corporate entity was not meant to promote unfair the CBA between petitioner Union and private respondent company. While we do not
objectives.48 discount the possibility of the similarities of the businesses of private respondent and
Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting
The doctrine of piercing the corporate veil applies only in three (3) basic areas, the relief sought. The fact that the businesses of private respondent and Acrylic are
namely: 1) defeat of public convenience as when the corporate fiction is used as a related, that some of the employees of the private respondent are the same persons
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate manning and providing for auxiliary services to the units of Acrylic, and that the
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego physical plants, offices and facilities are situated in the same compound, it is our
cases, where a corporation is merely a farce since it is a mere alter ego or business considered opinion that these facts are not sufficient to justify the piercing of the
conduit of a person, or where the corporation is so organized and controlled and its corporate veil of Acrylic. (Emphasis supplied.)
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.49 16. CHINA BANKING CORPORATION vs DYNE SEM ELECTRONICS CORP

As ruled in Prince Transport, Inc., et al. v. Garcia, et al.,55 it is the act of hiding behind The general rule is that a corporation has a personality separate and distinct from that
the separate and distinct personalities of juridical entities to perpetuate fraud, commit of its stockholders and other corporations to which it may be connected. 14 This is a
illegal acts, evade ones obligations that the equitable piercing doctrine was fiction created by law for convenience and to prevent injustice.15
formulated to address and prevent:
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may
A settled formulation of the doctrine of piercing the corporate veil is that when two exist to warrant the disregard of its independent being and the piercing of the
business enterprises are owned, conducted and controlled by the same parties, both corporate veil.16 In Martinez v. Court of Appeals,17 we held:
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that these two entities are distinct and treat them as identical or as one The veil of separate corporate personality may be lifted when such
and the same. personality is used to defeat public convenience, justify wrong, protect fraud
or defend crime; or used as a shield to confuse the legitimate issues; or
15. VIVIAN T. RAMIREZ, ET AL vs MAR FISHING CO, INC when the corporation is merely an adjunct, a business conduit or an alter
ego of another corporation or where the corporation is so organized and
At the fore, the question of whether one corporation is merely an alter ego of another controlled and its affairs are so conducted as to make it merely an
is purely one of fact generally beyond the jurisdiction of this Court.35 In any case, instrumentality, agency, conduit or adjunct of another corporation; or when
given only these bare reiterations, this Court sustains the ruling of the LA as affirmed the corporation is used as a cloak or cover for fraud or illegality, or to work
by the NLRC that Miramar and Mar Fishing are separate and distinct entities, based injustice, or where necessary to achieve equity or for the protection of the
on the marked differences in their stock ownership. 36 Also, the fact that Mar Fishings creditors. In such cases, the corporation will be considered as a mere
 CORPORATION CODE

association of persons. The liability will directly attach to the stockholders or

to the other corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must

be proven clearly and convincingly.18

RESIDENCE OF A CORPORATION

17. HYATT ELEVATORS INC. vs GOLDSTAR ELEVATORS PHILS.

The resolution of this case rests upon a proper understanding of Section 2 of Rule 4
of the 1997 Revised Rules of Court:

"Sec. 2. Venue of personal actions. All other actions may be commenced and tried
where the plaintiff or any of the principal plaintiff resides, or where the defendant or
any of the principal defendant resides, or in the case of a non-resident defendant
where he may be found, at the election of the plaintiff."

Since both parties to this case are corporations, there is a need to clarify the meaning
of "residence." The law recognizes two types of persons: (1) natural and (2) juridical.
Corporations come under the latter in accordance with Article 44(3) of the Civil Code. 8

Residence is the permanent home -- the place to which, whenever absent for
business or pleasure, one intends to return.9 Residence is vital when dealing with
venue.10 A corporation, however, has no residence in the same sense in which this
term is applied to a natural person. This is precisely the reason why the Court
in Young Auto Supply Company v. Court of Appeals 11 ruled that "for practical
purposes, a corporation is in a metaphysical sense a resident of the place where its
principal office is located as stated in the articles of incorporation."12 Even before this
ruling, it has already been established that the residence of a corporation is the place
where its principal office is established.13

This Court has also definitively ruled that for purposes of venue, the term "residence"
is synonymous with "domicile."14 Correspondingly, the Civil Code provides:

"Art. 51. When the law creating or recognizing them, or any other provision does not
fix the domicile of juridical persons, the same shall be understood to be the place
where their legal representation is established or where they exercise their principal
functions."15

It now becomes apparent that the residence or domicile of a juridical person is fixed
by "the law creating or recognizing" it. Under Section 14(3) of the Corporation Code,
the place where the principal office of the corporation is to be located is one of the
required contents of the articles of incorporation, which shall be filed with the
Securities and Exchange Commission (SEC).
 CORPORATION CODE

CLAIM FOR MORAL DAMAGES recoverable in criminal cases as part of the civil liability when the crime was
committed with one or more aggravating circumstances; in quasi-contracts, if the
18. ABS-CBN BROADCASTING CORPORATION, vs. CA defendant acted with gross negligence; and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
Under Corporation Code,46 unless otherwise provided by said Code, corporate
powers, such as the power; to enter into contracts; are exercised by the Board of It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
Directors. However, the Board may delegate such powers to either an executive quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary
committee or officials or contracted managers. The delegation, except for the damages can only be based on Articles 19, 20, and 21 of the Civil Code.
executive committee, must be for specific purposes, 47 Delegation to officers makes
the latter agents of the corporation; accordingly, the general rules of agency as to the The elements of abuse of right under Article 19 are the following: (1) the existence of
bindings effects of their acts would apply. For such officers to be deemed fully a legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of
clothed by the corporation to exercise a power of the Board, the latter must specially prejudicing or injuring another. Article 20 speaks of the general sanction for all other
authorize them to do so. provisions of law which do not especially provide for their own sanction; while Article
21 deals with acts contra bonus mores, and has the following elements; (1) there is
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil an act which is legal, (2) but which is contrary to morals, good custom, public order, or
Code. Article 2217 thereof defines what are included in moral damages, while Article public policy, and (3) and it is done with intent to injure.
2219 enumerates the cases where they may be recovered, Article 2220 provides that
moral damages may be recovered in breaches of contract where the defendant acted Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad
fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only faith implies a conscious and intentional design to do a wrongful act for a dishonest
under item (10) of Article 2219, thereof which reads: purpose or moral obliquity. Such must be substantiated by evidence.

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered. and not to impose a penalty on the wrongdoer. The award is
not meant to enrich the complainant at the expense of the defendant, but to enable
the injured party to obtain means, diversion, or amusements that will serve to obviate
then moral suffering he has undergone. It is aimed at the restoration, within the limits
of the possible, of the spiritual status quo ante, and should be proportionate to the
suffering inflicted. Trial courts must then guard against the award of exorbitant
damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial
court.

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 call be experienced only by one having a nervous
system. The statement in People v. Manero and Mambulao Lumber Co. v. PNB that
a corporation may recover moral damages if it "has a good reputation that is debased,
resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of
the Civil Code. These are imposed by way of example or correction for the public
good, in addition to moral, temperate, liquidated or compensatory damages. They are
 CORPORATION CODE

DOCTRINE OF APPARENT AUTHORITY In Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals,79 we ruled that
the doctrine of apparent authority is applied when the petitioner, through its president
19. ADVANCE PAPER CORP, ET. AL vs ARMA TRADERS CORP ET. AL Antonio Punsalan Jr., entered into the First Contract without first securing board
approval. Despite such lack of board approval, petitioner did not object to or repudiate
Arma Traders is liable to pay the loans on the basis of the doctrine of apparent said contract, thus "clothing" its president with the power to bind the corporation.
authority.
"Inasmuch as a corporate president is often given general supervision and control
The doctrine of apparent authority provides that a corporation will be estopped from over corporate operations, the strict rule that said officer has no inherent power to act
denying the agents authority if it knowingly permits one of its officers or any other for the corporation is slowly giving way to the realization that such officer has certain
agent to act within the scope of an apparent authority, and it holds him out to the limited powers in the transaction of the usual and ordinary business of the
public as possessing the power to do those acts.76 The doctrine of apparent authority corporation."80 "In the absence of a charter or bylaw provision to the contrary, the
does not apply if the principal did not commit any acts or conduct which a third party president is presumed to have the authority to act within the domain of the general
knew and relied upon in good faith as a result of the exercise of reasonable prudence. objectives of its business and within the scope of his or her usual duties."81
Moreover, the agents acts or conduct must have produced a change of position to
the third partys detriment.77

In Inter-Asia Investment Industries v. Court of Appeals,78 we explained:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and
responsibility to decide whether the corporation should enter into a contract that will
bind the corporation is lodged in the board, subject to the articles of incorporation,
bylaws, or relevant provisions of law. However, just as a natural person who may
authorize another to do certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers, committees or agents.
The authority of such individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or impliedly by
habit, custom or acquiescence in the general course of business, viz.:

A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon
him, and this includes powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers
added by custom and usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused person dealing with the
officer or agent to believe that it has conferred.

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority to
act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporate officer with
the power to bind the corporation. [emphases and underscores ours]
 CORPORATION CODE

TRUST FUND DOCTRINE presume good faith, andfor that reason accord prime importance to the separate
personality of the corporation, disregarding the corporate personality only after the
20. DONNINA C. HALLEY vs PRINTWELL wrongdoing is first clearly and convincingly established.29It thus behooves the courts
to be careful in assessing the milieu where the piercing of the corporate veil shall be
Settled is the rule that when the veil of corporate fiction is used as a means of done.30
perpetrating fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievements or perfection of monopoly Unpaid creditor may satisfy its claim from unpaid subscriptions;stockholders
or generally the perpetration of knavery or crime, the veil with which the law covers must prove full payment oftheir subscriptions
and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals (First The trust fund doctrineenunciates a xxx rule that the property of a corporation is a
Philippine International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under trust fund for the payment of creditors, but such property can be called a trust fund
this doctrine, the corporate existence may be disregarded where the entity is formed only by way of analogy or metaphor. As between the corporation itself and its
or used for non-legitimate purposes, such as to evade a just and due obligations or to creditors it is a simple debtor, and as between its creditors and stockholders its assets
justify wrong (Claparols vs. CIR, 65 SCRA 613). are in equity a fund for the payment of its debts.32

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine, The trust fund doctrine, first enunciated in the American case of Wood v.
under which corporate debtors might look to the unpaid subscriptions for the Dummer,33was adopted in our jurisdiction in Philippine Trust Co. v. Rivera,34where
satisfaction of unpaid corporate debts, stating thus: thisCourt declared that:

It is an established doctrine that subscription to the capital stock of a corporation It is established doctrine that subscriptions to the capital of a corporation constitute a
constitute a fund to which creditors have a right to look up to for satisfaction of their fund to which creditors have a right to look for satisfaction of their claims and that the
claims, and that the assignee in insolvency can maintain an action upon any unpaid assignee in insolvency can maintain an action upon any unpaid stock subscription in
stock subscription in order to realize assets for the payment of its debts (PNB vs. order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802)
Bitulok Sawmill, 23 SCRA 1366). xxx35

Premised on the above-doctrine, an inference could be made that the funds, which We clarify that the trust fund doctrineis not limited to reaching the stockholders
consists of the payment of subscriptions of the stockholders, is where the creditors unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
can claim monetary considerations for the satisfaction of their claims. If these funds encompasses not only the capital stock, but also other property and assets generally
which ought to be fully subscribed by the stockholders were not paid or remain an regarded in equity as a trust fund for the payment of corporate debts.36All assets and
unpaid subscription of the corporation then the creditors have no other recourse to property belonging to the corporation held in trust for the benefit of creditors thatwere
collect from the corporation of its liability. distributed or in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.
Moreover, a corporation has no power to release a subscription or its capital stock,
without valuable consideration for such releases, and as against creditors, a reduction Also, under the trust fund doctrine,a corporation has no legal capacity to release an
of the capital stock can take place only in the manner and under the conditions original subscriber to its capital stock from the obligation of paying for his shares, in
prescribed by the statute or the charter or the Articles of Incorporation. (PNB vs. whole or in part,37 without a valuable consideration,38 or fraudulently, to the
Bitulok Sawmill, 23 SCRA 1366). prejudice of creditors.39The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the satisfaction
Although a corporation has a personality separate and distinct from those of its of its debt.40To make out a prima facie case in a suit against stockholders of an
stockholders, directors, or officers,26such separate and distinct personality is merely insolvent corporation to compel them to contribute to the payment of its debts by
a fiction created by law for the sake of convenience and to promote the ends of making good unpaid balances upon their subscriptions, it is only necessary to
justice.27The corporate personality may be disregarded, and the individuals establish that thestockholders have not in good faith paid the par value of the stocks
composing the corporation will be treated as individuals, if the corporate entity is of the corporation.41
being used as a cloak or cover for fraud or illegality;as a justification for a wrong; as
an alter ego, an adjunct, or a business conduit for the sole benefit of the Liability of stockholders for corporate debts isup to the extent of their unpaid
stockholders.28 As a general rule, a corporation is looked upon as a legal entity, subscription
unless and until sufficient reason to the contrary appears. Thus,the courts always
 CORPORATION CODE

CAPITAL i.e., common shares. Furthermore, ownership of record of shares will not suffice but it
must be shown that the legal and beneficial ownership rests in the hands of Filipino
21. WILSON P. GAMBOA, Petitioner, vs. FINANCE SECRETARY MARGARITO B. citizens.
TEVES, ET AL
In this connection, the Corporation Code which was already in force at the time the
The crux of the controversy is the definition of the term "capital." Does the term present (1987) Constitution was drafted defined outstanding capital stock as
"capital" in Section 11, Article XII of the Constitution refer to common shares or to the follows:
total outstanding capital stock (combined total of common and non-voting preferred
shares)? Section 137. Outstanding capital stock defined. The term "outstanding capital
stock", as used in this Code, means the total shares of stock issued under binding
The evident purpose of the citizenship requirement is to prevent aliens from assuming subscription agreements to subscribers or stockholders, whether or not fully or
control of public utilities, which may be inimical to the national interest. 27 This specific partially paid, except treasury shares.
provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to "conserve and develop our We agree with petitioner and petitioners-in-intervention. The term "capital" in Section
patrimony"28 and ensure "a self-reliant and independent national 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
economy effectively controlled by Filipinos."29 election of directors, and thus in the present case only to common shares,41 and not
to the total outstanding capital stock comprising both common and non-voting
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to preferred shares.
be a stockholder of record of PLDT, contended that the term "capital" in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez The Corporation Code of the Philippines42 classifies shares as common or preferred,
explained thus: thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Sec. 6. Classification of shares. - The shares of stock of stock corporations may be
Constitution refers to ownership of shares of stock entitled to vote, i.e., common divided into classes or series of shares, or both, any of which classes or series of
shares, considering that it is through voting that control is being exercised. x x x shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except
Obviously, the intent of the framers of the Constitution in imposing limitations and those classified and issued as "preferred" or "redeemable" shares, unless
restrictions on fully nationalized and partially nationalized activities is for Filipino otherwise provided in this Code: Provided, further, That there shall always be a
nationals to be always in control of the corporation undertaking said activities. class or series of shares which have complete voting rights. Any or all of the shares or
Otherwise, if the Trial Courts ruling upholding respondents arguments were to be series of shares may have a par value or have no par value as may be provided for in
given credence, it would be possible for the ownership structure of a public utility the articles of incorporation: Provided, however, That banks, trust companies,
corporation to be divided into one percent (1%) common stocks and ninety-nine insurance companies, public utilities, and building and loan associations shall not be
percent (99%) preferred stocks. Following the Trial Courts ruling adopting permitted to issue no-par value shares of stock.
respondents arguments, the common shares can be owned entirely by foreigners
thus creating an absurd situation wherein foreigners, who are supposed to be minority Preferred shares of stock issued by any corporation may be given preference in the
shareholders, control the public utility corporation. distribution of the assets of the corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be stated in the articles of
xxxx incorporation which are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the conditions of preferred shares of stock or any series thereof: Provided, That such
beneficial ownership and the controlling interest. terms and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
xxxx
Shares of capital stock issued without par value shall be deemed fully paid and non-
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities assessable and the holder of such shares shall not be liable to the corporation or to
prescribed by the Constitution refers to ownership of shares of stock entitled to vote, its creditors in respect thereto: Provided; That shares without par value may not be
 CORPORATION CODE

issued for a consideration less than the value of five (5.00) pesos per share: matters, on the theory that the preferred shareholders are merely investors in the
Provided, further, That the entire consideration received by the corporation for its no- corporation for income in the same manner as bondholders. 45 In fact, under the
par value shares shall be treated as capital and shall not be available for distribution Corporation Code only preferred or redeemable shares can be deprived of the right to
as dividends. vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
A corporation may, furthermore, classify its shares for the purpose of insuring common shareholders to vote is invalid.47
compliance with constitutional or legal requirements.
Considering that common shares have voting rights which translate to control, as
Except as otherwise provided in the articles of incorporation and stated in the opposed to preferred shares which usually have no voting rights, the term "capital" in
certificate of stock, each share shall be equal in all respects to every other share. Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term "capital" shall include such preferred shares because the right to participate in
Where the articles of incorporation provide for non-voting shares in the cases allowed the control or management of the corporation is exercised through the right to vote in
by this Code, the holders of such shares shall nevertheless be entitled to vote on the the election of directors. In short, the term "capital" in Section 11, Article XII of
following matters: the Constitution refers only to shares of stock that can vote in the election of
directors.
1. Amendment of the articles of incorporation;
This interpretation is consistent with the intent of the framers of the Constitution to
2. Adoption and amendment of by-laws; place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, "capital" refers to
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or the voting stock or controlling interest of a corporation
substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or

other corporations;

7. Investment of corporate funds in another corporation or business in

accordance with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control
or management of the corporation.43 This is exercised through his vote in the election
of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of directors and on other
 CORPORATION CODE

BOARD OF DIRECTORS/POWER OF THE BOD Based on the above discussion, when Section 23 of the Corporation Code declares
that the board of directors shall hold office for one (1) year until their successors are
22. VALLE VERDE COUNTRY CLUB, INC. vs. VICTOR AFRICA elected and qualified, we construe the provision to mean that the term of the
members of the board of directors shall be only for one year; their term expires
In his nullification complaint before the RTC, Africa alleged that the one year after election to the office. The holdover period that time from the lapse of
election of Roxas was contrary to Section 29, in relation to Section 23, of the one year from a members election to the Board and until his successors election and
Corporation Code of the Philippines (Corporation Code). These provisions read: qualification is not part of the directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this incumbent member of the board of directors continues to serve in a holdover capacity,
Code, the corporate powers of all corporations formed under this Code shall be it implies that the office has a fixed term, which has expired, and the incumbent is
exercised, all business conducted and all property of such corporations controlled and holding the succeeding term
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who The powers of the corporations board of directors emanate from its
shall hold office for one (1) year until their successors are elected and qualified. stockholders

xxx The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring the corporation from them. The board of directors, in drawing to themselves the
in the board of directors or trustees other than by removal by the stockholders powers of the corporation, occupies a position of trusteeship in relation to the
or members or by expiration of term, may be filled by the vote of at least a stockholders, in the sense that the board should exercise not only care and diligence,
majority of the remaining directors or trustees, if still constituting a quorum; but utmost good faith in the management of corporate affairs.
otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a The underlying policy of the Corporation Code is that the business and affairs of a
vacancy shall be elected only for the unexpired term of his predecessor in office. xxx. corporation must be governed by a board of directors whose members have stood for
[Emphasis supplied.] election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
To repeat, the issue for the Court to resolve is whether the remaining legitimacy of their decisions that bind the corporation's stockholders, be assured. The
directors of a corporations Board, still constituting a quorum, can elect another shareholder vote is critical to the theory that legitimizes the exercise of power by the
director to fill in a vacancy caused by the resignation of a hold-over director. directors or officers over properties that they do not own.
The resolution of this legal issue is significantly hinged on the determination of what
constitutes a directors term of office. This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations
The holdover period is not part of the term of office of a member of board of directors is caused not by the expiration of a members term, the successor
the board of directors. so elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office. The law has authorized the remaining members of the board to
The word term has acquired a definite meaning in jurisprudence. In fill in a vacancy only in specified instances, so as not to retard or impair the
several cases, we have defined term as the time during which the officer may corporations operations; yet, in recognition of the stockholders right to elect the
claim to hold the office as of right, and fixes the interval after which the several members of the board, it limited the period during which the successor shall serve
incumbents shall succeed one another. The term of office is not affected by the only to the unexpired term of his predecessor in office.
holdover. The term is fixed by statute and it does not change simply because the It also bears noting that the vacancy referred to in Section 29 contemplates a
office may have become vacant, nor because the incumbent holds over in office vacancy occurring within the directors term of office. When a vacancy is created
beyond the end of the term due to the fact that a successor has not been elected and by the expiration of a term, logically, there is no more unexpired term to speak of.
has failed to qualify. Hence, Section 29 declares that it shall be the corporations stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a members term.
Term is distinguished from tenure in that an officers tenure represents
the term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or beyond the
power of the incumbent.
 CORPORATION CODE

23. FILIPINAS PORT SERVICES vs. GO

a) the party bringing suit should be a shareholder as of the time of the act or
The governing body of a corporation is its board of directors. Section 23 of the transaction complained of, the number of his shares not being material;
Corporation Code explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
business conducted and all property of the corporation shall be controlled and held by board of directors for the appropriate relief but the latter has failed or refused to heed
a board of directors. Thus, with the exception only of some powers expressly granted his plea; and
by law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to c) the cause of action actually devolves on the corporation, the wrongdoing or harm
determine policies, enter into contracts, and conduct the ordinary business of the having been, or being caused to the corporation and not to the particular stockholder
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws bringing the suit.
and relevant provisions of law. Verily, the authority of the board of directors is
restricted to the management of the regular business affairs of the corporation, unless
more extensive power is expressly conferred.

The raison detre behind the conferment of corporate powers on the board of
directors is not lost on the Court. Indeed, the concentration in the board of the powers
of control of corporate business and of appointment of corporate officers and
managers is necessary for efficiency in any large organization. Stockholders are too
numerous, scattered and unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is for the stockholders to
choose the directors who shall control and supervise the conduct of corporate
business.

The election of officers of a corporation is provided for under Section 25 of the Code
which reads:

Sec. 25. Corporate officers, quorum. Immediately after their election, the
directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer
who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. (Emphasis
supplied.)

Under the Corporation Code, where a corporation is an injured party, its

power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit in behalf of the corporation
in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary action
would be futile because they are the ones to be sued, or because they hold control of
the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal party.

Besides, the requisites before a derivative suit can be filed by a stockholder are
present in this case, to wit:
 CORPORATION CODE

CORPORATE OFFICERS
Also, an intra-corporate controversy is one which arises between a stockholder and
24. MATLING INDL AND COMMERCIAL CORP., ET. AL. vs. COROS the corporation. There is no distinction, qualification or any exemption whatsoever.
The provision is broad and covers all kinds of controversies between stockholders
The decisive issue is whether the respondent was a corporate officer of Matling or and corporations.
not.
In order to determine whether a dispute constitutes an intra-corporate controversy or
Section 25 of the Corporation Code provides: not, the Court considers two elements instead, namely: (a) the status or relationship
of the parties; and (b) the nature of the question that is the subject of their
Section 25. Corporate officers, quorum.--Immediately after their election, the directors controversy. This was our thrust in Viray v. Court of Appeals:
of a corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a The establishment of any of the relationships mentioned above will not necessarily
resident and citizen of the Philippines, and such other officers as may be provided always confer jurisdiction over the dispute on the SEC to the exclusion of regular
for in the by-laws. Any two (2) or more positions may be held concurrently by the courts. The statement made in one case that the rule admits of no exceptions or
same person, except that no one shall act as president and secretary or as president distinctions is not that absolute. The better policy in determining which body has
and treasurer at the same time. jurisdiction over a case would be to consider not only the status or relationship of the
The directors or trustees and officers to be elected shall perform the duties enjoined parties but also the nature of the question that is the subject of their controversy.
on them by law and the by-laws of the corporation. Unless the articles of incorporation
or the by-laws provide for a greater majority, a majority of the number of directors or Not every conflict between a corporation and its stockholders involves
trustees as fixed in the articles of incorporation shall constitute a quorum for the corporate matters that only the SEC can resolve in the exercise
transaction of corporate business, and every decision of at least a majority of the of its adjudicatory or quasi-judicial powers. If, for example, a
directors or trustees present at a meeting at which there is a quorum shall be valid as person leases an apartment owned by a corporation of which
a corporate act, except for the election of officers which shall require the vote of a he is a stockholder, there should be no question that a
majority of all the members of the board. complaint for his ejectment for non-payment of rentals would
still come under the jurisdiction of the regular courts and not of
Directors or trustees cannot attend or vote by proxy the SEC. By the same token, if one person injures another in a
at board meetings. vehicular accident, the complaint for damages filed by the
victim will not come under the jurisdiction of the SEC simply
Conformably with Section 25, a position must be expressly mentioned in because of the happenstance that both parties are
the By-Laws in order to be considered as a corporate office. Thus, the creation of an stockholders of the same corporation. A contrary interpretation
office pursuant to or under a By-Law enabling provision is not enough to make a would dissipate the powers of the regular courts and distort the
position a corporate office. Guerrea v. Lezama, the first ruling on the matter, held that meaning and intent of PD No. 902-A.
the only officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws; the rest of the corporate officers could be In another case, Mainland Construction Co., Inc. v. Movilla,
considered only as employees or subordinate officials. Thus, it was held in Easycall Court reiterated these determinants thuswise:
Communications Phils., Inc. v. King: In order that the SEC (now the regular courts) can take cognizance of a
case, the controversy must pertain to any of the following relationships:
An office is created by the charter of the corporation and the officer is elected by the
directors or stockholders. On the other hand, an employee occupies no office and
a) between the corporation, partnership or association and the public;
generally is employed not by the 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. b) between the corporation, partnership or association and its
stockholders, partners, members or officers;
The criteria for distinguishing between corporate officers who may be ousted from
office at will, on one hand, and ordinary corporate employees who may only be c) between the corporation, partnership or association and the State as
terminated for just cause, on the other hand, do not depend on the nature of the far as its franchise, permit or license to operate is concerned; and
services performed, but on the manner of creation of the office. In the respondents
case, he was supposedly at once an employee, a stockholder, and a Director of
d) among the stockholders, partners or associates themselves.
Matling.
 CORPORATION CODE

25. MARC II MARKETING, INC. vs. JOSON

This interpretation is the correct application of Section 25 of the Corporation
Under Section 5 of Presidential Decree No. 902-A, intra-corporate Code, which plainly states that the corporate officers are the President, Secretary,
controversies are those controversies arising out of intra-corporate or partnership Treasurer and such other officers as may be provided for in the [b]y-[l]aws.
relations, between and among stockholders, members or associates; between any or Accordingly, the corporate officers in the context of PD No. 902-A are
all of them and the corporation, partnership or association of which they are exclusively those who are given that character either by the Corporation Code
stockholders, members or associates, respectively; and between such corporation, or by the corporations [b]y[l]aws.
partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity. It also includes controversies in the A different interpretation can easily leave the way open for the Board of Directors to
election or appointments of directors, trustees, officers or managers of such circumvent the constitutionally guaranteed security of tenure of the employee by the
corporations, partnerships or associations. expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
Accordingly, in determining whether the SEC (now the RTC) has
jurisdiction over the controversy, the status or relationship of the parties and the It is relevant to state in this connection that the SEC, the primary agency
nature of the question that is the subject of their controversy must be taken into administering the Corporation Code, adopted a similar interpretation of Section 25 of
consideration. the Corporation Code in its Opinion dated November 25, 1993 [citation omitted], to
wit:
In Easycall Communications Phils., Inc. v. King, this Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those officers of a Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever
corporation who are given that character either by the Corporation Code or by are the corporate officers enumerated in the by-laws are the exclusive Officers of the
the corporations by-laws. Section 25 of the Corporation Code specifically corporation and the Board has no power to create other Offices without amending first
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) the corporate [b]y-laws. However, the Board may create appointive positions other
treasurer; and (4) such other officers as may be provided for in the by-laws. than the positions of corporate Officers, but the persons occupying such positions are
not considered as corporate officers within the meaning of Section 25 of the
The aforesaid Section 25 of the Corporation Code, particularly the phrase Corporation Code and are not empowered to exercise the functions of the corporate
such other officers as may be provided for in the by-laws, has been clarified and Officers, except those functions lawfully delegated to them. Their functions and duties
elaborated in this Courts recent pronouncement in Matling Industrial and Commercial are to be determined by the Board of Directors/Trustees. [Emphasis supplied.]
Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must 26. LESLIE OKOL vs. SLIMMERS WORLD INTERNATIONAL, BEHAVIOR
be expressly mentioned in the [b]y-[l]aws in order to be MODIFICATIONS, INC., and RONALD JOSEPH MOY
considered as a corporate office. Thus, the creation of an
office pursuant to or under a [b]y-[l]aw enabling The issue revolves mainly on whether petitioner was an employee or a corporate
provision is not enough to make a position a corporate officer of Slimmers World. Section 25 of the Corporation Code enumerates corporate
office. [In] Guerrea v. Lezama [citation omitted] the first ruling officers as the president, secretary, treasurer and such other officers as may be
on the matter, held that the only officers of a corporation provided for in the by-laws. In Tabang v. NLRC, we held that an office is created by
were those given that character either by the Corporation the charter of the corporation and the officer is elected by the directors or
Code or by the [b]y-[l]aws; the rest of the corporate stockholders. On the other hand, an employee usually occupies no office and
officers could be considered only as employees or generally is employed not by action of the directors or stockholders but by the
subordinate officials. Thus, it was held in Easycall managing officer of the corporation who also determines the compensation to be paid
Communications Phils., Inc. v. King [citation omitted]: to such employee.

An "office" is created by the charter of the corporation and the officer is elected by the 27. GLORIA V. GOMEZ vs. PNOC DEVELOPMENT AND MANAGEMENT
directors or stockholders. On the other hand, an employee occupies no office and CORPORATION (PDMC) (formerly known as FILOIL DEVELOPMENT
generally is employed not by the action of the directors or stockholders but by the AND MANAGEMENT CORPORATION [FDMC])
managing officer of the corporation who also determines the compensation to be paid
to such employee. Ordinary company employees are generally employed not by action of the directors
and stockholders but by that of the managing officer of the corporation who also
xxxx determines the compensation to be paid such employees. Corporate officers, on the
 CORPORATION CODE

other hand, are elected or appointed by the directors or stockholders, and are those (a) vote for or assent to patently unlawful acts of the corporation;
who are given that character either by the Corporation Code or by the corporations (b) act in bad faith or with gross negligence in directing the corporate affairs;
by-laws. (c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons.
But the relationship of a person to a corporation, whether as officer or agent or
employee, is not determined by the nature of the services he performs but by the
incidents of his relationship with the corporation as they actually exist. 2. When a director or officer has consented to the issuance of watered stocks
or who, having knowledge thereof, did not forthwith file with the corporate
LIABILITY OF CORPORATE OFFICER secretary his written objection thereto. 11

28. RODOLFO LABORTE and PHILIPPINE TOURISM AUTHORITY, vs. 3. When a director, trustee or officer has contractually agreed or stipulated to
PAGSANJAN TOURISM CONSUMERS COOPERATIVE, ET. AL hold himself personally and solidarily liable with the Corporation.

The PTA is a government owned and controlled corporation which was mandated to 4. When a director, trustee or officer is made, by specific provision of law,
administer tourism zones. Based on this mandate, it was the PTAs obligation to personally liable for his corporate action.13
adopt a comprehensive program and project to rehabilitate and upgrade the facilities
of the PTA Complex as shown in Annexes "H-2" to "H-4" of the petition. The Court 30. HARPOON MARINE SERVICES, INC. and JOSE LIDO T. ROSIT vs.
finds that there was indeed a renovation of the Pagsanjan Administration Complex FERNAN H. FRANCISCO
which was sanctioned by the PTA main office; and such renovation was done in good
faith in performance of its mandated duties as tourism administrator. In the exercise of As held in the case of MAM Realty Development Corporation v. National Labor
its management prerogative to determine what is best for the said agency, the PTA Relations Commission, obligations incurred by [corporate officers], acting as such
had the right to terminate at any moment the PTCCs operations of the restaurant and corporate agents, are not theirs but the direct accountabilities of the corporation they
the boat ride services since the PTCC has no contract, concession or franchise from represent. As such, they should not be generally held jointly and solidarily liable with
the PTA to operate the above-mentioned businesses. As shown by the records, the the corporation. The Court, however, cited circumstances when solidary liabilities may
operation of the restaurant and the boat ride services was merely tolerated, in order to be imposed, as exceptions:
extend financial assistance to its PTA employee-members who are members of the
then fledging PTCC. 1. When directors and trustees or, in appropriate cases, the officers of a
corporation:
With respect to Laborte's liability in his official and personal capacity, the Court finds a) vote for or assent to [patently] unlawful acts of the corporation;
that Laborte was simply implementing the lawful order of the PTA Management. As a b) act in bad faith or with gross negligence in directing the corporate
general rule the officer cannot be held personally liable with the corporation, whether affairs;
civilly or otherwise, for the consequences of his acts, if acted for and in behalf of the c) are guilty of conflict of interest to the prejudice of the corporation, its
corporation, within the scope of his authority and in good faith.73 stockholders or members, and other persons.
2. When the director or officer has consented to the issuance of watered stock
29. MAM REALTY DEVELOPMENT CORPORATION and MANUEL or who, having knowledge thereof, did not forthwith file with the corporate
CENTENO vs. NATIONAL LABOR RELATIONS COMMISSION and secretary his written objection thereto.
CELSO B. BALBASTRO 3. When a director, trustee or officer has contractually agreed or stipulated to
hold himself personally and solidarily liable with the corporation.
A prime focus in the instant petition is the question of when to hold a director or officer 4. When a director, trustee or officer is made, by specific provision of law,
of a corporation solidarily obligated with the latter for a corporate liability. personally liable for his corporate action.

A corporation, being a juridical entity, may act only through its directors, officers and The general rule is grounded on the theory that a corporation has a legal personality
employees. Obligations incurred by them, acting as such corporate agents, are not separate and distinct from the persons comprising it.To warrant the piercing of the veil
theirs but the direct accountabilities of the corporation they represent. True, solidary of corporate fiction, the officers bad faith or wrongdoing must be established clearly
liabilities may at times be incurred but only when exceptional circumstances warrant and convincingly as [b]ad faith is never presumed.
such as, generally, in the following cases:9 31. SPI TECHNOLOGIES, INC. and LEA VILLANUEVA vs. VICTORIA K.
MAPUA
1. When directors and trustees or, in appropriate cases, the officers of a
corporation On the issue of the solidary obligation of the corporate officers impleaded vis--vis the
corporation for Mapuas illegal dismissal, "[i]t is hornbook principle that personal
 CORPORATION CODE

liability of corporate directors, trustees or officers attaches only when: (a) they assent declared by the corporation, a right inherent in the ownership of the shares.
to a patently unlawful act of the corporation, or when they are guilty of bad faith or
gross negligence in directing its affairs, or when there is a conflict of interest resulting Upon the death of a shareholder, the heirs do not automatically become
in damages to the corporation, its stockholders or other persons; (b) they consent to stockholders of the corporation and acquire the rights and privileges of the deceased
the issuance of watered down stocks or when, having knowledge of such issuance, as shareholder of the corporation. The stocks must be distributed first to the heirs in
do not forthwith file with the corporate secretary their written objection; (c) they agree estate proceedings, and the transfer of the stocks must be recorded in the books of
to hold themselves personally and solidarily liable with the corporation; or (d) they are the corporation. Section 63 of the Corporation Code provides that no transfer shall be
made by specific provision of law personally answerable for their corporate action." 53 valid, except as between the parties, until the transfer is recorded in the books of the
corporation. During such interim period, the heirs stand as the equitable owners of the
32. MIRANT (PHILIPPINES) CORPORATION AND EDGARDO A. BAUTISTA stocks, the executor or administrator duly appointed by the court being vested with
vs. JOSELITO A. CARO the legal title to the stock. Until a settlement and division of the estate is effected, the
stocks of the decedent are held by the administrator or executor. Consequently,
A corporation has a personality separate and distinct from its officers and board of during such time, it is the administrator or executor who is entitled to exercise the
directors who may only be held personally liable for damages if it is proven that they rights of the deceased as stockholder.
acted with malice or bad faith in the dismissal of an employee. 57 Absent any evidence
on record that petitioner Bautista acted maliciously or in bad faith in effecting the 34. DAVID C. LAO and JOSE C. LAO vs. DIONISIO C. LAO
termination of respondent, plus the apparent lack of allegation in the pleadings of
respondent that petitioner Bautista acted in such manner, the doctrine of corporate IS the mere inclusion as shareholder in the General Information Sheet of
fiction dictates that only petitioner corporation should be held liable for the illegal a corporation sufficient proof that one is a shareholder in such corporation?
dismissal of respondent.
STOCKHOLDERS A certificate of stock is the evidence of a holders interest and status in a
corporation. It is a written instrument signed by the proper officer of a corporation
33. JOSELITO MUSNI PUNO (as heir of the late Carlos Puno) vs. PUNO stating or acknowledging that the person named in the document is the owner of a
ENTERPRISES, INC., represented by JESUSA PUNO designated number of shares of its stock. It is prima facie evidence that the holder is a
shareholder of a corporation.
In any case, Sections 74 and 75 of the Corporation Code enumerate the
persons who are entitled to the inspection of corporate books, thus Section 63 of the Corporation Code provides:

Sec. 74. Books to be kept; stock transfer agent. x x x. Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
The records of all business transactions of the corporation and the minutes of any or vice-president, countersigned by the secretary or assistant secretary, and sealed
meeting shall be open to the inspection of any director, trustee, stockholder or with the seal of the corporation shall be issued in accordance with the by-laws.
member of the corporation at reasonable hours on business days and he may Shares of stock so issued are personal property and may be transferred by delivery of
demand, in writing, for a copy of excerpts from said records or minutes, at his the certificate or certificates indorsed by the owner or his attorney-in-fact or other
expense. x x x x person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the
Sec. 75. Right to financial statements. Within ten (10) days from receipt of a written corporation so as to show the names of the parties to the transaction, the date of the
request of any stockholder or member, the corporation shall furnish to him its most transfer, the number of the certificate or certificates and the number of shares
recent financial statement, which shall include a balance sheet as of the end of the transferred.
last taxable year and a profit or loss of statement for said taxable year, showing in
reasonable detail its assets and liabilities and the result of its operations. The mere inclusion as shareholder of petitioners in the General Information
Sheet of PFSC is insufficient proof that they are shareholders of the company.
The stockholders right of inspection of the corporations books and records is based
upon his ownership of shares in the corporation and the necessity for self-protection. The information in the document will still have to be correlated with the corporate
After all, a shareholder has the right to be intelligently informed about corporate books of PFSC. As between the General Information Sheet and the corporate books,
affairs. Such right rests upon the stockholders underlying ownership of the it is the latter that is controlling.
corporations assets and property.

Similarly, only stockholders of record are entitled to receive dividends

 CORPORATION CODE

BY-LAWS meaning for the word "must" in the first sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing of the by-laws even prior to
35. LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC. incorporation. This provision in the same section of the Code rules out mandatory
vs. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY compliance with the requirement of filing the by-laws "within one (1) month after
CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission." It necessarily follows that failure to file the by-
May the failure of a corporation to file its by-laws within one month from the date of its laws within that period does not imply the "demise" of the corporation. By-laws may
incorporation, as mandated by Section 46 of the Corporation Code, result in its be necessary for the "government" of the corporation but these are subordinate to the
automatic dissolution? articles of incorporation as well as to the Corporation Code and related statutes. 15
There are in fact cases where by-laws are unnecessary to corporate existence or to
The pertinent provision of the Corporation Code that is the focal point of controversy the valid exercise of corporate powers, thus:
in this case states:
In the absence of charter or statutory provisions to the contrary, by-laws are not
Sec. 46. Adoption of by-laws. Every corporation formed under this Code, must necessary either to the existence of a corporation or to the valid exercise of the
within one (1) month after receipt of official notice of the issuance of its certificate of powers conferred upon it, certainly in all cases where the charter sufficiently provides
incorporation by the Securities and Exchange Commission, adopt a code of by-laws for the government of the body; and even where the governing statute in express
for its government not inconsistent with this Code. For the adoption of by-laws by the terms confers upon the corporation the power to adopt by-laws, the failure to exercise
corporation, the affirmative vote of the stockholders representing at least a majority of the power will be ascribed to mere nonaction which will not render void any acts of the
the outstanding capital stock, or of at least a majority of the members, in the case of corporation which would otherwise be valid. 16 (Emphasis supplied.)
non-stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of Even under the foregoing express grant of power and authority, there can be no
the corporation, subject to the stockholders or members voting for them and shall be automatic corporate dissolution simply because the incorporators failed to abide by
kept in the principal office of the corporation, subject to inspection of the stockholders the required filing of by-laws embodied in Section 46 of the Corporation Code. There
or members during office hours; and a copy thereof, shall be filed with the Securities is no outright "demise" of corporate existence. Proper notice and hearing are cardinal
and Exchange Commission which shall be attached to the original articles of components of due process in any democratic institution, agency or society. In other
incorporation. words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted
and filed prior to incorporation; in such case, such by-laws shall be approved and Non-filing of the by-laws will not result in automatic dissolution of the corporation.
signed by all the incorporators and submitted to the Securities and Exchange Under Section 6(I) of PD 902-A, the SEC is empowered to "suspend or revoke, after
Commission, together with the articles of incorporation. proper notice and hearing, the franchise or certificate of registration of a corporation"
on the ground inter alia of "failure to file by-laws within the required period." It is clear
In all cases, by-laws shall be effective only upon the issuance by the Securities and from this provision that there must first of all be a hearing to determine the existence
Exchange Commission of a certification that the by-laws are not inconsistent with this of the ground, and secondly, assuming such finding, the penalty is not necessarily
Code. revocation but may be only suspension of the charter. In fact, under the rules and
regulations of the SEC, failure to file the by-laws on time may be penalized merely
The Securities and Exchange Commission shall not accept for filing the by-laws or with the imposition of an administrative fine without affecting the corporate existence
any amendment thereto of any bank, banking institution, building and loan of the erring firm.
association, trust company, insurance company, public utility, educational institution
or other special corporations governed by special laws, unless accompanied by a 36. PETRONILO J. BARAYUGA vs. ADVENTIST UNIVERSITY OF THE
certificate of the appropriate government agency to the effect that such by-laws or PHILIPPINES, THROUGH ITS BOARD OF TRUSTEES, REPRESENTED
amendments are in accordance with law. BY ITS CHAIRMAN, NESTOR D. DAYSON

automatic corporate dissolution for failure to file the by-laws on time was never the Section 108 of the Corporation Code determines the membership and number of
intention of the legislature. trustees in an educational corporation, viz:

Taken as a whole and under the principle that the best interpreter of a statute is the Section 108. Board of trustees. Trustees of educational institutions organized as
statute itself (optima statuli interpretatix est ipsum statutum), 14 Section 46 educational corporations shall not be less than five (5) nor more than fifteen (15):
aforequoted reveals the legislative intent to attach a directory, and not mandatory, Provided, however, That the number of trustees shall be in multiples of five (5).
 CORPORATION CODE

SEC. 91. Termination of membership.Membership shall be terminated in the

Unless otherwise provided in the articles of incorporation or the by-laws, the board of manner and for the causes provided in the articles of incorporation or the by-
trustees of incorporated schools, colleges, or other institutions of learning shall, as laws. Termination of membership shall have the effect of extinguishing all rights of a
soon as organized, so classify themselves that the term of office of one-fifth (1/5) of member in the corporation or in its property, unless otherwise provided in the articles
their number shall expire every year. Trustees thereafter elected to fill vacancies, of incorporation or the by-laws. (Emphasis supplied)
occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by Does the Corporation Code permit the termination of membership without due notice
expiration of term shall hold office for five (5) years. A majority of the trustees to the member? The Code itself is silent on that matter, and the argument can be
shall constitute a quorum for the transaction of business. The powers and authority of made that if no notice is provided for in the articles of incorporation or in the by-laws,
trustees shall be defined in the by-laws. then termination may be effected without any notice at all.

For institutions organized as stock corporations, the number and term of directors Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to
shall be governed by the provisions on stock corporations. provide any formal notice and hearing procedure before a members share may be
seized and sold. The Court would have been satisfied had the by-laws or the articles
The second paragraph of the provision, although setting the term of the members of of incorporation established a procedure which assures that the member would in
the Board of Trustees at five years, contains a proviso expressly subjecting the reality be actually notified of the pending accounts and provide the opportunity for
duration to what is otherwise provided in the articles of incorporation or by-laws of the such member to settle such accounts before the membership share could be seized
educational corporation. That contrary provision controls on the term of office. then sold to answer for the debt. As we have emphasized, membership in Valley Golf
and many other like-situated non-stock corporations actually involves the purchase of
37. VALLEY GOLF & COUNTRY CLUB, INC. vs. ROSA O. VDA. DE CARAM a membership share, which is a substantially expensive property. As a result,
termination of membership does not only lead to loss of bragging rights, but the actual
May a non-stock corporation seize and dispose of the membership share of a fully- deprivation of property.
paid member on account of its unpaid debts to the corporation when it is authorized to
do so under the corporate by-laws but not by the Articles of Incorporation?

Firstly, they correctly noted that the procedure under Section 67 of the Corporation
Code for the stock corporations recourse on unpaid subscriptions is inapt to a non-
stock corporation vis--vis a members outstanding dues. The basic factual backdrops
in the two situations are disperate. In the latter, the member has fully paid for his
membership share, while in the former, the stockholder has not yet fully paid for the
share or shares of stock he subscribed to, thereby authorizing the stock corporation to
call on the unpaid subscription, declare the shares delinquent and subject the
delinquent shares to a sale at public auction.

Secondly, the two bodies below concluded that following Section 6 of the Corporation
Code, which provides:

The shares of stock of stock corporation may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation x x x

The lien on the Golf Share in favor of Valley Golf is not valid, as the power to
constitute such a lien should be provided in the articles of incorporation, and not
merely in the by-laws.

However, there is a specific provision under the Title XI, on Non-Stock Corporations
of the Corporation Code dealing with termination of membership. Section 91 of the
Corporation Code provides:
 CORPORATION CODE

DERIVATIVE SUIT suits are prohibited. In determining whether a suit is a nuisance or harassment suit,
the court shall consider, among others, the following:
38. JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD),
INC. vs. SPOUSES ROBERTO and RACHEL ANG (1) The extent of the shareholding or interest of the initiating stockholder or
member;
A derivative suit is an action brought by a stockholder on behalf of the corporation to (2) Subject matter of the suit;
enforce corporate rights against the corporations directors, officers or other (3) Legal and factual basis of the complaint;
insiders.29 Under Sections 2330 and 3631 of the Corporation Code, the directors or (4) Availability of appraisal rights for the act or acts complained of; and
officers, as provided under the by-laws,32 have the right to decide whether or not a (5) Prejudice or damage to the corporation, partnership, or association in
corporation should sue. Since these directors or officers will never be willing to sue relation to the relief sought.
themselves, or impugn their wrongful or fraudulent decisions, stockholders are
permitted by law to bring an action in the name of the corporation to hold these In case of nuisance or harassment suits, the court may, motu proprio or upon motion,
directors and officers accountable.33 In derivative suits, the real party ininterest is the forthwith dismiss the case.
corporation, while the stockholder is a mere nominal party.
39. LEGASPI TOWERS 300, INC., ET. AL. vs. AMELIA P. MUER, ET. AL.
This Court, in Yu v. Yukayguan,34 explained:
A derivative suit must be differentiated from individual and representative or class
The Court has recognized that a stockholders right to institute a derivative suit is not suits, thus:
based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate Suits by stockholders or members of a corporation based on wrongful or fraudulent
directors or officers liable for damages suffered by the corporation and its acts of directors or other persons may be classified into individual suits, class suits,
stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for and derivative suits. Where a stockholder or member is denied the right of inspection,
mismanagement, waste or dissipation of corporate assets because of a special injury his suit would be individual because the wrong is done to him personally and not
to him for which he is otherwise without redress. In effect, the suit is an action for to the other stockholders or the corporation. Where the wrong is done to a
specific performance of an obligation owed by the corporation to the stockholders to group of stockholders, as where preferred stockholders' rights are violated, a class
assist its rights of action when the corporation has been put in default by the wrongful or representative suit will be proper for the protection of all stockholders
refusal of the directors or management to make suitable measures for its protection. belonging to the same group. But where the acts complained of constitute a
The basis of a stockholders suit is always one in equity. However, it cannot prosper wrong to the corporation itself, the cause of action belongs to the corporation
without first complying with the legal requisites for its institution. (Emphasis in the and not to the individual stockholder or member. Although in most every case of
original) wrong to the corporation, each stockholder is necessarily affected because the value
of his interest therein would be impaired, this fact of itself is not sufficient to give him
Section 1, Rule 8 of the Interim Rules imposes the following requirements for an individual cause of action since the corporation is a person distinct and separate
derivative suits: from him, and can and should itself sue the wrongdoer. Otherwise, not only would the
theory of separate entity be violated, but there would be multiplicity of suits as well as
(1) The person filing the suit must be a stockholder or member at the time the a violation of the priority rights of creditors. Furthermore, there is the difficulty of
acts or transactions subject of the action occurred and the time the action determining the amount of damages that should be paid to each individual
was filed; stockholder.
(2) He must have exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the However, in cases of mismanagement where the wrongful acts are committed
articles of incorporation, by-laws, laws or rules governing the corporation or by the directors or trustees themselves, a stockholder or member may find that he
partnership to obtain the relief he desires; has no redress because the former are vested by law with the right to decide whether
(3) No appraisal rights are available for the act or acts complained of; and or not the corporation should sue, and they will never be willing to sue themselves.
(4) The suit is not a nuisance or harassment suit. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right
The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a of a stockholder to sue on behalf of a corporation in what eventually became
nuisance or harassment suit under Section 1(b) of the Interim Rules. Section 1(b) known as a "derivative suit." It has been proven to be an effective remedy of the
thereof provides: minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he
b) Prohibition against nuisance and harassment suits. - Nuisance and harassment holds stock in order to protect or vindicate corporate rights, whenever officials
 CORPORATION CODE

of the corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party-in- interest.

Since it is the corporation that is the real party-in-interest in a derivative suit, then the
reliefs prayed for must be for the benefit or interest of the corporation. When the
reliefs prayed for do not pertain to the corporation, then it is an improper derivative
suit.

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed
his plea; and

(c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.

The stockholders right to file a derivative suit is not based on any express provision of
The Corporation Code, but is impliedly recognized when the law makes corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties,[ which is not the issue in this case.

40. MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION

vs. MIGUEL LIM, ET. AL.

A derivative action is a suit by a shareholder to enforce a corporate cause of action. It

is a remedy designed by equity and has been the principal defense of the minority
shareholders against abuses by the majority. For this purpose, it is enough that a
member or a minority of stockholders file a derivative suit for and in behalf of a
corporation. An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are the ones to
be sued or hold the control of the corporation. In such actions, the suing stockholder
is regarded as the nominal party, with the corporation as the party in interest.
 CORPORATION CODE

TRANSFER OF STOCK OWNERSHIP their names. Indeed, even if Gilberts parents were not the beneficial owners, an
endorsement in blank of the stock certificates coupled with its delivery, entitles the
41. SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS holder thereof to demand the transfer of said stock certificates in his name from the
OF THE LATE GRACE G. CHEU vs. GILBERT G. GUY issuing corporation.63
x-----------------------x
SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS
OF THE LATE GRACE G. CHEU vs. 42. FIL-ESTATE GOLF AND DEVELOPMENT, INC. and FILESTATE LAND,
THE HON. OFELIA C. CALO, in her capacity as Presiding Judge of the INC. vs. VERTEX SALES AND TRADING, INC.
RTC -Mandaluyong City - Branch 211 and GILBERT G. GUY
Physical delivery is necessary to transfer ownership of stocks
Suits by stockholders or members of a corporation based on wrongful or fraudulent The factual backdrop of this case is similar to that of Raquel-Santos v. Court of
acts of directors or other persons may be classified into individual suits, class suits, Appeals,9 where the Court held that in "a sale of shares of stock, physical delivery of
and derivative suits.30 a stock certificate is one of the essential requisites for the transfer of ownership of the
stocks purchased."
An individual suit may be instituted by a stockholder against another stockholder for
wrongs committed against him personally, and to determine their individual rights 31 In that case, Trans-Phil Marine Ent., Inc. (Trans-Phil) and Roland Garcia bought Piltel
this is an individual suit between stockholders. But an individual suit may also be shares from Finvest Securities Co., Inc. (Finvest Securities) in February 1997. Since
instituted against a corporation, the same having a separate juridical personality, Finvest Securities failed to deliver the stock certificates, Trans-Phil and Garcia filed an
which by its own may be sued. It is of course, essential that the suing stockholder has action first for specific performance, which was later on amended to an action for
a cause of action against the corporation.32 rescission. The Court ruled that Finvest Securities failure to deliver the shares of
stock constituted substantial breach of their contract which gave rise to a right on the
Individual suits against another stockholder or against a corporation are remedies part of Trans-Phil and Garcia to rescind the sale.
which an aggrieved stockholder may avail of and which are recognized in our
jurisdiction as embedded in the Interim Rules on Intra-Corporate Controversy. Section 63 of the Corporation Code provides:
Together with this right is the parallel obligation of a party to comply with the
compulsory joinder of indispensable parties whether they may be stockholders or the SEC. 63. Certificate of stock and transfer of shares. The capital stock of stock
corporation itself. corporations shall be divided into shares for which certificates signed by the president
or vice-president, countersigned by the secretary or assistant secretary, and sealed
Failure to specifically allege the fraudulent acts in intra-corporate controversies is with the seal of the corporation shall be issued in accordance with the by-laws.
indicative of a harassment or nuisance suit and may be dismissed motu proprio. Shares of stock so issued are personal property and may be transferred by delivery of
the certificate or certificates indorsed by the owner or his attorney-in-fact or other
When a stock certificate is endorsed in blank by the owner thereof, it constitutes person legally authorized to make the transfer.1wphi1 No transfer, however, shall be
what is termed as "street certificate," so that upon its face, the holder is entitled to valid, except as between the parties, until the transfer is recorded in the books of the
demand its transfer his name from the issuing corporation. corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares
In Santamaria v. Hongkong and Shanghai Banking Corp., 61 this Court held that when transferred.
a stock certificate is endorsed in blank by the owner thereof, it constitutes what is
termed as "street certificate," so that upon its face, the holder is entitled to demand its No shares of stock against which the corporation holds any unpaid claim shall be
transfer into his name from the issuing corporation. Such certificate is deemed quasi- transferable in the books of the corporation.
negotiable, and as such the transferee thereof is justified in believing that it belongs to
the holder and transferor.

While there is a contrary ruling, as an exception to the general rule enunciated above,
what the Court held in Neugene Marketing Inc., et al., v CA, 62 where stock certificates
endorsed in blank were stolen from the possession of the beneficial owners thereof
constraining this Court to declare the transfer void for lack of delivery and want of
value, the same cannot apply to Gilbert because the stock certificates which Gilbert
endorsed in blank were in the undisturbed possession of his parents who were the
beneficial owners thereof and who themselves as such owners caused the transfer in
 CORPORATION CODE

SALE OF DELINQUENT STOCKS QUOROM

43. CALATAGAN GOLF CLUB, INC. vs. SIXTO CLEMENTE, JR. 44. PAUL LEE TAN, ET. AL. vs. PAUL SYCIP and MERRITTO LIM

There are fundamental differences that defy equivalence or even analogy between For stock corporations, the "quorum" referred to in Section 52 of the Corporation
the sale of delinquent stock under Section 68 and the sale that occurred in this case. Code is based on the number of outstanding voting stocks. For nonstock
At the root of the sale of delinquent stock is the non-payment of the subscription price corporations, only those who are actual, living members with voting rights shall be
for the share of stock itself. The stockholder or subscriber has yet to fully pay for the counted in determining the existence of a quorum during members meetings. Dead
value of the share or shares subscribed. members shall not be counted.

Under Section 91 of the Corporation Code, membership in a non-stock corporation Basis for Quorum
"shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws." The By-law provisions are elaborate in explaining the Generally, stockholders or members meetings are called for the purpose of electing
manner and the causes for the termination of membership in Calatagan, through the directors or trustees 23 and transacting some other business calling for or requiring
execution on the lien of the share. The Court is satisfied that the By-Laws, as written, the action or consent of the shareholders or members, 24 such as the amendment of
affords due protection to the member by assuring that the member should be notified the articles of incorporation and bylaws, sale or disposition of all or substantially all
by the Secretary of the looming execution sale that would terminate membership in corporate assets, consolidation and merger and the like, or any other business that
the club. In addition, the By-Laws guarantees that after the execution sale, the may properly come before the meeting.
proceeds of the sale would be returned to the former member after deducting the
outstanding obligations. If followed to the letter, the termination of membership under Under the Corporation Code, stockholders or members periodically elect the board of
this procedure outlined in the By-Laws would accord with substantial justice. directors or trustees, who are charged with the management of the corporation. 25
The board, in turn, periodically elects officers to carry out management functions on a
day-to-day basis. As owners, though, the stockholders or members have residual
powers over fundamental and major corporate changes.

While stockholders and members (in some instances) are entitled to receive profits,
the management and direction of the corporation are lodged with their representatives
and agents -- the board of directors or trustees. 26 In other words, acts of
management pertain to the board; and those of ownership, to the stockholders or
members. In the latter case, the board cannot act alone, but must seek approval of
the stockholders or members. 27

Conformably with the foregoing principles, one of the most important rights of a
qualified shareholder or member is the right to vote -- either personally or by proxy --
for the directors or trustees who are to manage the corporate affairs. 28 The right to
choose the persons who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the
management of corporate affairs, or in which a member in a nonstock corporation can
have a say on how the purposes and goals of the corporation may be achieved. 29
Once the directors or trustees are elected, the stockholders or members relinquish
corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general
rule is that every member of a nonstock corporation, and every legal owner of shares
in a stock corporation, has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right to vote. 30
Voting may be expressed personally, or through proxies who vote in their
representative capacities. 31 Generally, the right to be present and to vote in a
meeting is determined by the time in which the meeting is held. 32
 CORPORATION CODE

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially

Section 52 of the Corporation Code states: all of the corporation property;
"Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in 4. Incurring, creating or increasing bonded indebtedness;
the by-laws, a quorum shall consist of the stockholders representing a majority of the 5. Increase or decrease of capital stock;
outstanding capital stock or a majority of the members in the case of non-stock 6. Merger or consolidation of the corporation with another corporation or other
corporations." corporations;
7. Investment of corporate funds in another corporation or business in accordance
In stock corporations, the presence of a quorum is ascertained and counted on the with this Code; and
basis of the outstanding capital stock, as defined by the Code thus: 8. Dissolution of the corporation.
"SECTION 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this Code, means the total shares of stock issued under binding "Except as provided in the immediately preceding paragraph, the vote necessary to
subscription agreements to subscribers or stockholders, whether or not fully or approve a particular corporate act as provided in this Code shall be deemed to refer
partially paid, except treasury shares." (Underscoring supplied) only to stocks with voting rights."

The Right to Vote in Stock Corporations Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the
intention of the lawmakers was to base the quorum mentioned in Section 52 on the
The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 number of outstanding voting stocks. 38
It is settled that unissued stocks may not be voted or considered in determining
whether a quorum is present in a stockholders meeting, or whether a requisite The Right to Vote in Nonstock Corporations
proportion of the stock of the corporation is voted to adopt a certain measure or act.
Only stock actually issued and outstanding may be voted. 34 Under Section 6 of the In nonstock corporations, the voting rights attach to membership. 39 Members vote as
Corporation Code, each share of stock is entitled to vote, unless otherwise provided persons, in accordance with the law and the bylaws of the corporation. Each member
in the articles of incorporation or declared delinquent 35 under Section 67 of the Code. shall be entitled to one vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for determining the
Neither the stockholders nor the corporation can vote or represent shares that have quorum for stock corporations is applied by analogy to nonstock corporations, only
never passed to the ownership of stockholders; or, having so passed, have again those who are actual members with voting rights should be counted.
been purchased by the corporation. 36 These shares are not to be taken into
consideration in determining majorities. When the law speaks of a given proportion of Under Section 52 of the Corporation Code, the majority of the members representing
the stock, it must be construed to mean the shares that have passed from the the actual number of voting rights, not
corporation, and that may be voted. 37 the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum. 41
Section 6 of the Corporation Code, in part, provides:
Section 25 of the Code specifically provides that a majority of the directors or
"Section 6. Classification of shares. The shares of stock of stock corporations may trustees, as fixed in the articles of incorporation, shall constitute a quorum for the
be divided into classes or series of shares, or both, any of which classes or series of transaction of corporate business (unless the articles of incorporation or the bylaws
shares may have such rights, privileges or restrictions as may be stated in the articles provide for a greater majority). If the intention of the lawmakers was to base the
of incorporation: Provided, That no share may be deprived of voting rights except quorum in the meetings of stockholders or members on their absolute number as
those classified and issued as "preferred" or "redeemable" shares, unless otherwise fixed in the articles of incorporation, it would have expressly specified so. Otherwise,
provided in this Code: Provided, further, that there shall always be a class or series of the only logical conclusion is that the legislature did not have that intention.
shares which have complete voting rights.
Effect of the Death of a Member or Shareholder
xxxxxxxxx
Having thus determined that the quorum in a members meeting is to be reckoned as
"Where the articles of incorporation provide for non-voting shares in the cases the actual number of members of the corporation, the next question to resolve is what
allowed by this Code, the holders of such shares shall nevertheless be entitled to vote happens in the event of the death of one of them.
on the following matters: In stock corporations, shareholders may generally transfer their shares. Thus, on the
death of a shareholder, the executor or administrator duly appointed by the Court is
1. Amendment of the articles of incorporation; vested with the legal title to the stock and entitled to vote it. Until a settlement and
2. Adoption and amendment of by-laws; division of the estate is effected, the stocks of the decedent are held by the
 CORPORATION CODE

administrator or executor. 44 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
On the other hand, membership in and all rights arising from a nonstock corporation provided in the Code; and
are personal and non-transferable, unless the articles of incorporation or the bylaws 3. In case of merger or consolidation. (n)
of the corporation provide otherwise. 45 In other words, the determination of whether
or not "dead members" are entitled to exercise their voting rights (through their Clearly, the right of appraisal may be exercised when there is a fundamental change
executor or administrator), depends on those articles of incorporation or bylaws. in the charter or articles of incorporation substantially prejudicing the rights of the
stockholders. It does not vest unless objectionable corporate action is taken. 13 It
Vacancy in the Board of Trustees serves the purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation.14
As regards the filling of vacancies in the board of trustees, Section 29 of the
Corporation Code provides: Now, however, a corporation can purchase its own shares, provided payment is made
out of surplus profits and the acquisition is for a legitimate corporate purpose. 18 In the
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring Philippines, this new rule is embodied in Section 41 of the Corporation Code, to wit:
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of the Section 41. Power to acquire own shares. - A stock corporation shall have the power
remaining directors or trustees, if still constituting a quorum; otherwise, said to purchase or acquire its own shares for a legitimate corporate purpose or purposes,
vacancies must be filled by the stockholders in a regular or special meeting called for including but not limited to the following cases: Provided, That the corporation has
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for unrestricted retained earnings in its books to cover the shares to be purchased or
the unexpired term of his predecessor in office." acquired:

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining 1. To eliminate fractional shares arising out of stock dividends;
still constitute a quorum. The phrase "may be filled" in Section 29 shows that the 2. To collect or compromise an indebtedness to the corporation, arising out of
filling of vacancies in the board by the remaining directors or trustees constituting a unpaid subscription, in a delinquency sale, and to purchase delinquent
quorum is merely permissive, not mandatory. 48 Corporations, therefore, may choose shares sold during said sale; and
how vacancies in their respective boards may be filled up -- either by the remaining 3. To pay dissenting or withdrawing stockholders entitled to payment for their
directors constituting a quorum, or by the stockholders or members in a regular or shares under the provisions of this Code. (n)
special meeting called for the purpose. 49
The Corporation Code defines how the right of appraisal is exercised, as well as the
APPRAISAL RIGHT implications of the right of appraisal, as follows:

45. PHILIP TURNER and ELNORA TURNER vs. LORENZO SHIPPING 1. The appraisal right is exercised by any stockholder who has voted against the
CORPORATION proposed corporate action by making a written demand on the corporation within 30
days after the date on which the vote was taken for the payment of the fair value of
Stockholders Right of Appraisal, In General his shares. The failure to make the demand within the period is deemed a waiver of
the appraisal right.19
A stockholder who dissents from certain corporate actions has the right to demand
payment of the fair value of his or her shares. This right, known as the right of 2. If the withdrawing stockholder and the corporation cannot agree on the fair value of
appraisal, is expressly recognized in Section 81 of the Corporation Code, to wit: the shares within a period of 60 days from the date the stockholders approved the
corporate action, the fair value shall be determined and appraised by three
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have disinterested persons, one of whom shall be named by the stockholder, another by
the right to dissent and demand payment of the fair value of his shares in the the corporation, and the third by the two thus chosen. The findings and award of the
following instances: majority of the appraisers shall be final, and the corporation shall pay their award
within 30 days after the award is made. Upon payment by the corporation of the
1. In case any amendment to the articles of incorporation has the effect of agreed or awarded price, the stockholder shall forthwith transfer his or her shares to
changing or restricting the rights of any stockholder or class of shares, or of the corporation.20
authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate 3. All rights accruing to the withdrawing stockholders shares, including voting and
existence; dividend rights, shall be suspended from the time of demand for the payment of the
 CORPORATION CODE

fair value of the shares until either the abandonment of the corporate action involved
or the purchase of the shares by the corporation, except the right of such stockholder
to receive payment of the fair value of the shares.21

4. Within 10 days after demanding payment for his or her shares, a dissenting
stockholder shall submit to the corporation the certificates of stock representing his
shares for notation thereon that such shares are dissenting shares. A failure to do so
shall, at the option of the corporation, terminate his rights under this Title X of the
Corporation Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of the transferor
as a dissenting stockholder under this Title shall cease and the transferee shall have
all the rights of a regular stockholder; and all dividend distributions that would have
accrued on such shares shall be paid to the transferee. 22

5. If the proposed corporate action is implemented or effected, the corporation shall

pay to such stockholder, upon the surrender of the certificates of stock representing
his shares, the fair value thereof as of the day prior to the date on which the vote was
taken, excluding any appreciation or depreciation in anticipation of such corporate
action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting

stockholder unless the corporation has unrestricted retained earnings in its books to
cover the payment. In case the corporation has no available unrestricted retained
earnings in its books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to
fund the payment of the shares of stocks of the withdrawing stockholders. Under the
doctrine, the capital stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets.24 The creditors of a corporation have the right to
assume that the board of directors will not use the assets of the corporation to
purchase its own stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the stockholders without first
paying corporate debts. Thus, any disposition of corporate funds and assets to the
prejudice of creditors is null and void.26
 CORPORATION CODE

CORPORATE BOOKS AND RIGHT TO INSPECT

Second. Any officer or agent of the concerned corporation shall refuse to allow the
46. MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG, said director, trustee, stockholder or member of the corporation to examine and copy
HANNAH ZORAYDA A. ANG, and VICENTE G. GENATO vs. EDUARDO said excerpts;
G. ANG
Third. If such refusal is made pursuant to a resolution or order of the board of
In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the directors or trustees, the liability under this section for such action shall be imposed
rationale behind a stockholder's right to inspect corporate books, to wit: upon the directors or trustees who voted for such refusal; and,
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an Fourth. Where the officer or agent of the corporation sets up the defense that the
incident of ownership of the corporate property, whether this ownership or interest be person demanding to examine and copy excerpts from the corporations records and
termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This minutes has improperly used any information secured through any prior examination
right is predicated upon the necessity of self-protection. It is generally held by majority of the records or minutes of such corporation or of any other corporation, or was not
of the courts that where the right is granted by statute to the stockholder, it is given to acting in good faith or for a legitimate purpose in making his demand, the contrary
him as such and must be exercised by him with respect to his interest as a must be shown or proved.
stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the
interest as a stockholder, and has to be proper and lawful in character and not defense of improper use or motive is in the nature of a justifying circumstance that
inimical to the interest of the corporation.30 would exonerate those who raise and are able to prove the same. Accordingly, where
the corporation denies inspection on the ground of improper motive or purpose, the
In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or burden of proof is taken from the shareholder and placed on the corporation. 33 This
examine the records of a corporation under Section 74 of the Corporation Code is being the case, it would be improper for the prosecutor, during preliminary
circumscribed by the express limitation contained in the succeeding proviso, which investigation, to refuse or fail to address the defense of improper use or motive, given
states that: its express statutory recognition. In the past we have declared that if justifying
circumstances are claimed as a defense, they should have at least been raised during
[I]t shall be a defense to any action under this section that the person demanding to preliminary investigation;34 which settles the view that the consideration and
examine and copy excerpts from the corporation's records and minutes has determination of justifying circumstances as a defense is a relevant subject of
improperly used any information secured through any prior examination of the preliminary investigation.
records or minutes of such corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his demand. (Emphasis 47. ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA vs. CEZAR T.
supplied) QUIAMBAO and ERIC C. PILAPIL

Thus, contrary to Eduardos insistence, the stockholders right to inspect corporate The act of ref using to allow inspection of the stock and transfer book of a corporation,
books is not without limitations. While the right of inspection was enlarged under the when done in violation of Section 74(4) of the Corporation Code, is punishable as an
Corporation Code as opposed to the old Corporation Law (Act No. 1459, as offense under Section 144 of the same code.
amended),
We first address the inaccurate pronouncement of the RTC.
It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information secured Section 74 is the provision of the Corporation Code that deals with the books a
through a prior examination, or that the person asking for such examination must be corporation is required to keep. It reads:
acting in good faith and for a legitimate purpose in making his demand. 32 (Emphasis
supplied) Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and
In order therefore for the penal provision under Section 144 of the Corporation Code carefully preserve at its principal office a record of all business transactions and
to apply in a case of violation of a stockholder or members right to inspect the minutes of all meetings of stockholders or members, or of the board of directors or
corporate books/records as provided for under Section 74 of the Corporation Code, trustees, in which shall be set forth in detail the time and place of holding the meeting,
the following elements must be present: how authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done at
First. A director, trustee, stockholder or member has made a prior demand in writing the meeting. Upon the demand of any director, trustee, stockholder or member, the
for a copy of excerpts from the corporations records or minutes; time when any director, trustee, stockholder or member entered or left the meeting
 CORPORATION CODE

must be noted in the minutes; and on a similar demand, the yeas and nays must be than five (5) years, or both, in the discretion of the court. If the violation is committed
taken on any motion or proposition, and a record thereof carefully made. The protest by a corporation, the same may, after notice and hearing, be dissolved in appropriate
of any director, trustee, stockholder or member on any action or proposed action must proceedings before the Securities and Exchange Commission: Provided, That such
be recorded in full on his demand. dissolution shall not preclude the institution of appropriate action against the director,
The records of all business transactions of the corporation and the minutes of any trustee or officer of the corporation responsible for said violation: Provided, further,
meetings shall be open to inspection by any director, trustee, stockholder or member That nothing in this section shall be construed to repeal the other causes for
of the corporation at reasonable hours on business days and he may demand, in dissolution of a corporation provided in this Code. (190 112 a) (Emphasis supplied)
writing, for a copy of excerpts from said records or minutes, at his expense.
While Section 74 of the Corporation Code expressly mentions the application of
Any officer or agent of the corporation who shall refuse to allow any director, trustees, Section 144 only in relation to the act of "refus[ing] to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its stockholder or member of the corporation to examine and copy excerpts from [the
records or minutes, in accordance with the provisions of this Code, shall be liable to corporation's] records or minutes," the same does not mean that the latter section no
such director, trustee, stockholder or member for damages, and in addition, shall be longer applies to any other possible violations of the former section.
guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of the board of It must be emphasized that Section 144 already purports to penalize "[v]iolations" of
directors or trustees, the liability under this section for such action shall be imposed "any provision" of the Corporation Code "not otherwise specifically penalized therein."
upon the directors or trustees who voted for such refusal: and Provided, further, That Hence, we find inconsequential the fact that that Section 74 expressly mentions the
it shall be a defense to any action under this section that the person demanding to application of Section 144 only to a specific act, but not with respect to the other
examine and copy excerpts from the corporation's records and minutes has possible violations of the former section.
improperly used any information secured through any prior examination of the records
or minutes of such corporation or of any other corporation, or was not acting in good Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be
faith or for a legitimate purpose in making his demand. made to apply to violations of the right of a stockholder to inspect the stock and
transfer book of a corporation under Section 74(4) given the already unequivocal
Stock corporations must also keep a book to be known as the "stock and transfer intent of the legislature to penalize violations of a parallel right, i.e., the right of a
book'', in which must be kept a record of all stocks in the names of the stockholders stockholder or member to examine the other records and minutes of a corporation
alphabetically arranged; the installments paid and unpaid on all stock for which under Section 74(2). Certainly, all the rights guaranteed to corporators under Section
subscription has been made, and the date of payment of any installment; a statement 7 4 of the Corporation Code are mandatory for the corporation to respect. All such
of every alienation, sale or transfer of stock made, the date thereof, and by and to rights are just the same underpinned by the same policy consideration of keeping
whom made; and such other entries as the by-laws may prescribe. The stock and public confidence in the corporate vehicle thru an assurance of transparency in the
transfer book shall be kept in the principal office of the corporation or in the office of corporation's operations.
its stock transfer agent and shall be open for inspection by any director or stockholder
of the corporation at reasonable hours on business days. 48. BANK OF COMMERCE vs. RADIO PHILIPPINES NETWORK, INC., ET.
AL.
No stock transfer agent or one engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Merger and De Facto Merger
Philippines unless he secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the Commission, which shall be Merger is a re-organization of two or more corporations that results in their
renewable annually: Provided, That a stock corporation is not precluded from consolidating into a single corporation, which is one of the constituent corporations,
performing or making transfer of its own stocks, in which case all the rules and one disappearing or dissolving and the other surviving. To put it another way, merger
regulations imposed on stock transfer agents, except the payment of a license fee is the absorption of one or more corporations by another existing corporation, which
herein provided, shall be applicable. (5 la and 32a; P.B. No. 268.) (Emphasis retains its identity and takes over the rights, privileges, franchises, properties, claims,
supplied) liabilities and obligations of the absorbed corporation(s). The absorbing corporation
continues its existence while the life or lives of the other corporation(s) is or are
Section 144 of the Corporation Code, on the other hand, is the general penal terminated.13
provision of the Corporation Code. It reads:
Section 144. Violations of the Code. - Violations of any of the provisions of this Code The Corporation Code requires the following steps for merger or consolidation:
or its amendments not otherwise specifically penalized therein shall be punished by a
fine of not less than one thousand (1,000.00) pesos but not more than ten thousand (1) The board of each corporation draws up a plan of merger or consolidation.
(10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more Such plan must include any amendment, if necessary, to the articles of
 CORPORATION CODE

incorporation of the surviving corporation, or in case of consolidation, all the

statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for
approval. A meeting must be called and at least two (2) weeks notice must
be sent to all stockholders or members, personally or by registered mail. A
summary of the plan must be attached to the notice. Vote of two-thirds of the
members or of stockholders representing two thirds of the outstanding
capital stock will be needed. Appraisal rights, when proper, must be
respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation.
These take the place of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the surviving
corporation.
(4) Submission of said articles of merger or consolidation to the SEC for
approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.14

In his book, Philippine Corporate Law,20 Dean Cesar Villanueva explained that under
the Corporation Code, "a de facto merger can be pursued by one corporation
acquiring all or substantially all of the properties of another corporation in exchange of
shares of stock of the acquiring corporation. The acquiring corporation would end up
with the business enterprise of the target corporation; whereas, the target corporation
would end up with basically its only remaining assets being the shares of stock of the
acquiring corporation." (Emphasis supplied)

It is pointed out that under common law,23 if one corporation sells or otherwise
transfers all its assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor if it has acted in good faith and has paid adequate
consideration for the assets, except: (1) where the purchaser expressly or impliedly
agrees to assume such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered into
fraudulently in order to escape liability for such debts. 24
 CORPORATION CODE

MERGER AND CONSOLIDATION Clearly, the merger shall only be effective upon the issuance of a certificate of merger
by the SEC, subject to its prior determination that the merger is not inconsistent with
49. MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by the Corporation Code or existing laws.29 Where a party to the merger is a special
its Liquidator, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION corporation governed by its own charter, the Code particularly mandates that a
vs. EDWARD WILLKOM, ET. AL. favorable recommendation of the appropriate government agency should first be
obtained.30
Ordinarily, in the merger of two or more existing corporations, one of the corporations
survives and continues the combined business, while the rest are dissolved and all The issuance of the certificate of merger is crucial because not only does it bear out
their rights, properties, and liabilities are acquired by the surviving corporation. 20 SECs approval but it also marks the moment when the consequences of a merger
Although there is a dissolution of the absorbed or merged corporations, there is no take place. By operation of law, upon the effectivity of the merger, the absorbed
winding up of their affairs or liquidation of their assets because the surviving corporation ceases to exist but its rights and properties, as well as liabilities, shall be
corporation automatically acquires all their rights, privileges, and powers, as well as taken and deemed transferred to and vested in the surviving corporation. 31
their liabilities.21
The same rule applies to consolidation which becomes effective not upon mere
The merger, however, does not become effective upon the mere agreement of the agreement of the members but only upon issuance of the certificate of consolidation
constituent corporations.22 Since a merger or consolidation involves fundamental by the SEC.32 When the SEC, upon processing and examining the articles of
changes in the corporation, as well as in the rights of stockholders and creditors, consolidation, is satisfied that the consolidation of the corporations is not inconsistent
there must be an express provision of law authorizing them. 23 with the provisions of the Corporation Code and existing laws, it issues a certificate of
consolidation which makes the reorganization official. 33 The new consolidated
The steps necessary to accomplish a merger or consolidation, as provided for in corporation comes into existence and the constituent corporations are dissolved and
Sections 76,24 77,25 78,26 and 7927 of the Corporation Code, are: cease to exist.34

(1) The board of each corporation draws up a plan of merger or consolidation. A corporation is an artificial being created by operation of law. It possesses the right
Such plan must include any amendment, if necessary, to the articles of of succession and such powers, attributes, and properties expressly authorized by
incorporation of the surviving corporation, or in case of consolidation, all the law or incident to its existence.35 It has a personality separate and distinct from the
statements required in the articles of incorporation of a corporation. persons composing it, as well as from any other legal entity to which it may be
related.36 Being separate entities, the property of one cannot be considered the
(2) Submission of plan to stockholders or members of each corporation for property of the other.
approval. A meeting must be called and at least two (2) weeks notice must
be sent to all stockholders or members, personally or by registered mail. A 50. METROPOLITAN BANK & TRUST COMPANY, INC. (as successor-in-
summary of the plan must be attached to the notice. Vote of two-thirds of the interest of the banking operations of Global Business Bank, Inc.
members or of stockholders representing two-thirds of the outstanding formerly known as PHILIPPINE BANKING CORPORATION) vs. THE
capital stock will be needed. Appraisal rights, when proper, must be BOARD OF TRUSTEES OF RIVERSIDE MILLS CORPORATION
respected. PROVIDENT AND RETIREMENT FUND, ET. AL.

(3) Execution of the formal agreement, referred to as the articles of merger o[r] Under Section 12227 of the Corporation Code, a dissolved corporation shall
consolidation, by the corporate officers of each constituent corporation. nevertheless continue as a body corporate for three (3) years for the purpose of
These take the place of the articles of incorporation of the consolidated prosecuting and defending suits by or against it and enabling it to settle and close its
corporation, or amend the articles of incorporation of the surviving affairs, to dispose and convey its property and to distribute its assets, but not for the
corporation. purpose of continuing the business for which it was established. Within those three (3)
years, the corporation may appoint a trustee or receiver who shall carry out the said
(4) Submission of said articles of merger or consolidation to the SEC for purposes beyond the three (3)-year winding-up period. Thus, a trustee of a dissolved
approval. corporation may commence a suit which can proceed to final judgment even beyond
the three (3)-year period of liquidation.28
(5) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before. 51. Supra #48

(6) Issuance of certificate of merger or consolidation.28

 CORPORATION CODE

CORPORATE DISSOLUTION them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
52. VITALIANO N. AGUIRRES II and FIDEL N. AGUIRRE vs. FQB+7, INC., corporation, partnership or association and the state insofar as it concerns
NATHANIEL D. BOCOBO, PRISCILA BOCOBO and ANTONIO DE VILLA their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers
Section 122 of the Corporation Code prohibits a dissolved corporation from continuing or managers of such corporations, partnerships or associations.
its business, but allows it to continue with a limited personality in order to settle and
close its affairs, including its complete liquidation, thus: The Court reproduced the above jurisdiction in Rule 1 of the Interim Rules of
Procedure Governing Intra-corporate Controversies under R.A. No. 8799:
Sec. 122. Corporate liquidation. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for SECTION 1. (a) Cases Covered These Rules shall govern the procedure to be
other purposes is terminated in any other manner, shall nevertheless be continued as observed in civil cases involving the following:
a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and (1) Devices or schemes employed by, or any act of, the board of directors,
enabling it to settle and close its affairs, to dispose of and convey its property and to business associates, officers or partners, amounting to fraud or
distribute its assets, but not for the purpose of continuing the business for which it misrepresentation which may be detrimental to the interest of the public
was established. and/or of the stockholders, partners, or members of any corporation,
partnership, or association;
A partys stockholdings in a corporation, whether existing or dissolved, is a property (2) Controversies arising out of intra-corporate, partnership, or association
right44 which he may vindicate against another party who has deprived him thereof. relations, between and among stockholders, members, or associates; and
The corporations dissolution does not extinguish such property right. Section 145 of between, any or all of them and the corporation, partnership, or association
the Corporation Code ensures the protection of this right, thus: of which they are stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers,
Sec. 145. Amendment or repeal. No right or remedy in favor of or against any or managers of corporations, partnerships, or associations;
corporation, its stockholders, members, directors, trustees, or officers, nor any liability (4) Derivative suits; and
incurred by any such corporation, stockholders, members, directors, trustees, or (5) Inspection of corporate books.
officers, shall be removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or of any part Meanwhile, jurisprudence has elaborated on the above definitions by providing tests
thereof. (Emphases supplied.) in determining whether a controversy is intra-corporate. Reyes v. Regional Trial Court
of Makati, Br. 14247 contains a comprehensive discussion of these two tests, thus:
Intra-corporate disputes remain even when the corporation is dissolved.
A review of relevant jurisprudence shows a development in the Court's approach in
Jurisdiction over the subject matter is conferred by law. R.A. No. 879945 conferred classifying what constitutes an intra-corporate controversy. Initially, the main
jurisdiction over intra-corporate controversies on courts of general jurisdiction or consideration in determining whether a dispute constitutes an intra-corporate
RTCs,46 to be designated by the Supreme Court. Thus, as long as the nature of the controversy was limited to a consideration of the intra-corporate relationship existing
controversy is intra-corporate, the designated RTCs have the authority to exercise between or among the parties. The types of relationships embraced under Section
jurisdiction over such cases. 5(b) x x x were as follows:

So what are intra-corporate controversies? R.A. No. 8799 refers to Section 5 of a) between the corporation, partnership, or association and the public;
Presidential Decree (P.D.) No. 902-A (or The SEC Reorganization Act) for a b) between the corporation, partnership, or association and its stockholders, partners,
description of such controversies: members, or officers;
c) between the corporation, partnership, or association and the State as far as its
a) Devices or schemes employed by or any acts, of the board of directors, franchise, permit or license to operate is concerned; and
business associates, its officers or partners, amounting to fraud and d) among the stockholders, partners or associates themselves. xxx
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholder, partners, members of associations or The existence of any of the above intra-corporate relations was sufficient to confer
organizations registered with the Commission; jurisdiction to the SEC now the RTC, regardless of the subject matter of the dispute.
b) Controversies arising out of intra-corporate or partnership relations, between This came to be known as the relationship test.
and among stockholders, members, or associates; between any or all of
 CORPORATION CODE

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, the intra-corporate relations between the parties, and the questions involved pertain
Inc., the Court introduced the nature of the controversy test. We declared in this case to their rights and obligations under the Corporation Code and matters relating to the
that it is not the mere existence of an intra-corporate relationship that gives rise to an regulation of the corporation. We further hold that the nature of the case as an intra-
intra-corporate controversy; to rely on the relationship test alone will divest the regular corporate dispute was not affected by the subsequent dissolution of the corporation.
courts of their jurisdiction for the sole reason that the dispute involves a corporation,
its directors, officers, or stockholders. We saw that there is no legal sense in It bears reiterating that Section 145 of the Corporation Code protects, among others,
disregarding or minimizing the value of the nature of the transactions which gives rise the rights and remedies of corporate actors against other corporate actors. The
to the dispute. statutory provision assures an aggrieved party that the corporations dissolution will
not impair, much less remove, his/her rights or remedies against the corporation, its
Under the nature of the controversy test, the incidents of that relationship must also stockholders, directors or officers. It also states that corporate dissolution will not
be considered for the purpose of ascertaining whether the controversy itself is intra- extinguish any liability already incurred by the corporation, its stockholders, directors,
corporate. The controversy must not only be rooted in the existence of an intra- or officers. In short, Section 145 preserves a corporate actors cause of action and
corporate relationship, but must as well pertain to the enforcement of the parties' remedy against another corporate actor. In so doing, Section 145 also preserves the
correlative rights and obligations under the Corporation Code and the internal and nature of the controversy between the parties as an intra-corporate dispute.
intra-corporate regulatory rules of the corporation. If the relationship and its incidents
are merely incidental to the controversy or if there will still be conflict even if the The dissolution of the corporation simply prohibits it from continuing its business.
relationship does not exist, then no intra-corporate controversy exists. However, despite such dissolution, the parties involved in the litigation are still
corporate actors. The dissolution does not automatically convert the parties into total
The Court then combined the two tests and declared that jurisdiction should be strangers or change their intra-corporate relationships. Neither does it change or
determined by considering not only the status or relationship of the parties, but also terminate existing causes of action, which arose because of the corporate ties
the nature of the question under controversy. This two-tier test was adopted in the between the parties. Thus, a cause of action involving an intra-corporate controversy
recent case of Speed Distribution, Inc. v. Court of Appeals: remains and must be filed as an intra-corporate dispute despite the subsequent
'To determine whether a case involves an intra-corporate controversy, and is to be dissolution of the corporation.
heard and decided by the branches of the RTC specifically designated by the Court to 53. PARAMOUNT INSURANCE CORP. vs. A.C. ORDOEZ CORPORATION
try and decide such cases, two elements must concur: (a) the status or relationship of and FRANKLIN SUSPINE
the parties, and [b] the nature of the question that is the subject of their controversy.
Although the cancellation of a corporations certificate of registration puts an end to its
The first element requires that the controversy must arise out of intra-corporate or juridical personality, Sec. 122 of the Corporation Code, however provides that a
partnership relations between any or all of the parties and the corporation, corporation whose corporate existence is terminated in any manner continues to be a
partnership, or association of which they are stockholders, members or associates, body corporate for three years after its dissolution for purposes of prosecuting and
between any or all of them and the corporation, partnership or association of which defending suits by and against it and to enable it to settle and close its affairs. 11
they are stockholders, members or associates, respectively; and between such Moreover, the rights of a corporation, which is dissolved pending litigation, are
corporation, partnership, or association and the State insofar as it concerns the accorded protection by law pursuant to Sec. 145 of the Corporation Code, to wit:
individual franchises. The second element requires that the dispute among the parties
be intrinsically connected with the regulation of the corporation. If the nature of the Section 145. Amendment or repeal. No right or remedy in favor of or against any
controversy involves matters that are purely civil in character, necessarily, the case corporation, its stockholders, members, directors, trustees, or officers, nor any
does not involve an intra-corporate controversy.' (Citations and some emphases liability incurred by any such corporation, stockholders, members, directors, trustees,
omitted; emphases supplied.) or officers, shall be removed or impaired either by the subsequent dissolution of
said corporation or by any subsequent amendment or repeal of this Code or of any
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of part thereof. (Emphasis ours)
intra-corporate or partnership relations, and (b) the nature of the question subject of
the controversy must be such that it is intrinsically connected with the regulation of the Dissolution or even the expiration of the three-year liquidation period should not be a
corporation or the enforcement of the parties rights and obligations under the bar to a corporations enforcement of its rights as a corporation. 12
Corporation Code and the internal regulatory rules of the corporation. So long as
these two criteria are satisfied, the dispute is intra-corporate and the RTC, acting as a 54. ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS
special commercial court, has jurisdiction over it. VILLAGE ASSOCIATION and RAFAEL TINIO

Examining the case before us in relation to these two criteria, the Court finds and so SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own
holds that the case is essentially an intra-corporate dispute. It obviously arose from limitation or is annulled by forfeiture or otherwise, or whose corporate existence for
 CORPORATION CODE

other purposes is terminated in any other manner, shall nevertheless be continued as FOREIGN CORPORATION
a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and 55. STEELCASE, INC. vs. DESIGN INTERNATIONAL SELECTIONS, INC.
enabling it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it The rule that an unlicensed foreign corporations doing business in the Philippine do
was established. not have the capacity to sue before the local courts is well-established. Section 133 of
the Corporation Code of the Philippines explicitly states:
At any time during said three (3) years, said corporation is authorized and empowered Sec. 133. Doing business without a license. - No foreign corporation transacting
to convey all of its property to trustees for the benefit of stockholders, members, business in the Philippines without a license, or its successors or assigns, shall be
creditors, and other persons in interest. From and after any such conveyance by the permitted to maintain or intervene in any action, suit or proceeding in any court or
corporation of its property in trust for the benefit of its stockholders, members, administrative agency of the Philippines; but such corporation may be sued or
creditors and others in interest, all interest which the corporation had in the property proceeded against before Philippine courts or administrative tribunals on any valid
terminates, the legal interest vests in the trustees, and the beneficial interest in the cause of action recognized under Philippine laws.
stockholders, members, creditors or other persons in interest.
The phrase "doing business" is clearly defined in Section 3(d) of R.A. No. 7042
Upon winding up of the corporate affairs, any asset distributable to any creditor or (Foreign Investments Act of 1991), to wit:
stockholder or member who is unknown or cannot be found shall be escheated to the
city or municipality where such assets are located. d) The phrase "doing business" shall include soliciting orders, service
contracts, opening offices, whether called "liaison" offices or branches;
Except by decrease of capital stock and as otherwise allowed by this Code, no appointing representatives or distributors domiciled in the Philippines or who
corporation shall distribute any of its assets or property except upon lawful dissolution in any calendar year stay in the country for a period or periods totalling one
and after payment of all its debts and liabilities. hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in
This Court has held that: the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the
It is to be noted that the time during which the corporation, through its own officers, performance of acts or works, or the exercise of some of the functions
may conduct the liquidation of its assets and sue and be sued as a corporation is normally incident to, and in progressive prosecution of, commercial gain or of
limited to three years from the time the period of dissolution commences; but there is the purpose and object of the business organization: Provided, however,
no time limit within which the trustees must complete a liquidation placed in their That the phrase "doing business" shall not be deemed to include mere
hands. It is provided only (Corp. Law, Sec. 78 now Sec. 122]) that the conveyance to investment as a shareholder by a foreign entity in domestic corporations duly
the trustees must be made within the three-year period. It may be found impossible to registered to do business, and/or the exercise of rights as such investor; nor
complete the work of liquidation within the three-year period or to reduce disputed having a nominee director or officer to represent its interests in such
claims to judgment. The authorities are to the effect that suits by or against a corporation; nor appointing a representative or distributor domiciled in the
corporation abate when it ceased to be an entity capable of suing or being sued (7 Philippines which transacts business in its own name and for its own
R.C.L., Corps., par. 750); but trustees to whom the corporate assets have been account; (Emphases supplied)
conveyed pursuant to the authority of Sec. 78 [now Sec. 122] may sue and be sued
as such in all matters connected with the liquidation... 7
This definition is supplemented by its Implementing Rules and Regulations, Rule I,
In the absence of trustees, this Court ruled, thus: Section 1(f) which elaborates on the meaning of the same phrase:
Still in the absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of f. "Doing business" shall include soliciting orders, service contracts, opening offices,
the corporation, acting for and in its behalf, might make proper representations with whether liaison offices or branches; appointing representatives or distributors,
the Securities and Exchange Commission, which has primary and sufficiently broad operating under full control of the foreign corporation, domiciled in the Philippines or
jurisdiction in matters of this nature, for working out a final settlement of the corporate who in any calendar year stay in the country for a period totalling one hundred eighty
concerns.8 [180] days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to and in progressive prosecution of commercial gain or of
 CORPORATION CODE

the purpose and object of the business organization. rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith."
The following acts shall not be deemed "doing business" in the Philippines:
Concededly, corporations act through agents, like directors and officers. Corporate
1. Mere investment as a shareholder by a foreign entity in domestic dealings must be characterized by utmost good faith and fairness. Corporations
corporations duly registered to do business, and/or the exercise of rights as cannot just feign ignorance of the legal rules as in most cases, they are manned by
such investor; sophisticated officers with tried management skills and legal experts with practiced
2. Having a nominee director or officer to represent its interest in such eye on legal problems. Each party to a corporate transaction is expected to act with
corporation; utmost candor and fairness and, thereby allow a reasonable proportion between
3. Appointing a representative or distributor domiciled in the Philippines which benefits and expected burdens. This is a norm which should be observed where one
transacts business in the representative's or distributor's own name and or the other is a foreign entity venturing in a global market. Xxx
account;
4. The publication of a general advertisement through any print or broadcast Thus, our consistent pronouncement, as held in cases such as Merril Lynch Futures
media; v. Court of Appeals, is apropos:
5. Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines; The rule is that a party is estopped to challenge the personality of a corporation after
6. Consignment by a foreign entity of equipment with a local company to be having acknowledged the same by entering into a contract with it. And the doctrine of
used in the processing of products for export; estoppel to deny corporate existence applies to foreign as well as to domestic
7. Collecting information in the Philippines; and corporations; "one who has dealt with a corporation of foreign origin as a corporate
8. Performing services auxiliary to an existing isolated contract of sale which entity is estopped to deny its existence and capacity." The principle "will be applied to
are not on a continuing basis, such as installing in the Philippines machinery prevent a person contracting with a foreign corporation from later taking advantage of
it has manufactured or exported to the Philippines, servicing the same, its noncompliance with the statutes, chiefly in cases where such person has received
training domestic workers to operate it, and similar incidental services. the benefits of the contract . . ."
(Emphases supplied)
56. GLOBAL BUSINESS HOLDINGS, INC. (formerly Global Business Bank,
From the preceding citations, the appointment of a distributor in the Philippines is not Inc.) vs. SURECOMP SOFTWARE, B.V.
sufficient to constitute "doing business" unless it is under the full control of the foreign
corporation. On the other hand, if the distributor is an independent entity which buys As a rule, unlicensed foreign non-resident corporations doing business in the
and distributes products, other than those of the foreign corporation, for its own name Philippines cannot file suits in the Philippines.23 This is mandated under Section 133
and its own account, the latter cannot be considered to be doing business in the of the Corporation Code, which reads:
Philippines.14 It should be kept in mind that the determination of whether a foreign
corporation is doing business in the Philippines must be judged in light of the Sec. 133. Doing business without a license. - No foreign corporation transacting
attendant circumstances.15 business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
A foreign corporation doing business in the Philippines may sue in Philippine Courts administrative agency of the Philippines, but such corporation may be sued or
although not authorized to do business here against a Philippine citizen or entity who proceeded against before Philippine courts or administrative tribunals on any valid
had contracted with and benefited by said corporation. To put it in another way, a cause of action recognized under Philippine laws.
party is estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the doctrine of A corporation has a legal status only within the state or territory in which it was
estoppel to deny corporate existence applies to a foreign as well as to domestic organized. For this reason, a corporation organized in another country has no
corporations. One who has dealt with a corporation of foreign origin as a corporate personality to file suits in the Philippines. In order to subject a foreign corporation
entity is estopped to deny its corporate existence and capacity: The principle will be doing business in the country to the jurisdiction of our courts, it must acquire a license
applied to prevent a person contracting with a foreign corporation from later taking from the Securities and Exchange Commission and appoint an agent for service of
advantage of its noncompliance with the statutes chiefly in cases where such person process. Without such license, it cannot institute a suit in the Philippines.241avvphi1
has received the benefits of the contract.
The exception to this rule is the doctrine of estoppel. Global is estopped from
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria sua non challenging Surecomps capacity to sue.
habere debet no person ought to derive any advantage of his own wrong. This is
as it should be for as mandated by law, "every person must in the exercise of his A foreign corporation doing business in the Philippines without license may sue in
 CORPORATION CODE

Philippine courts a Filipino citizen or a Philippine entity that had contracted with and states:
benefited from it.25 A party is estopped from challenging the personality of a
corporation after having acknowledged the same by entering into a contract with it. 26 [T]he phrase "doing business" shall include "soliciting orders, service contracts,
The principle is applied to prevent a person contracting with a foreign corporation opening offices, whether called liaison offices or branches; appointing
from later taking advantage of its noncompliance with the statutes, chiefly in cases representatives or distributors domiciled in the Philippines or who in any calendar
where such person has received the benefits of the contract. 27 year stay in the country for a period or periods totalling one hundred eighty (180) days
or more; participating in the management, supervision or control of any domestic
57. CARGILL, INC. vs. INTRA STRATA ASSURANCE CORPORATION business, firm, entity or corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements, and contemplate to that
Doing Business in the Philippines and Capacity to Sue extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the
The principal issue in this case is whether petitioner, an unlicensed foreign purpose and object of the business organization: Provided, however, That the phrase
corporation, has legal capacity to sue before Philippine courts. Under Article 12313 of doing business shall not be deemed to include mere investment as a shareholder by
the Corporation Code, a foreign corporation must first obtain a license and a a foreign entity in domestic corporations duly registered to do business, and/or the
certificate from the appropriate government agency before it can transact business in exercise of rights as such investor; nor having a nominee director or officer to
the Philippines. Where a foreign corporation does business in the Philippines without represent its interests in such corporation; nor appointing a representative or
the proper license, it cannot maintain any action or proceeding before Philippine distributor domiciled in the Philippines which transacts business in its own name and
courts as provided under Section 133 of the Corporation Code: for its own account.

Sec. 133. Doing business without a license. No foreign corporation transacting To be doing or "transacting business in the Philippines" for purposes of Section 133 of
business in the Philippines without a license, or its successors or assigns, shall be the Corporation Code, the foreign corporation must actually transact business in the
permitted to maintain or intervene in any action, suit or proceeding in any court or Philippines, that is, perform specific business transactions within the Philippine
administrative agency of the Philippines; but such corporation may be sued or territory on a continuing basis in its own name and for its own account. Actual
proceeded against before Philippine courts or administrative tribunals on any valid transaction of business within the Philippine territory is an essential requisite for the
cause of action recognized under Philippine laws. Philippines to to acquire jurisdiction over a foreign corporation and thus require the
foreign corporation to secure a Philippine business license. If a foreign corporation
Thus, the threshold question in this case is whether petitioner was doing business in does not transact such kind of business in the Philippines, even if it exports its
the Philippines. The Corporation Code provides no definition for the phrase "doing products to the Philippines, the Philippines has no jurisdiction to require such foreign
business." Nevertheless, Section 1 of Republic Act No. 5455 (RA 5455), 14 provides corporation to secure a Philippine business license.23 (Emphasis supplied)
that:
58. STRATEGIC ALLIANCE DEVELOPMENT CORPORATION vs. STAR
x x x the phrase "doing business" shall include soliciting orders, purchases, service INFRASTRUCTURE DEVELOPMENT CORPORATION ET AL.
contracts, opening offices, whether called liaison offices or branches; appointing
representatives or distributors who are domiciled in the Philippines or who in any An intra-corporate dispute is understood as a suit arising from intra-corporate
calendar year stay in the Philippines for a period or periods totalling one hundred relations29 or between or among stockholders or between any or all of them and the
eighty days or more; participating in the management, supervision or control of any corporation.30 Applying what has come to be known as the relationship test, it has
domestic business firm, entity or corporation in the Philippines; and any other act or been held that the types of actions embraced by the foregoing definition include the
acts that imply a continuity of commercial dealings or arrangements, and contemplate following suits: (a) between the corporation, partnership or association and the public;
to that extent the performance of acts or works, or the exercise of some of the (b) between the corporation, partnership or association and its stockholders, partners,
functions normally incident to, and in progressive prosecution of, commercial gain or members, or officers; (c) between the corporation, partnership or association and the
of the purpose and object of the business organization. (Emphasis supplied) State insofar as its franchise, permit or license to operate is concerned; and, (d)
among the stockholders, partners or associates themselves.31 As the definition is
This is also the exact definition provided under Article 44 of the Omnibus Investments broad enough to cover all kinds of controversies between stockholders and
Code of 1987. corporations, the traditional interpretation was to the effect that the relationship test
brooked no distinction, qualification or any exemption whatsoever.32
Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Investments Act of
1991, which repealed Articles 44-56 of Book II of the Omnibus Investments Code of However, the unqualified application of the relationship test has been modified on the
1987, enumerated not only the acts or activities which constitute "doing business" but ground that the same effectively divests regular courts of jurisdiction over cases for
also those activities which are not deemed "doing business." Section 3(d) of RA 7042 the sole reason that the suit is between the corporation and/or its corporators. It was
 CORPORATION CODE

held that the better policy in determining which body has jurisdiction over a case INTRA-CORPORATE DISPUTE
would be to consider not only the status or relationship of the parties but also the
nature of the question that is the subject of their controversy.33 Under the nature of 60. RENATO REAL vs. SANGU PHILIPPINES, INC. and/ or KIICHI ABE
the controversy test, the dispute must not only be rooted in the existence of an intra-
corporate relationship, but must also refer to the enforcement of the parties' Two-tier test in determining the existence of intra-corporate controversy
correlative rights and obligations under the Corporation Code as well as the internal
and intra-corporate regulatory rules of the corporation. 34 The combined application of Respondents strongly rely on this Courts pronouncement in the 1997 case of Tabang
the relationship test and the nature of the controversy test has, consequently, become v. National Labor Relations Commission, to wit:
the norm in determining whether a case is an intra-corporate controversy or is purely
civil in character. [A]n intra-corporate controversy is one which arises between a stockholder and the
corporation. There is no distinction, qualification nor any exemption whatsoever. The
CORPORATION SOLE provision is broad and covers all kinds of controversies between stockholders and
corporations.16
59. IGLESIA EVANGELICA METODISTA EN LAS ISLAS FILIPINAS
(IEMELIF), INC. vs. NATANAEL B. JUANE x - - - - - - - - - - - - - - - - - - - - - - In view of this, respondents contend that even if petitioner challenges his being a
-x G.R. No. 179404 NATANAEL B. JUANE vs. IGLESIA EVANGELICA corporate officer, the present case still constitutes an intra-corporate controversy as
METODISTA EN LAS ISLAS FILIPINAS (IEMELIF), INC. petitioner is undisputedly a stockholder and a director of respondent corporation.

As held by the Court of Appeals, even if the transformation of IEMELIF from a It is worthy to note, however, that before the promulgation of the Tabang case, the
corporation sole to a corporation aggregate was legally defective, its head or Court provided in Mainland Construction Co., Inc. v. Movilla17 a "better policy" in
governing body, i.e., Bishop Lazaro, whose acts were approved by the Highest determining which between the Securities and Exchange Commission (SEC) and the
Consistory of Elders, still did not change. A corporation sole is one formed by the Labor Arbiter has jurisdiction over termination disputes, 18 or similarly, whether they
chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious are intra-corporate or not, viz:
denomination, sect, or church, for the purpose of administering or managing, as
trustee, the affairs, properties and temporalities of such religious denomination, sect The fact that the parties involved in the controversy are all stockholders or that the
or church.8 As opposed to a corporation aggregate, a corporation sole consists of a parties involved are the stockholders and the corporation does not necessarily place
single member, while a corporation aggregate consists of two or more persons. If the dispute within the ambit of the jurisdiction of the SEC (now the Regional Trial
the transformation did not materialize, the corporation sole would still be Bishop Court19). The better policy to be followed in determining jurisdiction over a case
Lazaro, who himself performed the questioned acts of removing Juane as Resident should be to consider concurrent factors such as the status or relationship of
Pastor of the Tondo Congregation. If the transformation did materialize, the the parties or the nature of the question that is subject of their controversy. In
corporation aggregate would be composed of the Highest Consistory of Elders, which the absence of any one of these factors, the SEC will not have jurisdiction.
nevertheless approved the very same acts. As either Bishop Lazaro or the Highest Furthermore, it does not necessarily follow that every conflict between the corporation
Consistory of Elders had the authority to appoint Juane as Resident Pastor of the and its stockholders would involve such corporate matters as only SEC (now the
IEMELIF Tondo Congregation, it also had the power to remove him as such or Regional Trial Court20) can resolve in the exercise of its adjudicatory or quasi-judicial
transfer him to another congregation. powers. (Emphasis ours)

And, while Tabang was promulgated later than Mainland Construction Co., Inc., the
"better policy" enunciated in the latter appears to have developed into a standard
approach in classifying what constitutes an intra-corporate controversy. This is
explained lengthily in Reyes v. Regional Trial Court of Makati, Br. 142,21 to wit:

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Courts approach in

classifying what constitutes an intra-corporate controversy. Initially, the main
consideration in determining whether a dispute constitutes an intra-corporate
controversy was limited to a consideration of the intra-corporate relationship existing
between or among the parties. The types of relationships embraced under Section
5(b) x x x were as follows:
 CORPORATION CODE

a) between the corporation, partnership or association and the public;

b) between the corporation, partnership or association and its stockholders, partners, 61. CHATEAU DE BAIE CONDOMINIUM CORPORATION vs. SPS.
members or officers; RAYMOND and MA. ROSARIO MORENO
c) between the corporation, partnership or association and the State as far as its
franchise, permit or license to operate is concerned; and The facts of this case are similar to the facts in Wack Wack Condominium
d) among the stockholders, partners or associates themselves. Corporation, et al. v. Court of Appeals, et al.,20 where we held that the dispute as to
the validity of the assessments is purely an intra-corporate matter between Wack
The existence of any of the above intra-corporate relations was sufficient to confer Wack Condominium Corporation and its stockholder, Bayot, and is, thus, within the
jurisdiction to the SEC (now the RTC), regardless of the subject matter of the dispute. exclusive original jurisdiction of the Securities and Exchange Commission (SEC). 21
This came to be known as the relationship test. We ruled in that case that since the extrajudicial sale was authorized by Wack Wack
Condominium Corporations by-laws and was the result of the nonpayment of the
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, assessments, the legality of the foreclosure was necessarily an issue within the
Inc., the Court introduced the nature of the controversy test. We declared in this case exclusive original jurisdiction of the SEC.
that it is not the mere existence of an intra-corporate relationship that gives rise to an
intra-corporate controversy; to rely on the relationship test alone will divest the regular 62. WACK WACK CONDOMINIUM CORPORATION, WELBILT
courts of their jurisdiction for the sole reason that the dispute involves a corporation, CONSTRUCTION CORPORATION and EUGENIO JUAN GONZALES vs.
its directors, officers, or stockholders. We saw that there is no legal sense in TEH CORT OF APPEALS, HON. JUANITO ALMOSA, JR., in his capacity
disregarding or minimizing the value of the nature of the transactions which gives rise as Securities and Exchange Commission Hearing Officer, and
to the dispute. JOSEFINA M. BAYOT

Under the nature of the controversy test, the incidents of that relationship must also We agree with the Court of Appeals and the SEC that the dispute as to the validity of
be considered for the purpose of ascertaining whether the controversy itself is intra- the assessments is purely an intra-corporate matter between Wack Wack and its
corporate. The controversy must not only be rooted in the existence of an intra- stockholder, Bayot, and is thus within the exclusive original jurisdiction of the SEC. 3
corporate relationship, but must as well pertain to the enforcement of the parties And since the extrajudicial sale was authorized by Wack Wack's by-laws and was the
correlative rights and obligations under the Corporation Code and the internal and result of the non-payment of said assessment, the legality of such foreclosure is
intra-corporate regulatory rules of the corporation. If the relationship and its incidents necessarily an issue also within the exclusive original jurisdiction of the SEC, contrary
are merely incidental to the controversy or if there will still be conflict even if the to petitioner's contention that the SEC has no jurisdiction over such foreclosure it
relationship does not exist, then no intra-corporate controversy exists. being an action quasi-in-rem. Just because the property has already been sold
extrajudicially does not mean that the questioned assessment have now become
The Court then combined the two tests and declared that jurisdiction should be legal and valid or that they have become immaterial. In fact, the validity of the
determined by considering not only the status or relationship of the parties, but also foreclosure depends on the legality of the assessments and the issue must
the nature of the question under controversy. This two-tier test was adopted in the determined by the SEC if only to insure that the private respondent was not deprived
recent case of Speed Distribution Inc. v. Court of Appeals: of her property without having been heard. If there were no valid assessments, then
To determine whether a case involves an intra-corporate controversy, and is to be there was no lein on the property, and if there was no lien, what was there to
heard and decided by the branches of the RTC specifically designated by the Court to foreclosure? Thus, SEC Case No. 2675 has not become moot and academic and the
try and decide such cases, two elements must concur: (a) the status or relationship of SEC retains its jurisdiction to hear and decide the case despite the extrajudicial sale.
the parties, and (2) the nature of the question that is the subject of their controversy.
63. RAUL C. COSARE vs. BROADCOM ASIA, INC. and DANTE AREVALO
The first element requires that the controversy must arise out of intra-corporate or
partnership relations between any or all of the parties and the corporation, As regards the issue of jurisdiction, the Court has determined that contrary to the
partnership, or association of which they are not stockholders, members or ruling of the CA, it is the LA, and not the regular courts, which has the original
associates, between any or all of them and the corporation, partnership or association jurisdiction over the subject controversy. An intra-corporate controversy, which falls
of which they are stockholders, members or associates, respectively; and between within the jurisdiction of regular courts, has been regarded in its broad sense to
such corporation, partnership, or association and the State insofar as it concerns the pertain to disputes that involve any of the following relationships: (1) between the
individual franchises. The second element requires that the dispute among the parties corporation, partnership or association and the public; (2) between the corporation,
be intrinsically connected with the regulation of the corporation. If the nature of the partnership or association and the state in so far as its franchise, permit or license to
controversy involves matters that are purely civil in character, necessarily, the case operate is concerned; (3) between the corporation, partnership or association and its
does not involve an intra-corporate controversy. [Citations omitted.] stockholders, partners, members or officers; and (4) among the stockholders,
 CORPORATION CODE

partners or associates, themselves.29 Settled jurisprudence, however, qualifies that dispute which falls within the jurisdiction of the trial courts.
when the dispute involves a charge of illegal dismissal, the action may fall under the
jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination disputes To support their argument that Cosare was a corporate officer, the respondents
and claims for damages arising from employer-employee relations as provided in referred to Section 1, Article IV of Broadcoms by-laws, which reads:
Article 217 of the Labor Code. Consistent with this jurisprudence, the mere fact that
Cosare was a stockholder and an officer of Broadcom at the time the subject ARTICLE IV
controversy developed failed to necessarily make the case an intra-corporate dispute. OFFICER

In Matling Industrial and Commercial Corporation v. Coros, 30 the Court distinguished Section 1. Election / Appointment Immediately after their election, the Board of
between a "regular employee" and a "corporate officer" for purposes of establishing Directors shall formally organize by electing the President, the Vice-President, the
the true nature of a dispute or complaint for illegal dismissal and determining which Treasurer, and the Secretary at said meeting.
body has jurisdiction over it. Succinctly, it was explained that "[t]he determination of
whether the dismissed officer was a regular employee or corporate officer unravels The Board may, from time to time, appoint such other officers as it may determine to
the conundrum" of whether a complaint for illegal dismissal is cognizable by the LA or be necessary or proper. Any two (2) or more compatible positions may be held
by the RTC. "In case of the regular employee, the LA has jurisdiction; otherwise, the concurrently by the same person, except that no one shall act as President and
RTC exercises the legal authority to adjudicate.31 Treasurer or Secretary at the same time.37 (Emphasis ours)

Applying the foregoing to the present case, the LA had the original jurisdiction over
the complaint for illegal dismissal because Cosare, although an officer of Broadcom
for being its AVP for Sales, was not a "corporate officer" as the term is defined by law.
We emphasized in Real v. Sangu Philippines, Inc. 32 the definition of corporate officers
for the purpose of identifying an intra-corporate controversy. Citing Garcia v. Eastern
Telecommunications Philippines, Inc.,33 we held:

" Corporate officers in the context of Presidential Decree No. 902-A are those
officers of the corporation who are given that character by the Corporation Code or by
the corporations by-laws. There are three specific officers whom a corporation must
have under Section 25 of the Corporation Code. These are the president, secretary
and the treasurer. The number of officers is not limited to these three. A corporation
may have such other officers as may be provided for by its by-laws like, but not
limited to, the vice-president, cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the corporations by-laws."34
(Emphasis ours)

In Tabang v. NLRC,35 the Court also made the following pronouncement on the
nature of corporate offices:

It has been held that an "office" is created by the charter of the corporation and the
officer is elected by the directors and stockholders. 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.36 (Citations omitted)

As may be deduced from the foregoing, there are two circumstances which must
concur in order for an individual to be considered a corporate officer, as against an
ordinary employee or officer, namely: (1) the creation of the position is under the
corporations charter or by-laws; and (2) the election of the officer is by the directors
or stockholders. It is only when the officer claiming to have been illegally dismissed is
classified as such corporate officer that the issue is deemed an intra-corporate