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CORPORATION LAWINTRODUCTIONDefinition and attributes of a corporation

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation)A corporation has four (4) attributes:(1)It is an artificial being;(2)Created by operation of law;(3)With right of succession;(4)Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONSStock v. Non-Stock Corporations

StockNon-Stock

DefinitionCorporations which have capital stock divided into shares andare authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (3)All other private corporations (3)One where no part of its income is distributable as dividends to its members, trustees or officers. (87)

PurposePrimarily to make profits for its shareholdersMay 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. (88)

Distribution of ProfitsProfit is distributed to shareholdersWhatever incidental profit made is not distributed among its members but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members.

CompositionStockholdersMembers

Scope of right to voteEach stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6)Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)

Voting by proxyMay be denied by the AOI or the by-laws. (Sec. 89)Cannot be denied. (Sec. 58)

Voting by mailMay be authorized by the by-laws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89)Not possible.

Who exercises Corporate Powers 23Board of Directors or Trustees

Members of the corporation

Governing BoardBoard of Directors or Trustees, consisting of 5-15 directors / trustees.Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec, 92)

Term of directors or trusteesDirectors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23).Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92)

Election of officersOfficers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97)Officers may directly elected by the members UNLESS the AOI or by-laws provide otherwise. (Sec. 92)

Place of meetingsAny place within the Philippines, if provided for by the by-laws (Sec. 93)Generally, the meetings must be held at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located. (Sec. 51)

Transferability of interest or membershipTransferable.Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90)

Distribution of assets in case of dissolutionSee Sec. 94.

CIR VS. CLUB FILIPINO(5 SCRA 321; 1962)FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its gold course. The club is operated mainly with funds derived from membership fees and dues. The BIR seeks to tax the said restaurant as a business.HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stockholders and members. There was in fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course.For a stock corporation to exist, 2 requisites must be complied with:(1) a capital stock divided into shares(2) an authority to distribute to the holders of such shares, dividends or allotmentsof the surplus profits on the basis of shares held.In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.FORMATION AND ORGANIZATION OF CORPORATIONRequirements in the formation of a corporation

Who may form a corporation(See SEC. 10)INCORPORATORSREQUIREMENTSCOMMENTS

Definitionstockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereofcompare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.

Characteristicnatural personsexcludes corporations and partnerships

Numbernot less than 5; not more than 15may be more than 15 for non-stock corp. except educational corp.does not prevent the one-man (person) corporation wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal

Ageof legal age

Residencemajority should be residents of the Philippinesresidence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation1-Organize and establish a corporation2-Comply with requirements of corporation code3-Contribute capital/resources4-Mode of use of capital/resource and control/management of capital/resource5-distribution/disposition of capital/resource (embodied in constitutive documents)STEPSCOMMENTS

a. Promotional Stage (See SEC. 2. Definitions)Promoterbrings together persons who become interested in the enterpriseaids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itselfformulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same.

b.Drafting articles of incorporation(See SEC. 14)(see chart below)

c. Filing of articles; payment of fees.AOI & the treasurers affidavit duly signed & acknowledgedmust be filed w/ the SEC & the corresponding fees paidfailure to file the AOI will prevent due incorporation of the proposed corporation & will not give rise to its juridical personality. It will not even be a de facto corp.Under present SEC rules, the AOI once filed , will be published in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or rejection by SEC.Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law. b) If not, the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions.Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules & regulations; c) Treasurers Affidavit is false; d) required percentage of ownership has not been complied with (Sec. 17) e) corp.s establishment, organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC, after consultation w/ BOI, NEDA or any appropriate government agency -- PD 902-A as amended by PD 1758, Sec. 6 (k))Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in accordance w/ the ROC.

e. Issuance of certificate of incorporation.Certificate of Incorporation will be issued if: a) SEC is satisfied that all legal requirements have been complied with; and b) there are no reasons for rejecting or disapproving the AOI.It is only upon such issuance that the corporation acquires juridical personality.(See Sec. 19. Commencement of corporate existence)Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice & hearing.

b.Drafting articles of incorporation (See SEC. 14)CONTENTS OF AOICOMMENTS

Corporate NameEssential to its existence since it is through it that the corporation can sue and be sued and perform all legal actsA corporate name shall be disallowed by the SEC if the proposed name is either:(1)identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or(2)patently deceptive, confusing or contrary to existing laws. (Sec. 18)LYCEUM OF THE PHILS. VS. CA(219 SCRA 610)The policy underlying the prohibition against the registration of a corporate name which is identical or deceptively or confusingly similar to that of any existing corporation or which is patently deceptive or patently confusing or contrary to existing laws is:1.the avoidance of fraud upon the public which would have occasion to deal with the entity concerned;2.the prevention of evasion of legal obligations and duties, and3.the reduction of difficulties of administration and supervision over corporations.

Purpose ClauseA corporation can only have one (1) primary purpose. However, it can have several secondary purposes.A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary to accomplish its purposes & those which may be incident to its existence.Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy

Principal Officemust be within the Philippinesspecify city or provincestreet/number not necessaryimportant in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered

Term of Existencecannot specify term which is longer than 50 years at a timemay be renewed for another 50 years, but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension.

Incorporators and Directorsnames, nationalities & residences of the incorporators;names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected;treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them.

Capital Stockamount of its authorized capital stock in lawful money of the Philippinesnumber of shares into which it is dividedin case the shares are par value shares, the par value of each,names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be statedfor a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each25% of 25% rule to be certified by Treasurerpaid up capital should not be less than P5,000

Other mattersClasses of shares into w/c the shares of stock have been divided; preferences of & restrictions on any such class; and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles.If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce the Filipino ownership of its stock to less than the required minimum.

Any corporation may be incorporated as a close corporation, except: a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities; f) educational institutions; & g) corporations declared to be vested w/ public interest

De Facto Corporations: Requisites

User of Corporate PowersWhat is a de facto corporation?A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present:(1)That there is an apparently valid statute under which the corporation with its purposes may be formed;(2)That there has been colorable compliance with the legal requirements in good faith; and,(3)That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation.Can a corporation transact business as a de facto corporation while application is still pending with SEC?No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.Formation under apparently valid statute.MUNICIPALITY OF MALABANG V. BENITO(29 SCRA 533; 1969)WON a corporation organized under a statute subsequently declared void acquires status as de facto corporation.No. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a de facto corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot conceivably make it a de facto corporation since there is no other valid statute to give color of authority to its creation.Colorable compliance with the legal requirements in good faith.BERGERON V. HOBBS(71 N.W. 1056, 65 Am. St. Rep. 85)The constitutive documents of the proposed corporation were deposited with the Register of Deeds but not on file in said office. One of the requirements for valid incorporation is the filing of constitutive documents in the Register of Deeds.Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation?No. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the right to act as a corporate body. As long as an act, required as a condition precedent, remains undone, no immunity from individual liability is secured.HARRIL V. DAVIS (168 F. 187; 1909)The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk of court in the judicial district where the business was located. Arkansas law requires filing in both offices.Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation?No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the articles were filed (requisites for valid incorporation).HALL v. PICCIO(29 SCRA 533; 1969)In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.NOTE:The validity of incorporationcannotbe inquired into collaterally in any private suitto which such corporation may be a party. Such inquiry must be through aquo warrantoproceeding made by the Solicitor General. (Sec. 20)CORPORATION BY ESTOPPEL

(Sec. 21)Distinguish a de facto corporation from a corporation by estoppel.The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)What are the effects of a Corporation by Estoppel in suits brought:(1)against the Corporation? Considered a corporation in suits brought against it ifit held itself out as such and denies capacity to be sued;(2)against third party?Third party cannot deny existence of corporation if itdealt with it as such.EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881)Company was sued on a promissory note. Its defense was that at the time of its issuance, it was defectively organized and therefore could not be sued as such.The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mistake affecting the original organization.LOWELL-WOODWARD vs. WOODS(104 Kan. 729; 1919)Corporation sued a partnership on a promissory note. The latter as defense alleged that the plaintiff was not a corporation.One who enters into a contract with a party described therein as a corporation is precluded, in an action brought thereon by such party under the same designation, from denying its corporate existence.ASIA BANKING VS STANDARD PRODUCTS(46 Phil. 145; 1924)The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties.The defendant is estopped from denying its own corporate existence. It is also estopped from denying the others corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence.CRANSON VS IBM(234 MD. 477, 200 A. 2D 33 ; 1964)IBM sued Cranson in his personal capacity regarding a typewriter bought by him as President of a defectively organized company whose Articles were not yet filed when the obligation was contracted.IBM, having dealt with the defectively organized company as if it were properly organized and having relied on its credit instead of Cransons, is estopped from asserting that it was not incorporated. It cannot sue Cranson personally.SALVATIERRA VS GARLITOS(103 Phil. 757; 1958)Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable.He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk arising from the transaction.ALBERT VS UNIVERSITY PUBLISHING CO., INC.(Jan. 30, 1965) Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was existing under the law.BY-LAWS (Sec. 46 & 47)

When adopted:(a) No later than one (1) month after receipt from SEC of official notice of issuance of Cert. of incorporation. Requirement: Affirmative vote of stockholders representing at leastmajority of outstanding capital stock (Stock Corp.) or members (Non-Stock) Must be signed by stockholders or members voting for them(b)Prior to incorporation Requirement: Approval of all incorporators; must be signed by all of themWhere kept: (1) In the principal office of the corporation ; and (2) Securities and Exchange CommissionWhen effective:Only upon the SECs issuance of a certification that the by-lawsare not inconsistent with the Corporation Code.Special corporations:By-laws and/or amendments thereto must be accompanied by a certificate of the appropriate government agency to the effect that such by-laws / amendments are in accordance with law.banks or banking institutionsbuilding and loan associationstrust companiesinsurance companiespublic utilitieseducational institutionsother special corporations governed by special lawsContents of By-laws- Subject to the provisions of the Constitution, this Code, otherspecial laws, and the articles of incorporation, a private corporation may provide in its by-laws for:1)the time, place and manner of calling and conducting regular or special meetings of the directors or trustees;2)the time and manner of calling and conducting regular and special meetings of the stockholders or members;3)the required quorum in meetings of stockholders or members and the manner of voting herein;4)the form for proxies of stockholders and members and the manner of voting them;5)the qualifications, duties and compensation of directors or trustees, officers and employees;6)the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof;7)the manner of election or appointment and the term of office of all officers other than directors or trustees;8)the penalties for violation of the by-laws;9)in the case of stock corporations, the manner of issuing certificates; and10)such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.FLEISCHER V. BOTICA NOLASCO CO.(47 Phil. 583; 1925)As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objective of the corporation and are not contradictory to the general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and cannot justify an restriction upon the right of sale.GOVT. OF P.I. V. EL HOGARIs a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid?No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which prohibits forced surrender of unmatured stocks except in case of dissolution.Is a provision in the by-laws fixing the salary of directors valid?Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the corporation.Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid?Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors.CITIBANK, N.A. v. CHUA(220 SCRA 75)Where the SEC grants a license to a foreign corporation, it is deemed to have approved itsforeign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid without SEC approval applies only to domestic corporations.A board resolution appointing an attorney-in-fact to represent the corporation during pre-trial is not necessary where the by-laws authorize an officer of the corporation to make such appointment.LOYOLA GRAND VILLAS v. CA(276 SCRA 681)ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the dateof its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution.RULING: No. Failure to file by-laws doesnotresult in the automatic dissolution of the corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain their neglect or omission and remedy the same.THE CORPORATE ENTITYThe Theory of Corporate Entity

When does the corporations existence as a legal entity commence?Upon issuance by the SEC of the certificate of incorporation (Sec. 19)What rights does the corporation acquire?The right to:1) sue and be sued;2) hold property in its own name;3) enter into contracts with third persons; &4) perform all other legal acts.Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares.SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA(296 SCRA 631)A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors.In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said corporate treasurer was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation since she was not the sole controlling stockholder.STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS(6 SCRA 373)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 act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.CARAM V. CA(151 SCRA 373; 1987)The case of the unpaid compensation for the preparation of the project study.The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline.There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent.PALAY V. CLAVE(124 SCRA 640; 1983)The case of the reliance on a default provision of the contract granting automatic extra-judicial rescission.The court found no badges of fraud on the part of the president of the corporation. The BOD had literally and mistakenly relied on the default provision of the contract. As president and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot, therefore, be made personally liable because he appears to be the controlling stockholder. 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.MAGSAYSAY V. LABRADOR(180 SCRA 266)The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC.The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover.Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest 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.While a share of stock represents a proportionate or aliquot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter.Q: When Can the Veil of Corporate Entity be Pierced?A: The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.Q: What are the effects of disregarding the corporate veil?(1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored.(2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved.Contrary to law / public policy; evasion of liability to governmentSTATE V. STANDARD OIL(49 Ohio, St., 137, N.E. 279, 15; 1892)Where all or a majority of stockholders comprising a corporation do an act which is designed to affect the property and business of the company, as if it had been a formal resolution of its Board of Directors and the acts done is ultra vires, the act should be regarded as the act of the corporation, and may be challenged by the state in a quo warrranto proceeding.LAGUNA TRANS V. SSS(107 Phil. 833; 1960)Where the corporation was formed by and consisted of the members of a partnership whose business and property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts.MARVEL BLDG. CORP. V. DAVID(94 Phil. 376; 1954)The fact that:certificates in possession of Castro were endorsed in blank;Castro had enormous profits and had motive to hide them;other subscribers had no incomes of sufficient magnitude; anddirectors never met;shows that other shareholders may be considered dummies of Castro. Hence, corporate veil may be pierced.Evasion of liability to creditorsTAN BOON BEE CO. V. JARENCIO(163 SCRA 205; 1988)Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the machine, having leased such to G.Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability to T.NAMARCO v. AFCorp(19 SCRA 962; 1967)Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N delivers, AFC doesn't since it did not have sugar to supply in the first place. N sues to recover sum of money plus damages.Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade liability.JACINTO V. CA(198 SCRA 211)Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate issues. There was no clear cut delimitation between the personality of Jacinto and the corporation.Evasion of liability / obligation to employeesCLAPAROLS V. CIR(65 SCRA 613; 1975)Both predecessor and successor were owned and controlled by petitioner and there was no break in the succession and continuity of the same business. All the assets of the dissolved Plant were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA(205 SCRA 698)Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage).SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine.NAFLU V. OPLE(143 SCRA 125; 1986)Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations, since it was in fact an illegal lock-out, the company having maintained a run-away shop and transferred its machines and assets there.Here, the veil of corporate fiction was pierced in order to safeguard the right to self-organization and certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose.ASIONICS PHILS. v. NLRC(290 SCRA 164)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. 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.Where there is nothing on record to indicate the President and majority stockholder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, hecannotbe held solidarily and personally liable with the corporation.Evasion of liability on contractVILLA-REY TRANSIT V. FERRER(25 SCRA 849; 1968) Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was authorized to operate 32 units from Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One of the conditions included in the contract of sale was that the seller (Villarama) "shall not, for a period of 10 years from the date of the sale, apply for any TPU service identical or competing with the buyer (Pantranco)." Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. Barely a month after its registration with the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and applied with the Public Service Commission (PSC) for approval of the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. Shortly thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the dispute over the CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies.A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee.Close CorporationsCEASE V. CA(93 SCRA 483; 1979)The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father.While originally, there were other incorporators of Tiaong, it has developed into a closed family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. It was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stocks they own.DELPHER TRADES V. CA(157 SCRA 349; 1988)The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher and placing the control of their properties under the corporation. This saved them inheritance taxes.This is the reverse of Cease; however, it does not modify the other cases. It stands on its own because of the facts.Parent-Subsidiary Relationship

Q: What is the general rule governing parent-subsidiary relationship?A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to justify their being treated as one entity.Q: When may it be disregarded by the courts?(1)if the subsidiary was formed for the payment of evading the payment of higher taxes(2)where it was controlled by the parent that its separate identity was hardly discernible(3)parent corporations may be held responsible for the contracts as well as the torts of the subsidiaryQ: What are the criteria by which the subsidiary can be considered a mereinstrumentality of the parent company?1.the parent corp. owns all or most of the capital stock of the subsidiary.2.the parent and subsidiary have common directors and officers3.the parent finances the subsidiary4.the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation5.the subsidiary has grossly inadequate capital6.the parent pays the salaries and other expenses or losses of the subsidiary7.the subsidiary has substantially no business except with the parent corp. 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 as the parents own9.the parent uses the property of the subsidiary as its own10.the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corp. in the latters interest11.the formal legal requirements of the subsidiary are not observed(Garrett vs. Southern Railway)(Note: Sir Jack said that we must not stop after weve gone through the 11 points in order to determine whether or not there is a subsidiary or instrumentality. We must go further and consider other circumstances which may help determine clearly the true nature of the relationship. --- Em)GARRETT VS. SOUTHERN RAILWAY(173 F. Supp. 915, E.D. Tenn. 1959) This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works. The plaintiff sought to claim from Southern Railway Company, which acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that Southern so completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern. The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary,unlessthe separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.In the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the manager of the subsidiary, was in full control of the operation. He established prices, handled negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmens Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of Southern. In fact, a substantial part of its requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions remained in the hands of Marius. Hence, the complaint against Southern Railway was dismissed.KOPPEL VS. YATCO(77 Phil. 496; 1946) This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of First Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of "disregard of the corporate fiction."The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. K-Phil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable expenses) and also those of its principal. Moreover, K-Phils share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly.LIDDELL & CO. VS. CIR(2 SCRA 632; 1961)Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the Liddel Inc.s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds. The bulk of the business of Liddel Inc. was channeled through Liddel Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare parts from Liddel Inc. and then sell them to the general public.To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the circumvention of tax laws.YUTIVO VS. CTA(1 SCRA 160; 1961)Southern Motors was actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo financed principally, if not wholly, the business of Southern Motors and actually exceeded the credit of the latter . At all times, Yutivo, through the officers and directors common to it and the Southern Motors exercised full control over the cash funds, policies, expenditures and obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of Yutivo.LA CAMPANA VS. KAISAHAN(93 Phil. 160; 1953)The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single business although with 2 trade names. It is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invoked to further the end subversive of the purpose for which it was created. In the case at bar, the attempt to make the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail.PROMOTERS CONTRACTS PRIOR TO INCORPORATIONLiability of Corporation for Promoters Contracts

While a corporation could not have been a party to a promoter's contract since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make the contracts its own and become bound thereon if, after incorporation, it:(1)Adopts or ratifies the contract; or(2)Accepts its benefits with knowledge of the terms thereof.It must be noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.McARTHUR V. TIMES PRINTING CO.(48 Minn. 319, 51 N.W. 216; 1892)It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown.The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the company have express or implied authority to enter into.CLIFTON v. TOMB(21 F. 2d 893; 1921)Whatever may be the proper legal theory by which a corporation may be bound by the contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by the corporation), it is necessary in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts.CAGAYAN FISHING DEV. CO. v. SANDIKO(65 Phil. 223; 1937)A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a contract.Also see Caram v. CACorporate Rights under Promoters Contracts

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for:(1)Specific performance; or(2)Damages resulting from breach of contract.The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.BUILDERS DUNTILE CO. v. DUNN(229 Ky. 569, 17 S.W. 2d 715; 1929)When the corporation was formed, the incorporators took upon themselves the whole thing, and ratified all that had been done on its behalf. Though there was no formal assignment of the contract to the corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for damages for the breach of contract.RIZAL LIGHT V. PSC(25 SCRA 285; 1968)The incorporation of (Morong) and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and Morong but also cured the deficiency pointed out by the petition. The fact that Morong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as Morong later obtained its certificate of incorporation and accepted the franchise.Personal Liability of Promoter on Pre-Incorporation Contracts

GENERAL RULE:Promoters are personally liable on their contracts made on behalfof a corporation to be formed.EXCEPTION:If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract doesnotrelease the promoter from responsibilityunlessa novation was intended.WELLS VS. FAY & EGAN CO.(143 Ga. 732, 85 S.E. 873; 1915)Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize one member to issue a note, in contemplation of organizing a corporation which was not formed. (see Campos' notes p. 258-259). The agent is personally liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no adoption or ratification.HOW & ASSOCIATES INC. VS. BOSS(222 F. Supp. 936; 1963)The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. Even if the promoter signed "on behalf of corporation to be formed, who will be obligor," there was here an intention of the parties to have a present obligor, because three-fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the creditor agreed to look solely to the new corporation for payment; or 2) that the promoter did not have any duty toward the creditor to form the corporation and give the corporation the opportunity to assume and pay the liability.QUAKER HILL VS. PARR(148 Colo. 45, 364 P. 2d 1056; 1961)The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not named there as obligors/promissors. The creditor-plaintiff was aware of the inexistence of the corporation but insisted on naming it as obligor because the planting season was fast approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff-creditor to look to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed.Fiduciary relationship between corporation and promoter

OLD DOMINION VS. BIGELOW(203 Mass. 159, 89 N.E. 193; 1909)A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it, but he must pursue one of four courses to make the contract binding. These are: 1) provide an independent board of officers in no respect directly or indirectly under his control, and make full disclosure to the corporation through them; 2) make full disclosure of all material facts to each original subscriber of shares in the corporation; 3) procure a ratification of the contract after disclosing its circumstances by vote of the stockholders of the completely established corporation; or 4) be himself the real subscriber of all the shares of the capital stock contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the stock of the corporation at the time of the transaction, if further original subscription to capital stock contemplated as an essential part of the scheme of promotion came in after such transaction.CORPORATE POWERSGeneral Powers of Corporation (Sec. 36)

To sue and be sued in its corporate name;Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation;To adopt and use a corporate seal;To amend its articles of incorporation in accordance with the provisions of this Code;To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;In case of stock corporations, to issue of 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 non-stock corporation;To purchase, receive, take, 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;(NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties:(1)that the property must be reasonable and necessarily required by the transaction of its lawful business, and(2)that the power shall be subject to the limitations prescribed by other special laws and the Constitution.)To adopt any plan of merger or consolidation as provided in this Code;To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific, civic, or similar purposes:Provided that: no corporation, domestic or foreign, shall give donations inaid of any political party or candidate or for purposes of partisan political activity;To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; andTo exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.Specific Powers of Corporation

Extension or shortening of the corporate term (Sec. 37)Increase or decrease of the capital stock (Sec. 38)Incur, create or increase bonded indebtedness (Sec. 38)Denial of the pre-emptive right (Sec. 39)Sale or other disposition of substantially all its assets. (Sec. 40)A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.Acquisition of its own shares. (Sec. 41)Investment in another corporation or business. (Sec. 42)Declaration of dividends. (Sec. 43)Entering into management contracts. (Sec. 44)Implied Powers

Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires.A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.The Ultra Vires Doctrine

Blacks Law Dictionary Definition:Ultra viresacts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of state of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly.Q: What are the consequences ofultra viresacts?The corporation may be dissolved under a quo warrranto proceeding.The Certificate of Registration may be suspended or revoked by the SEC.Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. Neither party can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is not illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited from the formers performance.Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. If the act or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. When the suit against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or impliedly in its purposes clause.Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are prejudiced thereby, or unless the acts are illegal.REPUBLIC OF THE PHILS. v. ACOJE MINING(7 SCRA 361; 1963)Resolution adopted by the company to open a post office branch at the mining camp and to assume sole and direct responsibility for any dishonest, careless or negligent act of its appointed postmaster is NOT ULTRA VIRES because the act covers a subject which concerns the benefit, convenience, and welfare of the companys employees and their families.While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation.CARLOS v. MINDORO SUGAR CO.(57 SCRA 343, 1932)The BOD of the Phil Trust Co. adopted a resolution which authorized its president to purchase at par and in the name of the corp. bonds of MSC. These bonds were later resold and guaranteed by PTC to third persons. PTC paid plaintiff the corresponding interest payments until July 1, 1928 when it alleged that it is not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void.Held: The act of guaranty by PTC was well within its corporate powers. Furthermore, having received money or property by virtue of the contract which is not illegal, it is estopped from denying liability. Even if the then prevailing law (Corp. Law) prohibited PTC from guaranteeing bonds with a total value in excess of its capital, with all the MSC properties transferred to PTC based on the deed of trust, sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds.GOVT v. EL HOGAR(50 Phil 399; 1932)(This case is an example of how the implied powers concept may be used to justify certain acts of a corporation.)A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan ass'n to deprive it of its corp. franchise.1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence this cause will not prosper.2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its reasonable requirements, held valid bec, it was found to be necessary and legally acquired and developed.3. El Hogar leased some office space in its bldg.; it administered and managed properties belonging to delinquent SHs; and managed properties of its SHs even if such were not mortgaged to them.Held: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan ass'n.4.Compensation to the promoter and organizer allegedly excessive and unconscionable.Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its SHs who may bring a complaint on such.5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n nor make its loans usurious.6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the by-laws expressly authorizes the BOD to determine each year the amount to be written down upon the expenses of installation and the property of the corp.7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances.8. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute which expressly declares that loans may be made by these ass'ns solely for the purpose of bldg. homes.9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and loan ass'n. The word "person" is used on a broad sense including not only natural persons but also artificial persons.BISSEL v. MICHIGAN SOUTHERN( 22 NY 258; 1860)Two railroad corporations contend that they transcended their own powers and violated their own organic laws. Hence, they should not be held liable for the injury of the plaintiff who was a passenger in one of their trains.Held: The contract between the two corporations was an ultra vires act. However, it is not one tainted with illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense.PIROVANO v. DELA RAMA STEAMSHIP (96 Phil 335 , 1954)This case involved the issue of whether or not the defendant corporation performed an ultra vires act by donating the life insurance proceeds to the minor children of Pirovano, the deceased president of the defendant company under whose management the company grew and progressed to become a multi-million peso corporation.Held: NO.The AOI of the corporation provided two relevant items:(1) to invest and deal with moneys of the company not immediately required, in such manner as from time to time may be determined; and(2) to aid in any other manner any person, association or corporation of which any obligation or in which any interest is held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest.From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer.HARDEN v. BENGUET CONSOLIDATED(58 Phil 141)A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. and technical expertise in exchange for capital shares in Balatoc. Harden was a SH of Balatoc and he contends that this contract violated the Corp.Law which restricts the acquisition of interest by amining corp. in another mining corp.Held: Harden has no standing bec. if any violation has been committed, the same can be enforced only in a criminal prosecution by an action of quo warranto which may be maintained only by the Attorney-General.CONTROL AND MANAGEMENTAllocation of Power and Control

Q: What are the three levels of corporate control/power?Board of directors or trustees-responsible for corporate policies and the general management of the business and affairs of the corporation.Officers-execute the policies laid down by the board.Stockholders or members-have residual power over fundamental corporate changes like amendments of articles of incorporation.Who Exercises Corporate Powers

Board of directors or trusteesQ: What are the powers of the BOD?The BOD is responsible for corporate policies and the general management of the business affairs of the corporation.(See Citibank v Chua)(a)Authority (Sec. 24)(b)Requirements(i)Qualifying share (Sec. 24)(ii)Residence (Sec. 24)(iii)Nationality(iv)Disqualifications (Sec. 27)-conviction by final judgment of offense punishable > 6 yrs. prison-violation of Corporation code within 5 years prior to date of election or appointment(c)How elected (Sec. 24)The formula for determining the number of shares needed to elect a given number of directors is as follows: X =Y x N1 + 1 N + 1 X = being the number of shares needed to elect a given number of directors Y = being the total number of shares present or represented at the meeting N1 = being the number of directors desired to be elected N = being the total number of directors to be elected(d)How removed (Sec. 28) By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at least 2/3 of the members entitled to vote, provided that such removal takes place at either a regular meeting of the corporation or at a special meeting called for the purpose. In both cases, there must be previous notice to the SHs / members of the intention to propose such removal at the meeting. Removal may be with or without cause. However, removal without cause maynotbe used to deprive minority SHs or members of the right of representation to which they may be entitled under Sec. 24 of the Code.(e)How vacancy filled (Sec. 29)If vacancy due to removal Must be filled by the SHs in a regular or special meetingor expiration of term: called for that purpose. If "vacancy" due to increase Only by means of an election at a regular or special SHsin number of directors meeting duly called for the purpose, or in the same or trustees: meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. All other vacancies: May be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum.Note: Directors or trustees so elected to fill vacancies shall be elected only for the unexpiredterm of their predecessors in office.(f)How compensated (Sec. 30) If provided in by-laws:That compensation stated in the by-laws.If not provided in by-laws:Directors shall not receive any compensation other thanreasonableper diems, as directors.However,compensation other than per diems may be granted to directors by a majority vote of the SHs at a regular or special stockholders' meeting.Note:In no case shall the total yearly compensation of directors, as such directors, exceed 10%of the net income before income tax of the corporation during the preceding year.(g)Matters requiring Board of Directors' action(h)Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.)(i) In general (Sec. 31)(ii) Business judgment rule(iii) Dealings with the corporation (Sec. 32)(iv) Contracts between corporations with interlocking directors (Sec. 33)(v)Disloyalty (Sec. 34)(vi)Watered stocks (Sec. 65)(i)Executive Committee (Sec. 35)See subsequent discussion under Board Committees.RAMIREZ VS. ORIENTALIST CO AND FERNANDEZ(38 Phil. 634; 1918)In this case, the board of directors, before the financial inability of the corporation to proceed with the project was revealed, had already recognized the contracts as being in existence and had proceed with the necessary steps to utilize the films. The subsequent action by the stockholders in not ratifying the contract must be ignored. The functions of the stockholders are limited of nature. The theory of a corporation is that the stockholders may have all the profits but shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined by law. In conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stockholders.LOPEZ VS. ERICTA(45 SCRA 539; 1972)In this case, the Board of Regents of the University of the Philippines terminated the ad interim appointment of Dr. Blanco as Dean of the College of Education by not acting on the matter. In the transcript of the meeting which was latter agreed to be deleted, it was found out that the BOR, consisting of 12 members, voted 5 in favor of Dr. Blanco's appointment 3 voted against, and 4 abstained.The core of the issue is WON the 4 abstentions will be counted in favor of Dr. Blanco's appointment or against it. The SC held that such abstentions be counted as negative vote considering that those who abstained, 3 of which members of the Screening Committee, intended to reject Dr. Blanco's appointment.ZACHARY VS. MILLIN(294 Mic. 622; 1940)The issue in this case is regarding the validity of the director's meeting at the company's laboratory on December 8, 1937 wherein Zachary was removed as president of the company. Zachary that he was not notified of the meeting thus, the action was void. On the other hand, the defendants contend that the notice requirement was waived by Zachary's presence at the meeting.The SC held that the validity of the meeting was not affected by the failure to give notice as required by the by-laws, provided that the parties were personally present. Since all the parties were present at the meeting of December 8, and understood that the meeting was to be a directors' meeting, then the action taken is final and may not be voided by any informality in connection with its being called.PNB VS. CA(83 SCRA 238; 1978)The action was brought by the mortgagor (Tapnio) against PNB for damages in connection with the failure of the latter's board of directors to act expeditiously on the proposed lease of the former's sugar quota to one Tuazon.The Supreme Court held that while the PNB has the ultimate authority to approve or disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly cannot escape liability for observing, for the protection of the interest of the private respondents, that degree of care, precaution and vigilance which the circumstances justly demand in approving or disapproving the lease of the said sugar quota.Corporate officers and agents(a)Minimum set of officers and their qualifications (Sec. 25)The minimum set of officers are:(1)president (who shall be a director);(2)secretary (who shall be a resident and Filipino citizen); and(3)treasurer (who may or may not be a director)The by-laws, however, may provide for other officers.Any 2 or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time.(b)Disqualifications (Sec. 27)- Conviction by final judgment of an offense punishable by imprisonment > 6 yrs.- Violation of Corporation Code committed within 6 yrs. prior to the date of election or appointment(c)Liability in general (Sec. 31)See discussion under Duties of Directors and Controlling Stockholders. .(d)Dealings with the corporation (Sec. 32)- Generally voidable (See discussion under Duties of Directors and ControllingStockholders)What is the doctrine of apparent authority?The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent where the representation was made by the agent in the course of business and acting within his/her general scope of authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his/her principal or some other person for his/her own ultimate benefit.FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA(January 24, 1996)The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, was laid out inPrudential Bank v. CA (223 SCRA 350)where it was held that:A bank is liable for the wrongful acts of its officers done in the interest of the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shrink from its responsibility for such frauds, even though no benefit may accrue to the bank therefrom.Accordingly, a bank is liable to innocent third persons where the representation is made in the course of its business by its agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Application of these principles is especially necessary because banks have a fiduciary relationship with the public and their stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and supervision of its employees, resulting in prejudice to their depositors.YU CHUCK V. KONG LI PO(46 Phil. 608; 1924)The power to bind a corporation by contract lies with its board of directors or trustees. Such power may be expressly or impliedly be delegated to other officers and agents of the corporation. It is also well settled that except where the authority of employing servants or agents is expressly vested in the board, officers or agents who have general control and management of the corporation's business, or at least a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Those contracts of employment should be reasonable. Case at bar: contract of employment in the printing business was too long and onerous to the business (3-year employment; shall receive salary even if corp. is insolvent).THE BOARD OF LIQUIDATORS V. HEIRS OF MAXIMO KALAW(20 SCRA 987; 1967)Kalaw was a corporate officer entrusted with general management and control of NACOCO. He had implied authority to make any contract or do any act which is necessary for the conduct of the business. He may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. Particularly, he contracted forward sales with business entities. Long before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board knew about this practice and have entrusted fully such decisions with Kalaw. He was never questioned nor reprimanded nor prevented from this practice. In fact, the board itself, through its acts and by acquiescence, have laid aside the by-law requirement of prior board approval. Thus, it cannot now declare that these contracts (failures) are not binding on NACOCO.ZAMBOANGA TRANSPO V. BACHRACH MOTORS(52 Phil. 244; 1928)A chattel mortgage, although not approved by the board of directors as stipulated in the by-laws, shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it. The following acts of the board constitute implied ratification:1.Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the President, GM, Attorney, Auditor, etc.)2.Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel mortgage.3.The corporation took advantage of the benefits of the chattel mortgage. There were even partial payments made with the knowledge of the three directors.ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION(20 SCRA 526; 1967)Acuna entered into an agreement with Verano, manager of PROCOMA, in which the former would be constituted as the latter's agent in Manila. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. During the face-to-face meeting with the board, Acuna was assured that there need not be any board approval for his constitution as agent for it would only be a mere formality. Later on, the board disapproved the agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of the corp. proven by these acts:1.He was assured by the board that no board approval was necessary.2.He delivered P 20,000, performed his work with the knowledge of the board.3.Due to acquiescence, the board cannot disown or disapprove the contract.Board CommitteesThe By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board, to be appointed by the Board. The executive committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a majority vote of the board.However, the following acts mayneverbe delegated to an executive committee:(1)approval of any action for which shareholders' approval is also required;(2)the filling of vacancies in the board (refer to Sec. 29);(3)the amendment or repeal of by-laws or the adoption of new by-laws;(4)the amendment or repeal of any resolution of the board which by itsexpress terms is not so amendable or repealable; and(5)a distribution of cash dividends to the shareholders.HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD.(181 F. 289; 1910)In this case, the Executive Committee:a)removed the Treasurer and appointed a new oneb)fixed the annual salary of the members of the Executive Committeec)amended the by-laws by giving the President the sole authority to call a stockholder's meeting and a board of directors meetingd)amended the composition of the ExeCom by limiting it to just 2 persons.Was these actions valid?No, because the Executive Commmittee usurped the powers vested in the board and the stockholders. If their actions was valid, it would put the corp. in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. "Full powers" should be interpreted only in the ordinary conduct of business and not total abdication of board and stockholders' powers to the ExeCom. "FULL POWERS" does not mean unlimited or absolute power.Stockholders or Members In the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stockholders or members would be necessary:(1)Amendment of articles of incorporation;(2)Increase and decrease of capital stock;(3)Incurring, creating or increasing bonded indebtedness;(4)Sale, lease, mortgage or other disposition of substantially all corporate assets;(5)Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized;(6)Adoption, amendment and repeal of by-laws;(7)Merger and consolidation;(8)Dissolution of corporationIn all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote. (Sec. 6)BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN(105 Phil. 426; 1959)Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before meeting. March 26 posting not enough for March 28 election.JOHNSTON VS. JOHNSTON(61 O.G. No. 39, 6160; 1965)As a general rule, a quorum at a stockholders' meeting, once reached, cannot be nullified by a subsequent walkout. However, the proceedings can be nullified if the walkout was for a reasonable and justifiable cause. In this case, F. Logan Johnston, who owned and/or represented more than 50% of the corporation's outstanding shares, was prohibited from voting the shares of the Silos family (which he had validly purchased) and of the minor children of Albert S. Johnston (of whom he was guardian) on the ground that such shares must first be registered in the names of the wards, thereby prompting the walkout. The Court of Appeals held that the walkout was neither unreasonable nor unjustifiable. It noted however that there was no formal declaration of a quorum before the withdrawal from the meeting by F. Logan Johnston.PONCE VS. ENCARNACION(94 Phil. 81; 1953)Upon good cause, such as a Chairman of the Board failing to call a meeting, either by his absence or neglect, the Court may grant a stockholder the authority to call such a meeting.DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL(26 SCRA 225; 1968)The Corporation Law says that every director must own at least one (1) share of the capital stock of the corporation.GOKONGWEI VS. SEC(89 SCRA 336; 1979)Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications, duties, and compensation of its directors.A stockholder has no vested right to be elected director for he impliedly contracts that the will of the majority shall govern.Amended by-laws are valid for the corporation has its inherent right to protect itself.ROXAS V. DELA ROSA(49 Phil. 609; 1926)Under the Law, directors can only be removed from office by a vote of the stockholders representing 2/3 of subscribed capital stock, while vacancies can be filled by a mere majority.A director cannot be removed by a mere majority by disguising it as filling a vacancy.ANGELES V. SANTOS(64 Phil. 697; 1937)Court may appoint a receiver when corporate remedy is unavailable when board of directors perform acts harmful to the corporation.Generally, stockholders cannot sue on behalf of the corporation. The exception is when the defendants are in complete control of the corporation.CAMPBELL V. LEOWS INC.(134 A. 2d 852; 1957)The stockholders have an implied power to remove a director for cause. Even when there is cumulative voting, stockholders can still remove directors for cause.DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC.(27 SCRA 247; 1969)A corporation may use its funds to invest in another corporation without the approval of the stockholders if done in pursuance of a corporate purpose. However, if it is purely for investment, the vote of the stockholders is necessary.VOTING

Pledgors, mortgagors, executors, receivers, and administrators (Sec. 55) - Pledgors or mortgagors have the right to attend and vote at stockholders' meetings.Exception:If the pledgee or mortgagee is expressly given by the pledgor ormortgagor such right in writing which is recorded on the appropriate corporate books.- Executors, administrators, receivers and other legal representatives duly appointedby the court may attend and vote in behalf of the stockholders or members without need of any written proxy. Joint owners of stock(Sec. 56) - Generally, consent of all co