CORPORATION LAW

MIDTERMS REVIEWER

I. INTRODUCTION

CORPORATION - is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incidental to its existence.

A corporation is, after all, but an association of individuals under an assumed name and
with a distinct legal entity. In organizing itself as a collective body, it waives no
constitutional immunities appropriate for such body. Its property cannot be taken without
compensation.

SOCIEDADES ANONIMAS

Sociedad Anonima (commercial partnership)

● Same as partnership
● Note Article 1771 NCC - A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto, in which case a
public instrument shall be necessary.

Benguet Consolidated Mining v. Pineda

In this case, Benguet Mining has no vested right to extend its life. It is a well-
settled rule that no person has a vested interest in any rule of law entitling him to
insist that it shall remain unchanged for his benefit. Had Benguet Mining agreed
to extend its life prior to the passage of the Corporation Code of 1906 such right
would have vested. But when the law was passed in 1906, Benguet Mining was
already deprived of such right. To allow Benguet Mining to extend its life will be
inimical to the purpose of the law which sought to render obsolete sociedades
anonimas. If this is allowed, Benguet Mining will unfairly do something which new
corporations organized under the new Corporation Law can’t do – that is, exist
beyond 50 years. Plus, it would have reaped the benefits of being a sociedad
anonima and later on of being a corporation. Further, under the Corporation
Code of 1906, existing sociedades anonimas during the enactment of the law
must choose whether to continue as such or be organized as a corporation under
the new law. Once a sociedad anonima chooses one of these, it is already
proscribed from choosing the other. Evidently, Benguet Mining chose to exist as
a sociedad anonima hence it can no longer elect to become a corporation when
its life is near its end.

Topic addition: Under the RCC – life of corporation is now PERPETUAL

Unless, the existing corporation positively elect a corporate term (if you don’t report)

KINDS OF BUSINESS ORGANIZATIONS

II. GENERAL
THEORIES OF FORMATION

THEORY OF CONCESSION THEORY OF ENTERPRISE ENTITY

The grant is only by virtue of a The corporate entity is viewed as taking its
primary franchise given by the significance primarily from the reality of the
State, and it is within the power underlying enterprise, formed or in formation, that
of the State whether to grant it the State’s approval of the corporate form sets up a
or to deny such grant prima facie case that the assets, liabilities, and
operations of the corporation are those of the
enterprise

There can be no corporate existence without

persons to compose it, there can be no association
without associates.

Corporation is simply a creature Meant to cover the situations where the courts have
of the State and of limited either:
powers and capabilities, 1. Erected corporate personality which the
completely within the control of State had not granted
the State 2. Disregarded corporate personality where the
State had granted it, bot for purpose of giving
legal effect to factual relationships set up
between an economic entity and an outsider

A corporation cannot come into The corporation is emerging as an enterprise

being by mere consent of the bounded by economics, rather than as an artificial
parties; there must be a law juridical personality bounded by forms of words in a
granting it, and once granted charter, minute books, and books of account.
forms the primary franchise of
the corporation Here it is not legal fiction alone that creates a
corporate entity, Any State- grant must presuppose
the existence of consent or common venture among
those who will form the corporation. Although it is
within the power of the State to give or deny such
grant, the corporate fiction cannot be created unless
there is an enterprise or group upon whom it would
be conferred. (It would be against public policy for
the State to prohibit the pursuit of a legal business
enterprise.

CASES:
Tayag v. Benguet Consolidated Inc

Benguet Consolidated is a corporation who owes its existence to Philippine laws.

It has been given rights and privileges under the law. Corollary, it also has
 obligations under the law and one of those is to follow valid legal court orders. It
is not immune from judicial control because it is domiciled here in the Philippines.
BCI is a Philippine corporation owing full allegiance and subject to the
unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be
considered in any way as immune from lawful court orders. Further, to allow
BCI’s opposition is to render the court order against CTC-NY a mere scrap of
paper. It will leave Tayag without any remedy simply because CTC-NY, a foreign
entity, refuses to comply with a valid court order. The final recourse then is for
our local courts to create a legal fiction such that the stock certificates in issue be
declared lost even though in reality they exist in the hands of CTC-NY. This is
valid.

Further still, the argument invoked by BCI that it can only issue new stock
certificates in accordance with its bylaws is misplaced. It is worth noting that
CTC-NY did not appeal the order of the court – it simply refused to turn over the
stock certificates hence ownership can be said to have been settled in favor of
the estate of Perkins here. Also, assuming that there really is a conflict between
BCI’s bylaws and the court order, what should prevail is the lawful court order. It
would be highly irregular if court orders would yield to the bylaws of a
corporation. Again, a corporation is not immune from judicial orders.

NOTE: The Philippine jurisprudence adopted the Concession or fiat theory, which states
that a corporation is conceived as an artificial person owing existence through creation
by a foreign power. Further, a corporation has without any existence until it has received
the imprimatur of the State acting according to law, through the SEC.

Tayag case expressly denied the application of the Genossenschaft theory enunciated
by Friedmann that treated a corporation as “the reality of the group as a social and legal
entity, independent of state recognition and concession.

Philippine Stock Exchange Inc. v. CA

Under the Business Judgment Rule, the SEC and the courts are barred from
intruding into business judgements of corporations, when the same are made in
good faith. The same rule precludes the reversal of the decision of the PSE, to
which PALI had previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer has complied with
the PSE listing rules and requirements, PSE retains the discretion to accept or
reject the issuer’s listing application if the PSE determines that the listing shall
not serve the interests of the investing public. It is undeniable that the petitioner
PSE is not an ordinary corporation, in that although it is clothed with the markings
of a corporate entity, it functions as the primary channel through which the
vessels of capital trade ply. The SEC’s power to look into the subject ruling of the
PSE, therefore, may be implied from or be considered as necessary or incidental
to the carrying out of the SEC’s express power to insure fair dealing in securities
traded upon a stock exchange or to ensure the fair administration of such
exchange.
 A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself
as a collective body, it waives no constitutional immunities and requisites
appropriate to such a body as to its corporate and management decisions,
therefore, the state will generally not interfere with the same. Questions of policy
and management are left to the honest decision of the officers and directors of a
corporation, and the courts are without authority to substitute their judgements for
the judgement of the board of directors. The board is the business manager of
the corporation and so long as it acts in good faith, its orders are not reviewable
by the courts. In matters of application for listing in the market the SEC may
exercise such power only if the PSE’s judgement is attended by bad faith.

Business Judgment Rule – exercise business judgment in good faith and without malice

TRI-LEVEL EXISTENCE IN CORPORATE SETTING

1. The corporation as a JURIDICAL ENTITY or a JURIDICAL FUNCTION, which

views the relationship between the State and the corporation.
2. The corporate setting provides for CONTRACTUAL RELATIONSHIPS on four
sub-levels, namely: (aggregation of assets and resources)
a. Between the corporation and its agents or representatives to act in the
real world
b. Between the corporation and its shareholders or members
c. Between and among the shareholders in a common venture
d. Between the corporation and third parties or “outsiders”
3. The corporation becomes in its operation a business economic unit, a business
enterprise, or what is call in Accounting as “going concern”

NOTE: in practice, the piercing of the veil of corporate fiction is achieved only by looking
at the corporation as an aggregation of individuals doing business, and the Courts
would look at the underlying association of individuals in a corporate setting to resolve
the issues raised in controversy.

Corporation as a Creature of the Law

Constitutional Provisions

● Power to create corporations is one of the attributes of sovereignty, the exercise

of which is legislative in character
● Congress cannot provide for the formation, organization, or regulation of private
corporations
○ Except by general law
● GOCCs are allowed to be created or established by:
○ Special charters in the interests of the common good
○ Subject to the test of economic viability

NOTE: a private corporation created pursuant to special law is a NULLITY, and such
special law is void for being in violation of the Constitution.
Civil Code Provisions

Article 44 - the law recognizes corporations, partnerships, and associations for private
interest or purpose to which are granted “ a juridical personality, separate, and distinct
from that of each shareholder, partner, or member.

Article 45 - juridical persons organized as public corporations are governed by the laws
creating or recognizing them, while private corporations are regulated by laws of
general application on this subject (ex. Corpo Code)

Franchises of Corporations

a. Corporate or general franchises

i. The franchise to exist as a corporation
ii. Primary franchise - the right to exist as such, is vested in the individuals
who compose the corporation and not in the corporation itself and cannot
be conveyed in the absence of a legislative authority to do so.
b. Special or secondary franchises
i. Certain rights and privileges conferred upon existing corporations (ex.
right to use streets of a municipality to lay pipes or tracks etc)
ii. Vested in the corporation and may ordinarily be conveyed or mortgaged
under a general power granted to a corporation to dispose of its property
1. Except such special or secondary franchises as are charged with a
public use.

ATTRIBUTES OF A CORPORATION

Note: just memorize the meaning of Corporation under Sec. 2, RCC

1. It is an Artificial being
○ A corporation is a legal or juridical person with a personality separate and
apart from individual stockholders or members and from any other legal
entity into which it may be connected or related.
2. It is created by operation of Law
○ The juridical existence of a corporation is dependent on the consent or
grant of the State (Theory of Concession)
○ It must be noted that there must first be an underlying contract among the
individuals forming the corporation upon which the state grant may be
conferred
○ This requirement ensures that it would have a strong juridical personality,
for unlike a partnership which comes into being essentially by the meeting
of minds to undertake a common venture and is dissolved by the will of
the partners or by their death, incapacity, withdrawal or insolvency, every
corporation receives a particular commission from the State, and it is only
the State that can effect its final dissolution.
3. It enjoys the right of Succession
 ○ A corporation has the capacity for continuous existence despite the death
or replacement of its shareholders or members, for it has a personality
separate and distinct from those who compose it.
○ A corporation may exist up to the period stated in the articles of
incorporation not exceeding 50 years from the date of incorporation,
unless sooner dissolved or unless said period is extended (CC, Sec. 11).
Note: The Revised Corporation Code now allows corporations to have
perpetual existence.
4. It has the Powers, Attributes and Properties expressly authorized by law or
Incident to its existence.
○ The powers that a corporation can exercise are only those which are
granted by the law of its creation. All powers which may be implied from
those expressly provided by law and those which are incidental or
essential to the corporation’s existence may also be exercised (RCC, Sec.
35).
○ TEST: Whether the act of the corporation is in direct and immediate
furtherance of its business, fairly incidental to the express powers and
reasonably necessary to their exercise.

CASES:

PNB v. Andrada Electric & Engineering Co.

Basic is the rule that a corporation has a legal personality distinct and separate
from the persons and entities owning it. The corporate veil may be lifted only if it
has been used to shield fraud, defend crime, justify a wrong, defeat public
convenience, insulate bad faith or perpetuate injustice.

Piercing the veil of corporate fiction may be allowed only if the following
elements concur: (1) control — not mere stock control, but complete domination
— not only of finances, but of policy and business practice in respect to the
transaction attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; (2)
such control must have been used by the defendant to commit a fraud or a wrong
to perpetuate the violation of a statutory or other positive legal duty, or a
dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the
said control and breach of duty must have proximately caused the injury or unjust
loss complained of.

As a rule, a corporation that purchases the assets of another will not be liable for
the debts of the selling corporation, provided that the former acted in good faith
and paid adequate consideration for such assets, except when any of the
following circumstances is present: 1.) where the purchaser expressly or
impliedly agreed to assume the 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 fraudulently entered into in order to escape liability for those debts.
Vasquez v. Borja

It is well known that a corporation is an artificial being invested by law with a

personality of its own, separate and distinct from its stockholders and from that of
its officers who manage and run its affairs. The mere fact that its personality is
owing to a legal fiction and that it necessarily has to act thru its agents, does not
make the latter personally liable on a contract duly entered into, or for an act
lawfully performed by them, for and in its behalf. The legal fiction by which the
personality of a corporation is created is a practical reality and necessity. Without
it, no corporate entity may exist and no corporate business may be efficiently
transacted.

Wensha Spa Center, Inc. v Yung

Elementary is the rule that a corporation is invested by law with a personality

separate and distinct from those of the persons composing it and from that of any
other legal entity to which it may be related.

In labor cases, corporate directors and officers may be held solidarily liable with
the corporation for the termination of employment only if done with malice or in
bad faith. Bad faith does not connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong; it
means breach of a known duty through some motive or interest or ill will; it
partakes of the nature of fraud.

Monfort Hermanos Agricultural Dev. Corp. v. Montfort III

A corporation has no power except those expressly conferred on it by the

Corporation Code and those that are implied by or are incidental to its existence.
In turn, a corporation exercises said powers through its board of directors and/or
its duly authorized officers and agents. Thus, it has been observed that the
power of a corporation to sue and be sued in any court is lodged with the board
of directors that exercises its corporate powers. In torn, physical acts of the
corporation, like the signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws or by a specific act
of the board of directors.

NOTE: The Doctrine of creature of limited powers under Section 2 is buttressed by

SEC. 44. Ultra Vires Acts of Corporations which states that: “No corporation shall
possess or exercise corporate powers other than those conferred by this Code or by its
articles of incorporation and except as necessary or incidental to the exercise of the
powers conferred.”

ADVANTAGE AND DISADVANTAGE OF CORPORATIONS

Advantages

1. Strong Juridical Personality

 ○ Not affected by death of the incorporators
2. Centralized Management
○ Corporation’s management is centralized in the Board of Directors
○ Centralized Management - imbues the corporate medium with stable and
efficient system of governance and dealings with third parties, since
management prerogatives are centralized in its BOD.
3. Limited Liability to Investors
○ A corporation is limited to their shares and every member or stockholder is
assured limited liability. This feature flows from the legal theory that a
corporate entity is separate and distinct from its stockholders.
○ Exceptions:
i. Doctrine of Piercing the Corporate Veil
ii. Has contractual obligation
4. Free Transferability of Units of Investment
○ General Rule: the shares of stocks can be transferred without the consent
of the other stockholders. (Ready mechanism to dispose of their
investments when their personal or financial situation may require it. Place
more liquidity in the corporate setting and would better encourage
investors to channel their investments through corporate vehicle)
5. Advantages over unregistered associations
○ Enjoys perpetual succession under its corporate name and artificial form
○ Capacity to take and grant property, and contract obligation
○ Sue and be sued in its corporate name as a juridical person
○ Capacity to receive and enjoy common grants of privileges and immunities
○ Stockholders or members have generally no personal liability beyond the
value of their shares

Disadvantages

1. Complicated and Costly Formation and Maintenance

2. Lack of personal element and abuse of corporate management
3. Limited liability hits innocent victims
4. Double Taxation
○ Profits are subject to Corporate Income Tax. When the profit is declared
and distributed as dividends, it becomes subjected to further income tax
i. Corporate Income Tax
ii. Income Tax

CORPORATIONS DIFFERENTIATED WITH OTHER BUSINESS ORGANIZATIONS

Sole Proprietorships

Sole Proprietorships Corporation

The sole proprietorship, where the business Endowed with a separate

enterprise is not endowed with a separate juridical juridical entity. It is often
 personality, is less saddled with the many subjected to by law, rules and
requirements and regulations. regulations

The owner is in common of his whole business and The control of the corporate
in the event the business venture goes bankrupt, he enterprise is vested in the
stands to lose as much as he puts in and even Board of Directors
more to the extent of all his personal holdings

The sole proprietor exercises both the prerogatives

of control and management and the main
beneficiary of the income and fruits of operation

Limited liability does not apply to a sole Limited liability is applied on

proprietorship that will limit the claims of business the part of the shareholders
creditors to the assets of the business enterprise

Sole proprietor remains personally liable for all

debts and liabilities of the enterprise with all his
assets and properties, whether they be intended for
business or those for personal consumption or
enjoyment. Sole Proprietorship represents the
highest form of “unlimited liability”

Works well only for carrying on simple or small

business endeavors and do not function well in
cases of large enterprises which require huge
capital investments and specialized management
skills

Joint Accounts or Cuentas en Participacion

Joint Accounts/Cuentas en Participacion Corporation

A sort of an accidental partnership

constituted in such a manner that its
existence was only known to those who
had an interest in it

No mutual agreement between the Has a firm name

partners, and without a corporate name
indicated to the public in some way that
there were other people besides the one
who ostensibly managed and conducted
the business

Those contract with the persons whose Has juridical personality and may sue or
name the business of such cuentas en be sued under its firm name
participación was conducted, only had a
right of action against such person and
not against the other person interested in
the venture

Has no juridical personality and can sue

or be sued only in the name of the
ostensible partner.

Has no common fund Has a common fund

The ostensible partner manages its all general partners have the right of
business operations. management.

liquidation thereof can only be done by Liquidation may, by agreement, be

the ostensible partner. entrusted to a partner or partners.

Business Trusts

Business Trusts Corporation

Created under the terms of a deed of trust Bound by legal requirements and must be
which is easier and less expensive to registered. Created by operation of law.
constitute for it is not bounded by any
legal requirements

Trust relationship does not come about

simply by the execution of the deed of
trust. It requires delivery.

Trust is created when ownership over the

property subjected thereof (the corpus) is
split between the trustee who assumes
legal or naked title, and the beneficiary
who has beneficial title.

No separate juridical personality, and Has a separate juridical personality.

mainly governed by contractual doctrines Governed mainly by the Corporation
and the common law principles on trust Code

Basic set-up of a business trust - splits Basic set-up in corporate enterprise-

naked title from beneficial title in the naked title to the corporate properties are
corpus held by the Board of Directors pursuant to
Sec 22 of the RCC, the beneficial title to
the corporate enterprise is vested with the
 group of stockholders

Here the BOD basically acts as trustee

with full powers to manage the corporate
enterprise as the corpus of the legal
relationship, with the stockholders as the
beneficiary group with certain legal
powers to enforce the fiduciary
obligations of the Board.

Partnership

NOTE: In RCC, Corporation can now enter into Partnership

Partnership Corporation

By the contract of A corporation is an artificial being

partnership two or more created by operation of law, having the
persons bind themselves right of succession and the powers,
to contribute money, attributes, and properties expressly
property, or industry to a authorized by law or incidental to its
common fund, with the existence.
intention of dividing the
profits among
themselves.

Creation and Created by mere Created by operation of law and

governing law agreement of the parties governed by the Corporation Code
and governed by the Civil
Code

Commenceme From the moment of Existence of the corporation commences

nt of juridical meeting of minds of the from the date of issuance of the
personality partners Certificate of Incorporation by the
and term of Securities and Exchange Commission
existence The term of a partnership (SEC).
may be established for
any period of time RCC: SEC. 11. Corporate Term. – A
stipulated by the partners corporation shall have perpetual
existence unless its articles of
incorporation provides otherwise.
(READ THE WHOLE PROVISION, mejo
mahaba kasi siya. Note on the Revival
Application)

Number of May be organized by at RCC: SEC. 10. Number and

Incorporators least 2 persons Qualifications of Incorporators. – Any
person, partnership, association or
corporation, singly or jointly with others
but not more than fifteen (15) in number,
may organize a corporation for any lawful
purpose or purposes: Provided, That
natural persons who are licensed to
practice a profession, and partnerships
or associations organized for the
purpose of practicing a profession, shall
not be allowed to organize as a
corporation unless otherwise provided
under special laws. Incorporators who
are natural persons must be of legal age.

Each incorporator of a stock corporation

must own or be a subscriber to at least
one (1) share of the capital stock.

A corporation with a single stockholder is

considered a One Person Corporation as
described in Title XIII, Chapter III of this
Code.

Legal capacity The withdrawal, death, With right of succession, a corporation

incapacity or insolvency has a stronger legal personality, enabling
of any partner would it to continue despite the death,
automatically bring about incapacity, withdrawal or insolvency of
the dissolution of the any of its stockholders or members
partnership

Extent of Partners are liable Stockholders are liable only to the extent
liability to third personally for partnership of the shares subscribed by them
persons debts not only to what whether paid or not.
(Limited they have invested in the
Liability) partnership but even as
to their other properties

GR: Partners are liable

personally and
subsidiarily (sometimes
solidarily) for partnership
debts to third persons

XPN: Limited partner

Agent Every partner is an agent Only the Board of Directors or its agents
of the partnership and by can bind the corporation
his sole act, he can bind
the partnership

Transferability Although a partner has Every stockholder has the right to

of shares the power to sell or transfer his shares in the corporation,
dispose of his capital and the buyer or transferee assumes the
interest or proprietary role of stockholder of said shares when
interest, the buyer or the transfer has been duly registered in
transferee does not the corporate books.
assume transferor’s
position as partner, but Unless the right of first refusal is
merely has a right to embodied in the articles of incorporation.
demand for accounting or
distribute of the profits **Free transferability of units of
pertaining thereto ownership

Note: Delectus personae

(Partner cannot transfer
his interest in the
partnership without the
consent of all the other
existing partners.)

Powers GR: May exercise any May exercise only such powers as may
power authorized by the be granted by law and its articles of
partners. incorporation, implied therefrom or
incidental thereto.
XPN: Acts which are
contrary to law, morals,
good customs, public
order, public policy

Management When management is not GR: Power to do business and manage

agreed upon, every its affairs is vested in the Board of
partner is an agent of the Directors (BOD) / Board of Trustees
partnership (BOT)

XPNs:
1. Executive Committee (Sec. 34, RCC)
2. Management Contract (Sec. 43, CC)
3. The AOI of a close corporation may
provide that the business of the
corporation shall be managed by the
stockholders of the corporation rather
 than by a board of directors. (Sec. 96,
RCC)

Effect of A partner as such can The suit against a member of the BOD or
Mismanageme sue a co-partner who BOT who mismanages must be brought
nt mismanages in the name of the corporation; this is
commonly known as “derivative suit”.

Dissolution May be dissolved any Can only be dissolved with the consent
time by the will of any or of the State.
all of the partners.
Death or insolvency of shareholders
Death, civil interdiction cannot dissolve the corporation.
and insolvency of a
partner dissolve the
partnership.

Question: whether a defective incorporation which does not result in the grant of a
charter to a corporate being, would at least result into a partnership?

NO. Both corporate and partnership relationships are fundamentally contractual

relationships created by the co-venturers who consent to come together under said
relationships. If the parties had intended to create an association in the form of a
corporation, a partnership cannot be created in its stead since such is not within their
intent (not part of consent to the contractual relationship. Furthermore, the differences
between the corporation and partnership cannot lead one to the conclusion that in the
absence of the first, the contracting parties would have gone along with the latter (note
on centralized management, free transferability of units of ownership, limited liability).
One cannot presume that if these features were not met, the parties would in the
alternative wish to be covered by a partnership relationship (unlimited liability, mutual
agency among partners, delectus personae features).

Contrary View: RCC SEC. 20. Corporation by Estoppel. – All persons who assume to
act as a corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use its lack of corporate personality as a defense. Anyone who
assumes an obligation to an ostensible corporation as such cannot resist performance
thereof on the ground that there was in fact no corporation.

The issue in the contrary view would be the priority between the personal creditors of
the “partners” in a corporation by estoppel doctrine, and the “corporate” creditors of the
corporation by estoppel, as to the assets invested into the venture.
 ● We would presume that it would be the corporate creditors that would have
priority over the “corporate” assets as this seems to be the moving spirit of the
corporation by estoppel.

CASES:

Pioneer Insurance & Surety Corp. v. CA

Ordinarily, persons who attempt but fail to form a corporation and who carry on
business under the corporate name occupy the position of partners inter se, and
their rights as members of the company to the property acquired by the company
will be recognized. On the contrary, a partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter. Nor will it make the investor to
a would-be corporation liable for losses sustained from its operation under a
partnership inter se theory.

The Supreme Court reconcile the issue, considering the key elements of intent
and participation in business activity, when parties come together INTENDING
TO FORM A CORPORATION, but no corporation is actually incorporated:

1. Parties who had intended to participate or actually participated in the

business affairs of the intended corporation would be considered as
partners under a de facto partnership, and liable as such in an action for
settlement of partnership obligations
2. Parties who took no part except to subscribe to shares of stock in the
intended corporation, do not become partners with other subscribers who
engaged in business under the name of the pretended corporation, and
are not liable for action for settlement of the alleged partnership
contribution

This is consistent with the distinction between:

1. Partnership venture - where there is a clear intent to participate in the

management of the partnership business and for which limited liability is
not afforded by law
2. Investor in a corporation - where under the principal of centralized
management, there is no intent to participate in the corporate operations,
and for which limited liability prevails.

Lim Tong Lim v. Philippine Fishing Gear Industries Inc,

The liabilities of the parties were adjudged under the corporation by estoppel
doctrine.

Some Points on Limited Partnership

 ● When the prerogatives of management of the business enterprise are divorced
from a person who thereby is made to assume the passive role of being a mere
beneficiary of the profits flowing from the business enterprise, he is thereby
accorded “limited liability” status
● The moment a person so classified as having limited liability begins to exercise
the prerogatives of management, he thereby becomes unlimitedly liable for the
debts and obligations of the business enterprise.

Joint Ventures

Joint Ventures Corporation

A form of partnership and should this be Governed by Corporation Code.

governed by the Law on Partnerships, Note:
which would then include the features of Separate Juridical Personality
separate juridical personality, mutual Centralized Management
agency among the co-venturers, and Limited Liability
unlimited liability.

Defined as an association of persons or A corporation is an artificial being created

companies jointly undertaking some by operation of law, having the right of
commercial enterprise, generally all succession and the powers, attributes,
contributes assets and share risks and properties expressly authorized by
law or incidental to its existence.
Requires:
1. Community of interest in the
performance of the subject matter
2. Right to direct and govern the
policy in connection therewith
3. Duty which may be altered by
agreement to share both in profit
and losses

NOTE: discussion on Partnership vs.

Corporation would apply to joint ventures

Cooperatives

Cooperatives Corporation

Autonomous and duly registered An artificial being created by operation of

association of persons, with a common law, having the right of succession and
bond of interest, who have voluntarily the powers, attributes, and properties
joined together to achieve their social, expressly authorized by law or incidental
economic, and cultural needs and to its existence.
aspirations by making equitable
contributions to the capital required
patronizing their products and services
and by accepting a fair share of the risks
and benefits of the undertaking in
accordance with universally accepted
cooperative principles.

Has a juridical personality separate and Has a juridical personality separate and
distinct from its members, and has limited distinct from its members, and has limited
liability feature liability feature

Governed by principles of democratic Voting rights depends on the shares

control where the members in primary acquired. Not all shares vests to the
cooperatives shall have equal voting shareholder a right to vote.
rights on a one-member-one-vote
principle It is the shareholders who vote for the
Board of Directors based on the number
of their shares.

Board of Directors manages the affairs of Doctrine of Centralized Management

the cooperative, but it is the General Shareholders are passive investors. It is
Assembly of full membership that the Board of Directors who manages all
exercises all the rights and performs all the affairs of the corporation.
the obligations of the cooperative

Under the supervision and control of the Securities and Exchange Commission
Cooperative Development of Authority

Primary objective is self-help - help Primary Objective

improve the quality of life of its members Stock corporation: profit
Non-stock corporation: can be organized
for any eleemosynary purpose and no
part of the net income is to be distributed
to the officers and members

CONSTITUTIONAL GUARANTEES OF A CORPORATION

1. Due Process and Equal Protection Clause

● A corporation is entitled to due process and equal protection of the law
and protection against unreasonable searches and seizure

Smith, Bell & Co v. Natividad

Supreme Court acknowledged that corporate entities do have a right to claim

protection under such constitutional rights, because -- The guarantees of the
Fourteenth Amendment and so of the first paragraph of the Philippine Bill of
Rights, are universal in their application to all persons within the territorial
 jurisdiction, without regard to any differences of race, color, or nationality. The
word “person” includes aliens… Private corporations, likewise, are “persons”
within the scope of the guaranties in so far as their property is concerned.

2. Unreasonable Searches and Seizure

Stonehill v. Diokno

Corporations are protected by the constitutional guarantee against unreasonable

searches and seizures. However, the court ruled that the officers of a corporation
from which documents, papers and things were seized have no cause of action
to assail the legality of the seizures, regardless of the amount of shares of stock
or of the interest of each of them in said corporation, and whatever the offices
they hold therein may be, because the corporation has a personality separate
and distinct from those of said officers. It held that the legality of a seizure can be
contested only by the party whose rights have been impaired thereby; and the
objection to an unlawful search is purely personal and cannot be availed of by
third parties, such as officers of the corporation who interpose it for their personal
interests.

Bache & Co. (Phil.) Inc. v. Ruiz

A corporation is entitled to immunity against unreasonable searches and seizures

since: “A corporation is, after all, but an association of individuals under an
assumed name and with a distinct legal entity. In organizing itself as a
collective body, it waives no constitutional immunities appropriate for such body.
Its property cannot be taken without compensation. It can only be proceeded
against by due process of law, and is protected, under the 14th Amendment,
against unlawful discrimination.”

3. No Right against Self-Incrimination

● The denial of the right against self-incrimination from corporations does
not really invite state authorities into the premises or physical privacy of
the stockholders or members who compose the corporation, but would
deny acting individuals the right to abuse the corporate medium as a
means to do folly.

Bache & Co. (Phil.) Inc. v. Ruiz

The Court denied that corporations have a right to claim protection on the
constitutional right against self-incrimination. The court held that the privilege
against self-incrimination “is a personal one, applying only to natural
individuals,” and a corporation may be compelled to submit to the visitorial
powers of the State even if this result in disclosure of criminal acts of the
corporation.

PNB v. CA
 A corporation is civilly liable in the same manner as natural persons for torts. A
principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation asof a natural person. A
corporation is liable therefore whenever a tortious act is committed by an officer
or agent under express direction or authority from the stockholders or members
acting as a body, from the directors as the governing body.

Criminal Liability

General Rule: Corporation cannot be held criminally liable

Exception:

● Cancellation of license
● Express provision of law (AMLA)

Corporate Criminal (why corporation cannot be criminally liable)

● Corporation cannot be proceeded against as defendants or accused in criminal

proceedings is that there are no existing laws by which to support such process
● Public policy that ultimately a crime committed in the name of a corporation is
actually committed by the individuals who act fro and in behalf of such
corporation
● Impossibility of imposing upon a corporation the penal sanction (note on fine as
penalty)
● Mala in se cannot be imputed to a corporation

→ When a criminal statute forbids the corporation itself from doing an act, the prohibition
extends to the Board of Directors, and to each director separately and individually. Although all
corporate powers are vested in the BOD, this does not mean that the officers of the corporation
other than the board of directors cannot be made criminally liable for their criminal acts if it can
be proven that they participated therein.

→ the existence of the corporate entity does not shield from prosecution the corporate agent who
knowingly and intentionally causes the corporation to commit the crime.

→ Stockholders are only liable if they have knowledge and took part.

People v. Tan Boon Kong

The Supreme Court brushed aside the defense of separate juridical personality
of a corporation by an officer who seeks to avoid personal criminal liability arising
from a violation of the law for transactions done on behalf of the corporation. The
Court’s reasoning was in line with the piercing doctrine” that the veil of corporate
fiction cannot be used to avoid the penalty imposable for committing a criminal
offense.

Espiritu v. Petron Corp

 Stockholders, being essentially investors in the corporation, with management
being with the BOD, cannot be made personally liable for crimes committed on
behalf of the corporations unless they personally participated in such acts.

Torts

→ A corporation is liable whenever a tortious act is committed by an officer or agent under

express direction or authority from the stockholders or members acting as a body, or generally
from the directors as the governing body.

NOTE: Corporation is liable for TORT, if act of the officer is:

1. within scope of authority

2. ratified by the Board of Directors
3. Through the BOD, gave express instruction through a resolution

NOTE: the acting officer is SOLIDARILY LIABLE with the Corporation for damages
resulting to his negligence as a joint tortfeasor

Gross Negligence: only time when the corporation and officer be solidarily liable

If simple negligence – not liable

Civil Liability

→ debts incurred by directors, officers and employees acting as such corporate agents are not
theirs but the direct liability of the corporation they represent.

→ it does not follow that the corporation cannot be a real-party-in-interest for the purpose of
bringing a civil action for malicious prosecution for the damages incurred by the corporation for
the criminal proceedings brought against its officers

→ the criminal liability of a corporation’s officers or employees stem from their active
participation in the commission of the wrongful act. Active participation requires a strongly overt
physical acts or intention to commit such acts.

Moral Damages

● Since a corporation is an artificial person, and cannot experience physical

sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock
or social humiliation, there would be no basis to grant its recovery of moral
damages/ it noted by way of obiter in that case that “a corporation may have a
good reputation which, if besmirched, may also be a ground for the award of
moral damages.

General Rule: corporation are not entitled to moral damages

Exception: when the corporation has a good reputation and the reputation has been
besmirched or debased by act or wrongdoing of another such as libel.

Rule: must have clear and actual proof of injury

ABS-CBN v. CA

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
wrongdoers. The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses. It cannot, therefore,
experience physical suffering and mental anguish, which can be experienced
only by one having a nervous system. The statement in one jurisprudence that a
corporation may recover moral damages if it “has a good reputation that is
debased, resulting in social humiliation” is an obiter dictum… The possible basis
of recovery of a corporation would be under Article 19, 20, and 21 of the Civil
Code, but which requires a clear proof of malice or bad faith.

NATIONALITY OF CORPORATIONS

Nationality of a corporation - serves as legal basis for subjecting the enterprise or its
activities to the laws, the economic and fiscal powers, and the various social and
financial policies, of the state to which it is supposed to belong.

1. Place of Incorporation Test - a corporation is a national of the country under the

laws of which it has been organized and registered.

→ RCC, SEC 140 a foreign corporation is one formed, organized or existing under laws other
than those of the Philippines’ and whose laws allow Filipino citizens and corporations to do
business in its own country or State.

2. Control Test - the nationality of a corporation is determined by the nationality of

the majority of the stockholders on whom equity control is vested, on the theory
that they would be able to elect the majority of the Board of Directors.
a. The control test cannot overcome the place of incorporation test (foreign
corporation even when 100% of its equity is owned by Filipino citizens
continues to be considered as a foreign corporation.
i. EXC: a corporation organized abroad and registered as doing
business in the PH under the Corporation Code 100% of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos.

NOTE: Place of principal business test - also applied to determine whether a state has
jurisdiction over the existence and legal character of a corporation, its capacity or
powers, internal organization, capital structure, the rights and liabilities of directors,
officers, and shareholders, towards each other and its creditors and third persons.
→ although the place of incorporation test is the primary test of nationality of corporation in the
PH, in some cases, in addition to the place of incorporation test, the control test also applies:

A. Exploitation of Natural Resources (60%) ART XII, Sec 2

B. Ownership of Private Land ART XII, Sec 7

Register of Deeds of Rizal v. Ung Sui Si Temple

The purpose of the 60% requirement is obviously to ensure that corporations or

associations allowed to acquire agricultural land or to exploit natural resources
shall be controlled by Filipinos, and that the spirit of the Constitution demands
that in the absence of capital stock, the controlling membership should be
composed of Filipino citizens.

Roman Catholic Administrator of Davao Inc. v. The LRC

A corporation sole would have no nationality at all to disqualify it from owning

land in the Philippines even though its only corporator was a Canadian Citizen.
Even if the nationality is ascribed to a corporate sole, the nationality of the
constituents of the diocese, and not the nationality of the actual incumbent of the
parish, must be taken into consideration, because the corporate sole ordinarily
holds the property in trust for the benefit of the Roman Catholic faithful of their
respective locality or diocese.

Note: RCC SEC. 108. Corporation Sole. – For the purpose of administering and
managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious
denomination, sect, or church.

C. Public Utilities ART XII, Sec 11

People v. Quasha

The Constitution does not prohibit the mere formation of a public utility
corporation without the required proportion of Filipino capital. What it does
prohibit is the granting of a franchise or other form of authorization for the
operation of a public utility to a corporation already in existence but without the
requisite proportion of Filipino capital.

This case drew the distinction between the primary franchise of a corporate entity by
virtue of which it is constituted as a body politic endowed with separate juridical
personality, and the second franchise that it may receive during its life for the exercise
of a privilege granted by law, such as the operation of a public utility. While the primary
franchise merely constitutes the corporation into a juridical entity, it is the secondary
franchise by which the corporation may be granted special privileges, licenses, or
benefits not enjoyed by other corporations, where the real abuse may be committed.
 D. Mass Media (100%) ART XVI, Sec 11
E. Advertising Industry (70%) ART XVI, Sec 11

(Note: See FIA Negative List)

F. War-Time Test -- Controlling stockholders

● In times of war, the nationality of a private corporation is determined by
the citizenship of its controlling stockholders. The Court considered the
juridical entity as an enemy based on the fact that the “majority of the
stockholders of the respondent corporation were German subjects” it
refused the sole application of the place of incorporation test during war-
time to determine the nationality of an enemy corporation.
G. Investment Test and the Grandfather Rule
H.
○ Grandfather Rule is a sub-application under the control test, where the
various nationality tests shall fist be applied on the shareholders of the
holding companies, to determine the nationality of the equity in the target
corporation, and thereby arriving at the nationality of such target
corporation.
○ The Grandfather Rule is applicable only when there is a corporate
stockholder or subscriber.

NOTE: For Grandfather Rule, See PREINOTES PART1

○ DOJ-SEC Rule - Shares belonging to corporations or partnerships at least

60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of Fil.
ownership in the corporation or partnership is less than 60% only the
number of shares corresponding to such percentage shall be counted as
of PH nationality
i. 2 RULES to determine nationality of corporate equity investments
in the target (operating) company
1. The investment is treated totally “Filipino equity” if the
investing company’s own equity is at least 60% owned by
Filipinos
2. If an investing company’s equity is owned by less that 60%
Filipinos, then its equity investment in the target (operating)
company is to be proportionately divided between the
Filipino and foreign equities.
○ Control Test under FIA ‘91 - Philippine national - a corporate entity shall
mean a corporation organized under the laws of the PH of which at least
60% of the capital stock outstanding and entitled to vote is owned and
held by citizens of the PH,
i. 60% → of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the PH
ii. 60% → of the members of the BOD of both corporations must be citizens
of the PH.
CLASSIFICATION OF CORPORATIONS

In relation to the State

PUBLIC CORPORATION PRIVATE CORPORATION

Formed or organized for the Those formed for some private purpose, benefit,
government of a portion of the aim or end.
state. It is created for political
purposes connected with the
public good in the administration
of the civil government

Usually created by its charter Greeted under general incorporation law

Note: many private corporations are granted

special charters by the Legislature, because they
constitute government-owned or controlled
corporations, but still cannot be considered as
public corporations

(ex. Municipal corporations) Stock corporation - corporations which have a

Baranggays, municipalities, city, capital stock divided into shares and are authorized
province to distribute to the holders of such shares dividends
or allotments of the surplus profit on the basis of
the shares held

non-stock corporation - all other private

corporations that are not stock corporations.

Purpose:
1. Business corporation (profit seeking corp)
2. Religious corporations
3. Eleemosynary corporation (those organized
for charitable, scientific, or vocational
corporations

Has a juridical entity, but it exists Has a separate juridical personality

primarily for the government of a
portion of the state, and thereby
exercising state powers as
police power, taxing and the
power of eminent domain

NOTE: when the government undertaking is set up without endowing it with a separate
juridical personality, then it is neither a public nor private corporation, but remains an
instrumentality of the State.
National Coal Co. v. Collector of Internal Revenue

The mere fact that the government happens to be a majority stockholder does
not make a corporation a public corporation. The court took into consideration
that the law creating the National Coal Co. expressly made the company subject
to all the provisions of the then Corporation Law. it can have no greater rights,
powers, or privileges than any other corporation which might be organized for the
same purpose under the Corporation Code.

MIAA vs CA

The MIAA is not a government-owned or controlled corporation because it is not

constituted of capital divided into shares of stock, and neither is it a non-stock
corporation because it has no members. MIAA is a governmental instrumentality
vested with corporate powers to perform efficiently its governmental functions.

***Quasi-Public Corporations

● One which exist without formal legislative grant

● A group of association that seems to be a cross between private corporations
and public corporations
● These cover school districts, water districts and the like

As to Place of Incorporation

● DOMESTIC CORPORATION
○ incorporated under the laws of the Philippines.
● FOREIGN CORPORATION
○ RCC, SEC. 140, foreign corporations are one formed, organized or
existing under laws other than those of the Philippines’ and whose laws
allow Filipino citizens and corporations to do business in its own country or
State. It shall have the right to transact business in the Philippines after
obtaining a license for that purpose in accordance with this Code and a
certificate of authority from the appropriate government agency.

As to Legal Status

● De Jure Corporation
○ There is a full or substantial compliance with the requirements of an
existing law permitting organization of such corporation as by proper
articles of incorporation duly executed and filed.
○ Generally, its juridical personality is not subject to attack in the courts from
any sources. (even in a quo warranto proceeding)
● De Facto Corporation
○ RCC SEC. 19. The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise
corporate powers, shall not be inquired into collaterally in any private suit
 to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.
○ Elements
■ There is a bona fide attempt to incorporate
■ Colorable compliance with the statute (below substantial)
■ User of corporate powers
● Corporation by Estoppel
○ RCC SEC. 20. All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof:
Provided, however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort committed by
it as such, it shall not be allowed to use its lack of corporate personality as
a defense. Anyone who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on the ground that
there was in fact no corporation.
○ Here, there is no intention to incorporate
○ This is founded on procedural convenience, avoidance of inquiries into
irrelevant formalities, and fairness to all parties concerned.
○ Elements of Estoppel
■ Misrepresentation
■ Reliance in Good Faith by third person
■ Damage or Injury
● Corporation by Prescription
○ A corporation by prescription is one which has exercised powers for an
indefinite period without interference on the part of the sovereign power
and which by fiction of law, is given the status of a corporation

Barlin v. Ramirez

The Roman Catholic Church is a corporation by prescription, with acknowledged

juridical personality inasmuch as it is an institution which antedated by almost a
thousand years any other personality in Europe, and which existed when Gracian
eloquence still flourished in Antioch and when idols were still worshipped in the temple
of Mecca

As to Existence of Shares of Stocks

● Stock Corporation
○ Corporations which have a capital stock divided into shares and are
authorized to distribute to the holders dividends
● Non-Stock Corporation
○ RCC, SEC. 86 a non-stock corporation is one where no part of its income
is distributable as dividends to its members, trustees, or officers: Provided,
That any profit which a non-stock corporation may obtain incidental to its
operations shall, whenever necessary or proper, be used for the
 furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.
○ RCC, SEC. 87. Purposes. – Non-stock corporations may be formed or
organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing particular classes
of non-stock corporations.

As to Relationship of Management and Control

● Parent or Holding ‐ related to another corporation that it has the power either,
directly or indirectly to, elect the majority of the director of such other corporation.
○ Parent Company - controls (power to direct the affairs of another
company) another as a subsidiary or affiliate by the power to elect its
management
○ Holding Company - one which holds stocks in other companies for
purposes of control rather than for mere investment
● Subsidiary ‐ so related to another corporation that the majority of its directors can
be elected either, directly or indirectly, by such other corporation
○ In FRIA, a subsidiary of a specific person is an affiliate controlled by such
person, directly or indirectly, through one or more intermediaries
○ In AMLA, a subsidiary means an entity more than 50% of the outstanding
voting stock of which is owned by the parent company (50% + 1)
○ In SEC, it is an enterprise that is controlled by another enterprise (known
as the parent)
● Affiliate Company
○ Affiliate is defined by the SEC as a person that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is
under common control with the person specified, through the owner of
voting shares, by contract, or otherwise.
○ In AMLA, affiliate means an entity at least 20% but not exceeding 50% of
the voting stock of which is owned by another company
○ In FRIA, it is a corporation that directly or indirectly, through one or more
intermediaries, is controlled by, or is under the common control of another
corporation

NOTE:

● Corporators are those who compose a corporation, whether as stockholders or

shareholders in a stock corporation or as members in a nonstock corporation.
(RCC, Sec 5)
● Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof. (RCC, Sec 5)
● Classification of Shares (See RCC, Sec 6.)
 ○ Common Shares - These are ordinarily and usually issued stocks without
extraordinary rights and privileges, and entitle the shareholder to a pro
rata division of profits. It represents the residual ownership interest in the
corporation. The holders of this kind of share have complete voting rights
and they cannot be deprived of the said rights except as provided by law.
○ Preferred Shares - These entitle the shareholder to some priority on
distribution of dividends and assets over those holders of common shares.
Preferred shares may be issued only with a stated par value
○ Founders’ Shares - Founders’ shares may be given certain rights and
privileges not enjoyed by the owners of other stocks. Where the exclusive
right to vote and be voted for in the election of directors is granted, it must
be for a limited period not to exceed five (5) years from the date of
incorporation x x x (RCC,SEC. 7)
○ Redeemable Shares - They are shares which may be purchased by the
corporation from the holders of such shares upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions stated
in the articles of incorporation and the certificate of stock representing the
shares, subject to rules and regulations issued by the Commission. (RCC,
SEC 8)
○ Treasury Shares. – Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation, or some other lawful
means. Such shares may again be disposed of for a reasonable price
fixed by the board of directors. (RCC, SEC. 9)

III. CORPORATE JURIDICAL PERSONALITY

Doctrine of Separate Juridical Personality

A corporation has a personality separate and distinct from that of its stockholders
and members and is not affected by the personal rights, obligations, and
transactions of the latter.

Stockholders of F. Guanzon v. Register of Deeds

Properties registered in the name of the corporation are owned by it as an entity

separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. A share of stock only
typifies an aliquot part of the corporation’s property, or the right to share in its
proceeds to that extent when distributed according to law and equity, but its
holder is not the owner of any part of the capital of the corporation. Nor Is he
entitled to the possession of any definite portion of its property or assets. The
stockholder is not a co-owner or tenant in common of the corporate property.
Saw v. CA

The interest of stockholder in corporate property is purely inchoate or in sheer

expectancy of a right in the management of the corporation and to share in the
profits thereof and in the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations.

Sesbreno v. CA

The mere showing that the 3 corporations had one common director sitting in the
boards of all the corporations without further allegation and proof that one or
another of the 3 corporations concededly related companies used the other two
as mere alter egos or that the corporate affairs of the other two were
administered and managed for the benefit of one, did not authorize piercing their
separate juridical personalities.

Padilla v. CA

The fact that 2 corporations may be sister companies, and that they may be
sharing personnel and resources, without more, is insufficient to prove that their
separate corporate personalities are being used to defeat public convenience,
justify wrong, protect fraud or defend crime.

LEGAL CONSEQUENCES OF THE APPLICATION OF THE DOCTRINE OF

SEPARATE PERSONALITY

1. The property of the corporation is not the property of its stockholders; nor can
the property of even controlling stockholders or the officers be treated as part of
the corporate estate.

2. A parent or holding corporation has no proprietary interest in the property,

rights and interests of its subsidiaries or affiliates; consequently, any suit against
the parent company does not bind the subsidiaries and vice versa.

3. A corporation may not be held liable for the obligations of the stockholders or
members composing it, or those of its officers; and neither can its stockholders
be held liable for the obligations of such corporation.

4. Corporate officers are not personally liable for their official acts in pursuing the
affairs and business of the corporation; unless it is shown that they have
exceeded their authority.

5. Substantial ownership in the capital stock entitling the shareholder a significant

vote in corporate affairs allows them no standing or claims pertaining to
corporate affairs. Thus, a suit against a corporation cannot be considered as a
suit against its stockholders, and vice versa.
 6. Since the separate juridical personality is a fiction created by law for
convenience and to prevent injustice, it may be disregarded if it is used as a
means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.

7. However, the following facts by themselves or in combination, would not

warrant a disregard the veil of the corporate fiction, absence fraud or other public
policy consideration:

o Ownership by a single stockholder or by another corporation of all or

nearly all of the capital stock is not of itself sufficient ground to disregard
the separate corporate personality;

o Substantial identity of the incorporators of 2 corporations does not

imply fraud;

o Existence of interlocking directors or corporate officers; or

o Location of head offices or facilities in the same compound or having

the same addresses.

Richard owns 90% of the shares of the capital stock of GOM Corporation. On one
occasion, GOM Corporation, represented by Richard as President and General
Manager, executed a contract to sell a subdivision lot in favor of Tomas. For
failure of GOM Corporation to develop the subdivision, Tomas filed an action for
rescission and damages against GOM Corporation and Richard. Will the action
prosper? Explain. (1996 Bar)

A: The action may prosper against GOM Corporation but definitely not against
Richard. Richard has a legal personality separate and distinct from that of GOM
Corporation. If he signed the contract to sell, he did so as the President and
General Manager of GOM Corporation and not in his personal capacity. Mere
ownership by Richard of 90% of the capital stock of GOM Corporation is not of
itself sufficient ground to disregard his separate legal personality absent a
showing, for example, that he acted maliciously or in bad faith.

Q: As a result of perennial business losses, a corporation’s net worth has been

wiped out. In fact, it is now in negative territory. Nonetheless, the stockholders
did not like to give up. Creditor-banks, however, do not share the confidence of
the stockholders and refuse to grant more loans. Assuming that the corporation
continues to operate even with depleted capital, would the stockholders or the
managers be solidarily liable for the obligations incurred by the corporation?
Explain. (1999 Bar)

A: No. As a general rule, the stockholders or the managers cannot be held

solidarily liable for the obligations incurred by the corporation. The corporation
has a separate and distinct personality from that of the stockholders and
managers. The latter are presumed to be acting in good faith in continuing the
 operation of the corporation. The obligations incurred by the corporation are
those of the corporation which alone is liable therefor. However, when the
corporation is already insolvent, the directors and officers become trustees of the
business and assets of the corporation for the benefit of the creditors and are
liable for negligence or mismanagement.

Q: Marulas Creative Technology Inc., an e-business enterprise engaged in the

manufacture of computer multimedia accessories, rents an office and store space
at a commercial building owned by X. being a start-up company, Marulas enjoyed
some leniency in its rent payment; but after 3 years, X put a stop to it and asked
Marulas president and general manager, Y, who is a stockholder, to pay back
rentals amounting to a hundred thousand pesos or to vacate the premises at the
end of the month. Marulas neither paid its debt nor vacated the premises. X sued
Marulas and Y for collection of the unpaid rentals, plus interest and costs of
litigation. Will the suit prosper against X? Against Y? (2000 Bar)

A: Yes, the suit will prosper against Marulas. It is the one renting the office and
store space, as lessee, from the owner of the building, X, as lessor. But the suit
against Y will not prosper. Y, as president and general manager, and also
stockholder of Marulas Creative Technology, Inc., has a legal personality
separate and distinct from that of the corporation and not that of its officers and
stockholders who are not liable for corporate liabilities.

Q: Nine individuals formed a private corporation pursuant to the provisions of the

Corporation Code of the Philippines. Incorporator S was elected director and
president—general manager. Part of his emolument is a Ford Expedition, which
the corporation owns. After a few years. S lost his corporate positions but he
refused to return the motor vehicle claiming that as a stockholder with a
substantial equity share, he owns that portion of the corporate assets now in his
possession. Is the contention of S valid? Explain. (2000 Bar)

A: No. The contention of S is not valid. The Ford Expedition is owned by the
corporation. The corporation has a legal personality separate and distinct from
that of its stockholder. What the corporation owns is its own property and not
property of any stockholder even how substantial the equity share that
stockholder owns.

Q: Nelson owned and controlled Sonnel Construction Company. Acting for the
company, Nelson contracted the construction of a building. Without first
installing a protective net atop the sidewalks adjoining the construction site, the
company proceeded with the construction work. One day a heavy piece of lumber
fell from the building. It smashed a taxicab which at that time had gone off road
and onto the sidewalk in order to avoid the traffic. The taxicab passenger died as
a result.

If you were the counsel for Sonnel Construction, how would you defend your
client? What would be your theory? (2008 Bar)
 A: If I were the counsel for Sonnel Construction Company, I will argue that the
proximate cause of the death of the victim is the gross negligence of the taxicab
driver. The latter drove the taxicab offroad and onto the sidewalk in order to avoid
the traffic. Furthermore, I will argue that assuming that Nelson was negligent, he
alone should be sued as the Sonnel Coonstruction Company has a separate and
distinct personality. Nelson’s controlling interest in Sonnel Construction Company
does not justify the piercing of the corporate veil.

Q: In an action for collection of a sum of money, the RTC of Makati City issued a
decision finding D- Securities, Inc. liable to Rehouse Corporation for P10M.
Subsequently, the writ of execution was issued but returned unsatisfied because
D-Securities had no more assets to satisfy the judgment. Rehouse moved for an
Alias Writ of Execution against Fairfield Bank (FB), the parent company of D-
Securities. FB opposed the motion on the grounds that it is a separate entity and
that it was never made party to the case. The RTC granted the motion and issued
the Alias Writ of Execution. In its Resolution, the RTC relied on the following
facts: 499,995 out of the 500,000 outstanding shares of stocks of D-Securities are
owned by FB; FB had actual knowledge of the subject matter of litigation as the
lawyers who represented D-Securities are also the lawyers of FB. As an alter ego,
there is no need for a finding of fraud or illegality before the doctrine of piercing
the veil of corporate fiction can be applied. The RTC ratiocinated that being one
and the same entity in the eyes of the law, the service of summons upon D-
Securities has bestowed jurisdiction over both the parent and wholly-owned
subsidiary. Is the RTC correct? (2014 Bar)

A: No, the RTC is not correct. The court must have first acquire jurisdiction over
the corporation(s) involved before its or their separate personalities are
disregarded; and the doctrine of piercing the veil of corporate 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.

Doctrine of Piercing the Corporate Veil

Under the doctrine of “piercing the veil of corporate entity,” the legal fiction that a
corporation is an entity with a juridical personality separate and distinct from its
members or stockholders may be disregarded and the corporation will be
considered as a mere association of persons, such that liability will attach directly
to the officers and the stockholders. It is an equitable doctrine developed to
address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes.

To what circumstances will the doctrine apply?

 The doctrine of “piercing the veil of corporate entity” will apply when the
corporation’s separate juridical personality is used:

a) To defeat public convenience;

b) To justify wrong, protect fraud, or defend crime;

c) As a shield to confuse the legitimate issues;

d) Where a corporation is the mere alter ego or business conduit of a person; or

e) Where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.

How does one pierce the veil of corporate fiction?

The veil of corporate fiction may be pierced by proving in court that the notion of
legal entity is being used to defeat public convenience, justify wrong, protect
fraud, or defend crime or the entity is just an instrument or alter ego or adjunct of
another entity or person.

San Juan Structural & Steel Fabricators v. CA

When the fiction is used as a means of perpetrating a fraud or an illegal act or as

a vehicle for the evasion of an existing obligation, the circumvention of statutes,
the achievement or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates the corporation
from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals. In this case, the court
finds no reason to pierce the corporate veil of respondent Motorich. Petitioner
utterly failed to establish the said corporation was formed, or that it is operated
for the purpose of shielding any alleged fraudulent or illegal activities of its
officers or stockholders; or that the said veil was used to conceal fraud, illegality
or inequity at the expense of third persons like petitioner.

PNB v. Andrada

Characterized the piercing doctrine as an “equitable remedy” and gave a

rundown of onstances when its application is warranted: The court pierced the
corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets
as part of the estate of the decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield
unfair objectives to cover up an otherwise blatant violation of the prohibition
against forum shopping. Only in these and similar instances may the veil be
pierced and disregarded.
NATURE AND CONSEQUENCES OF THE NATURE OF THE PIERCING DOCTRINE
AS BEING ESSENTIALLY AN EQUITABLE REMEDY

a. Piercing Doctrine Applies Only to Prevent a Wrong or Injustice, or to Achieve

Equitable Ends

Gregorio Araneta v. Tuason de Paterno

The Court ruled that the corporate fiction will not be disregarded because the
corporate entity was not used to perpetuate fraud nor circumvent the law and the
disregard of the technicality would pave the way for the evasion of a legitimate
and binding commitment, especially since Tuason was fully aware of the position
of Mr. Araneta in the corporation at the time of sale.

b. Piercing Doctrine a Remedy of Last Resort; Cannot Be Applied to Establish a

Right or a Cause of Action

Umali v. CA

Being merely an equitable remedy, the application of the piercing doctrine is a

remedy of last resort and will not be applied, even in case of fraud, if other
remedies are available to the parties. The Supreme Court refused to apply the
piercing doctrine since the petitioners were “merely seeking the declaration of the
nullity of the foreclosure sale, which relief may be obtained without having to
disregard the aforesaid corporate fiction attaching to respondent corporations,
especially since petitioners failed to establish by clear and convincing evidence
that private respondents were purposely formed and operated, and thereafter
transacted with petitioners, with the sole intention of defrauding the latter.

Union Bank v. CA

The piercing doctrine cannot be availed of in order to dislodge from the

jurisdiction of the SEC the petition for suspension of payments filed under
Section 5(e) of PD No, 902-A. The doctrine of piercing the veil of corporate fiction
heavily relied upon by the petitioner is entirely misplaced, as said doctrine only
applies when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend . In other words, the piercing doctrine is an equity
remedy, and not to be used to build legal theories or to evade the rules pertaining
to acquiring proper jurisdiction in civil cases.

c. Party Invoking the Piercing Doctrine Must Have a “Victim Standing”

Being an equitable remedy, piercing doctrine can be invoked only on behalf of

parties who are the victims of fraud, deceit, or injustice brought about by the use
or as a result of the attributes of the corporate juridical personality.

d. Piercing Applies Only When the Corporate Personality Was the Efficient Cause
or Means; It Must Be Shown to Be Necessary and With Factual Bases
Jardine Davies Inc. v. JRB Realty

It is essential that the “corporate fiction” is the very means by which to defeat
public convenience, justify wrong, protect fraud or defend crime: “To warrant
resort to this extraordinary remedy, there must be proof that the corporation is
being used as a cloak or cover of fraud or illegality, or to work injustice.

Concept Builders v. NLRC

The sister corporation is used as a shield to evade a corporation’s subsidiary

liability for damages, the corporation may not be heard to say that it has a
personality separate and distinct from the other corporation. The piercing of the
corporate veil comes into play. Clearly, petitioner ceased its business operations
in order to evade the payment to private respondents of back wages and to bar
their reinstatement to their former positions. HPPI is obviously a business conduit
of petitioner corporation and its emergence was skillfully orchestrated to avoid
the financial liability that already attached to petitioner corporation.

The conditions under which the juridical entity may be disregarded vary
according to the peculiar facts and circumstances of each case. No hard and fast
rule can be accurately laid down, but certainly, there are some probative factors
of identity that will justify the application of the doctrine of piercing the corporate
veil, to wit:

1. Stock ownership by one or common ownership of both

corporations;

2. Identity of directors and officers;

3. The manner of keeping corporate books and records;

4. Methods of conducting the business.

In addition, where one corporation is so organized and controlled and its affairs
are conducted 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
test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:

1. Control, not mere majority or complete stock control, but

complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
 2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act in contravention of
plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause

the injury or unjust loss complained of.

The absence of any one of these elements prevents “piercing the corporate veil.”
In applying the “instrumentality” or “alter ego” doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation.

Luxuria Homes v. CA

Refused to pierce the veil of corporate fiction and held that the organization of
the corporation at the time when the relationship between the landowner and the
developer were still cordial cannot be used as a basis to hold the corporation
liable later on for the obligations of the landowner to the landowner to the
developer under the mere allegation that the corporation is being used to evade
the performance of an obligation by one of its major stockholders.

e. Piercing Application is Essentially a Judicial Prerogative

CONSEQUENCES OF THE APPLICATION OF THE PIERCING DOCTRINE

a. Treat the Corporation, Its Controlling or Accountable Officers as a Mere

Association

What are the 2 formulation on the application of the piercing doctrine?

1. The courts “will often look at the corporation as a mere collection of individuals
or an aggregation of persons undertaking business as a group, disregarding the
separate juridical personality of the corporation unifying the group.

2. When 2 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 district entities
and treat them as identical or one and the same.

b. Piercing May Apply to Benefit Those Within and Those Outside the Intra-
Corporate Relations

Gochan v. Young
 Applied the piercing doctrine even if the applicants were not stockholders of the
companies which were shown to have been used as mere alter egos of the
directors to acquire corporate properties in violation of their fiduciary duty, thus:
The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical if, as alleged in the present case, the
corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; or as an alter ego, an adjunct, or a business conduit for
the sole benefit of the stockholders.

c. Piercing Application Only Has Res Adjudicata Effect

Koppel v. Yatco

When the piercing doctrine is applied against a corporation in a particular case,

the court does “not deny legal personality for any purposes”. The application of
the piercing doctrine is therefore within the ambit of the principle of res adjudicata
that binds only the parties to the case only to the matters actually resolved
therein.

What are the 3 Classification of the Piercing Application Case?

1. FRAUD PIERCING CASES – When the corporate entity is used to commit

fraud or to justify a wrong, or to defend a crime. (element of malice)

2. ALTER EGO PIERCING CASES – When the corporate entity is used as a

mere alter ego, business conduit or instrumentality of a person or another entity.

3. DEFEAT PUBLIC CONVENIENCE OR EQUITY PIERCING CASES – When

respect for the corporate entity would defeat public convenience, or would result
in injustice.

FRAUD PIERCING CASES

1. Corporate Fiction Must Be the Very Means to Commit Fraud

The rule is that when the legal fiction of the separate corporate personality is
abused, such as when the same is used for fraudulent or wrongful ends, the
courts would not hesitate to pierce the corporate veil. However, it must be shown
by clear and convincing proof that the separate juridical personality was
purposefully employed to evade a legitimate and binding commitment and
perpetuate a fraud or similar wrongdoing.

2. Alter Ego Elements in Fraud Piercing Cases

 Fraud piercing need not necessarily be accompanied by alter ego elements to
make the fraud case stick, because fraud is a matter of proof, and often it is a
state of the mind being founded on malice. The alter ego circumstances may be
needed to prove the malicious intent of the parties.

In fraud cases, the alter ego concept pertains to employing the corporation even
for a single transaction, to do evil, unlike in pure alter ego piercing cases, where
the courts go into findings of systematic disregard and disrespect of the separate
juridical person of the corporation.

3. Tax Evasion Cases

The Court considers the presence of the following circumstances, to wit: when
the owner of one directs and controls the operations of the other, and the
payments effected or received by one are for the accounts due from or payable
to the other; or when the properties or products of one are all sold to the other,
which in turn immediately sells them to the public, as substantial evidence in
support of the finding that the two are actually one juridical taxable personality.

4. Evasion of Lawful Obligations

When the corporate entity is set-up or used to escape liability to third parties, it is
considered to constitute fraud to warrant piercing of the veil of corporate fiction.

Villa Rey v. Ferrer

When the fiction of legal entity is urged as a means of perpetrating a fraud or an

illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or a crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of
individual. The Court pierced the veil of corporate fiction to enforce a non-
competition clause entered into by its controlling stockholder in his personal
capacity.

5. Parent-Subsidiary Scenarios in Fraud Piercing Cases

The act of creating a corporation to pursue a related or another line of business

cannot itself be presumed to be with fraudulent intent, or a scheme resorted to
avoid liabilities.

6. Application of the Piercing Doctrine to Impose Liability on Corporate Officers

 The Supreme Court has at times employed the piercing doctrine also in order to
make corporate officers liable for contracts or transactions entered into in behalf
of the corporation.

We stress in hornbook law that corporate personality is a shield against personal

liability of its officers. Thus, we agree that the Executive Vice-President and his
spouse cannot be made personally liable since he entered into and signed the
contract clearly in his official capacity as Executive Vice President. The
personality of the corporation is separate and distinct from the persons
composing it.

7. Doctrinal Summation of Fraud Piercing Cases

Piercing the Veil of Corporate Fiction is allowed only when THE FOLLOWING
ELEMENTS are present:

1. There must have been fraud or an evil motive in the affected transaction, and
the mere proof of control of the corporation would not authorize piercing;

2. Corporate entity has been used in the perpetration of the fraud or in the
justification of wrong, or to escape personal liability;

3. The main action should seek for the enforcement of pecuniary claims
pertaining to the corporation against corporate officers or stockholders, or vice
versa.

ALTER EGO PIERCING CASES

Whether a corporation is a mere alter ego is purely one of fact and therefore it is
not sufficient to allege that a corporate entity is being used as an instrumentality
of another person or entity, but that the facts and circumstances be clearly shown
to demonstrate such situation.

1. Disturbing Developments Adopting the Umali Doctrine in Alter Ego Piercing

Cases

2. Manner of Operating the Corporate Enterprise

Arnold v. Willets & Patterson Ltd.

There is no claim or pretense that there was any fraud or collusion between
plaintiff and Willets, and it is very apparent that Exhibit B was to the mutual
interests of both parties. The Court held the validity of contract and although the
plaintiff was the president of the local corporation, the testimony is conclusive
that both of them were what is known as one man corporation, and Willits, as the
 owner of all the stocks, was the force and dominant power which controlled them.
The Court expressed the language of piercing doctrine when applied to alter ego
cases, as follows : “Where the stock of a corporation is owned by one person
whereby the corporation functions only for the benefit of such individual owner,
the corporation and the individual should be deemed the same.”

3. Tax Avoidance Cases

The legal right of a taxpayer to decrease the amount of what otherwise would be
his taxes, or altogether avoid them, by means which the law permits, cannot be
doubted and a taxpayer may gain advantage of doing business thru a corporation
if he pleases, but the revenue officers in proper cases, may disregard the
separate corporate entity where it serves but as a shield for tax evasion and treat
the person who actually may take the benefits of the transactions as the person
accordingly taxable.

Therefore, no less than the SC has stated that the use of the corporate entity to
gain a vantage is not by itself a fraudulent scheme. The corporate entity is there
for both businessmen and lawyers to tinker with, to gain every advantage
available under the law, and that alone is not a reprehensible act.

4. The Case for Under-Capitalization of the Corporation

McConnel v. CA

The Court decided for piercing, holding the stockholders liable for the deficiency.
Although it held that a mere ownership of all and nearly all of the stocks does not
make a corporation a business conduit of the stockholders, the Court
nevertheless ruled for the application of the piercing doctrine to make the
stockholders liable when it was shown that the operation of the corporation was
so merged with those of the stockholders as to be practically indistinguishable.
Furthermore, they had the same office, the funds were held by the stockholders,
and the corporation had no visible assets.

The facts thus found cannot be varied by us, and conclusively show that the
corporation is a mere instrumentality of the individual stockholders, hence the
latter must individually answer for the corporate obligations. While the mere
ownership of all or nearly all of the capital stock of a corporation does not make it
a mere business conduit of the stockholder, the conclusion is amply justified
where it is show, as the case before us, that the operation of the corporation
were so merged with those of the stockholders as to be practically
indistinguishable from them. To hold the latter liable for the corporation’s
obligation is not to ignore the corporation’s separate entity can not be invoked or
used for purposes that could not have been intended by the law that created that
separate personality.
5. Forum-Shopping

The corporation veil cannot be used to shield an otherwise blatant violation of the
prohibition against forum shopping. Shareholders, whether suing as the majority
in direct actions or as the minority in a derivative suit, cannot be allowed to trifle
with court processes, particularly where, as in this case, the corporation itself has
not been remiss in vigorously prosecuting or defending corporate causes and in
using and applying remedies available to it. To rule otherwise would be to
encourage corporate litigants to use their shareholders as fronts to circumvent
the stringent rules against forum shopping.

6. Transfer of Business Enterprise

7. Parent-Subsidiary Scenarios in Alter Ego Piercing Cases

The alter ego piercing doctrine has had an uneven application in the area of
parent-subsidiary relationships. It is accepted that the mere fact that one or more
corporations are owned and controlled by a single stockholder is not of itself
sufficient ground for disregarding separate corporate entities. Authorities support
the rule that it is lawful to obtain a corporation charter, even when a single
substantial shareholder, to engage in a specific activity, and such activity may co-
exist with other private activities of the stockholder. If the corporation is a
substantial one, conducted lawfully and without fraud on another, its separate
identity is to be respected.

The fact that a corporation owns all of the stocks of another corporation, taken
alone, is not sufficient to justify their being treated as one entity – any claim or
suit of the parent corporation cannot be pursued by the subsidiary based solely
on the reason that the former owns the majority or even the entire stock of the
latter.

The doctrine that a corporation is a legal entity or a person in law distinct from
the persons composing it is merely a legal fiction for purposes of convenience
and subserve the ends of justice. This fiction cannot be extended to a point
beyond its reason and policy.

PNB v. Ritratto Group

While confirming that there exists no definite test of general application in

determining when a subsidiary may be treated as a mere instrumentality of the
parent corporation, it IDENTIFIED FACTORS that will justify the application of
the treatment of the doctrine of the piercing of the corporate veil:

1. Parent Corporation owns all or almost all of the capital stock of the
subsidiary
 2. Parent & subsidiary corporations have common directors or officers

3. Parent corporation finances the subsidiary

4. Parent corp subscribes to all the capital stock of the subsidiary or

otherwise causes its incorporation

5. Subsidiary has grossly inadequate capital

6. Parent corp pays the salaries and other expenses or losses of the
subsidiary

7. Subsidiary has substantially no business except with the parent

corporation or no assets except those conveyed to or by the parent corp

8. In the papers of the parent corp or in the statements of its officers, the
subsidiary is described as a department or division of the parent corp, or
its business or financial responsibility is referred to as the parent
corporation’s own.

9. Parent corp uses subsidiary’s property as its own

10. Directors or executives of the subsidiary do not act independently but

take their orders from parent corp

11. Formal legal requirements of the subsidiary are not observed.

8. Business-Sense Rulings as Tempering the Application of the Alter Ego

Piercing Doctrine

9. Doctrinal Summation of Alter Ego Piercing Cases

FOUR POLICY BASES

1. Even when the controlling stockholder or managing officer intends consciously

to do no evil, the use of the corporation as an alter ego or as a mere
instrumentality for personal agenda, and in some cases as the private checkbook
of the controlling stockholder, is in direct violation of the central principle in
Corporate Law of treating the corp as a separate juridical entity form its members
and stockholders.

2. By not respecting the separate juridical personality of the corp, other who deal
with the corp are not also expected to be bound by the separate juridical
personality of the corporation, and may treat the interests of both the controlling
stockholder or officer and the corporation as the same.
 3. Alter ego piercing case may prevail even when no monetary claims are sought
to be enforced against the stockholders or officers of the corporation.

4. When the underlying business enterprise does not really change and only the
medium by which that business enterprise is changed, then there would be
occasion to pierce the veil of corporate fiction to allow the business creditors to
recover from whoever has actual control of the business enterprise.

DEFEAT PUBLIC CONVENIENCE OR EQUITY PIERCING CASES

Equity cases applying the piercing doctrine are what are termed the “dumping
ground” where no fraud or alter ego circumstances can be culled by the courts to
warrant piercing.

The main features of equity piercing is the need to render justice in the situation
at hand or to brush aside merely technical defenses. Often, equity piercing cases
appear in combination with other types of piercing, especially the defeat of public
convenience cases.

Piercing Doctrine and the Due Process Clause

A person not impleaded in the case cannot be bound by the decision rendered
therein, since no individual or entity shall be affected by a proceeding to which he
is a stranger, and to do otherwise would be a denial of due process.

1. In Non- Labor cases

The requirements of due process may well be complied with even when the
individuals sought to be made liable are not initially and formally made parties to
the litigation, so long as when the basis for the application of the piercing
doctrine, they are given an opportunity to contest its application and meet the
evidence adduced for its enforcement.

a) the court must first acquire jurisdiction over the corporation or corporations
involved before its or their separate personalities are disregarded; and b) the
doctrine of the piercing the veil of corporate 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.

2. In Labor Cases

The doctrine takes a different twist when invoking the piercing doctrine to make
stockholders and officers liable for corporate debts at the point of execution.
 The responsible officer of an employer corporation can be held personally, not to
say even criminally, liable for a non-payment of back wages. That is the policy of
law.

Corporations in Sequestration Issues

A suit against individual shareholders cannot be considered as a suit against the

corporations which issued the shares. And that failure to implead the corp as
defendants and merely annexing a list of such corporations to the complaints,
would be a violation of each of the corporations ‘due process for it would in effect
be disregarding their distinct and separate personalities without a hearing.

Plaintiffs filed a collection action against “X” Corporation. Upon execution of the
court’s decision, “X” Corporation was found to be without assets. Thereafter
plaintiffs filed an action against its present and past stockholder “Y” Corporation
which owned substantially all of the stocks of “X” Corporation. The two
corporations have the same board of directors and “Y” Corporation financed the
operations of “X” Corporation. May “Y” Corporation be held liable for the debts of
“X” Corporation? Why? (2001 Bar)

A:Yes, “Y” Corporation may be held liable for the debts of “X” Corporation. The
doctrine of piercing the veil of corporate fiction applies to this case. The two
corporations have the same board of directors and “Y” corporation owned
substantially all of the stocks of “X” Corporation, which facts justify the conclusion
that the latter is merely an extension of the personality of the former, and that the
former controls the policies of the latter. Added to this is the fact that “Y”
Corporation controls the finances of “X” Corporation which is merely an adjunct,
business conduit or alter-ego of “Y” Corporation.

Q: Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawsuit
which could subject him to substantial damages. A year before the court
rendered judgment, Mr. Pablo sought his lawyer’s advice on how to plan his
estate to avoid taxes. His lawyer suggested that he should form a corporation
with himself, his wife and his children (all students and still unemployed) as
stockholders and then transfer all his assets and liabilities to this corporation. Mr.
Pablo and the plaintiff sought to enforce this judgment. The sheriff, however,
could not locate any property in the name of Mr. Pablo and therefore returned the
writ of execution unsatisfied. What remedy, if any, is available to the plaintiff?
(1991 Bar)

A: The plaintiff can avail himself of the doctrine of piercing the veil of corporate
fiction which can be invoked when a corporation is formed or used in avoiding a
just obligation. While it is true that a family corporation may be organized to
pursue an estate tax planning, which is not per se illegal or unlawful, the factual
settings, however, indicate the existence of a lawsuit that could subject Mr. Pablo
to a substantial amount of damages. It would thus be difficult for Mr. Pablo to
 convincingly assert that the incorporation of the family corporation was intended
merely as a case of “estate tax planning”.

I. FORMATION and ORGANIZATION

a. Who may form

Revised Corporation Code (RCC)
Section 10. Number and Qualifications of Incorporators. - Any person,
partnership, association or corporation, singly or jointly with others but not more
than fifteen (15) in number, may organize a corporation for any lawful purpose or
purposes: Provided, That natural persons who are licensed to practice a
profession, and partnerships or associations organized for the purpose of
practicing a profession, shall not be allowed to organize as a corporation unless
otherwise provided under special laws. Incorporators who are natural persons
must be of legal age.
Each incorporator of a stock corporation must own or be a subscriber to at least
one (1) share of the capital stock.
A corporation with a single stockholder is considered a One Person Corporation
as described in Title XIII, Chapter III of this Code.

b. Promotion
Who is a promoter?
Securities Regulation Code (SRC) defines a promoter to be a person who, acting alone
or with others, takes initiative in founding and organizing the business or enterprise of
the issuer and receives consideration therefor.

What are Promoter’s Contracts?

These are those types of contracts entered into in behalf of a corporation which is in the
process of organization and incorporation, and such fact is acknowledged as an
essential ingredient in the process of perfection. They are otherwise known as “pre-
incorporation” contracts, where the agent or representative of the “would be” corporation
expressly engages the other party, both of them fully aware that the corporation is yet to
be registered or is still in the process of registration.
These contracts are governed by the Law on Agency.

c. Defectively Formed and Non Existent Corporations

What is De Facto Corporation Doctrine?
The main importance of the application of the de facto corporation doctrine is the
ancillary application of the rule that the defect or alleged inexistence of the juridical
personality of a corporation cannot be raised collaterally, and can only be pursued in a
direct suit filed that seeks to question such juridical personality, i.e., quo warranto. In
essence, it promotes the policy that a contracting party cannot avoid the legal
consequences of his contractual commitment by pointing to the technical defects in the
“person” of the contracting corporation.

What are the various scopes of De Facto Corporation Doctrine?

a. The enterprise enters into a contract with an outsider, who later brings an action
against the enterprise as though it were a corporation, and the enterprise is held liable
in corporate form;

b. The enterprise enters into a contract with an outsider, and subsequently brings
actions in corporate form against the outsider, the outsider is held liable to the
enterprise;

c. The enterprise enters into a contract with an outsider, and the outsider brings an
action against the component individuals, they are absolved from liability and the
outsider is limited to his remedy against the enterprise only; or

d. The enterprise enters into a contract with an outsider, and the component individuals
seek to hold the outsider liable on his contract, where logically the individuals are not
allowed to recover, recovery must be by the enterprise.

What are the requisites for De Facto Corporation Doctrine’s Application?

a. The existence of a valid law under which the corporation may be incorporated;

b. An attempt in good faith to incorporate, or existence of a colorable compliance with

provisions on incorporation and

c. The assumption by the enterprise of corporate powers.

i. Hall v. Piccio / 86 Phil 603

In the absence of the formal issuance by the SEC of the certificate of
incorporation, any other colorable attempt in good faith to incorporate would not
qualify the application of the de facto corporation doctrine, and that any party
may raise the lack of juridical personality to avoid the enforcement of a contract
entered into in the name of the corporation.

What is colorable compliance with the law?

The general principle is that while substantial compliance is not necessary, colorable
compliance with the requirements of the law must be shown. When there has been no
attempt in good faith to create a corporation de jure, there can be no de facto
corporation. Mere intent is not sufficient. There must be a bona fide attempt to comply
with the requirements of the law.

Some defects that would preclude the creation of a de facto corporation are the
absence of articles of incorporation, failure of filing the articles of incorporation with the
SEC, and the lack of certificate of incorporation from the SEC.

Some defects that do not preclude the creation of a de facto corporation are as follows:
a. Defects in the incorporation papers – the articles of incorporation fail to state
all the matters required by the Corporation Code to be stated, or state some of
the incorrectly;
b. Corporate name – the name of the corporation closely resembles that of a pre-
existing corporation that it will tend to deceive the public;
c. Ineligibility of incorporators – the incorporators or a certain number of them are
not residents of the Philippines; or
d. Defects in the execution of incorporation papers, the acknowledgment in the
articles of incorporation, or certificate of incorporation is insufficient or defective
in form, or it was acknowledged before the wrong office

What is a Corporation by Estoppel Doctrine?

The corporation by estoppel doctrine presents a clear exception to the general

treatment of unregistered associations. It seeks to enforce a contract where clearly the
element of consent is lacking because one of the parties thereto, a purported
corporation, does not in fact exist at the time of perfection.

The doctrine of estoppel has its origins in equity, and is based on moral right and
natural justice and is designed to prevent injustice and unfairness.

ii.Vda. De Salvatierra v. Garlitos / 103 Phil 757

While as a general rule a person who has contracted or dealt with an association
in such a way as to recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction or dealing, yet this
doctrine may not be held to be applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff's charge that she was unaware of the
fact that the Philippine Fibers Producers Co., Inc., had no juridical personality,
defendant Refuerzo gave no confirmation or denial and the circumstances
surrounding the execution of the contract lead to the inescapable conclusion that
plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such
corporation was duly organized in accordance with law.

There can be no question that a corporation with registered has a juridical

personality separate and distinct from its component members or stockholders
and officers such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president and conversely,
a stockholder or member cannot be held personally liable for any financial
obligation be, the corporation in excess of his unpaid subscription. But this rule
is understood to refer merely to registered corporations and cannot be made
applicable to the liability of members of an unincorporated association. The
reason behind this doctrine is obvious-since an organization which before the
law is non-existent has no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the rights and subject to all
the liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and
obligations and comes personally liable for contracts entered into or for other
acts performed as such, agent.

d. Ultra Vires Doctrine

What is an Ultra Vires Doctrine?
The ultra vires doctrine deals with the corporate capacity to validly enter into contracts
and transaction, and involves either of the two principles in Philippine Corporate Law.

a. Every corporation organized under the law is a creature of the State and that
consequently is a creature of limited powers in that it only has such powers and
authority as are expressly granted by law or incident to its existence, and that any act or
contract entered into by a corporation outside of its powers is ultra vires and void; and
b. Every corporation can validly act only through its Boards of Directors and agents duly
authorized by its Board, and any contract entered not through the Board is not binding
on the corporation.

Consequently, the application of the ultra vires doctrine in Corporate Law is an

application of the Contract Law principle that a contract entered into in behalf of a
juridical party which does not exist is void for want of the essential element of consent.
What are the types of Ultra Vires Cases?
1. Those entered into or done beyond the powers of the corporation as provided for in
the law or its articles of incorporation;
2. Those entered into or done on behalf of the corporation by persons who have no
corporate authority; and
3. Acts or contracts which are per se illegal as being contrary to law.

i.Twin Towers Condominium Corp. v. CA / 398 SCRA 203

Sec. 45. Ultra vires acts of corporations. - No corporation under this code shall
possess or exercise any corporate powers except those conferred by this Code
or by its articles of incorporation and except such as are necessary or incidental
to the exercise of the powers so conferred.

The term ultra vires refers to an act outside or beyond corporate powers,
including those that may ostensibly be within such powers but are, by general or
special laws, prohibited or declared illegal.33 The Corporation Code defines an
ultra vires act as one outside the powers conferred by the Code or by the Articles
of Incorporation, or beyond what is necessary or incidental to the exercise of the
powers so conferred. Moreover, special laws governing certain classes of
corporations, like the Condominium Act, also grant specific corporate powers to
corporations falling under such special laws.

e. Articles of Incorporation
What is an Articles of Incorporation (AOI)?
AOI represent the highest form of contract in Corporate Law, defining the charter of the
corporation. AOI, when it has been approved by the SEC, constitutes every duly
registered corporation’s charter, the basis by which to adjudge whether it exists for legal
purposes, as well as the extent of its powers and capacities, or what is termed in Civil
Law as its juridical capacity to act.

i.Grounds for Disapproval of the AOI

Section 16. Grounds When Articles of Incorporation or Amendment May be

Disapproved. The Commission may disapprove the articles of incorporation or
any amendment thereto if the same is not compliant with the requirements of this
Code: Provided, That the Commission shall give the incorporators, directors,
trustees, or officers as reasonable time from receipt of the disapproval within
which to modify the objectionable portions of the articles or amendment. The
following are ground for such disapproval:
 (a) The articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;

(b) The purpose or purposes of the corporation are patently

unconstitutional, illegal, immoral or contrary to government rules and
regulations;

(c) The certification concerning the amount of capital stock subscribed

and/or paid is false; and

(d) The required percentage of Filipino ownership of the capital stock under
existing laws or the Constitution has not been complied with.

No articles of incorporation or amendment to articles of incorporation of banks,

banking and quasi-banking institutions, preneed, insurance and trust companies,
NSSLAs, pawnshops and other financial intermediaries shall be approved by the
Commission unless accompanied by a favorable recommendation of the
appropriate government agency to the effect that such articles or amendment is
in accordance with law.

ii.Contents
1. Corporate Name

Section 17. Corporation Name. - No corporate name shall be allowed by the

Commission if it is not distinguishable from that already reserved or registered
for the use if another corporation, or if such name is already protected by law,
rules and regulations.

A name is not distinguishable even if it contains one or more of the following:

(a) The word "corporation", "company", incorporated", "limited", "limited

liability", or an abbreviation ofone if such words; and

(b) Punctuations, articles, conjunctions, contractions, prepositions,

abbreviations, different tenses, spacing, or number of the same word or phrase.

The Commission upon determination that the corporate name is: (1) not
distinguishable from a name already reserved or registered for the use of another
corporation; (2) already protected by law; or (3) contrary to law, rules and
regulations, may summarily order the corporation to immediately cease and
desist from using such name and require the corporation to register a new one.
The Commission shall also cause the removal of all visible signages, marks,
advertisements, labels prints and other effects bearing such coroporate name.
Upon the approval of the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name.

If the corporation fails to comply with the Commission's order, the Commission
may hold the corporation and its responsible directors or officers in contempt
and/or hold them administratively, civilly and/or criminally liable under this Code
and other applicable laws and/or revoke the registration of the corporation.

a. SEC Guidelines on the Use of Corporate Names

Check :
https://www.sec.gov.ph/wp-content/uploads/2019Advisory/2019MCNo13.pdf

2. Purpose Clause

The significance of the purpose clause in the AOI is that it confers, as well as limits, the
powers which a corporation may exercise. The purpose clause must specify which is
the corporation’s primary purpose and which are the secondary purposes.

3. Principal Place of Business

a. SEC Guidelines on the Use of Corporate and Partnership Names
Check :
https://www.sec.gov.ph/wp-content/uploads/2019Advisory/2019MCNo13.pdf

b. Villa Rey Transit v. Far East Motor Corp. / 81 SCRA 298

Service of process on a corporation is controlled by Section 13, Rule 14 of the

Revised Rules of Court, thus —

Sec. 13. Service upon private domestic corporation for partnership. — If the
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president, manager,
secretary, cashier, agent, or any of its directors.

According to jurisprudence, the rationale of all rules for service of process

on corporation is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that
he will realize his responsibilities and know what he should do with any
legal papers served on him. 5 Based on the particular facts of this case,
service of summons upon Atty. Virgilio A. Reyes has served the purpose of
 the law. And as he refused to receive the summons, tender unto him was
sufficient to confer jurisdiction over the petitioner.

4. Corporate Term

Section 11. Corporate Term. - A corporation shall have perpetual existence unless
its articles of incorporation provides otherwise.

Corporations with certificates of incorporation issued prior to the effectivity of

this Code and which continue to exist shall have perpetual existence, unless the
corporation, upon a vote of its stockholders representing a majority of its articles
of incorporation: Provided, That any change in the corporate right of dissenting
stockholders in accordance with the provisions of this Code.

A corporate term for a specific period may be extended or shortened by

amending the articles of incorporation: Provided, That no extension may be made
earlier than three (3) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined
by the Commission: Provided, further, That such extension of the corporate term
shall take effect only on the day following the original or subsequent expiry
date(s).

A corporation whose term has expired may apply for revival of its corporate
existence, together with all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and liabilities existing prior to
its revival. Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides otherwise.

No application for revival of certificate of incorporation of banks, banking and

quasi-banking institutions, preneed, insurance and trust companies, non-stock
savings and loan associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall be approved by
the Commission unless accompanied by a favorable recommendation of the
appropriate government agency.

5. Capital Structure

Section 12. Minimum Capital Stock Not Required of Stock Corporations. - Stock
corporations shall not be required to have minimum capital stock, except as
otherwise specially provided by special law.
a. Burke v. Smith / 16 Wall., U.S. 390, 21 L. Ed. 361 (1873)

The weight of authority in the US supports the view that the purpose of the
legislature in requiring a certain percentage of the authorized capital stock to be
subscribed before incorporation is to give assurance to the public that may deal
with the new corporation that it is actually able to operate and undertake to do
business and to meet obligations as they arise from the start of its operations.

The Supreme Court held in this case that the purpose of such a requisition is,
that the state may be assured of the successful prosecution of the work, and that
the creditors of the company may have, to the extent, at least, of the required
subscription, the means of obtaining satisfaction for their claims.

6. Other Accompanying Documents

a. Certificate of Deposit – SEC guidelines require that a bank certificate covering the
deposit of the paid-up capital, in accordance with a prescribed form subscribed under
oath by a responsible bank officer, must accompany the incorporation papers.

b. Letter of Authority to Examine Bank Deposit – In addition, a letter of authority

authorizing the SEC to examine not only the bank deposit account but also the
corporation’s books of accounts and supporting records to determine the existence and
utilization of the paid-up capital stock must also be submitted.

c. Written Undertaking to Change Corporate Name – SEC also requires that

incorporators submit a written undertaking to change their partnership or corporate
name in case there is another person, firm or entity with a prior right to the use of the
said name or one similar to it.

iii.Amendments to the Article of Incorporation

Section 15. Amendment of Articles of Incorporation. - Unless otherwise

prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by a
majority vote of the board of directors or trustees and the vote or written assent
of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code. The articles of incorporation of a
nonstock corporation may be amended by the vote or written assent of majority
of the trustees and at least two-thirds (2/3) of the members.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Amendments to the articles
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of the
directors or trustees, with a statement that the amendments have been duly
approved by the required vote of the stockholders or members, shall be
submitted to the Commission.

The amendments shall take effect upon their approval by the Commission or from
the date of filing with the said Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to the corporation.

II. BY-LAWS

a. Gokongwei Jr. v. SEC / 86 SCRA 336

It is recognized by an authorities that 'every corporation has the inherent power

to adopt by-laws 'for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. At common law, the rule
was "that the power to make and adopt by-laws was inherent in every corporation
as one of its necessary and inseparable legal incidents. And it is settled
throughout the United States that in the absence of positive legislative provisions
limiting it, every private corporation has this inherent power as one of its
necessary and inseparable legal incidents, independent of any specific enabling
provision in its charter or in general law, such power of self-government being
essential to enable the corporation to accomplish the purposes of its creation.

b. Contractual Significance

What are By-laws?

By-laws, unlike AOI, are meant to be an intramural document, to govern the relationship
between and among the members of a corporate family. They are intended merely for
the protection of the corporation, and prescribe regulations, not restrictions. By-laws
being merely private documents to regulate the relationship among the members of the
corporate family, cannot create rights or be used to restrict rights.
c. Requisites of Valid By-laws
1. By-Law Provisions cannot contravene the law
2. By-Law provisions cannot contravene the charter
3. By-laws must be reasonable and non-discriminatory

i.Tayag v. Benguet Consolidated Inc. / 26 SCRA 242

In this case, SC refused to apply the provisions of the by-laws of a domestic
corporation on the issuance and replacement of lost certificates of stock to
overturn an order of a court of law for the corporation to issue new certificates of
stockin lieu of those which were physically outside of Philippine jurisdiction.

ii.Loyola Grand Villas Homeowners (South) Association Inc. v. CA / 276 SCRA 681

Taken as a whole and under the principle that the best interpreter of a statute is
the statute itself (optima statuli interpretatix est ipsum statutum), 14 Section 46
aforequoted reveals the legislative intent to attach a directory, and not
mandatory, 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 incorporation. This provision in the same section of the
Code rules out mandatory compliance with the requirement of filing the by-laws
"within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission." It
necessarily follows that failure to file the by-laws within that period does not
imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes.15

Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within the
period provided for in Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A.

Even under the foregoing express grant of power and authority, there can be no
automatic corporate dissolution simply because the incorporators failed to abide
by the required filing of by-laws embodied in Section 46 of the Corporation Code.
There is no outright "demise" of corporate existence. Proper notice and hearing
are cardinal components of due process in any democratic institution, agency or
society. In other words, the incorporators must be given the chance to explain
their neglect or omission and remedy the same.

d. Procedure for Adoption of By-laws

Section 45. Adoption of Bylaws. - For the adoption of bylaws by the corporation,
the affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members in case on
nonstock corporations, shall be necessary. The bylaws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office
of the corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified by a majority of the directors or
trustees and countersigned by the secretary of the corporation, shall be filed with
the Commission and attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, bylaws maybe

adopted and filed prior to incorporation; in such case, such bylaws shall be
approved and signed by all incorporators and submitted to the Commission,
together with the articles of incorporation.

In all cases, bylaws shall be effective only upon the issuance by the Commission
of a certification that the bylaws are in accordance with this Code.

The Commission shall not accept for filing the bylaws or any amendment thereto
of any bank, banking institution, building and loan association, trust company,
insurance company, public utility, educational institution, or any other
corporations governed by special laws, unless accompanied by a certificate of
the appropriate government agency to the effect that such by laws or
amendments are in accordance with law.

i.Sawadjaan v. CA / 459 SCRA 516

Moreover, a corporation which has failed to file its by-laws within the prescribed
period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations, details
the procedures and remedies that may be availed of before an order of revocation
can be issued. There is no showing that such a procedure has been initiated in
this case.

e. Contents of By-laws

Section 46. Contents of Bylaws. - A private corporation may provide the following
in its bylaws;

(a) The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
 (b) The time and manner of calling and conducting regular or special
meetings and mode of notifying the stockholders or members thereof;

(c) The required quorum in meetings of stockholders or members and the

manner of voting therein;

(d) The modes by which a stockholder, member, director or trustees may

attend meetings and cast their votes;

(e) The form for proxies of stockholders and members and the manner of
voting them;

(f) The directors' or trustees' qualifications, duties and responsibilities, the

guidelines for setting the compensation of directors or trustees and
officers, and the maximum number of other board representations that an
independent director or trustee may have which shall, in no case, be more
than the number prescribed by the Commission;

(g) The time for holding the annual election of directors or trustees and the
mode or manner of giving notice thereof;

(h)The manner of election or appointment and the term of officers other

than directors or trustees;

(i) The penalties for violation of the bylaws;

(j) In the case of stock corporations, the manner of issuing stock

certificates; and

(k) Such other matters as may be necessary for the proper or convenient
transaction of its corporate affairs for the promotion of good governance
and anti-graft and corruption measures.

An arbitration agreement maybe provided in the bylaws pursuant to Section 181

of this Code .

f. Amendments and Revisions of the By-laws

Section 47. Amendment to Bylaws. - A majority of the board of directors or

trustees, and the owners of at least a majority of the outstanding capital stock, or
at least a majority of the members of a nonstock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal the bylaws or
adopt new bylaws. The owner of two-thirds (2/3) of the outstanding capital stock
or two-third (2/3) of the members in a nonstock corporation mat delegate to the
board of directors or trustees the power to amend or repeal the bylaws or adopt
new bylaws: Provided, That any power delegated to the board of directors or
trustee to amend or repeal the bylaws or adopt new bylaws shall be considered
as revoke whenever stockholders owning or representing a majority of the
outstanding capital stock or majority of the members shall so vote at a regular or
special meeting.

Whenever the bylaws are amended or new bylaws are adopted, the corporation
shall file with the Commission such amended or new bylaws and, if applicable,
the stockholders' or members' resolution authorizing the delegation of the power
to amend and/or adopt new bylaws, duly certified under oath by the corporate
secretary and majority of the directors or trustees.

The amended or new bylaws shall only be effective upon the issuance by the
Commission of certification that the same is in accordance with this Code and
other relevant laws.

VI. CORPORATE POWERS

When it comes to the legal consequences of corporate contracts and transaction in relation to
corporate powers and capacity, there are three types of ultra vires acts, namely: (a) those which
are outside the express, implied and incidental powers of a corporation; (b) those which have
been executed on behalf of the corporation without proper authority from the Board of Directors;
and (c) those which are per se contrary to laws, morals, or public policy.

The application of ultra vires doctrine in Corporate Law provides a study of dynamic
relationship between the corporate principle that “ A corporation is a creature of limited powers,
and cannot give consent be its powers” and the commercial public policy that “Those who deal
in good faith with a corporate entity must be protected in their contractual expectations.”

UNDERLYING THEORY ON CORPORATE POWERS

A corporation has no power except those expressly conferred on it by the Corporation Code and
its charter, and those that are implied or incidental to its existence; in turn, a corporation
exercises its powers through its Board of Directors and/or its duly authorized officers and agents.

a. Doctrine of Creature of Limited Powers

The treatment of the corporation as a creature of limited powers finds its jurisprudential
application in the ultra vires doctrine, now formally expressed in Sec. 45 of the Corporation
Code , which provides that “ No corporation…shall possess or exercise any corporate powers
except those that conferred by this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred. “ Under the ultra vires
doctrine, a corporation has only three types of powers which would result into intra vires
contracts or transaction: express, implied, or incidental powers. Strictly speaking, any corporate
contract or transaction that does not fall into any of these powers, is ultra vires since it lacks of
the essential element of consent, based on the theory that a corporation does not exist outside of
its legal powers.

b. Doctrine of Centralized Management

The doctrine in Section 23 of the Corporation Code is that “unless otherwise provided in the
Code,” all corporate powers shall be exercises by, and all corporate business shall be conducted
through, the Board of Directors of the corporation. The source of power of the Board of
Directors is therefore primary and directly vested by law; it is not a delegated power from the
stockholders or members of the corporation. In the absence of statutory provision to the contrary,
the consent of the corporation in all contracts and transactions that it enters into as a contracting
party is effected through its Board of Directors under the doctrine of “Centralized
Management”. In short, the corporation’s consent is that of the Board of Directors.

In the case of the group of stockholders or members constituting a “party” to the

corporate contractual relationship, there is a need to determine how their consent or
dissent to particular contractual amended or alteration is deemed to be expressed. As a
“party-group”, stockholders’ or members’ consent or dissent is recognized either by their
majority vote or qualified two-thirds (2/3) vote, as the case may be, and their decisions
generally affect even those who did not vote for, or even voted against, the wishes of the
majority.

It should be noted that although for efficiency of running of corporate affairs the “rule of
majority” has been adopted in the case of stockholders and members, the Corporation Code still
recognized that in certain instances a dissenting stockholder whose contractual expectation has
either been frustrated or altered by the decision of the majority, are given on specified instances
to withdraw from the confines of the corporate contractual relationship. In such instances, the
dissenting stakeholder is granted the right of appraisal.

CORPORATE POWERS AND CAPACITY

1. Express Powers

Article 46. Civil Code. “Juridical persons may acquire and possess property of all kinds, as well
as incur obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization.” These enumerated powers constitute part of the express
powers of every juridical person constituted under Philippine laws.
Sec. 35 of corp code enumerates 11 powers which every corp may exercise: (sa amended na ‘to,
iba nakalagay sa book. Sec. 36 sa book)

Corporate Powers and Capacity. - Every corporation incorporated under this Code has the power
and capacity:

(a) To sue and be sued in its corporate name;

(b) To have perpetual existence unless the certificate of incorporation provides otherwise;

(c) To adopt and use a corporate seal;

(d) To amend its articles of incorporation in accordance with the provisions of this Code;

(e) To adopt bylaws, not contrary to law, morals or public policy, and to amend or repeal the
same in accordance with this Code;

(f) 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 admit members to the corporation if it be a
nonstock corporation;

(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the constitution;

(h) To enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons;

(i) To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no foreign corporation
shall give donations in aid of any political party or candidate or for purpose s of partisan political
activity;

(j) To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers, and employees; and

(k) To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

Sec. 35 enumerated the powers, some of which are really considered to be inherent or incidental
powers, which means that even when not expressly granted by law, they are deemed to be within
the capacity of corporate entities, such as the power to adopt and amend by-laws, but are
regulated powers under corp.code.
The express power granted to corporations under sec. 36 adopt and use a seal only has historical
significance and harks back to the old days when the use of seal was important to lend authority
to a document.

The Supreme Court has held that even in the exercise of express powers of the corporation,
in the absence of an authority from the Board of Directors, no person, not even the officers
of the corporation, can validly bind the corporation. It has also been held that a
corporation exercises its powers, including the power to enter into contracts, through its
Board of Directors; and that while a corporation may appoint agents to enter into a
contract in its behalf, the agent should not exceed his authority.

i. Power to sue and be sued.

Tam Wing Tak v. Makasiar, held:

…Under Section 36 of the Corp. Code, read in relation to Sec. 23, it is clear that where a
corporation is an injured party, its power to sue is lodged with its board of directors or trustees.
Note that petitioner failed to show any proof that he was authorized or deputized or granted
specific powers by the corporation’s Board of Directors to sue the defendant for and on behalf of
the firm. Clearly, petitioner as a minority stockholder and member of the board of directors had
no such power or authority to sue on the corporation’s behalf. Nor can we uphold this as a
derivative suit in behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders similarly
situated who may wish to join him in the suit. There is no showing that petitioner has complied
with the foregoing requisites…

· The power of the corp. to sue and be sued is lodged with the BoD that exercises its
corporate powers. XPN: is when the circumstances allow the filing by a realtor-stockholder
of a derivative suit in behalf of the corporation without prior approval of the BoD or
Trustees.

· The rules in corporate litigation also require that if the petitioner is a corporation, a board
reso. authorizing a corporate officer to execute the cert. against forum shopping is necessary
—a certification is not signed by a duly authorized person renders the petition subject for
dismissal. (including GOCC)

· When the corporate officer has granted an express power by the board to sue, it is
deemed to be broad enough to include the power to execute the certificate of non-forum
shopping.

· Although a lawyer may sign the certification on behalf of the corp., such lawyer must
specifically be authorized by the board to sign. Nonetheless, even if the counsel executed the
verification and certificate of non-forum shopping before the board authorized him, the
passing of the board resolution of authorization before the actual filing of the complaint or
the submission in the motion for reconsideration of the authority to sign the verification and
certification constitutes substantial compliance with procedural requirements.
 · The failure to attach a certified copy of the board resolution authorizing the filing of the
petition is deemed fatal, because courts are not expected to take judicial notice of corporate
board resolutions or corporate officer’s authority to represent a corporation. Moreover, where
the corporate officer’s power as an agent of the corporation was not derived from such
resolution, it would nonetheless be necessary to show a clear source of authority from the
charter, by-laws or the implied acts of the governing body.

(i) Service of Summons on a Corporation

Section 11, Rule 14 of the 1997 Rules of Civil Procedure has now removed the term
“agent” from those enumerated officers authorize to receive summons for a corporate
defendant: “When the defendant is a corporation…organized under the laws of the
Philippines… service may be made on the president, managing president, general partner,
corporate secretary, treasurer, or in-house counsel.”

South Cotabato Communications Corp. v. Sto. Tomas, held that since the President is among
the enumerate corporate officers who can receive summons on behalf of the corporation, then
he can sign the verification and certification against forum-shopping in behalf of the
corporation without the benefit of the board resolution.

ii. Power to sell, lease, dispose or encumber assets

It is the BoD which exercises almost all the corporate powers in a corporation as indicated
clearly under Section 23 of the Corp. Code and that Section 36 also confirms the power to
purchase and sell property to be vested with the corporation through its Board: “Under these
provisions, the power to purchase real property is vested in the board of directors or trustees.
While a corporation may appoint agents to negotiate for the purchase of real property needed
by the corporation, the final say will have to be with the board, whose approval will finalize
the transaction. A corporation can only exercise its powers and transact its business through
its board of directors and through its officers and agent when authorized by a board
resolution or its by-laws.”

The SEC has opined that investments of a corporation in another corporation in the form of
shares of stock constitute part of the assets of property of the investor corporation, and cannot
be legally disposed of by mere endorsement of the President, since such shares fall within
disposition of properties being part of the management powers of the Board of Directors.

ii. Power to borrow or enter into loans

Although the power to borrow is one of the enumerated powers of every corporation under Sec.
36 of Corp Code, it is really an inherent or implied power of every corporation since it flows
from its being granted the capacity to contract or to obligate itself as a juridical person.
Generally, therefore, the decision to borrow money to finance the operation of the corporate
enterprise falls within the business discretion of the BoD or Trustees of every corporation. The
exception in under Section 38, when the corporation shall incur or increase a bonded
indebtedness.
Yasuma v. Heirs of Cecilio S. De Villa, held that the power of an agent to borrow money on
behalf of the principal is one of those cases that require the existence of a special power of
attorney; therefore, corporate officers as agents of the corporation need a special power of
attorney in order to validly borrow in behalf of the corporation. Yasuma held that when
promissory notes in the name of the corporation were executed by its President, the same would
be void as against the corporation where no special power of attorney was given by the Board of
Directors.

iv. Incidental Powers

Incidental powers of the corporation, in addition to its express powers, are recognized also under
Section 2 of the Corporation Code which defines a corporation as having “ the powers, attributes
and properties expressly authorized by law or incident to its existence.”

Powers incident to corporate existence are those that attach to a corporation at the moment of its
creation without regard to its express powers or particular primary purpose, and may be said
necessarily arise from its being a juridical person engaged in business. These powers include the
power to sue or be sued, to grant and receive, in the corporate name; the power to purchase, hold,
and covey real and personal property for such purposes as are within the objects of its creation;
the power to have a corporate seal; the power to adopt and amend by-laws for its government;
and the power, in the proper cases, to disenfranchise or remove members.

Nonetheless, powers that go into the very nature and extent of a corporation’s entity cannot be
presumed to be incidental or inherent powers. The juridical entity of a corporation is “State-
granter”, and cannot be altered or amended without State authority. For example, the right of
succession is not inherent or an incidental power of a corporation and does not exist by the fact
that a corporation is granted a juridical entity. The arguments is that when the State grants to an
aggregation of individuals a separate juridical entity, such grant is specific and does not extend to
others not originally part of the group without a further grant by the State of the power of
succession.

Another example would be the power to merge or consolidate with another corporate entity.
Such power cannot be implied to exist outside the State-grant merely from the fact that a
corporation has been granted juridical entity. Corporations cannot, without State authorization,
vary the composition of those to whom it grants juridical entities by merger or consolidation.

v. Implied or Necessary Powers

Section 36 (11) of the Corporation Code provides that a corporation has the power and capacity
“To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation.” The sub-paragraph covers what are called the
“implied or necessary powers” of corporate entities, which exist as a necessary consequence of
the grant and/or exercise of the express powers of the corporation or the pursuit of its purposes as
provided for in the articles of incorporation. Whereas, “incidental powers” flow from the nature
of the corporation as a juridical person, “ implied powers” flow from the nature of underlying
business enterprise. The rule may thus be stated that the management of a corporation, in
absence of express restrictions, has discretionary authority to enter into contracts or transaction
which may be deemed reasonably necessary or incidental to its business purposes.

Example:

The act of issuing checks is within the ambit of valid corporate act, for it was for securing a loan
to finance the activities of the corporation, hence, not an ultra vires act.

An officer of the corporation who is authorized to purchases the stock of another corporation has
the implied power to perform all other obligations arising therefrom such as payment of the
shares of stock.

b. ULTRA VIRES ACT

The first type of ultra vires acts are referred to as the “classic ultra vires” type, conform to the
notion that the corporation is a creature of limited powers. They are encompassed within the
provision of Section 45 of the Corporation Code that holds that a corporate act, contract or
transaction must fall within a corporation’s express, implied or incidental powers, and implement
the doctrine found on Section 2 of the Code that a corporation is a mere creature of the State has
only such “powers, attributes and properties expressly authorized by law or incident to its
existence.”

i. Test

Montelibano v. Bacolod Murcia Milling, upheld the authority of the Board acting for the
corporation to modify the terms of amended milling contract for the purpose of making its terms
more acceptable to the other contracting parties. It gave the formula for determining the
applicability of ultra vires doctrine:

It is a question, therefore, in each case of the logical relation of the act to the corporate
purpose expressed in each charter. “If the act is one which is lawful in itself,” and not otherwise
prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the
promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may fairly
considered within charter powers. The test to be applied is whether the act in question is in
direct and immediate furtherance of the corporation’s business, fairly incident to the express
powers and reasonably necessary to their exercise. If so the corporation has the power to do it;
otherwise, not.

The test uses the rather stringent terms “direct and immediate” only with reference to the
business of the corporation; whereas, it uses the rather liberal terms of “fairly incident” and
“reasonably necessary” with reference to powers of the corporation.

Even when a particular corporate transaction does not pass the lenient Montelibano test and is
considered ultra vires, the transaction would nevertheless be held binding on the corporation
under the estoppel doctrine.

Carlos vs. Mindoro Sugar Co., laid down the following presumption:
 When a contract is not on its face necessarily beyond the scope of the power of the
corporation, by which it was made, it will, in the absence of proof to the contrary, be presumed
to be valid. Corporations are presumed to contract within their powers. The doctrine of ultra
vires, when invoked for or against a corporation, should not be allowed to prevail where it would
defeat the ends of justice or work of legal wrong.

Carlos pointed out that the great weight of authority is to the effect that, where a transaction is
merely ultra vires and not malum in se or malum prohibitum, although it may be made a basis of
forfeiture of the corporate charter or dissolution of the corporation, such transaction is, if
performed by one party, not void as between the parties, and an action may be brought directly
upon the transaction and relief had according to its terms.

C. Power to Extend or Shorten Corporate Term

Section 36. Power to Extend or Shorten Corporate Term. - A private corporation may extend or shorten its
term as stated in the articles of incorporation when approved by a majority vote of the board of directors or
trustees, and ratified at a meeting by the stockholders or members representing at least two-thirds (2/3) of the
outstanding capital stock or of its members. Written notice of the proposed action and the time and place of
the meeting shall be sent to the stockholders or members at their respective place of residence as shown in the
books of the corporation, and must be deposited to the addressee in the post office with postage prepaid,
served personally, or when allowed in the bylaws or done with the consent of the stockholder, sent
electronically in accordance with the rules and regulations of the Commission on the use of electronic data
messages. In case of extension of corporate term, a dissenting stockholder may exercise the right of appraisal
under the conditions provided in this Code.

Nature of power

The power to extend corporate life is not an inherent power of a corporation, since the corporate term in not
only a mater that constitutes an integral clause of the articles of incorporation, but also the State granting
juridical personality to a corporation is presumed to have granted it only for the period of time provided in the
corporation’s charter.

On the other hand, the power to shorten the corporate life, although an item that would cover an amendment of
the articles of incorporation, is for practical purposes, an inherent right on the part of the corporation, since the
decision to shorten the business life of a business endeavor should really be address to the business decision of
the co-venturers.

Appraisal Rights Issues

The exercise of appraisal rights rightly belongs to a case of extension of the corporate term actually novates the
corporate contract with each shareholders which now seeks to extend the corporate relationship beyond the
original term provided for in the articles of incorporation.

The appraisal right should not be triggered when it comes to the shortening of corporate life, because there is
really no violation of the original contractual intent; if the dissenting stockholder had invested into the venture
for say a 50-year corporate term, then he is presumed to be in it for a lesser period of time.

D. Power to Cease Corporate Operations

The SEC has ruled that the temporary stoppage of the operations of the corporation cannot be classified as an
ordinary business transaction such as to limit its approval to the Board of Directions; that the cessation of
business operations, though temporary, is a fundamental concern which should be decided not only by the
Board but also by the stockholders themselves who stand to be primarily affected by such event; however,
considering the critical nature of the issue, which is not mere exercise of management prerogative, the two-
thirds (2/3) vote of the outstanding capital stock is required either prior to the voting of the Board or by
subsequent ratification in a meeting of the stockholders called for the purpose.

If the temporary cessation of operations of the corporate enterprise requires the ratificatory vote of the
stockholders. More so would a permanent ceasure of operations which is not accompanied by formal
dissolution of the corporate entity.

E. Power to Increase/Decrease Capital Stock

Section 37. Power to increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of
the board of directors and by two-thirds (2/3) of the outstanding capital stock at a stockholders' meeting duly called for the
purpose. Written notice of the time and place of the stockholders' meeting and the purpose for said meeting must be sent to the
stockholders at their places of residence as shown in the books of the corporation served on the stockholders personally, or
through electronic means recognized in the corporation's bylaws and/or the Commission's rules as a valid mode for service of
notices.

A certificate must be signed by a majority of the directors of the corporation and countersigned by the chairperson and secretary
of the stockholders' meeting, setting forth:

(a) That the requirements of this section have been complied with;

(b) The amount of the increase or decrease of the capital stock;

(c) In case of an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually
subscribed, the names nationalities and addresses of the persons subscribing, the amount of capital stock or number of no-par
stock subscribed, the names, nationalities and addresses of the persons subscribing, the amount of capital stock or number of no-
par stock subscribed by each, and the amount paid by each on the subscription in cash or property, or the amount of capital
stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective
stock dividend therefor authorized;

(d) Any bonded indebtedness to be incurred, created ot increased;

(e) The amount of stock represented at the meeting; and

(f) The vote authorizing the increase or decrease of capital stock, or incurring, creating or increasing of bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require
prior approval of the Commission and where appropriate, of the Philippine Competition Commission. The application with the
Commission shall be made within six (6) months from the date of approval of the board of directors and stockholders, which
period may be extended for justifiable reasons.

Copies of the certificate shall be kept on file in the office of the corporation and filed with the Commission and attached to the
original articles of incorporation. After approval by the Commission and the issuance by the Commission of its certificate of
filing may declare: Provided, That the Commission shall not accept for filing any certificate of increase of capital stock unless
accompanied by a sworn statement of the treasurer of the corporation accompanied by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five percent (25%) of
the increase in capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been
paid in actual cash to the corporation or that property, the valuation of which is equal to twenty-five percent (25%) of the
subscription, has been transferred to the corporation: Provided, further, That no decrease in capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.

Nonstock corporations may incur, create or increase bonded indebtedness when approved by a majority of the board of trustees
and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

Bonds issued by a corporation shall be registered with the Commission, which shall have the authority to determine the
sufficiency of the terms thereof.

i. Appraisal Right in Increase and Decrease Capital Stock

a. No Appraisal Right in Increase of Capital Stock

An increase of the authorized capital stock has the potential effect of diluting the stockholder’s proportionate
interest in the equity of the corporation. Even with the existence of the pre-emptive right to all stockholders in
case of increase of authorized capital stock (including those who dissented to the measure), there is no
guaranty that any stockholder can preserve his proportional interests in the corporation since he might not have
the personal financial resources to exercise his pre-emptive right on the increase. The non-granting of appraisal
right to dissenting stockholders in case of increase of capital stock may be rationalized in two grounds:

1. The increase of the capital does not prevent any stockholder, including a dissenting stockholder from opting
out of the contractual relationship by simply selling his shares in the corporation to any interested buyer. This
is true with shares of publicly listed corporations; however, this is more theoretical when it comes to shares of
non-listed corporations, where there may be no market for the shares to allow a dissenting stockholder to
withdraw from the corporate relationship.

On the other hand, the exercise of appraisal right when available affords the dissenting stockholder to obtain
the reasonable value of his shares. In addition, if the feature of free-transferability of shares is the basis for not
granting the appraisal right in this case, then the appraisal rights should not be granted also in all other cases
provided for Section 81 (80) of the Code, since also in those cases, the dissenting stockholder theoretically has
a way of getting put of the corporate set-up by selling his shares.
2. The grant of appraisal right in case of increase of capital stock would defeat the very purpose for which the
power is exercised, i.e., to raise funds for the operation or even survival of the corporate business. The reason
why a corporation would undertake to increase its capital stock is raise the working capital of the corporation,
and if dissenting stockholders were granted the appraisal right, then it would in fact dilute the attempted
increase, since the corporation would have to pay-out the fair value of the shares of the dissenting
stockholders. This seems to be the more rational basis for the non-granting of appraisal rights in case of
increase of the capital stock.

b. No Appraisal Right in Decrease of Capital Stock

The decrease of capital stock of a corporation should not trigger the exercise of the appraisal right since the
decrease of capital stock would result in returning part of the investments of the stockholders, including those
stockholders who dissented.

ii. Effectivity of Increase in Capital Stock

Prior to SEC approval of the increase in the authorized capital stock of the corporation, and despite the board
resolution approving the increase in the capital stock, and the receipt of payment on the future issues of the
shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation
until approval of the increase by the SEC. Thus, Central Textile Mills, Inc. v. National Wages and Productivity
Commission, held that:
These payments cannot as yet be deemed part of the [corporation’s] paid-up capital, technically
speaking, because its capital stock has not yet been legally increased… Such payments constitute
deposits on the future subscriptions, money which the corporation will hold in trust for the subscribers
until it files a petition to increase its capitalization and a certificate of filing of increase of capital stock
is approved and issued by the SEC. As trust fund, this money is still withdrawable by any of the
subscribers at any time before the issuance of the corresponding shares of stock, unless there is a pre-
subscription agreement to the contrary, which apparently is not present in the instant case.
Consequently, if a certificate of increase has not yet been issued by the SEC, the subscribers to the
unauthorized issuance are not be deemed as stockholders possessed of such legal rights as the rights to
vote and dividends.

F. Power to Incur, Create or Increase Bonded Indebtedness

Nature of the Bond

 The SEC Interim Guidelines for the Registration of Bonds define a “bond” as a security “representing
denominated units of indebtedness issued by a corporation to raise money or capital obliging the issuer to pay
the maturity value at the end of a specified period which should be not less than 360 days, and where
applicable, payment of interest on stipulated dates.

The SEC has limited the term to “bonded indebtedness” to cover only indebtedness of the corporation which
are secured by mortgage on real or personal property, as distinguished from “debentures” which are
unsecured corporate indebtedness and the debentures are issued on the basis of the general credit of the
corporation and are not secured by collaterals, and therefore do not constitute bonded indebtedness and will not
required approval of the stockholders.

Main feature of bonded indebtedness- the borrowing is intended to eventually become a public issue, i.e., that
is essentially structured in “denominated units of indebtedness” with the intention or anticipation that such
units of indebtedness would circulate within the investing public as securities representing units of investment.

i. Requirements of the Code (see Sec. 37)

G. Power to Sell, Dispose, Lease or Encumber Assets

Section 39. Sale or Other Disposition of Assets. - Subject to the provisions of Republic Act No. 10667,
otherwise known as the "Philippine Competition Act", and other related laws a corporation may, by a majority
vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge, or otherwise dispose of its
property and assets, upon such terms and conditions and for such consideration, which may be money, stock,
bonds, or other instruments for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient.

A sale of all or substantially all of the corporation's properties and assets, including its goodwill, must be
authorized by the vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or
at least two-thirds (2/3) of the members, meeting duly called for the purpose.

In nonstock corporations where there are no members with voting rights, the vote of at least a majority of the
trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by
this section.

The determination of whether or not the sale involves all or substantially all of the corporation's properties
and assets must be computed based on its net asset value, as shown in its latest financial statemments. A sale
or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or accomplishing the purpose of which it
was incorporated.
Written notice of the proposed action and of the time and place for the meeting shall be addressed to
stockholders or members at their places of residence as shown in the books of the corporation and deposited
to the addressee in the post office with postage prepaid, served personally, or when allowed by the bylaws or
done with the consent of the stockholder, sent electronically: Provided, That any dissenting stockholder may
exercise the right of appraisal under the conditions provided in this Code.

After such authorization or approval by the stockholders or members, the board of directors or trustees may,
nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge, or other disposition of
property and assets, subject to the rights of third parties under any contract relating thereto, without further
action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by the
stockholders or members, to sell, lease, exchange, mortgage, pledge, or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of the corporation or
if the proceeds of the sale or other disposition of such property and assets shall be appropriated for the
conduct of its remaining business.

i. Lopez Realty v. Fontecha

held that, providing gratuity pay for its employees is one of the express powers of a corporation under the
Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay. It held that such resolution did not also require the ratification of the
stockholders under Section 40 (39) of the Code of Corporation because such provision is applicable to the sale,
lease, exchange, or disposition of all or substantially all of the corporation’s assets, including its goodwill.

ii. Bulk Sales Law

Aside from the requirements under Section 39, the sale of all or substantially all of the corporate assets or
property may require compliance with the Bulk Sales Law, when the transaction falls within the classification
of the Law as “sale in bulk” and would required the seller to execute a sworn statement listing the corporate
creditors and the amount and nature of their claims, giving of notice of the sale, and applying the proceeds of
the sale proportionately to the payment of the listed obligations.

Under the Bulk Sales Law, failure to comply with its requirements renders the transaction fraudulent and void,
irrespective of the intention of the parties to the transaction.
iii. Pena v. CA

indicated that the sale of the only asses of the corporation made Board without the appropriate stockholders’
approval would render the contract void.

iv. Caltex (Phils) Inc. v. PNOC Shipping and Transport Corp.

clarified that even when the sale of all or substantially corporate assets is pursued following the provisions of
Section 40 of Corp. Code, the same would still constitute a species of “business enterprise transfers,” and the
legal effect is to make the assignee liable for the obligations arising from the business enterprise, thus—

The disposition of all or substantially all of the assets of a corporation is allowed under Section 40 of the corp.
code, but the transfer should not prejudice the creditors of assignor. The only way the transfer can proceed
without prejudice to the

H. POWER TO PURCHASE OWN SHARES

SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or
acquired, a stock corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including the following
cases:
(a)To eliminate fractional shares arising out of stock dividends;
(b)To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
(c)To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.

-It expressly empowers a corporation to acquire its own share “for legitimate purpose or
purposes” with the limitation that “ the corporation has unrestricted retained earnings in
its book to cover the shares to be purchased or acquired”.
-Such legitimate purpose should include a move by the corporation to exclude
interested purchasers of its stock who represent an antagonistic interest, or to comply
with its contractual commitment in financing contracts.
-Treasury shares- Sec.9 of the RCC, are shares of stock which have been issued and
fully paid for, but subsequently reacquired by the issuing corporation through purchase,
redemption, donation, or some other lawful means. Such shares may again be disposed
of for a reasonable price fixed by the board of directors.
-Shares of a corporation once purchased or acquired by it become treasury shares.
-Fractional shares go to treasury shares and will be distributed once it is whole again.

Rationale: The policy of the law as to the protection of capital stock is not consistently
carried out and that many abuses are made possible by the unrestricted use of such
power.

The corporation must have restricted retained earnings in its book to cover the shares to
be purchased or acquired. The reason for its limitation is that the repurchase of shares,
like the distribution or withdrawal of assets, and may be subject to abuse.

TRUST FUND DOCTRINE- All the property of the corporation is held in trust for the
protection of the creditors. It backstop the requirement of unrestricted retained earnings
to fund the payment of the shares of stocks of the withdrawing stockholders.

Debt-to-Equity Conversions- a corporation may negotiate with its creditors for

authority to convert their claims against the corporation into equity. Under this scheme,
the corporation may convert existing liabilities into equity accounts with the consent of
the corporate creditors.

I. POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION

SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or

for Any Other Purpose. – Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation, business, or for any
purpose other than the primary purpose for which it was organized, when
approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a meeting duly called for the purpose. Notice of the proposed
investment and the time and place of the meeting shall be addressed to each
stockholder or member at the place of residence as shown in the books of the
corporation and deposited to the addressee in the post office with postage
prepaid, served personally, or sent electronically in accordance with the rules
and regulations of the Commission on the use of electronic data message, when
allowed by the bylaws or done with the consent of the stockholders: Provided,
That any dissenting stockholder shall have appraisal right as provided in this
Code: Provided however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles
of incorporation, the approval of the stockholders or members shall not be
necessary.

-It needs to be:

 1. Approved by majority of the Board of Directors; and
2. Ratified by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations.
-Public listed in PSE does not need ratificatory.
-“Incidental power” flow from the nature of the corporation as juridical person
-“Implied power” flows from the nature of the underlying business enterprise. Sec 41,
is an example of implied power of the corporations. Its objective is to invest at the best
returns available from its investible funds.
-“funds”- includes any corporate property to be used in the furtherance of the business.
-In other words: Whenever the corporation seeks to engage into a secondary purpose
allowed under its articles of incorporation, although intra vires, it must seek approval of
the stockholders or members of the corporation.

Rationale: The presumes rather strongly that when stockholders invest, or members
join a corporation, it is with the primary expectation that the corporation, through its
Board, will only pursue the primary purpose indicated in the article of incorporation; and
that if the Board should feel it propitious(favorable) to pursue a secondary purpose, then
it would do so only if the stockholders or members have a chance to evaluate and
decide upon such diversion of corporate fund and diversion of Management’s attention
from the primary business of the corporation.
-The non-obtaining of the ratificatory vote of the stockholders or members under Section
41 of the RCC should be construed to be within the realm of the ultra vires contracts
of the second type, having been entered into by representatives of the
corporation not duly authorized.

J. POWER TO DECLARE DIVIDENDS

SEC. 42. Power to Declare Dividends. – The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, property, or in stock to all stockholders on the
basis of outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholders until their unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval of
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one
hundred percent (100%) of their paid-in capital stock, except: (a) when justified by
definite corporate expansion projects or programs approved by the board of
directors; or (b) when the corporation is prohibited under any loan agreement
with financial institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been secured; or
(c) when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.

-it lies with the Board of the Directors. General rule has been that the declaration of
dividends is essentially within the business judgment of the Board of Directors of a stock
corporation.
-The Board of Directors of a stock corporation may declare dividends out of the
“unrestricted retained earnings” which shall be payable in cash, property, or in stock to
all stockholders on the basis of outstanding capital stock held by them.
-The concept of TRUST FUND doctrine is acknowledged and its scope is clearly
delineated.
-Stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stocks, except:
a. When justified by definite corporation expansion projects or programs approved
by the Board of Directors;
b. When the corporation is prohibited under a loan agreement with any financial
institution or creditor, whether local or foreign from declaring dividends without
its/his consent , and such consent has not yet been secured; or
c. When it can be clearly shown that retention is necessary under special
circumstances obtaining, such as when there is a need for special reserve for
probable contingencies.

Nature of Dividends
-A stock corporation exists to make profits and to distribute a portion of the profits
to its stockholders.
-A dividend is that portion of the profits of a corporation set aside, declared and
ordered by the directors to be paid ratably to the stockholders on demand or at
fixed time.

Dividends distinguished from profits

Dividends Profits

Is that portion of the profits or net It covers larger meaning than dividends
earnings which the stock corporation has and includes benefits of any kind, the
set aside for ratable distribution among excess of value over cost, acquisition
the stockholders. beyond expenditures, gain, or advance,
etc.

Dividends come from profits Profits are not dividends until so declared
or set aside by the corporation

Retained earnings represents the accumulation of net profits of the corporation over
the years and likewise losses sustained, as well as deductions made upon previous
dividends declared. If the accumulation resulted in a net loss over the years, it is called
a “deficit”. It include earnings from sales of goods or services of the corporation in the
ordinary course of its business, as well as the earnings from sale of corporate property
other than its stock in trade, at a price higher than its cost.

Restricted or Appropriated retained earnings is that portion that is specifically

earmarked or “set aside” for a specific purpose such as to meet contingent liabilities, or
planned expansion facilities.

Unrestricted or unappropriated retained earnings represents that portion which is

free and can be declared or dividends to stockholders. It also means “the accumulated
profits realized out of normal and continuous operations of the business after deducting
therefrom distribution of stockholders and transfer to capital stock or other accounts.

Cash Dividend may be declared by the Board of Directors under a formal resolution
and does not require the approval or ratification of the stockholders. Revocable
BEFORE announcement to the stockholders; as soon as the cash dividends are publicly
declared, the stockholders have the right to their pro rata shares.

Stock Dividends requires the prior resolution of the Board of Directors, may be validly
declared only with the approval of stockholders representing not less than two-thirds (⅔)
of the outstanding capital stock at a regular or special meeting duly called for the
purpose. Stock dividend declarations may be revoked PRIOR to the actual issuance
thereof.

Property Dividends, the SEC Rules Regulating the Issuance of Property dividends,
provide for the guidelines for all stock corporations which declare property dividends.

Liquidating dividends, under the law, dividends other than liquidating dividends (which
form part of the capital) may be declared and paid out of the unrestricted retained
earnings of the corporation.

Nielson & Co, Inc. vs Lepanto Consolidated Mining Co. (1968)- (Right to receive
dividends only to stockholders of the corporation. )

Ruling:

Stock dividends cannot be issued to a person who is not a stockholder in payment of

services rendered.

Section 16 of the Corporation Law, the consideration for which shares of stock may be
issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are
given the special name “stock dividends” only if they are issued in lieu of undistributed
profits. If shares of stocks are issued in exchange of cash or property then those shares
do not fall under the category of “stock dividends”. A corporation may legally issue
shares of stock in consideration of services rendered to it by a person not a stockholder,
or in payment of its indebtedness. A share of stock issued to pay for services rendered
is equivalent to a stock issued in exchange of property, because a service is equivalent
to property. Likewise a share of stock issued in payment of indebtedness is equivalent
to issuing a stock in exchange for cash. But a share of stock thus issued should be part
of the original capital stock of the corporation upon its organization, or part of the stocks
issued when the increase of the capitalization of a corporation is properly authorized. In
other words, it is the shares of stock that are originally issued by the corporation and
forming part of the capital that can be exchanged for cash or services rendered, or
property; that is, if the corporation has original shares of stock unsold or unsubscribed,
either coming from the original capitalization or from the increased capitalization. Those
shares of stock may be issued to a person who is not a stockholder, or to a person
already a stockholder in exchange for services rendered or for cash or property. But a
share of stock coming from stock dividends declared cannot be issued to one who is not
a stockholder of a corporation.

A “stock dividend” is any dividend payable in shares of stock of the corporation

declaring or authorizing such dividend.

So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced
use of the dividend money to purchase additional shares of stock at par. When a
corporation issues stock dividends, it shows that the corporation’s accumulated profits
have been capitalized instead of distributed to the stockholders or retained as surplus
available for distribution, in money or kind, should opportunity offer. Far from being a
realization of profits for the stockholder, it tends rather to postpone said realization, in
that the fund represented by the new stock has been transferred from surplus to assets
and no longer available for actual distribution.

The term "dividend" both in the technical sense and its ordinary acceptation, is
that part or portion of the profits of the enterprise which the corporation, by its governing
agents, sets apart for ratable division among the holders of the capital stock. It means
the fund actually set aside, and declared by the directors of the corporation as a
dividend, and duly ordered by the directory, or by the stockholders at a corporate
meeting to be divided or distributed among the stockholders according to their
respective interests.

Thus, it is apparent that stock dividends are issued only to stockholders. This is
so because only stockholders are entitled to dividends. They are the only ones who
have a right to a proportional share in that part of the surplus which is declared as
dividends. A stock dividend really adds nothing to the interest of the stockholder; the
proportional interest of each stockholder remains the same. jIf a stockholder is deprived
of his stock dividends – and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the proportion of the stockholder’s
interest changes radically. Stock dividends are civil fruits of the original investment, and
to the owners of the shares belong the civil fruits.

K. POWER TO ENTER INTO MANAGEMENT CONTRACT

SEC. 43. Power to Enter into Management Contract. – No corporation shall

conclude a management contract with another corporation unless such contract
is approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members
in the case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (a) where a
stockholder or stockholders representing the same interest of both the managing
and the managed corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing corporation; or (b)
where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors of
the managed corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-thirds (2/3) of
the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation.

These shall apply to any contract whereby a corporation undertakes to manage or

operate all or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or otherwise:
Provided however, That such service contracts or operating agreements which
relate to the exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be provided by the
pertinent laws or regulations.

No management contract shall be entered into for a period longer than five (5)
years for any one (1) term.

-it needs to be:

1. Approved by the board of directors; and

2. By stockholders owning at least the majority of the outstanding capital
stock, or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation

-Applies only to “management contracts” defined as any contract whereby a

corporation undertakes to manage or operate all or substantially all of the business of
another company, whether such contract is called service contracts, operating
contracts, or otherwise.

-However, such service contracts or operating agreements which relates to the

exploration, development, exploitation, or utilization of natural resources may be
entered into for such periods as may be provided by the pertinent laws or regulations.

Rationale on the part of the Manage Corporation: Ratificatory requirement for the
managed corporation is that such a management contract is a deviation from the
principle of section 22 of the RCC, that the corporation shall be manage by the Board of
Directors.

Rationale on the part of the Managing Corporation: A Ratificatory measure on the

part of the managing corporation is that the management arrangement is also a
deviation from the principle that the Board of Directors in the managing corporation
assumed office with the understanding that they would devote their time and resources
to the affairs of the corporation.

-Inapplicable a) to corporation that is organized primarily as Management Company,

and its entering into management contract is clearly within the primary purpose of the
corporation and in accordance with the contractual understanding with the stockholders
of such managing corporation and b) when a corporation enters into a management
contract with an individual.

Special Ratification rule, where:

a. A stockholder or stockholders representing the same interest of both the

managing and the managed corporations own or control more than one-third(1/3) of
the total outstanding capital stock entitled to vote of the managing corporation
(Interlocking stockholders); or

b. A majority of the members of the Boards of Directors of the managing

corporation also constitute a majority of the members of the Board of Directors of the
managed corporation;

Then, the management contract must be:

-Approved by the stockholders of the managed corporation owning at least two-

thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock corporation.

L. POWER TO MAKE DONATIONS

SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under
this Code has the power and capacity:

(i)To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That
no foreign corporation shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;

- Incidental power
-Test of reasonableness: Maximize profit
-Limit only to “reasonable donations”
Business test: Corporate donation must be of such nature and such amount
that they promote the best interest of the corporation and its stockholders, in the
sense that the main purpose is to build the name and goodwill of the company as
a good corporate citizen, thereby enhancing patronage for its business on a long
term basis.
-Unreasonable and ultra vires act: If the donations constitute merely a wastage or
have no reasonable means of enhancing the business enterprise.

i. Prime White Cement Corp vs. Intermediate Appellate Corp.

Note: walang donation na naganap sa case. Eto lang yung sabi sa book.
● As corporate managers, directors are committed to seek the maximum amount
of profits for the corporation.
● Majority school of thought – the Board of Directors of every corporation holds a
fiduciary obligation to the stockholders to operate the corporation and manage its
enterprise for the benefit of its beneficial or equitable owners-the stockholders. It
would be a breach of trust on the part of the Board, and its duly designated
officers, to appropriate for themselves the benefits arising from the corporate
enterprise, or to give them to third parties, such as is the essence of every
donation made of corporate assets.

RULING: The “dealership agreement” is not valid and unenforceable.

Under the Corporation Law, which was then in force at the time the case arose, as well
as under the present Corporation Code, all corporate powers shall be exercised by the
Board of Directors, except as otherwise provided by law. Although it cannot completely
abdicate its power and responsibility to act for the juridical entity, the Board may
expressly delegate specific powers to its President or any of its officers. In the absence
of such express delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same expressly
or impliedly.

Implied ratification may take various forms — like silence or acquiescence; by

acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom. Furthermore, even in the absence of express
or implied authority by ratification, the President as such may, as a general rule, bind
the corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances. These rules are basic, but are all general and thus
quite flexible. They apply where the President or other officer, purportedly acting for the
corporations, is dealing with a third person, i.e., a person outside the corporation. The
situation is quite different where a director or officer is dealing with his own corporation.
Herein, Te was not an ordinary stockholder; he was a member of the Board of Directors
and Auditor of the corporation as well. He was what is often referred to as a "self-
dealing" director. A director of a corporation holds a position of trust and as such, he
owes a duty of loyalty to his corporation. In case his interests conflict with those of the
corporation, he cannot sacrifice the latter to his own advantage and benefit. As
corporate managers, directors are committed to seek the maximum amount of
profits for the corporation. A director's contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the
circumstances, it may be ratified by the stockholders provided a full disclosure of his
adverse interest is made.

ii. Doctrine of Corporate Social Responsibility

-Corporations being creatures of the law and receiving the protection of the State as
well as profiting from society, must bear certain non-profit and social responsibility
towards society; and that their Boards of Directors must properly meet such social
obligations of the corporation to society.

-Under such theory, donations and other contributions made by the Board of Directors
would not constitute ultra vires acts.

M. POWER TO GRANT PENSION, RETIREMENT, AND OTHER GRATUITIES

SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under
this Code has the power and capacity:

(j)To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers, and employees;

Rationale: The express power of corporation to grant gratuities is that they engender
loyalty among the corporation’s human resources and grants them motivation to remain
with the corporation, and thereby increase their productivity and avoid wastage of
occurring through unnecessary high turn-oiver of personnel.

Limitation: Parameters of Section 29 of the RCC, which essentially must be under

reasonable terms and must receive the ratificatory vote of stockholders or members
representing at least majority of the outstanding capital stock in a meeting duly called
for the purpose.

N. POWER TO ENTER INTO PARTNERSHIP

SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under
this Code has the power and capacity:

(h)To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons;

-It is now expressly stated in the RCC that corporation can enter into partnership.

i. Aurbach vs. Sanitary Wares Manufacturing Corp.

RULING:

It was a joint venture. The rule is that whether the parties to a particular contract have
thereby established among themselves a joint venture or some other relation depends
upon their actual intention which is determined in accordance with the rules governing
the interpretation and construction of contracts. In the instant cases, our examination of
important provisions of the Agreement as well as the testimonial evidence presented by
the Lagdameo and Young Group shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of Saniwares and the
unusual arrangements which govern its policy making body are all consistent with a joint
venture and not with an ordinary corporation.

According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the

Agreement with ASI in behalf of the Philippine nationals. He testified that ASI agreed to
accept the role of minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protect ASI as the minority.

The legal concept of a joint venture is of common law origin. It has no precise legal
definition but it has been generally understood to mean an organization formed for
some temporary purpose. It is in fact hardly distinguishable from the partnership, since
their elements are similar community of interest in the business, sharing of profits and
losses, and a mutual right of control. The main distinction cited by most opinions in
common law jurisdictions is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature.

This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular partnership may have for its
object a specific undertaking. (Art. 1783, Civil Code).

It would seem therefore that under Philippine law, a joint venture is a form of partnership
and should thus be governed by the law of partnerships. The Supreme Court has
however recognized a distinction between these two business forms, and has held that
although a corporation cannot enter into a partnership contract, it may however engage
in a joint venture with others.

VII. DIRECTORS, TRUSTEES, and OFFICERS

A. NATURE OF THE POWER OF THE BOARD

i. Hornilla vs. Salunat

In this jurisdiction, a corporation’s BOD is understood to be that body which:

1. Exercises all powers provided for under the Corporation Code; 2. Conducts
all business of the corporation; and, 3. Controls and holds all property of the
Corporation. Its members have been characterized as trustees or directors
clothed with a fiduciary character. It is clearly separate and distinct from the
corporate entity itself. Whatever may be the name used to designate such
corporate positions, the occupants of Board positions are bound by the same
duties and responsibilities as any member of the BOD.

ii. Centralized Management

- Section 23 (Corporation Code) expresses the fundamental corporate

character of “Centralized Management”, and thereby mandates
corporate powers to be directly vested in the BOD or Trustees, rather
than being considered as delegated powers coming from the
stockholders or members.
Note: Section 23 of Corpo Code was revised to Section 22 of the RCC
(2019)
- A corporation is an artificial being whose juridical personality is only a
fiction created by law. It can only exercise its powers and transact its
business through the instrumentalities of its BODs, and through its
officers and agents, when authorized by resolution or by its by laws.
- The physical acts of the corporation which is a juridical person, can
only be performed by natural persons duly authorized for the purpose
by corporate by-laws or by a special act of the BOD.
- Rationale of Centralized Management: Investors and creditors of the
corporation, as well as those who deal with it, can rely upon the law
upon the law-directed fact tat the corporation shall be bound only
through its BOD/Trustees, or representatives duly authorized by the
Board. In any organization set-up, the congruence of authority and
responsibility in the same person, committee, or board always
promotes efficiency.
- The BOD has the sole authority to determine policy and conduct the
ordinary business of the Corporation within the scope of its charter. As
long as the BOD acts honestly and the contract does not defraud the
rights of the minority, the courts will not interfere in their judgments and
transactions. The minority members and shareholders cannot come to
court upon allegations of want of judgment or lack of efficiency on the
part of majority and change the course of the administration of
corporate affairs.

iii. Assets Privatization Trust vs CA

Facts: The government undertook to support the financing of Marinduque

Mining and Industrial Corporation (MMIC) and thus, issued debenture bonds
in favor of MMIC which enable the latter to take out loans from the
Development Bank of the Philippines (DBP) and the Philippine National Bank
(PNB). The loans were mortgaged by MMIC’s assets. However, MMIC’s
indebtedness ballooned to P13.7 billion and P8.7 billion to DPB and PNB
respectively. Because of MMIC’s failure to pay, this exposed the government
due to the debenture bonds amounting to P22 billion obligation. A financial
restructuring plan (FRP) was drafted in order to mitigate the loan liability in
the presence of the representatives of PNB and DBP. The two banks
however never formally approved the said FRP. PNB and DBP chose to
foreclose MMIC’s assets and were eventually assigned to the Asset
Privatization Trust (APT). Later, Jesus Cabarrus, Sr., a stockholder of MMIC
initiated a derivative suit against PNB and DBP with APT being impleaded as
the successor in interest of the two banks. The suit basically questioned the
foreclosure as Cabarrus asserted that the foreclosure was invalid because he
insisted that the FRP was adopted by PNB and DBP as a consequence of the
presence of the banks’ representatives when the said FRP was drafted. The
Arbitration Committee (AC) which heard the case ruled in favor of Cabarrus.
Cabarrus then filed before the Makati RTC a motion to confirm the arbitration
award. APT opposed the same as it alleged that the motion is improper.
Makati RTC denied APT’s opposition and confirmed the arbitration award.
The Court of Appeals affirmed the ruling of the RTC.

Issue: WON the Financial Restructuring Plan valid since it was made in the
presence of the representatives of DBP and PNB?

Ruling: No. The FRP is not valid hence the foreclosure is valid. The mere
presence of DBP’s and PNB’s representatives during the drafting of FRP is
not constitutive of the banks’ formal approval of the FRP. The representatives
are personalities distinct from PNB and DBP. PNB and DBP have their own
boards and officers who may have different decisions. The representatives
were not shown to have been authorized by the respective boards of the two
banks to enter into any agreement with MMIC.

There is absolutely no evidence that the DBP and PNB agreed, expressly or
impliedly, to the proposed FRP. It cannot be overemphasized that a FRP, as
a contract, requires the consent of the parties thereto.

As a rule, a corporation exercises its powers, including the power to enter into
contracts, through its board of directors. While a corporation may appoint
agents to enter into a contract in its behalf, the agent should not exceed his
authority. In the case at bar, there was no showing that the representatives of
PNB and DBP in MMIC even had the requisite authority to enter into a debt-
for-equity swap. And if they had such authority, there was no showing that the
banks, through their board of directors, had ratified the FRP.

iv. Doctrine of Estoppel or Ratification

- The principle of estoppel precludes a corporation and its BOD from

denying the validity of the transaction entered into the by its officer with
a third party who in good faith relied om the authority of the former as
manager to act on behalf of the corporation. (Lipat vs. Pacific Banking
Corp.)

1. People’s Aircargo and Warehousing Co. Inc.

- Even when the contract entered into in behalf of the corporation was
outside the usual powers of the corporate officer, the corporation’s
ratification of the contract and acceptance of the benefits arising
therefrom have made such contract binding upon the corporation. It is
also observed that the enforceability of contracts made under Article
1403 (2) of the Civil Code, where there has been no authority by the
principal, is ratified “by acceptance of benefits under them” under
Article 1405 of the Civil Code.

2. Kwok vs. Philippine Carpet Manufacturing Corp.

- A verbal promise given by the Chairman and President of the company

to the general manager and the chief operating officer to give the latter
unlimited sick leave and vacation leave benefits and their cash
conversion upon retirement or resignation, when not an integral part of
the company’s rules and policies, is not binding on the company since
it was made without the approval of the BOD. This was because the
purported beneficiary was an officer who would have been familiar with
the policies involved, and could not have relied on the mere promise
given by the Chairman and President.
- Corporate policies need not be in writing. Contracts entered into by
corporate officers or obligations and prestations assumed by such
officer for and in behalf of such corporation are binding on the said
corporation only if such officer acted within the scope of his authority or
if such officer exceeded the limits of his authority, the corporation has
ratified such contracts or obligations.
v. Doctrine of Apparent Authority

- If a corporation knowingly permits one of its officers, or any other

agent, to act within the scope of apparent authority, it holds him out to
the public as possessing the power to do these acts; and thus, the
corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agent’s authority.
- It involves the question of whether the officer has the power or is
clothed with the appearance of having the power to act for the
corporation.
- Bank Manager has no power to modify contracts of the bank. This
power remains with the BOD. (Banate vs. Phil Countryside Rural Bank)

1. Francisco vs. GSIS

- The issue was the binding effect of an acceptance telegram sent by

the general manager of the corporation, which contained the provisions
contrary to the terms approved by the BOD, covering the terms of
settlement of an obligation.
- If a corporation intentionally or negligently clothes its officers or agents
with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent
third persons dealing in good faith with such officers/agents. Since a
corporation cannot see, or know, anything except through its officers,
then knowledge of facts acquired or possessed by an officer or agent
in the course of his employment, and in relation to matters within the
scope of his authority, is notice to the corporation, whether he
communicates such knowledge or not.
- This case explained why the public generally cannot be required to
look beyond the officers acting for a corporation: “A very large part of
the business of the country is carried on by corporations. It certainly is
not the practice of the persons dealing with officers or agents who
assume to act for such entities to insist on being shown the resolution
of the BOD authorizing the particular agent or officer to transact the
particular business which he assumes to conduct. A person who
knows that the officer or agent of the corporation habitually transacts
certain kinds of business for such corporation under circumstances
which necessarily shows knowledge on the part of those charged with
conduct of the corporate business assumes, as he has the right the
assume, that such agent or officer is acting within the scope of his
authority.
 2. Woodchild Holdings Inc. vs. Roxas Electric Constructions
Company Inc.

- It bears stressing that apparent authority is based on estoppel and can

arise from two instances: first, the principal may knowingly permit the
agent to so hold himself out as having such authority, and in this way,
the principal becomes estopped to claim that the agent does not have
such authority; second, the principal may so clothe the agent with the
indicia of authority as to lead a reasonably prudent person to believe
that he actually has such authority. There can be no apparent authority
of an agent without acts or conducts on the part of the principal and
such act or conduct of the principal must have been known and relied
upon in good faith as a result of the exercise of reasonable prudence
by a third person as claimant and such must have produced a change
of position to its detriment. The apparent power of an agent is to be
determined by the acts of the principal and not by the acts of the agent.
- The party invoking the principle of apparent authority has the burden to
prove the ff: 1. The acts of the purported corporate officer or agent
justifying belief in the agency by the principal corporation; 2.
Knowledge thereof by the principal corporation (i.e., BOD) which is
sought to be held; 3. Reliance thereon by the principal corporation (i.e.,
BOD) consistent with ordinary care and prudence.

vi. Repudiation of Authority

1. Ramirez vs. Orientalist Co.

- When an action is brought against a corporation upon an alleged

contract, if the corporation desires to set up the defense that the
contract was executed by one not authorized as its agent, it must plead
such fact. A corporation cannot avail itself of the defense that it had no
power to enter into the obligation to enforce which suit is brought,
unless it pleads that defense.
- In Ramirez, the Corporation was sought to be held liable on film
distribution contracts entered into by its director-treasurer. Although the
corporation did not deny under oath the contracts pleaded in the
complaint, it alleged that its officer did not have the authority to sign the
contracts for the corporation.
 - Public does not know the transactions of the BOD and that whether a
particular officer actually possesses the authority which he assumes to
exercise. The proof usually is not readily accessible to a stranger who
deals with the corporation on the faith of the ostensible authority
exercised by some of the corporate officers. It is reasonable in a case
where an officer of a corporation has made a contract in its name, that
the corporation should be required, if it denies his authority, to state
such defense in its answer, since by that means the plaintiff is apprised
of the fact that the agent’s authority is contested; and he is given an
opportunity to adduce evidence showing either that the authority
existed or that the contract was ratified and approved.

2. Yao Ka Sin Trading vs. CA (does not overrule Ramirez)

- Application of the Doctrine of Apparent Authority is the burden of the

outsider dealing with a corporation to show, thus: “It was incumbent
upon the petitioner to prove that indeed the private respondent had
clothed Mr. Maglana with apparent power to execute Exhibit A or any
similar contract. This could be easily done by evidence of similar acts
executed either in its favor or in favor of other parties. Petitioner
miserably failed to do that. On the other hand, private respondent’s
evidence overwhelmingly shows that no contract can be signed by the
president without first being approved by the BOD.
- Yao Ka Sin did not repudiate the Ramirez doctrine, it just holds that
once a corporation has discharged its obligation under the Ramirez
doctrine that the acting officer was not in fact authorized, then the
burden of proof now shifts to the contracting party to show that indeed
by previous acts and actuations of the acting officer had been clothed
by the corporation with apparent authority for the public to have taken
such authority at face value.

vii. Self Dealings of Directors and Officers

- Self dealing contracts of Directors and Officers constitute a strong

exception to the Doctrine of Apparent Authority.
- A director of a corporation holds a position of trust and as such, he
owes a duty of loyalty to his corporation. In case his interests conflict
with those of the corporation, he cannot sacrifice the latter to his own
advantage and benefit. As corporate managers, directors are
committed to seek the maximum amount of profits for the corporation.
 This trust relationship is not a matter of statutory or technical law. It
springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interest of
stockholders.
- A director of a corporation holds a position of trust and as such, he
owes a duty of loyalty to his corporation, and his contracts with the
corporation must always be at reasonable terms, otherwise the
contract is void or voidable at the option of the corporation.

viii. Victim Standing

1. Safic Alcan & Cie vs Imperial Vegetable Co.

- The necessary requirement that the doctrine of apparent authority

cannot apply to benefit a party who deals with the corporation aware of
the corporate representative’s lack of authority, thus:

Under Article 1898 of the Civil Code, the acts of an agent beyond
the scope of his authority do not bind the principal unless the latter
ratifies the same expressly or impliedly. It also bears emphasizing
that when the third person knows that the agent was acting beyond
his power or authority, the principal cannot be held liable for the
acts of the agent. If the said third person is aware of such limits of
authority, he is to blame, and is not entitled to recover damages
from the agent, unless the latter undertook to secure the principal’s
ratification.

xi. De Facto Corporate Officers

- SEC opined that the principle on de facto officers may be applied

insofar as third parties dealing with the corporations. It defined a
corporate officer as a de facto officer where he acts as such, under
color or an election or appointment, but fails being a de jure officer by
some irregularity or failure to qualify as required by law.
- Rationale: SEC is applying the doctrine on apparent authority
B. SOURCE OF THE POWER OF THE BOARD

i. Theory on Original Power

- The source of power of the Board comes directly from the law, and that
the Board is originally and directly granted corporate power as the
embodiment of the corporation.
- Under the theory of original power, the BOD is vested with the legal
title to the properties and business enterprise of the corporation, being
viewed as a medium or the corpus, with the stockholders being
considered as the beneficiaries, and thereby a fiduciary relationship is
established between the BOD as the trustee, and the stockholders, as
the beneficiaries.

ii. Theory of Delegated Power

- The authority exercised by the BOD is viewed as derived or delegated

authority, delegated to them by stockholders or members of the
corporation. Under such theory, the source of primary power can
override the decisions of its delegates. Such theory promotes the
notion of “agency” in the corporate set-up, where the real sources of
power are the stockholders or members, and the representatives
thereof would be the Board.
- The corporate powers should belong to the stockholders or members
who form the Corporation, and who contribute the corporate assets.
The stockholders or members are the real owners of the corporation,
and to them the corporate powers must belong, and that the BOD or
Trustees merely act as their agents or representatives.

C. BUSINESS JUDGMENT RULE (BJR)

- Corporate principle recognizing power and competence be lodged

primarily with the BOD. Thus, a resolution or transaction pursued
within the corporate powers and business operations of the
corporation, and passed in good faith by the BOD, is valid and binding;
and generally the courts have no authority to review the same or
substitute their own judgment, even when it can be proven that the
exercise of such power may cause losses to the corporation or
decrease its profits.
 1. Gamboa vs. Victoriano

- Courts cannot supplant the discretion of the BOD on administrative

and management matters as to which they have legitimate power of
action, and contracts which are intra vires entered into by the BOD are
binding upon the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount a
wanton destruction of rights of the minority.

2. Filipinas Port Services vs. Go

- The governing body of the corporation is its BOD. Sec. 23 of the Corpo
Code provides explicitly that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be
exercised, all business conducted and all property of the Corporation
shall be controlled and held by a BOD. Thus, with the exception only of
some powers expressly granted by law to stockholders (or members,
in case of non-stock corporation) the BOD (or Trustees, in case of a
non-stock corp) has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation within
the scope of its charter.
- The authority of the BOD is restricted to the management of the
regular business affairs of the corporation unless more extensive
power is expressly conferred.
- Rationale of BJR: The concentration in the BOD of the powers of
control of corporate business and appointment of corporate officers
and managers is necessary for efficiency in any large corporation.
Stockholders are too numerous, scattered and unfamiliar with the
business of a corporation to conduct its business directly.
- GR: BJR, XPN: Bad faith (If the cause of the losses is merely error in
BJ, not amounting to bad faith or negligence, directors and/or officers
are not liable. For them to be accountable, the mismanagement and
the resulting losses on account thereof are not only matters to be
proven; it is likewise necessary to show that the directors and/or
officers acted in bad faith and with malice in doing the assailed acts.)

Theoretical basis of the BJR

- Phil Stock Exchange vs. CA – Questions of policy and of management

are left to the honest decision of the officers and directors of a
 corporation, and the courts are without authority to substitute their
judgment for the judgment of the BOD. The BOD is the business
manager of the corporation, and so long as it acts in good faith, its
orders are reviewable by the Courts.
- Ong Yong vs. Tiu – no Court of law can, as an integral part of the
judgment resolving the issues between squabbling stockholders, order
the corporation to undertake certain corporate acts, since it would be in
violation of the BJR.

Two Branches of the BJR

BJR has actually two applications, namely:

1. Resolutions approved, contracts and transactions entered into by the BOD
within the powers of the corp cannot be reversed by the courts, not even
on the behest of the stockholders of the corp; and,

2. Directors and officers acting within such business judgment cannot be

held personally liable for the consequences of such acts.

1.1. Corporate Officers cannot be held personally liable for corporate debts or
obligations incurred in the exercise of the BJ. However, when directors or
trustees violate their duties, they can be held personally liable, thus:

a. When the Director willfully and knowingly vote for patently unlawful
acts of the Corporation;
b. When he is guilty of gross negligence or bad faith in directing the
affairs of the corp; and,
c. When he acquires any personal or pecuniary interest in conflict with
his duty as such Director.

2.1 This branch is consistent with the Law on Agency which holds that an agent
cannot be held personally liable for the contracts and transactions he enters into
in behalf of the principal, except when he acts without or in excess of authority, or
acts with negligence, in fraud or in bad, and in clear conflict of interests.

D. REQUIREMENT TO ACT AS A BODY

- Sec. 25 of the Corporation Code

 - The grant of corporate power is to the Board as a body, and not to the
individual members thereof, and that the corporation can be bound
only by the collective act of the Board.
- Rationale: public policy (that it makes for better management practice
for the Board to sit down, to discuss corporate affairs, and decide on
the basis of their consensus.

1. Manila Metal Container Corp. vs PNB (Directors or trustees cannot

act individually to bind the Corporation)

- Contracts or accts of a corporation must be made either by the BOD or

by a corporate agent duly authorized by the Board; and that absent
such valid delegation/authorization, the rule is that the declaration of
an individual director relating to the affairs of the corporation, but not in
the course of, or connected with the performance of authorized duties
of such director, are held not binding on the corporation.
- An individual director per se is not an agent of the corporation having
any implied powers to bind the corporation.

2. Ramirez vs. The Orientalist Co. (Ratification by the Board Does Not
Need Formal Meeting)

- The implication is clear from Ramirez in reference to outsiders dealing

with the corporation: that not all corporate actions need formal board
approval. The Board need not come together and act as a body to
perform a corporate act. In many cases, no act is required of the
members of the Board in order to bind the corporation; the fact that
they know of a particular corporate transaction or contract, and they
stayed silent about it, or worse they allowed the corporation to gain by
the transaction or contract, and they stayed silent about it, or worse,
they allowed the corporation to gain by the transaction or contract,
would already bind the corporation.
Note:

1. Directors or Trustees cannot bind the Board in a Stockholders’ or

Members’ meeting

Tan vs. Sycip

- Indeed, there is a well-defined distinction between a corporate act to
be done by the board and that by the constituent members of the
Corporation. The Board of Trustees must act, not individually or
 separately, but as a body in a lawful meeting. On the other hand, in
their annual meeting, the members may be represented by their
respective proxies.

2. Directors or Trustees Cannot Attend Meetings by Proxy or Through

an Alternate

- On account of their responsibility to the Corporation and by the fact

that they were elected into the Board based on their personal
qualifications, business acumen and background, directors or trustees
cannot validly act by proxy. They must attend meetings of the Board
and act in person and as a body. Each director or trustee is required by
law to exercise his personal judgment and he cannot delegate his
powers or assign his duties.
- SEC ruled that alternate directors are not allowed by law for the same
reason above.

E. EXECUTIVE COMMITTEE

- Sec. 34 of the Revised Corpo Code

Section 34. Executive Management, and Other Special Committees. - If the

bylaws so provide, the board may create an executive committee composed of at
least three (3) directors. Said committee may act, by majority of vote of all its
members, on such specific matters within the competence of the board, as may
be delegated to it in the bylaws or by majority vote of the board, except with
respect to the: (a) approval of any action for which shareholders' approval is also
required; (b) filing of vacancies in the board; (c) amendment or repeal of bylaws
or the adoption of new bylaws; (d) amendment or term is not amendable or
repealable; and (e) distribution of cash dividend to the shareholders.

The board of directors may create special committees of temporary or permanent

nature and determine the members' term, composition, compensation, powers,
and responsibilities.

F. QUALIFICATIONS AND DISQUALIFICATIONS OF THE BOARD

1. QUALIFICATIONS (Sec. 22 of the RCC)
- Every Director must own at least one share of the capital stock of the
corporation of which he is a director, which share shall stand in his
name on the books of the corporation.
- No person shall be elected as a trustee unless he is a member of the
corporation.
- Any Director who ceases to be the owner of at least one share of the
stock of the corporation of which he is a director shall thereby cease to
be a director.
- Majority of the directors or trustees of all corporations organized under
the Corpo Code are required to be residents of the Philippines.

i. Lee vs. CA

- The election of trustees and other persons who in fact are not the
beneficial owners of the shares registered in their names on the books
of the corporation becomes formally legalized and therefore, is a clear
indication that in order to be eligible as a director, what is material is
the legal title to, not the beneficial ownership of, the stock as appearing
on the books of the corporation.
- The disposition by a director of all the shares in the corporation,
through a voting trust agreement, had the legal effect of him ceasing to
be a director and creating a vacancy in the Board, since such director
ceased to own at least one share standing in his name in the books of
the corporation.
Note:

Gokongwei Jr vs. SEC – a stockholder has no vested right to be elected

into the BOD. He may be considered to have parted with his personal right or
privilege to regulate the disposition of his property which he has invested in
the capital stock of the corporation and surrendered it to the will of the
majority or his fellow incorporators.

ii. Rule on Corporate Stockholders

- In case of corporate stockholders or members of a corporation, such

entities cannot be qualified to be elected as such to the Board of the
corporation.
- This would contravene to the established rule that a director may not
be represented by a proxy at a meeting of the Board.
 - Such stockholders or members cannot also designate an individual
representative to be voted into the Board of the corporation since the
representative would not be a stockholder of record nor a member
himself, which is the minimum requirement to be qualified to be voted
into the Board of the corporation.

2. DISQUALIFICATIONS (Sec. 26 of the RCC)

Section 26. Disqualification of Directors, Trustees or Officers. - A person shall be disqualified from
being a director, trustee or officer of any corporation if, within five (5) years prior to the election or
appointment as such, the person was:

(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a period exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No. 8799, otherwise known as "The Securities
Regulation Code";

(b) Found administratively liable for any offense involving fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
misconduct similar to those enumerated in paragraphs (a) and (b) above.

The foregoing is without prejudice to qualifications or other disqualifications, which the Commission,
the primary regulatory agency, or Philippine Competition Commission may impose in its promotion of
good corporate governance or as a sanction in its administrative proceedings.

Note:
- Under Sec. 19 of the General Banking Law of 2000, except for rural
banks, no appointive or elective public official, whether full-time or part-
time shall at the same time serve as officer of any private bank, save in
cases where such service is incident to financial assistance provided
by the government or GOCC to the bank or unless otherwise provided
under existing laws.

Rules on Additional Qualifications and Disqualifications

- The by laws of the corporation can provide other qualifications and
disqualifications in addition to those provided in the Corporation Code.
- BOD does not have the power, by the exercise of its business judgment
expressed through a resolution, to provide for additional qualifications
 and/or disqualifications to those who are to be nominated and elected
into the Board.

G. INDEPENDENT DIRECTORS

Section 22 of the RCC

- “…An independent director is a person who apart from shareholdings and fees
received from any business or other relationship which could, or could
reasonable be received to materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director.

Independent directors must be elected by the shareholders present or entitled to vote

in absentia during the election of directors. Independent directors shall be subject to
rules and regulations governing their qualifications, disqualifications, voting
requirements, duration of term and term limit, maximum number of board
membership and other requirements that the Commission will prescribed to
strengthen their independence and align with international best practices.”

Section 38 of The Securities Regulation Code

Section 38. Independent Directors. – Any corporation with a class of equity

securities listed for trading on an Exchange or with assets in excess of Fifty
million pesos (P50,000,000.00) and having two hundred (200) or more holders,
at least of two hundred (200) of which are holding at least one hundred (100)
shares of a class of its equity securities or which has sold a class of equity
securities to the public pursuant to an effective registration statement in
compliance with Section 12 hereof shall have at least two (2) independent
directors or such independent directors shall constitute at least twenty percent
(20%) of the members of such board whichever is the lesser. For this purpose,
an "independent director" shall mean a person other than an officer or employee
of the corporation, its parent or subsidiaries, or any other individual having a
relationship with the corporation, which would interfere with the exercise of
independent judgement in carrying out the responsibilities of a director.

- The independence of an independent director comes from the utter lack

of official, professional, or business connection with the public
company which would interfere with the exercise of an independent
judgment in carrying out the responsibilities of a director.

- He must be completely independent from management of the company.

Note:
 - BOD of a bank shall have at least two “independent directors”, which
shall be persons other than an officer or employee of the bank, its
subsidiaries or affiliates or related interests (Sec. 15 of the General
Banking Law of 2000)
- Publicly held companies shall have at least 2 independent directors or
such number of independent directors that constitutes 20% of the
members of the Board, whichever is lesser, but in no case less than
two.
- The SEC Code mandates that an independent director should: a.
Attend and actively participate in Board and Committee meetings,
review meeting materials and, if called for, ask for questions or seek
explanation; b. be a member and the Chairman of the Audit
Committee; c. be a member of the Nominations Committee; and, d. be
a member of the Compensation/Remuneration Committee.

H. ELECTION OF THE BOARD (see Sec. 23 of the RCC)

i. Cumulative Voting

- Voting procedure wherein a stockholder is allowed to concentrate his

votes and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall
equal.
- Policy is to allow minority stockholders the capacity to be able to elect
representatives in the BOD.
- Atty. Aranas:

I. Non-Stock – straight voting ( assign your vote to 1 candidate )

- Villanueva defined straight voting as voting that allows a simple
majority of the shareholders (SH) to elect the entire BOD leaving the
minority SH unrepresented. Each shareholder simply votes the
number of shares he owns for each director nominated.

II. Stock Corp – cumulative voting (the number of votes depend on the number of
shares you have)

Ex. 1000 shares x 5 seats = u have 5,000 votes

- You can accumulate your votes to only one person.

 - If the Articles of Incorp (AOI) denies cumulative voting, then that is
VOID.

1. Cole Formula
2. Glasser Iterative Procedure
3. D’Hondt Remainders Table

(see page 338-341 examples, sorry di ko maexplain baka lalo kayo malito.
Uwuwu)

ii. Election of Trustees

- Non-stock or special corporations may, through their AOI or their By-

Laws, designate their governing boards by any name other than as
“Board of Trustees”
- GR: Members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more
than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected.
- XPN: Unless otherwise provided in the AOI or BL.

iii. Alien Membership in the BOD

- Anti-Dummy Law penalizes the intervention of aliens in the

management, operation, administration, or control of a nationalized
enterprise or activity.
- PD 715 (Amendment of the Anti-Dummy Law) settled that the issue of
alien membership in the BOD of nationalized enterprises, when it
provided that, “election of aliens as members of the BOD of governing
body of corporations or associations engaging in partially nationalized
activity shall be allowed in proportion to their allowable participation or
share in the capital of such entities.”

iv. Vacancy in Board (Sec. 28 of the RCC)

- Vacancies in the Board other than by removal or expiration of term

may be filled by the vote of majority of remaining directors/trustees, if
there is a quorum. If there is no quorum, it may be filled by
 stockholders or members in a regular or special meeting called for that
purpose.
- A director/trustee so elected to fill the vacancy shall be elected only for
the unexpired term of his predecessor in office.
- Atty. Aranas: If SH ang nagtanggal or nagexpire ang term, only SH
can fill, all others the Board can fill
- Meaning of “majority of the remaining board”: ex. 10 lang ang Board
Seats, natira is 7 Board seats lang. They need 4 votes. This still
constitutes a quorum.
- Increase in number of Board seats: majority of the board + 2/3 vote of
the Outstanding Capital Stockholders.

ii. Report on the Election of Directors, Trustees, and Officers (Sec.

25 of the RCC)
- Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, the secretary, or any other officer of the corporation, shall
submit to the Commission, the names, nationalities, shareholdings,
and residence addresses of the directors, trustees and officers elected.
- Atty. Aranas: How do you report result of election? Thru General
Information Sheet (GIS). Since kung sino ang nakalagay sa GIS, ayun
yung mga tao who can legally bind the corporation.

i. Premium Marble Resources vs. CA

- Importance of the requirement of within 30 days report: To give the
public information, under sanction of oath of responsible officers, of the
nature of the business, financial condition, and operational status of
the company, together with the information on its key officers or
managers so that those dealing with it and those who intend to do
business with it may know or have the means of knowing facts
concerning the corp’s financial resources and business responsibility.

ii. Monfort Hermanos Agricultural Development vs. Monfort III

- When the names of some of the directors who signed the board
resolution do not appear in the GIS filed with the SEC, then there is
doubt whether they were indeed duly elected members of the Board
legally constituted to bring suit in behalf of the Corp.

A. TERM OF OFFICE
 - Sec. 22 of the RCC: “Directors shall be elected for a term of one (1)
year from among the holders of stocks registered in the corporation's
book while trustees shall be elected for a term not exceeding three (3)
years from among the members of the corporation. Each director and
trustee shall hold office until the successor is elected and qualified. A
director who ceases to own at least one (1) share of stock or a trustee
who ceases to be a member of the corporation shall cease to be such.”
- Hold-over situation – arises when no successor is cleared due to valid
and justifiable reasons, and the incumbent holds over and continues to
function until another officer is chosen and qualified. This does not
disqualify an incumbent officer from seeking another term in office.
- Atty. Aranas: Can you designate board members? No. There should
be an election. However, there is Emergency Board meeting (Sec. 28,
RCC) in case of vacancy. XPN: hold-over principle that prevents the
remaining directors to get a quorum; they can appoint persons to
exercise a directorship function but the vote should be unanimous.

i. Valle Verde Country Club, Inc. vs. Africa

- The underlying policy of the Corporation Code is that the business and
affairs of a corporation must be governed by a Board of Directors
whose members have stood for election, and who have actually been
elected by the stockholders, on an annual basis. Only in that way can
the Directors’ continued accountability to the shareholders, and the
legitimacy of their decisions that bind the corporation’s stockholders,
be assured.
- “Term” is distinguished from “tenure” in that “an officer’s ‘tenure’
represents the term during which the incumbent actually holds office.
The tenure may be shorter (or in case of hold-over, longer) than the
term for reasons within or beyond the power of the incumbent.

J. Removal & Discipline of members of the Board

Removal of Directors or Trustees (Sec. 27)

Any director or trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock,
or in a nonstock corporation, by a vote of at least two-thirds (2/3) of the members entitled to
vote: Provided, That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either case, after
previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or members for
the purpose of removing any director or trustee must be called by the secretary on order of
the president, or upon written demand of the stockholders representing or holding at least a
majority of the outstanding capital stock, or a majority of the members entitled to vote. If there
is no secretary, or if the secretary, despite demand, fails or refuses to call the special meeting
or to give notice thereof, the stockholder or member of the corporation signing the demand
may call for the meeting by directly addressing the stockholders or members. Notice of the
time and place of such meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal may be with or
without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under
Section 23 of this Code.

· A stockholders’ meeting called for the removal of a director is valid only

when called by at least two-thirds of the outstanding capital stock.

o GR: any director may be removed from office by vote of stockholders

representing 2/3 of the outstanding capital stock. [with or without
cause]

o EXCPN: Director is elected by minority via cumulative voting. [there

must be a CAUSE, 2/3 votes will not be enough]

§ “cause” for removal – violation of duties—loyalty, obedience,

and diligence

v What if there is a provision that certain acts is to be done by BOD or

stockholders and notice is to be given?

- It’s a mandatory provision and must be complied with, otherwise the

removal will be void even if there is 2/3 of outstanding capital stock.

v What if there is a vacancy due to removal?

- May be filled by election on same day of removal without notice; OR

- Regular meeting or special meeting with notice

· Only stockholders or members have the power to remove the directors or

trustees elected by them.

o Rationale: Because Directors (as trustees) are to be collectively

accountable and individually only to shareholders (as beneficiaries).
Since stockholders are the ones who elected the members of the
Board, it should also be them who shall have the power to remove or
discipline them, with or without cause.
 (power to remove/discipline Board members is vested with the
stockholders, any provisions in AOI or By-Laws is null and void for
being contrary to public policy)

K. Meetings of the Board

i. Requisites for valid meeting

a) Meeting of the directors or trustees duly assembled as a Board, at the

place, time and manner provided in the by-laws;

b) Quorum;

c) Decision of the majority of the quorum or, in other cases, a majority of the
entire Board.

Abstention: In a Board meeting, an abstention is presumed to be counted as

an affirmative vote insofar as it may be construed as an acquiescence in the
action of those who voted affirmatively; but such presumption, being merely
prima facie would not hold in the face of clear evidence to the contrary.
ABSTAINING IS DEEMED TO ABIDE BY THE RULE OF THE MAJORITY.

ii. Mode of Attendance

1. SEC Memorandum Circular No. 15, series of 2001 [guidelines for

teleconferencing or videoconferencing]

- “a trustee may be allowed to vote through the internet, provided that

the internet medium to be used is akin to or similar to the one being used
in vide-conferencing or teleconferencing where a participant can see or
hear the actual proceedings of a board meeting and actively
participate in the deliberation of the board.”

- Voting via e-mail is inadequate because it is passive participation and

information is limited to print.

iii. Minutes of Board Meetings

o There is no provision in Corporation Code that requires that the

minutes of the meeting should be signed by all the members of the
Board—the signature of the corporate secretary gives the
minutes the probative value and credibility. The entries
contained in the minutes are prima facie evidence of what actually
took place during the meeting, pursuant to Sec. 44, Rule 130 of the
Revised Rule on Evidence.
 o Resolution versus Minutes: A resolution is distinct and different
from the minutes of the meeting. A Board resolution is a formal
action by a corporate board of directors or other corporate body
authorizing a particular act, transaction, or appointment; while
minutes are a brief statement not only of what transpired at a
meeting, usually of stockholders/members or directors/trustees, but
also at a meeting of an executive committee.

L. Compensation of Directors and Officers

Directors and trustees are not entitled to salary or other compensation

when they perform nothing more than the usual and ordinary duties of their office,
founded on the presumption that directors and trustees render service gratuitously,
and that the return upon their shares adequately furnishes the motives for service,
without compensation. But they can receive remunerations for acting as executive
officers, such as Chairman, President or Corporate Secretary. [Western Institute of
Technology, Inc. v. Salas, 278 SCRA 216 (1997)]

M. Corporate Officers

i. Power to Delegate by the Board (Management Handles the Day-to-Day Affairs of the
Company (Sec. 24)

- The Board of Directors is generally a policy making body. Even if the corporate
powers of a corporation are reposed in the Board under Sec. [22], it is of common
knowledge and practice that the Board does not directly engage or take charge with the
running of the recurring business affairs of the corporation; its members generally do
not concern themselves with the corporation’s day-to-day affairs, except those officers
who charged with running the corporate business and are concomitantly members of
the Board, like the President.

- Just as natural person may authorize another to do certain acts for and on his
behalf, the Board, as the repository of corporate powers, 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, bylaws or
authorization from the Board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. (People’s aircargo Warehousing Co. vs
Court of Appeals)

ii. Gomez v. PNOC Dev. And Management Corp. / 606 SCRA 187

- Ordinary employees are generally employed not by action of

the directors and stockholders but by that of the Management who
also determines the compensation to be paid such employees.
Corporate officers, on the other hand, are elected or appointed by
 the directors or stockholders, and are those who are given that
character either by the Corporation Code or by the bylaws.

iii. Election, Appointment and Removal of Officers

1. Gurrea v. Lezama / 103 Phil 553

- Who Is a “Corporate Officer” under the Power of the Board to Hire

and Fire? (Sec. 25): “Corporate officers” in the context of being the
business judgment powers of the Board to hire and fire are those
officers of the corporation who are given that character by the
Corporation Code or by the bylaws.

2. Matling Industrial and Commercial Corp. v. Coros / 633 SCRA 12

- Even if bylaws provide expressly that the Board of Directors “shall have full
power to create new offices and to appoint the officers thereto,” any office
created, and any officer appointed pursuant to such clause does not become a
“corporate officer”, but is an employee and the determination of the rights and
liabilities relating to his removal are within NLRC’s jurisdiction— they do not
constitute intra-corporate controversies. “A different interpretation can easily
leave the way open for the Board of Directors to circumvent the constitutionally
guaranteed security of tenure of the employee by the expedient inclusion in the
Bylaws of an enabling clause on the creation of just any corporate officer
position.”

3. Dy v. NLRC / 145 SCRA 211 4. Andaya v. Abadia / 228 SCRA 705

iv. Statutory Corporate Officers

1. President - as the highest executive office has implied powers

and apparent authority upon which the dealing public can rely upon.

“Inasmuch as a corporate president is often given general supervision

and control over corporate operations, the strict rule that said officer
has no inherent power to act for the corporation is slowly giving way to
the realization that such officer has certain limited powers in the
transaction of the usual and ordinary business of the corporation. In the
absence of a charter or bylaw provision to the contrary, the president is
presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual
duties. Hence, it has been held in other jurisdictions that the president
of a corporation possesses the power to enter into a contract for the
corporation, when the "conduct on the part of both the president and
the corporation [shows] that he had been in the habit of acting in
similar matters on behalf of the company and that the company had
 authorized him so to act and had recognized, approved and ratified his
former and similar actions." Furthermore, a party dealing with the
president of a corporation is entitled to assume that he has the
authority to enter, on behalf of the corporation, into contracts that are
within the scope of the powers of said corporation and that do not
violate any statute or rule on public policy. (People's Aircargo and
Warehousing Co. Inc. vs. CA, et al.)

2. Corporate Secretary

a. Lim Tay v. CA / 293 SCRA 63

- The duty of a corporate secretary to record transfers of stocks is

ministerial. However, he cannot be compelled to do so when the
transferee's title to said shares has no prima facie validity or is uncertain.
More specifically, a pledgor, prior to foreclosure and sale, does not
acquire ownership rights over the pledged shares and thus cannot compel
the corporate secretary to record his alleged ownership of such shares on
the basis merely of the contract of pledge.

b. SEC Revised Code of Corporate Governance

3. Compliance Officer – for publicly held companies, BOD shall appoint

Compliance officers with rank of at least VP who reports directly to the Chairman.
Duties and responsibilities:

(i) Monitor compliance by the corporation with this Code and the rules and
regulations of regulatory agencies and, if any violations are found, report the
matter to the Board and recommend the imposition of appropriate disciplinary
action on the responsible parties and the adoption of measures to prevent a
repetition of the violation;

(ii) Appear before the Commission when summoned in relation to compliance

with this Code; and

(iii) Issue a certification every January 30th of the year on the extent of the
corporation’s compliance with this Code for the completed year and, if there are
any deviations, explain the reason for such deviation.

4. Corporate Treasurer

5. Independent Auditor

- not an officer of the corporation, but a contractor of service

- not assume role of employee or management in client’s conduct of operation

and never under the supervision and control of the client.
- all external auditors of publicly listed companies are subject to SEC
accreditation

- but those judicially appointed need not be accredited by the SEC

because not covered.

v. Duties and Liabilities of Directors, Trustees and Officers

1. Duty of Obedience

The Board of Directors should act in the manner and within the
formalities, if any, prescribed by its charter or by the general law.

2. Duty of Diligence

a. Board of Liquidators v. Kalaw / 20 SCRA 986 [“Bad Faith”

amounting to fraud or other wrong things]

- Rightfully had it been said that bad faith does not simply connote
bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means
breach of a known duty thru some motive or interest or ill will; it
partakes of the nature of fraud. 34 Applying this precept to the
given facts herein, we find that there was no "dishonest purpose,"
or "some moral obliquity," or "conscious doing of wrong," or "breach
of a known duty," or "some motive or interest or ill will" that
"partakes of the nature of fraud."

b. Cebu Country Club Inc. v. Elizagaque / 542 SCA 65

- each of the Board members is being held personally liable for bad
faith , not for the negative vote cast by one of them that resulted in
the denial of the status of proprietary membership to Elizagaque.

3. Duty of Loyalty

a. Doctrine of Corporate Opportunity

- It is well established that corporate officers are not permitted to use their
position of trust and confidence to further their private interests. The
“doctrine of corporate opportunity” s precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was
acting for two entities with competing interest. The doctrine rest
fundamentally on the unfairness, in particular circumstances, of an officer
or director taking advantage of an opportunity for his personal profit when
the interest of the corporation justly calls for protection.

4. Dealing with the Corporation

a. Mead v. McCullough / 21 Phil 95

- Under the trust fund doctrine, it would be a violation of the right of

creditors to allow the return to the stockholders of any portion of their
capital or declare dividends outside of the unrestricted retained earnings,
and that upon the corporation’s insolvency, the Board of Directors are duty
bound to hold its assets primarily for the payment of the creditors.

5. Contracts with Interlocking Directors

a. DBP v. CA / 363 SCRA 307

- The rule under Sec. 33 of Corporation Code allowing annulment of

contracts between corporations with interlocking directors resulting in the
prejudice to one of the corporation, has no application to cases where
fraud is alleged to have been committed to third parties.

6. Rule of Liability of Corporate Officers

a. Sunio v. NLRC / 127 SCRA 390

- involves an illegal dismissal case where Sunio was personally

liable.

- SC held: personal liability of an officer to dismissed employees

depends on whether such officer acted with evident malice and bad
faith, when no evidence is adduced the acting officer cannot be
held personally liable.

“It is basic that a corporation is invested by law with a

personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it
may be related. 4 Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 5 Petitioner Sunio, therefore,
should not have been made personally answerable for the payment
of private respondents' back salaries.”

b. A.C. Ransom Labor Union-CCLU v. NLRC / 142 SCRA 269

- Under Article 283 of the Labor Code, since a corporate employer

is an artificial person, it must have an officer who can be presumed
to be the employer, “acting in the interest of (the) employer” and
therefore the highest officer becomes personally liable for labor
claims.
 NOTE: for the separate juridical personality of a corporation to be
disregarded as to make the highest corporate officer personally
liable on labor claims, the wrongdoing must be clearly and
convincingly established. Del Rosario v. NLRC, 187 SCRA 777
(1990).

c. Corporate Vicarious Liability

- labor law relative to principles on corporate officer’s liabilities is

similar to vicarious liability in quasi delicts, which makes a person
(parent/employer) liable not only for one’s acts but also for the
negligent act of persons under one’s custody or responsibility.

7. Fiduciary Duty to Creditors

a. Corporate Fraud or Tort

b. Trust Fund Doctrine

- it is a violation of the rights of the creditors of the corporation to

allow the return to the stockholders of their capital, or to declare
dividends outside of the unrestricted retained earnings. Likewise,
upon insolvency, the BOD is duty-bound to hold the assets of the
corporation primarily first for the payment of the corporation’s
liabilities.

c. Watered Stock

- SEC. 64. Liability of Directors for Watered Stocks. – A director or

officer of a corporation who: (a) consents to the issuance of stocks
for a consideration less than its par or issued value; (b) consents to
the issuance of stocks for a consideration other than cash, valued
in excess of its fair value; or (c) having knowledge of the insufficient
consideration, does not file a written objection with the corporate
secretary, shall be liable to the corporation or its creditors, solidarily
with the stockholder concerned for the difference between the value
received at the time of issuance of the stock and the par or issued
value of the same.