INTRODUCTION

I. What is 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.” (Sec. 2, Corpo Code)

II. What are the attributes of a corporation?

Taken from the defintion under Sec. 2 CoC:

Attribute Meaning ImplicationsArtificial being Juridical person capable of having rights

and obligations; distinct personality from members and shareholders

Stockholders not personally liable for corporate obligations; may only be liable to 3Ps limited to their capital contribution

Corporation not liable for personal obligations of stockholders

Created by operation of law State must give consent through an act (either a special grant or through registration via the Corporation Code, following the requirements under the law)

Must be expressly composed; mere consent to form insufficient

Succession Existence is continuous from term under AOI, unaffected by changes in members or stockholders, or transfer of shares

--

Powers, attributes and properties expressly authorized by law or incident to its existence

Offshoot of creation by operation of law; only express and incidental powers granted

--

III. Why organize corporations?

- They permit the combination of funds from various sources to raise the big capital needed for large-scale enterprise.

- Limited liability lowers the individual risk of each investor.

IV. Legal History of Corporations

Period Applicable Law Key PointsSpanish regime Code of Commerce

(1885 in Spain; 1888 in Phils.)

Had ‘sociedades anonimas’, which were distinct from today’s corporations, but already had features similar to them, such as limited liability and centralized management of affairs

American period Corporation Law (April 1, 1906); amended throughout its life to consider changes in the business world

Brought the American concept of corporation, but allowed the sociedades to continue under the Code of Commerce (if they chose to continue, either expressly or [after a reasonable time] by not making its choice while not reorganizing). Application of Corporation Law to those sociedades limited to public affairs (including term limit).

Marcos era-present Corporation Code (May 1, 1980)

Incorporated more common law principles and considered the latest developments in corporation practice.

Throughout our history :P Special Laws for certain types of corporations

Passed in order to better regulate specific types of corporations given the needs of the country (e.g. Insurance Code for insurance corporations, General Banking Act).

V. Compared with other forms of business organization

The type of form matters because it affects the operations of the business, including how management is conducted and how profits accrue to the actors involved. However, in certain types of businesses, one has no choice in the form (e.g. banks have to organize as stock corporations).

Form; description Advantages DisadvantagesIndividual proprietorship

Owner is the same as the worker, though the owner may hire others as business needs require.

Decision making is solely by the owner, so effects are immediate and without need for formalities.

Free from regulations and requirements sans business permits.

Owner is solely liable, and is liable to the full extent.

Resources limited to owner’s.

No succession.

Subjected to income tax only once.Partnership (Art. 1767 NCC: 2+ persons bind themselves to contribute money or industry to a common fund, with the intention of dividing the profits among themselves)

Involve multiple persons, creating a juridicial personality separate from them. However, this is not the same as in corporations (partners personally liable after p’ship assets exhausted). Often based on mutual trust and confidence.

Simpler to form than a corporation (only 2+ persons, possible by mere agreement)-- such act also creates its juridicial personality, unlike corporations which require the formalities under law.

Less regulation and management expenses than corporations.

All owners actively participate, and are considered agents (also a disadvantage).

Less limitations in powers (limited only by what is prohibited by law).

No succession. Change in partners can lead to dissolution.

Close corporation (Sec. 96, Corpo Code)

Corporations limited to only a certain class or number of stockholders; e.g. families.

Unlisted. Not possible for certain kinds of businesses, such as mining/oil companies, banks.

Identity of stock ownership and active management.

Essentially a de facto partnership with a corporate shell (apply advantages/disadvantages of corporations).

Stockholders are personally liable for corporate torts, unless covered by insurance (but limited liability for other obligations remains).

Limited partnership (NCC)

Type of partnership where there is limited liability based on a partner’s investment. Certain formalities are required to achieve this end.

Maintains the ease and flexibility of a partnership, but includes the security of limited liability of corporations.

Formalities are required for the limited partnership to exist.

Limited partners only invest; they cannot participate in management, lest they be converted to general partners.

Requires a general partner.Joint venture

Organizations formed for some temporary purpose (accounted for by the NCC definition of partnership).

Generally treated as similar to partnerships. SC treats them distinctly in that corporations may enter into joint ventures, but not p’ships.

<same as p’ship> <same as p’ship>

Business trust

Vesting of title to assets of a business enterprise to trustees, who act as representatives thereof, for the benefit of others.

Not covered by our laws.

Centralized management by trustees. (if complete control, MAJORITY holds that beneficiaries are exempt from debts incurred by trustees on behalf of the trust)

Easy transferability of beneficiaries’ interest.

Covered by general law on trusts. Not specifically accounted for by our laws.

No juridicial personality.

VI. Goverment Regulation (2 cases, pp. 21 - 40)

a. Legislature, through police power, given that they created the law allowing for the existence of corporations

b. SEC, a QJA for administrative supervision and enforcement of all laws affecting corporations.

- Sec. 3 of PD 902-A grants the SEC absolute jurisdiction, supervision and control over all corporations, etc. The SEC may event utilize other enforcement agencies and tap private entities for this purpose.

- Sec. 5 of the same grants it original and exclusive jurisdiction over certain types of corporation-related controversies (intra-corporate controversies)

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or

associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations.

Procedural Route: RTC as a commercial court -> CA by PFR -> SC; the SEC only has jurisdiction over registration cases, its jurisdiction under Sec. 5 being moved to the RTCs acting as Special Commercial CourtsCases use old rules.

CASE AND PARTIES FACTS ISSUE(S)/RATIOUnion Glass & Container v SEC (1983)

Stockholder Hofilena v. PG (stockholder in PG), DBP (against another stockholder, although their being a stockholder happened after the sale in question) and UG (transferee of properties due to the dacion sale)

Respondent Hofilena was a stockholder of Pioneer Glass. PG obtained loans from DBP for its operations. To facilitate the loans, PG mortgaged/assigned its assets. While the unpaid interests were being converted to equities, DBP was able to gain control of the outstanding shares of common stock of PG. Years after it made the loan, PG, being unable to meet its obligations, entered into a dacion with DBP, ceding all the mortgaged assets, including the glass plant, which found its way to P Union Glass.

R filed a complaint against PG, DBP, and UG. The crux of the issue revolved around the illegality of the dacion en pago resulting from the actions of PG and DBP, thus asking for damages. Ps move for dismissal due to lack of jurisdiction. SEC upheld its jurisdiction, treating it as a derivative suit instituted by a stockholder for the benefit of the corporation against a ‘newly-joined’ stockholder, DBP due to the actions regarding the loan, mortgage and DEP.

W/N the SEC has jurisdiction over the transfer to Union Glass. (NO!)

The jurisdiction of the SEC involves intra-corporate controversies: it involves relationships between the corporation and the public, corporation and its stockholders/partners/members/officers, corporation and state, and among the SPMs themselves. Such is a limited jurisdiction based on the enabling statute (PD 902-A).

The central cause of action in this case is the transfer of properties to Union Glass. Union Glass is merely a transferee—it isn’t a stockholder, officer, etc. This alone places it outside the jurisdiction of the SEC. However, such should await the decision on the validity of the dacion en pago with the SEC because the decision involving the DEP is necessary for her suit against UG to succeed.

DISSENT (Aquino):

To start, the petitioners are guilty of laches and nonexhaustion of administrative remedies (they should have appealed to the SEC en banc instead of going straight to the SC). Moreover, the inclusion of Union Glass should not have divested the tribunal of jurisdiction (there is definitely jurisdiction if it’s between PG/DBP and R). The joinder is necessary because DBP is being sued due to the DEP with UG being an indispensable party due to it being a transferee—Union Glass’ efences are tied with the efences of DBP in the ICC. There should be no splitting of cause of action.

Abejo v dela Cruz (1987)

Abejos and Telectronic (stockholders) v. Bragas/Dela Cruz (stockholders) with respect to transfers of shares of stock

The case arose due to a dispute between the Abejos, principal stockholders of Pocket Bell, the purchaser of Pocket Bell, Telectronic, and the Bragas, who are also majority stockholders. Telectronic purchased shares in Pocket Bell until it became the majority stockholder.

After the purchases in 1982, TT requested the corporate secretary, N. Braga, to register and transfer their purchased shares. Braga refused to register the transferred shares in the corporate books, asserting their claim of preemptive rights over the shares (including shares owned by the Abejos).

The Abejos and TT seek mandamus to compel the corporate secretary to register and transfer the shares. Bragas interpose the MTD. The SEC assumed jurisdiction. Soon after, the Bragas filed a petition for CPM with the SEC en banc with respecting to the jurisdictional issue, saying that the issue is ownership of shares. This was denied. After this, the Bragas filed an action with the CFI/RTC with respect to the transfer of shares. To this, Abejos filed an MTD stating that it is the SEC which has jurisdiction since this is an ICC between stockholders. The judge maintained jurisdiction.

W/N the SEC has jurisdiction. (YES!)

There are several reasons why this is an ICC under the jurisdiction of the SEC:

1. The key issue here really is the refusal of the corporate secretary to perform his ministerial duty to record the transfers of stock. Such may be treated as a scheme amounting to fraud and misrepresentation, preventing them from maintaining control of the corporation (paras a and b); as stated in DMRC Este del Sol, the expanded jurisdiction of the SEC includes private contractual arrangements.2. The claims of the Bragas with respect to rescission shall not deprive the SEC of its jurisdiction because at its core, that too is an ICC because at its core, it involves the rights of the stockholders to sell shares, the validity of the transfers, and the resulting changes in control. The RTC, in effect, interfered with the SEC's lawful exercise of jurisdiction.3. Note that ICCs, as enunciated in Philex v Reyes, cover a broad amount of disputes for as long as they involve the parties listed in the provision in PD 802-A.

Such is a recognition of the expertise of the SEC in

these matters, it being designated as the agency for handling ICCs.

VII. Effect of Corporation Code on Existing Corporations

- Under Sec. 148, existing corporations (under Corporation Law) are deemed authorized, licensed and registered under the Corpo Code, subject to the terms and conditions of its license. However, if such a corporation is affected by the new requirements under the Code, it has a 2 year compliance period UNLESS otherwise provided.

- Such refers to vested rights under Sec. 76 of the Corporation Law, which recognizes the law’s possibility for later repeal.

CLASSIFICATION OF PRIVATE CORPORATIONS

I. Stock v non-stock corporations (1 case, 44-48)

STOCK CORPORATIONS NON-STOCK CORPORATIONSCorporations organized such that capital stock is divided into shares, and that there is authority to distribute surplus profits to shareholders via dividends and similar means (CoC 3)

Organized primarily for PROFIT

Comprised of STOCKHOLDERS

All other corporations not meeting the requirements of a stock corporation (CoC 3)

NOT organized primarily for profit; though it may make profits, profits are merely incidental to the corporation (e.g. they are used to defray expenses for charity work)

Comprised of MEMBERS

- The law may prescribe the particular class of corporation for certain businesses (e.g. banks).

- The CoC, unlike the CoL, has rules specific for non-stock corporations (as well as SPECIFIC types of corporations like educational and close corporations), though the rules governing stock corporations apply suppletorily.

CASE: CIR v Club Filipino (1962) – Profit as the primary motive of a stock corporationFACTS: Club Filipino is a corporation that provides, operates and maintains certain facilities for its members. There is no provision on distribution of dividends and profits in its AOI and bylaws, though upon dissolution, remaining profits are to be donated to charity. Among its facilities is a bar-restaurant in its club and golf course. Such is operated through membership funds; profits are used to defray its expenses. Although it previous declared stock dividens, no distribution was made. In spite of all this, BIR levied percentage tax on the gross receipts of the bar and restaurant, claiming that it is a BUSINESS.ISSUES: WON Club Filipino is liable for the payment of percentage tax.RATIO: The question here is W/N the bar and restaurant is a BUSINESS that may be taxed under NIRC 182. A plain and ordinary meaning of business is restricted to activities for the sake of PROFIT. The Club’s activities and organization was not meant for profits—it is meant to provide services for sports and as a charity organization. Though it ‘made profits’, it did not convert it to a profit-making enterprise—it was merely incidental to its primary purpose (in fact its profits were used to defray costs).

The fact that it is divided into shares does not make it a STOCK CORPORATION with the purpose of making profits. Its object and purpose is still that of a non-stock corporation, especially in the absence of the authority to distribute the shares/dividends to its holders. It is BOTH a NON-STOCK CORPORATION and NOT ENGAGED IN THE BUSINESS of a bar/restaurant.

II. Corporation sole

- Under Sec. 110 CoC, it is an incorporated office that may be formed by the chief presiding officer of a religious denomination, sect or church for the purpose of administering and managing, as trustee, the affairs, property and temporalities of such. (e.g. they manage tithes)

III. Parents and subsidiaries; Holding Companies; Affiliate Corporations

- Subsidiary: a corporation in which control, usually in the form of ownership of majority of shares, is in the hands of ANOTHER (parent) corporation. That parent has control of management policies, including election of directors.

- Holding company: A parent corporation whose sole function is to HOLD the SHARES of other corporations it controls.

- Investment company: A parent corporations whose purpose for holding shares in other corporations is for INVESTMENT, not CONTROL.

- Affiliates/sister corporations: A corporation which are subject to common control and are operated as part of a system.

FORMATION and ORGANIZATION

I. Who may form corporations (incorporators)

- Sec. 5 distinguishes INCORPORATORS (who are REQUIRED to form corporations) and CORPORATORS:

a. CORPORATORS are those persons who compose a corporation, whether as stockholders or as members. They may be incorporators, or they may join after incorporation.

b. INCORPORATORS are stockholders/members (hence, corporators) MENTIONED in the Articles of Incorporation as originally forming and composing the corporation, AND are SIGNATORIES of the AOI.

- Sec. 10 lists the requirements in order that incorporators may form corporations:

General Rule:

a. Natural persons, EXCEPT in cases of rural banks where cooperatives and corporations primarily organized to hold equities in rural banks may be allowed

b. FIVE to FIFTEEN incorporators of LEGAL AGE, even if actual ownership is one individual with the other incorporators being nominal owners

c. MAJORITY of the incorporators are RESIDENTS of the Philippines, EXCEPT when otherwise provided in law or the Constitution (e.g. public utilities have a citizenship requirement).

- Even if the corporation has NO residency requirement, a written authorization must first be sought from the Board of Investments prior to registration if the outstanding capital is >40% foreign-owned, as a means of ensuring that the corporation would contribute to the local economy.

- SEC requires notice stating the number of shares that may be sold without impairing the citizenship requirement.

d. The corporation must be for LAWFUL purpose(s).

Special Cases:

- If the corporation is a STOCK corporation, they must each own or subscribe to at least ONE share of the capital stock.

- In certain corporations under Sec. 140 CoC and other special laws, there may be limitations to ownership specific to that corporation as experience has shown that ownership by a closely-knit group of a substantial portion of stocks has proven detrimental to the public interest (prevent monopolies, foreign domination...). Examples include banks, where the stockholdings of any one person OR persons related to each other within the 3rd degree of consanguinity/affinity MUST not exceed 20% of the voting stock.

o NEDA may make a determination of w/n corporations were used to frustrate the provisions of the law and Constitution, which Congress may use in formulating policies.

- In close corporations, the Articles of Incorporation may provide qualifications for owning/holding stocks therein (e.g. members of the same family per Sec. 97 CoC). However, they are still subject to the limitations under Sec. 140 (public interest).

II. Steps in formation (1 case; 63-74)

a. Promotional Stage- Involves the ‘promoter(s)’, which Sec. 2(r) of the Revised Securities Act describes as:

o Any person who, acting alone or in conjunction with 1+ persons, directly/indirectly, TAKES INITIATIVE in FOUNDING and ORGANIZING the business/enterprise of an issuer.

o Any person who, in connection with founding and organizing the business/enterprise of an issuer, RECEIVES in CONSIDERATION of services, property, or both TEN PERCENT or MORE of any CLASS of SECURITIES of the ISSUER / PROCEEDS from the SALE of any class of such SECURITIES

EXCEPT: If that person receives such securities/proceeds either solely as underwriting commissions, or as consideration of property AND that person does not otherwise take part in founding and organizing the enterprise.

- Promoters formulate the necessary initial business and financial plans, and if necessary, buys the rights and property that the business may need, with the understanding that when the corporation is formed, it shall take over the same.

- They also:o Help secure the 25% subscribed capital stock + 25% paid in subscription requirement (e.g. by

‘promoting’ the business if they cannot secure the 25% requirements by themselves-- they may sell shares at this point, but there are strict requirements under the Securities Act to protect the public)

o (often) Act as incorporators

b. Drafting of Articles of Incorporation- The articles of incorporation constitute a CONTRACT drafted by the incorporators, serving as the CHARTER of

the corporation. It is the contract between the corporation and its stockholders, and the stockholders amongst themselves.

- Sec. 14 CoC prescribes the contents of the AOI, which the AOI must substantially confirm to:o NAME of the corporationo Specific PURPOSE(s)

If more than one purpose, AOI to state the PRIMARY and SECONDARY purpose(s). If non-stock corporation, it may NOT include a purpose which would change/contradict its

nature as such.o Place of PRINCIPAL OFFICE, which must be in the Philippineso TERM of existenceo Names, nationalities and residences of the INCORPORATORSo Number of DIRECTORS/TRUSTEES (5 – 15)o Names, nationalities and residences of the acting directors/trustees until the first regular

directors/trustees are duly elected and qualified in accordance with the CoCo For STOCK corporations:

Amount of AUTHORIZED CAPITAL STOCK in lawful money of the Philippines NUMBER of SHARES into which it is divided

If par value shares: par value; names, nationalities and residences of original subscribers; amount subscribed and paid by each on his subscription

If some or all shares are NOT par value: that fact must be stated In addition to these formal requirements, if a STOCK CORPORATION files its AOI, it must be

accompanied with a SWORN STATEMENT of the TREASURER elected by the subscribers that >25% of the AUTHORIZED CAPITAL STOCK has been SUBSCRIBED, AND >25% of the TOTAL SUBSCRIPTION has been FULLY PAID to the Treasurer in actual cash and/or in property the fair valuation of whch is equal to >25% of the said subscription. The PUC must be at least P5,000 (as of the 1980s). (Sec. 13 CoC)

o For NON-STOCK corporations: Amount of capital Names, nationalities and residences of the contributors; amount contributed

o Such other matters not inconsistent with law that the incorporators deem necessary and convenient- Sec. 15 CoC prescribes the standard format for an AOI, which must be substantially complied with.- The AOI must be duly filed with the SEC in ANY ONE OF THE OFFICIAL LANGUAGE, and DULY SIGNED and

ACKNOWLEDGED by all the incorporators.

Corporate nameo The corporate name is the identity of corporation for purposes of suits and all legal acts. It distinguishes

it from its members/stockholders, as well as other juridical entities. When making such transactions, it MUST use its corporate name.

o Because of this, Sec. 18 CoC DOES NOT ALLOW a corporation to adopt: Names IDENTICAL or DECEPTIVELY/CONFUSINGLY SIMILAR to that of any existing

corporation, or to any other name already protected by law Names that are PATENTLY DECEPTIVE, CONFUSING, or CONTRARY to existing laws

o In practice:

Incorporators inform the SEC (they should also see the IPO) of the name they have chosen so that they may know if the name is legally permissible. In some cases, they may be allowed to reserve the name for a reasonable period.

SEC requires corporations to submit a written undertaking to change the corporate name in case there is a prior user/similar user.

Corporations append “Corporation” or “Inc.” to distinguish themselves from other business forms.

o Corporations may amend their name if they follow the procedure in the AOI, AND if the SEC approves.o SEC MC 12 s. 2008: A business or trade name which is different from the corporate or partnership

name shall be indicated in the articles of incorporation/partnership. A company may have more than one business or trade name.

Purpose clauseo The purpose clause confers and limits the powers which a corporation may exercise (according to its

listed purposes). This means EXPRESS POWERS, INCIDENTAL POWERS, and those REASONABLY NECESSARY to meet the purpose of the corporation’s existence.

o Sec. 14.2 CoC allows for MULTIPLE purposes, provided: The primary and secondary purpose(s) are specified. The secondary purpose(s) need not be

related to the primary purpose. Corporations for which special provisions are made in the CoC, or are governed by special

laws, can have only the purpose peculiar to them, and no other. Purpose(s) must be lawful. SEC (and now, NEDA as well) may make a determination of the

legality of purpose(s), and may even reject/disapprove an AOI whose purpose(s) are patently unconstitutional, illegal, immoral, etc. (if the purpose is legal, the SEC cannot look further, and issuance of certificate may be compelled via mandamus; if illegal, mandamus will not lie as the determination of w/n the purpose is lawful is a discretionary act; NEDA deals with compatibility with local economic policy)

Corporations may not be formed for practicing a profession. For NON-STOCK corporations, Sec. 88 CoC is applicable: it states what purposes may be

applicable, but it is broad enough to consider any lawful purpose other than PROFIT MAKING.

Principal officeo Significant in establishing the residence of the corporation (e.g. for setting venue).o Must be in the Philippines, and must state AT THE VERY LEAST the city and province.o SEC MC 3 s. 2006:

AOI shall state the specific address of principle office, down to the street number and name (if feasible), and specific residence address of each incorporator, stockholder, director, trustee, or partner.

"Metro Manila" shall not be allowed as the address of the principal office. The specific residence address of each stockholder, officer, director, or trustee shall appear in

their General Information Sheet. Term of existence

o Under Sec. 11 CoC, the original term cannot exceed 50 years.o Term may be extended an unlimited number times, but each EXTENSION CANNOT last over 50 years.o No extension can be made earlier than 5 years prior to the original/subsequent expiry date UNLESS

there are justifiable reasons for early extension as determined by the SEC.

Incorporators and directorso Directors is used in reference to STOCK corporations, while trustees is used for NON-STOCK corp.o General Rule: 5-15 directors, no limit on trustees

Special Cases: Educational corporations: multiples of five (CoC 108) Merger banks: may allow for excess directors (RA 337)

o Designated TREASURER must also be namedo Aliens may be directors, observing the proportion requirements in cases of partially nationalized

enterprises

Capital stock, subscription and paymento Capital stock – amount fixed in the AOI to be subscribed and paid in or secured to be paid in by the

shareholders, at the organization of the corporation or afterwards, and upon which it is to conduct its operations. It sets the limit to the total par or issued value of shares. (CoC 62)

o Subscription – mutual agreement of the subscribers to take and pay for the stock of a corporation.o Pre-incorporation subscription – amount which each incorporator or stockholder agrees to contribute to

a proposed corporation.o AOI must state the amount of authorized capital stock and number of shares to which it is divided.o Such shares may be PAR VALUE or NO PAR VALUE shares:

Par value share – one where the certificate of stock has an amount in pesos as the nominal value of the shares. Such must be stated in the AOI.

Implication: The nominal value is the LOWER LIMIT of the issuing price. No par value share – one where there is no nominal value, and the value is based on the

ISSUED VALUE, which depends on (1) the AOI, (2) the board of directors if so authorized, or (3) the majority stockholders as to the outstanding capital stock.

This fact must be stated in its AOI. Consideration cannot be less than the issued value, which cannot be <P5. Certain companies CANNOT issue no par value shares, like banks and public

utilities.o STOCK corporations do not have a minimum authorized capital stock, but Sec. 13 CoC provides for

minimum requirements for subscribed and paid-up capital. (see above)o Some corporations may have stricter capital requirements. For example, insurance corporations require

a P5M capital stock.

Other matterso Examples include: classes of shares into which the shares of stocks have been divided, preferences

and restrictions per class, prohibition on transfer of ownership that would reduce the Filipino ownership below the requirement under the law and the Constitution.

Special Case: Close corporationso Requirements of a close corporation under Sec. 96 CoC: (must be in AOI)

All issued stock of all classes EXCEPT treasury shares shall be held of record by not more than a specified number of persons (up to 20)

All issued stock of all classes shall be subject to 1+ restrictions on transfer under the title on close corporations

Corporation shall not list in any stock exchange or make any public offering of any of its stock of any class

o AOI may also list exclusion from the effect of certain provisions affecting corporations, making the close corporation an ‘incorporated partnership.’

o In addition, >2/3 its voting stocks/rights must not be in the hands of another NON-CLOSE corporation.o Certain enterprises declared to be vested with public interest may NOT be under close corporations.

c. Filing of articles and Payment of fees- The AOI are to be filed with SEC. The corresponding fees must alsobe paid.- Certain businesses also require the submission of a favourable recommendation from the appropriate

government agency to the effect that such AOIs are in accordance with law (e.g. banks).- If a non-stock corporation intends to solicit gifts, donations, or contributions for charitable, educational, etc.

Purposes, a certificate of registration with the Insurance Commissioner is required.- Effect of non-filing and non-payment: No incorporation. No juridical personality, not even a de facto one.

d. Examination of articles and Approval/Rejection by SEC- After filing of the articles, the SEC will examine them for conformity with the law. In some cases, they may

consult with the BOI, NEDA, or any appropriate government agency, especially if the corporation falls under a special rule.

- If defective, they must give a reasonable time for correction UNLESS it is due to the following grounds:o AOI or amendments not substantially in accordance with the prescribed form

o Purpose(s) patently unconstitutional, illegal, immoral or contrary to government rules and regulationso Treasurer’s Affidavit re: capital stock is falseo Required percentage of ownership by Filipino citizens not in accordance with existing laws or the

Constitution- Denial may be appealed to the CA via PFR.

e. Issuance of Certificate of Incorporation- If upon examination, the SEC is satisfied that all the legl requirements under the law have been complied with

and there are no compelling reasons for denial, the SEC SHALL issue a certificate of incorporation. Under Sec. 19 CoC, this certification is when juridical personality is vested on the corporation.

- The issuance is valid if under the official seal of the SEC.- However, if fraud in procuring the certificate is later discovered, the certificate may be revoked by the SEC after

proper notice and hearing. (Sec. 6i CoC)

CASE: Phil. First Insurance v Hartigan (1970), under Drafting of Articles of Incorporation – Corporate Name - Change in corporate name is mere change in nomenclature, not a change in being; as long as the amended AOI is filed at the time of the transaction under the new corporate name, there is privity of contract

FACTS: Petitioner formerly used the corporate name “The Yek Tong Lin Fire and Marine Insurance Co. Ltd.” However, on May 26, 1961, its AOI were amended pursuant to a certificate of the Board of Directors dated March 8, 1961 changing the anme of the corporation to “Philippine First Insurance Co., Inc.” Under the old name, it signed as a co-maker for a promissory not executed by defendant Hartigan as payment for an obligation with China Bank. Hartigan failed to pay, so petitioner paid the obligation as co-maker, and sued Hartigan for reimbursement. The respondent denies doing business with P, claiming they did business with Yek Tong Linxxx, not Phil. First (essentially saying that there are two corporations)-- the complaint did not even state the identity between the two ‘corporations’ (i.e. no privity of contract). The CFI agreed with Rs. Hence this petition.ISSUE(S): Whether or not there exists privity of contract between the petitioner and respondent given the change in corporate name, as noted in the amendment of the Articles of Incorporation. (YES)RATIO: Sec. 18 of the applicable Corporation Law allows for an amendment of the AOI, subject to the procedure stated within. It contains certain restrictions as to particular amendments, such as one changing the term of existence or one increasing/decreasing the capital stock. There is no prohibition with change of name-- if there was, it should have been explicit.

There is no reason to not allow the corporation to change its name. There is nothing sacrosanct or sentimental with the corporate name-- if an individual, whose name may hold some sentimental value, may be allow to change his name following the procedure prescribed by the law and rules, why not a corporation? There is no minority view among local commentators-- there is total assent. American authorities are of the same opinion: the power to alter/amend the AOI necessarily includes the power to change the name (Ft. Pitt Bldg. v Model Plan Bldg, among other cases; Fletcher on Corporation Law). Admittedly, some authors believe that the power to amend the AOI involves the power to create a corporation-- Sec. 18 of the CoL has similar procedures.

A previous case cited by the trial court, Red Line v Rural Transit, denied a change of name as being contrary to public policy, but the TC did not consider the rationale for it-- it was because the use of that name was confusingly similar to that of another corporation. Neither can this be a case of dissolution-- authorities are unanimous in saying that the change of name does not mean a change of being.

The question then becomes: was the procedure for the change of name complete when it filed the suit under the new name? Admitedly, the mere approval of the BOD on March 8, 1961 DID NOT lead to an effective change in name. Under the CoL, there has to be filing with the SEC. The filing of the amended AOI was on May 26, 1961. The case was filed under the name of December that year-- by then, the change of name has taken effect, and there is indeed privity of contract.

III. Defective attempts to incorporate; de facto corporations (4 cases; 89-106)

De jure corporation De facto corporation Neither de jure nor de facto under Sec. 20 CoC

Substantially conforms to the requirements under the law

No substantial complaince, but organizes in good faith to be a corporation under this Code (CoC 20)

No substantial compliance, and fails to meet the requirement of good faith organization

Incorporation and right to exercise powers cannot be attacked

Can be attacked DIRECTLY only by the State in a QUO WARRANTO proceeding

Can be attacked even collaterally by private individuals, not just the State

May exercise all the powers allowed under the law and its AOI, as well as incur liabilities. Limited liability applies.

May exercise all the powers allowed under the law and its AOI, as well as incur liabilities. Limited liability applies.

No such corporate powers. Liability is as if there is a PARTNERSHIP UNLESS there is a corporation by estoppel.

- The good faith test is based on the Ballantine test:o Is there an apparently valid statute under which the corporation with its purposes may be formed?

If a law is later declared invalid, it may still be possible to apply corporation by estoppel.

o Is there colorable compliance with the requirements in good faith? Recognized by a certificate of incorporation. If the corporation is still in the formation

stage, there can be no de facto corporation.o Was there a use of corporate powers?

Just a slight evidence of conducting business can be used to attack the de facto corporation. Mere purchase of corporate property is enough.

- Rationale: Promote security of business transactions, and eliminate quibbling over irregularities as to private individuals.

CASE FACTS ISSUE(S)/RATIOMunicipality of Malabang v Pangandapun (1969)

EO 386 of Pres. CP Garcia created Balabagan from the municipality of Malabang.

Mayor of Malabang (pets) brought action for prohibition to nullify EO 386 and to restrain the Balabagan mayor and councilors (resps) from performing the functions of their office, relying on Pelaez v. Auditor General.

Resps argue that Pelaez cannot apply in this case because unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least a de facto corporation, having been organized under color of a statute before this was declared unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged its corporate functions for the past 5 years before the action. It is contended that as a de facto corporation, its existence cannot be collaterally attacked, although it may be inquired into directly in an action for quo warranto at the instance of the State and not of an individual like the petitioner Balindong.

(1) WoN the municipality of Balabagan is a de facto corporation--NO(2) WoN a statute can lend color of validity to an attempted organization of a municipality despite the fact that such statute is subsequently declared unconstitutional--NO

General Rule: Only the State may question the legal existence of a (municipal corporation) in a direct proceeding. It must at least be a de facto corporation.

If null, anyone may question and attack it directly or collaterally.

Tooke's article in Yale Law Journal (1928):

I. The color of authority requisite to the organization of a de facto municipal corporation may be:1. A valid law enacted by the legislature.2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet been declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state.

II. There can be no de facto municipal corporation unless either directly or potentially, such a de jure corporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face.

IV. There can be no de facto corporation created to take the place of an existing de jure corporation, as such organization would clearly be a usurper.

In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid law giving corporate vitality to the organization.

In the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is no other valid statute to give color of authority to its creation.

An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed

EO 386 created no office. BUT this doesn't mean that the acts done by the municipality of Balabagan in the exercise of its corporate powers are a nullity because of the doctrine of operative fact.

Bergeron v Hobbs (1897)

Defendant Bayfield Agricultural Association (Bayfield) employed several persons to perform labor, they gave time checks as payment to the laborers to which were assigned to the plaintiff who brought the present action to recover their amounts.

Plaintiff alleges that the defendants were a co-partnership. The defendants allege they were members of a corporation.

It was shown that the articles of organization of Bayfield and a certificate showing the election of officers had been recorded in the office of the register of deeds of Bayfield BUT were not on file.

Defendants allege that they are a de facto corporation and their right to be a corporation cannot be inquired into a collateral action.

W/N defendants are a members of a corporation/co-partners. THEY ARE CO-PARTNERS

It is provided by statute that upon the filing of a certificate of organization, in the office of the register of deeds, such society shall have all the powers of a corp…

- The filing of the proper papers in the proper office is a condition precedent to the vesting of corporate powers.

- A literal filing of the papers is necessary. The verb “filing” vs “to file” include the idea that the paper is to remain in its proper order on file in the office. So the defendants have not secured corporate powers.

As to the de facto corporation allegation- The corporation to be considered as such,

its action, as a corporation, must be under a color at least, of right.

o It is immaterial that they carried the business as a corporation in good faith. If they have no color of legal right, they have obtained no immunity from individual liability for the debts of the supposed corporation.

- Until the articles of incorporation are filed in the office of the register of deeds, there is no color of legal right to act as a corporation.

Dissent: Defendant was a de facto corporation. Every element necessary to make it as such was present.

- There was a law under which it might have existed.

- The association prepared their articles of organization and by mistake filed it for record, and was recorded and returned, instead of filing it to be left in the office as the law required.

- They supposed that they had corporate existence by reason of the recording of their articles of organization.

- They assumed to act as a corporation, and exercised corporate powers for a considerable length of time and in utmost good faith.

- Plaintiff supposed that the corp was a corporate body till long after his contract with the defendant had expired.

Harril v Davis (1909) From June to December 1902, Defendants bought from Plaintiff lumber, material and labor for constructing a cotton gin under the name “The Coweta Gin Company”. They also conducted business (buying, selling and ginning cotton) under the name “The Coweta Cotton and Milling Company”.

It was only on December 22, 1902 when they made their first attempt to incorporate – and for the first time took on the color of appearance of a corporation. They file their Articles of Incorporation with the CA but they did not file any duplicate (as required by the law).

W/N Defendants are individually liable to Plaintiff - Yes

GENERAL RULE is that parties who associate themselves together and actively engage in business for profit under any name are liable as partners. EXCEPTION is (when they may escape individual liability) is by incorporating or by (a) a real attempt to incorporate which gives them the color of legal corporation, and (b) by the user of the franchise of such a corporation in the honest belief that it is duly incorporated.

Parties who actively engage in business for profit under the name and pretense of a corporation which

Plaintiff sued to recover amount of Defendant’s indebtedness. Defendants argue that they are a corporation de facto, although they concede that they never became a corporation de jure.

they know neither exists nor has any color of existence may not escape individual liability. The burden is not on the strangers who deal with them as a corporation, but on themselves who act under pretense. If they fail, they must pay the liabilities they incur, even in the absence of bad faith or fraud on their part.

The filing of the Articles of Incorporation with the clerk of CA was a condition sine qua non of any color of a legal corporation. Without that, there was no apparent corporation. There is no color of corporation until it was filed.

Plaintiffs are individually liable because the company had no color of corporation (which they knew) and yet they actively used the name to incur obligations. Also, the fact that the Plaintiff dealt with and treated the Coweta Company as a corporation does not estop him from denying that it was such before the defendants filed their Articles of Incorporation.

Hall v Piccio (1950) On May 27, 1948, petitioners and private respondents signed the articles of incorporation of Far Eastern Lumber and engaged in general lumber business. Attached was the affidavit of their treasurer that 23k shares of stock had to be subscribed and fully paid with certain properties transferred to the corporation. The corporation then proceeded to adopt its by-laws, elect its officers, and file its articles of incorporation with the SEC for issuance of their certificate of incorporation.

However, pending issuance, private respondents filed a case with the SC alleging that Far Eastern Lumber was an unregistered partnership, and asked for its dissolution because of dissent, mismanagement and fraud among its members.

Hall countered by questioning the sufficiency of the cause of action and the jurisdiction of the SEC. After hearing the parties, Hon, Edmund Piccio ordered the dissolution of the company.

Hence, this petition to set aside the judge’s decision and to enjoin him from further action upon the same judgment.

1. WON Far Eastern was a de facto corporation as to warrant a quo warranto proceeding for its dissolution- Not a de facto corporation. No quo warranto required

2. WON Far Eastern was a corporation or a mere partnership- mere partnership

1.No Quo warranto required.Article 19 (on de facto corporations) of the Corporation Law DOES NOT APPLY because:First, without the certificate of incorporation, neither Far Eastern Lumber nor its stockholders may claim “in good faith” to be a corporation. It is the issuance of a certificate of incorporation that calls a corporation into being. The immunity from collateral attack is granted to corporations “claiming in good faith to be a corporation under this act” Unless there has been evident attempt to comply with the law, the claim to be a corporation “under this act” could not be made “in good faith”Second, this is NOT A SUIT IN WHICH THE CORPORATION IS A PARTY. This is a case between the stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state.

2.Far eastern is a mere partnership.All of them know, or ought to know, that the personality of a corporation begins to exist only from the moment such certificate is issued-not before (Sec. 11 Corporation Law)

IV. Corporation by estoppel (6 cases; 108-120)

- On the part of the ‘corporation’, Sec. 21 CoC provides that all persons who assume to act as a corporation KNOWING it to be WITHOUT AUTHORITY shall be LIABLE as GENERAL PARTNERS for all debts, liabilities and damages incurred or arising as a result thereof. It may NOT use as a defense its LACK OF CORPORATE PERSONALITY if sued on a transaction entered as a ‘corporation’ or a tort committed as such. (Basis: quasi contract of unjust enrichment-- it benefitted off the transaction)

- On the part of third parties, they cannot resist performance of an obligation to such a corporation on the ground that there was in fact no corporation. (Basis: Admission of existence by fact of dealing with the corporation)

But remember: This is because they are deliberately evading responsibility. Contrast: fraudulent misrepresentation, where there may be treatment as partners.

- On the part of the associates, if an associate is ignorant of the defective incorporation, and an innocent 3P dealt with the corporation, the 3P cannot hold the associates personally liable. If the 3P knew, he is estopped from denying the existence.

- Note that all this assumes there is NO de jure or de facto corporation under CoC 20, and that the specific circumstances under CoC 21 are present.

CASE FACTS ISSUE(S)/RATIOEmpire Mfg v Stuart (1881)

The Empire Company made a Promissory Note (PN) in favor of the plaintiff. The PN was given in its corporate name. The payee therein sued the Empire Corporation for the amount to be paid (Collection Suit).

DEFENSE OF THE CORPORATION: That the corporation was, by mistake, at the time it issued the PN, not properly organized under any law of this state. That afterwards, upon knowing this fact, the corp was dissolved and a new corp formed under a different name.

WON the Empire Co. may be held liable on the PN

Yes. This corp was one that could have been legally organized under laws existing at the time of its formation. The business for which it was organized, that of manufacturing, was one authorized, and having attempted to organize in good faith, and having, in the course of its business, given negotiable paper in its corporate name, it could not afterwards repudiate the transaction or evade responsibility when sued thereon, by setting up its own mistake, affecting its original organization.

The dissolution would not deprive the creditors of still following and looking to the old organization for payment. Our statute allows three years after dissolution, for certain purposes, in winding up affairs.

Lowell-Woodward Hardware v Woods (1919)

An action was brought in the name of Lowell-Woodward Hardware Co., describing itself as a Colorado corporation, against several persons alleged to constitute a partnership, upon a promissory note. Judgment was rendered for the plaintiff, and Semke, one of the defendants, appealed.

The appellant contends that there was no evidence of the plaintiff’s corporate existence, or of his being a member of the partnership described.

A witness for the plaintiff testified that it was a corporation. He said that it was running a hardware store; that he inferred it was a corporation from its name and its mode of doing business; that a bank president told him it was a corporation.

WON the appellant is liable to the plaintiff. YES.

Re the status of the corporation:One who enters into a written 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. Here, the payee was styled in the note, “The Lowell-Woodward Hardware Co,” a title which prima facie imports a corporation. One who has signed a promissory note running to a payee described by a name appropriate to a corporation, although not employing that term, cannot in an action brought against him thereon by such payee under the same name, in which it alleges itself to be a corporation, be heard to question the plaintiff’s corporate existence, unless upon a showing that his obligation to make payment would be thereby affected. Here, the defendant, having given his promise to pay the indicated to the payee named, should not be permitted to escape or delay performance by raising an issue to the character of the organization to which he is indebted, unless his substantial rights might be thereby affected.

Re appellant’s personal liability:There is evidence that the defendants were engaged in business as a firm, operating a mine in Colorado under the name Superior Leasing Co., which was signed to the note sued on. The appellant was a member of the company and had put money into it and helped in the business. He had signed several notes in its behalf. He himself testified that he had been a member of the company until 1912.

Asia Banking v Standard Products (1924)

Entering into a contract with a corporation (as the entity) is acknowledgment of its existence; entering AS a corporation is acknowledgment of own existence

Asia Banking (plaintiff corporation) sued Standard Products (defendant corporation) to recover the balance due on a promissory note issued by Standard in favor of Asia Banking (signed by the president of Standard). The lower cout ruled in favor of Asia Banking, hence this petition by Standard.

What is interesting is that during trial, Asia Banking failed to prove affirmatively the corporate existence of the parties; Standard insists that because of this, the corporations involved had no juridical personality (such that they are not ‘parties’ to the action).

Whether or not Asia Banking is a party to the action due to its corporate existence. (YES, due to estoppel)

GR: In the absence of fraud, a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existnece in any action leading out or involving such a contract or dealing.

X: If its existence is attacked for a cause that arose

after making the contract or dealing.

When Standard Products made a promissory note in Asia Banking's favor and made partial payments on the same, it acknowledged its juridical existence and is estopped from assailing it. Through this, it is also estopped from assailing its own existence.

The consequence of this is that there is no need for Asia Banking to present other evidence of corporate existence.

Cranson v IBMSalvatierra v Garlitos (1958)

Salvatierra entered into a lease contract with the Phil. Fibers Producers Co. Inc, allegedly a corporation duly organized and registered under the laws of RP, with Refuerzo as its president.

Among the obligations in the contract were: period of lease is 10 years; land would be planted with kenaf, ramie, or other crops; the lessor would be entitled to 30% of net income and lessee should declare at the earliest possible time the income derived therefrom.

PFP failed to fulfill the obligations and Salvatierra sued the corp and Refuerzo in the RTC for an accounting, rescission and damages.

TC granted her petition, but Refuerzo countered that decision was void with respect to him, there being no allegation as to his personal liability and that while he was a signatory to the contract, he did so in his capacity as president. TC granted his motion and released all properties levied by its earlier judgment.

Salvatierra appealed, claiming that her failure to allege his personal liability was because all this time she was under the impression that the PFP represented by Refuerzo was a duly registered corporation, but a subsequent inquiry with the SEC revealed otherwise. Hence, Refuerzo should be personally liable.

WoNRefuerzo should be held personally liable. YES

General Rule: A person who 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 dealing.

Exception: This doctrine may not be held to be applicable where fraud takes a part in the transaction. - A stockholder cannot be held liable for any financial obligation by 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. - This is because such unincorporated association is incompetent to act and appropriate for itself the powers and attributes of a corporation and cannot create agents or confer authority. - Thus those who act or purport to act as its representatives or agents do so without authority and at their own risk.

Considering that Refuerzo was the moving spirit behind the consummation of the lease agreement by acting as the representative of PFP, his liability cannot be limited or restricted to that imposed upon corporate shareholders.

In acting in behalf of a corporation he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights if any arising out of the transaction.

Albert v University Publishing Co. (1965)

24 Sept 1954 – Mariano A. Albert sued University Publishing Co., Inc., alleging that it was a corporation duly organized and existing under the laws of the Philippines, and that it entered into a contract with the latter through Jose M. Aruego on 19 July 1948. Defendant agreed to pay plaintiff P30,000 for the exclusive right to publish his revised Commentaries on the Revised Penal Code and for his share in previous sales of the book’s first edition. Defendant had undertaken to pay in eight quarterly installments of P3,750.00 staring 15 July 1948, but then failed to pay the second installment. Per the contract, failure to pay one installment would render the rest due.

This case has been appealed to the Supreme Court thrice.

Albert v. University Publishing Co., Inc. (L-9300, 18 Apr 1958) – Plaintiff found entitled to damages for breach of contract, but reduced from P23,000 to P15,000

Albert v. University Publishing Co., Inc. (L-15275, 24 Oct 1960) – Judgment for P15,000, which had

W/N the judgment may be executed against Jose M. Aruego, supposed President of the University Publishing Co. as real defendant

YES. The fact of non-registration of UPCI in the SEC has not been disputed. On account of the non-registration, it cannot be considered a corporation, not even a corporation de facto. It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently.

The corporation by-estoppel doctrine has not been invoked; at any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the contract as “President” of “University Publishing Co. Inc.,” stating that this was a corporation duly organized and existing under the laws of the Philippines,” and obviously misled plaintiff into believing the same. One who has induced another to act upon his willful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel.

become final and executor, should be executed to its full amount, since in fixing it, payment already made had been considered; court a quo ordered issuance of an execution writ against University Publishing Co., Inc.

10 Aug 1961 – Plaintiff petitioned for a writ of execution against Jose M. Aruego, as the real defendant, after his counsel and the Sheriff of Manila discovered that there is no such entity as Universtiy Publishing Co., Inc. He annexed to his petition a certification from the SEC dated 31 July 1961, attesting that its records do not show the registration of UPCI either as a corporation or a partnership. UPCI countered with a manifestation, stating that Jose M. Aruego is not a party to the case. Plaintiff’s petition was denied.

As UPCI has no independent personality and is just a name, Jose M. Aruego was, in reality, the one who answered and litigated through his own law firm as counsel. He was in fact, if not in name, the defendant.

Even with regard to corporations duly organized and existing under the law, the veil of corporation has in many cases been pierced to administer the ends of justice. As ruled in Salvatierra v. Garlitos: “A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contract entered into or for other acts performed as such agent.”

Parties to a suit are “persons who have a right to control the proceedings, to make defnse, to adduce and cross-examine the witnesses and to appeal from a decision” – and Aruego was, in reality the person who had and exercised these rights. Clearly then, Aruego had his day in court as the real defendant; and due process of law has been substantially observed.

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party to the contract sued upon; and that he was the one who reaped the benefits resulting from it. In line with the ends of justice, responsibility under the judgment falls on him.

V. Internal organization (2 cases; 125-135)

- Takes place after the steps for incorporation have been accomplished and the certificate of incorporation has been issued .

- These steps are done to prepare for the actual conduct of business.

By-laws - agreement of stockholders/members that ESTABLISHES the RULES for the INTERNAL GOVERNMENT of the corporation (Secs. 46 and 47 CoC). They affect only THEMSELVES unless a 3P has knowledge of the same and deals with the corporation accordingly (Fleischer v Botica Nolasco).

- Must be adopted ONE MONTH after receipt of COI; they may be prepared at the same time as the AOI, or even before it, but they will require a 100% vote of the incorporators, be submitted alongside the AOI, and shall only be effective after SEPARATE certification by the SEC. In any case, the CERTIFICATION is REQUIRED regardless of when the by-laws were submitted.

- By-laws cannot be inconsistent with law, morals, or public policy, AND the Articles of Incorporation- By-laws may be amended, explicitly or impliedly, provided that it remains within the law, etc. An example of an

implied amendment is if the corporation enters into contract contrary to its by laws, and it has performed in that manner for a long time. (Board of Liquidators v Heirs of MAximo Kalaw)

- Required vote: Majority of outstanding capital stock / members (S/NS); ALL incorporators if submitted prior to incorporation.

- Required contents: Officers and their qualifications and functions (only PRESIDENT, SECRETARY and TREASURER are required by the law; Sec. 25 CoC)

- Sec. 47 lists possible contents of the by-laws (use of permissive MAY; not exclusive list):Time, place and manner of calling/conduct ing meetings of directors or trustees, and time and manner for stockholders or members (Note: Place of stockholders meetings MUST BE IN THE PRINCIPAL OFFICE)Required quorum in meetings, and manner of voting thereinForm for proxies of stockholders and members, and manner of voting themQualifications, duties and compensation of directors, officers and employeesTime for holding the annual election of directors/trustees, and mode and manner of giving notice thereofManner of election/appointment, and the term of office of all officers other than directors or trusteesPenalties for violation of by-laws

(Stock corporations) Manner of issuing stock certificates

CASE FACTS ISSUE(S)/RATIOFleischer v Botica Nolasco (1925)

Manuel Gonzalez originally owned five shares of stock in R-company. On March 11, 1923, he assigned and delivered said five shares to P, by accomplishing the form of endorsement provided on the back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez to Fleischer. Dr. Eduardo Miciano, who was the secretary-treasurer of R, offered to buy from P, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500. By virtue of article 12 of the by-laws of R, said corporation had the preferential right to buy from Manuel Gonzalez said shares. However, P refused to sell them to R, instead, P requested Doctor Miciano to register said shares in his name. Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws of the corporation.

It also appears from the record that two days after the assignment of the shares to P, Gonzales made a written statement to R, requesting that the five shares of stock sold by him to P be noted transferred to P's name. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares. On June 14, 1923, Gonzalez wrote a letter withdrawing and cancelling his first letter to which letter the R replied, declaring that his written statement was in conformity with the by-laws of the corporation and that the shares in question had been registered in the name of R.

P filed an action against R praying for a judgment ordering R to register in his name the five shares of stock. R, as a defense, interposed article 12 of its by-laws, which gave preferential right to R to buy said shares and that said offer was refused by P.

W/N the by-laws contradict the Corporation Law (Act No. 1459)

Section 13, paragraph 7 of the Corp Law empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. The law on this subject is found in section 35 of Act No. 1459. Under said section, the shares of stock are personal property and may be transferred. Said section contemplates no restriction as to whom they may be transferred or sold. Therefore, in adopting a by-law governing transfer of shares of stock, a corp should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith.

Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-law are intended merely for the protection of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law cannot take away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale.

It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. But any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption.

Government of the Philippine Islands v El Hogar Filipino (1927)

This is a quo warranto proceeding instituted originally in this court by the Government of the Philippine Islands on the relation of the Attorney-General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights and privileges, and effecting a final dissolution of said corporation. The complaint enumerates seventeen distinct causes of action. (I only included four because they’re the only ones mentioned in the book.)

El Hogar Filipino was organized in the year 1911 as a building and loan association under the laws of the Philippine Islands, and that, since its organization, the corporation has been doing business in the Philippine Islands, with its principal office in the City of Manila.

On March 1, 1906, the Philippine Commission enacted what is known as the Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to 190, inclusive, of this Act are devoted to the subject of building and loan associations, defining their objects making various provisions governing their organization and administration, and providing for the supervision to be exercised over them. The respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine Islands under the provisions cited, and the association has been favored with extraordinary success.

4th CoA Issue:WoN the corporation should be dissolved because of presence an invalid article in its by laws- NO.

It appears that among the by laws of the association there is an article (No. 10) which reads as follows:The board of directors of the association, by the vote of an absolute majority of its members, is empowered to cancel shares and to return to the owner thereof the balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of the owners of such shares is not desirable.

This by-law is of course a patent nullity, since it is in direct conflict with the latter part of section 187 of the Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has never been enforced, and in fact no attempt has ever been made by the board of directors to make use of the power therein conferred. In November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of its by-laws and expressing the view that said article was invalid. It was therefore suggested that the article in question should be eliminated from the by-laws. At the next meeting of the board of directors the matter was called to their attention and it was resolved to recommend to the shareholders that in their next annual meeting the article in question be abrogated. It appears, however, that no annual meeting of the shareholders called since that date has been attended by a sufficient number of shareholders to constitute a quorum, with the result that the

It is supposed in the statement of the fifth cause of action in the complaint that the failure of the corporation to hold annual meetings and the filling of vacancies in the directorate in the manner described constitute misdemeanors on the part of the respondent which justify the resumption of the franchise by the Government and dissolution of the corporation; and in this connection it is charge that the board of directors of the respondent has become a permanent and self perpetuating body composed of wealthy men instead of wage earners and persons of moderate means. We are unable to see the slightest merit in the charge. No fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings; and their non-attendance at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to allow the officer to holdover until his successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve the corporation.The doctrine above stated finds expressions in article 66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one year on until their successors shall have been elected and taken possession of their offices."

It result that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can any exception be taken to then personality of the individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair criticism to say that they have chosen competent businessmen of financial responsibility instead of electing poor persons to so responsible a position. The possession of means does not disqualify a man for filling positions of responsibility in corporate affairs.

6th CoAIssue:WoN the compensation given to the directors of the corporation are invalid- NO.

Under the sixth cause of action it is alleged that the directors of El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed salary, — as the complaint supposes would be proper, — have been receiving large compensation, varying in amount from time to time, out of the profits of the corporation.

Under section 92 of the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance sheet is distributed to the directors in proportion to their attendance at meetings of the board. It will be note that the compensation above indicated as accruing to the directorate as a whole has been divided among the members actually present at the different meetings. As a result of this practice, and the liberal measure of compensation adopted, we find that the attendance of the membership at the board meetings has been extraordinarily good. Attorney-General insisted that the payment of the compensation indicated is

provision referred to has not been eliminated from the by-laws, and it still stands among the by-laws of the association, notwithstanding its patent conflict with the law.

It is supposed, in the fourth cause of action, that the existence of this article among the by-laws of the association is a misdemeanor on the part of the respondent which justifies its dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity, and could not be enforced even if the directors were to attempt to do so. There is no provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident to corporate effort would certainly be largely increased. There is no merit in this cause of action.

5th CoAIssue:WoN the failure of the corporation to hold annual meetings and the filling of vacancies in the directorate in the manner described constitute misdemeanors on the part of the respondent which justify the resumption of the franchise by the Government and dissolution of the corporation- NO.

In section 31 of the Corporation Law it is declared that, "at all elections of directors there must be present, either in person or by representative authorized to act by written proxy, the owners of the majority of the subscribed capital stock entitled to vote. . . ." Conformably with this requirement it is declared in article 61 of the by-laws of El Hogar Filipino that, "the attendance in person or by proxy of shareholders owning one-half plus one of the shareholders shall be necessary to constitute a quorum for the election of directors.

As the corporation has grown, however, it has been fond increasingly difficult to get together a quorum of the shareholders, or their proxies. Most of their meetings have failed for lack of quorum. It has been foreseen by the officials in charge of the respondent that this condition of affairs would lead to embarrassment, and a special effort was made by the management to induce a sufficient number of shareholders to attend the annual meeting for February, 1923. In addition to the publication of notices in the newspapers, as required by the by-laws, a letter of notification was sent to every shareholder at his last known address, together with a blank form of proxy to be used in the event the shareholder could not personally attend the meeting. Notwithstanding these special efforts the meeting was attended only by shareholders, in person and by proxy, representing 3,889 shares, out of a total of 106,491 then outstanding and entitled to vote.

Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among the stockholders. This custom finds its sanction in article 71 of the by-laws, which reads as follows:ART. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board of directors until the election at the general meeting.

excessive and prejudicial to the interests of the shareholders at large. For the respondent, attention is directed to the fact that the liberal policy adopted by the association with respect to the compensation of the directors has had highly beneficial results, not only in securing a constant attendance on the part of the membership, but in obtaining their intelligent attention to the affairs of the association

In so far as this court is concerned the question here before us is not one concerning the propriety and wisdom of the measure of compensation adopted by the respondent but rather the question of the validity of the measure. Upon this point there can, it seems to us, be no difference of intelligent opinion. The Corporation Law does not undertake to prescribe the rate of compensation for the directors of corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated.The justice and property of this provision was a proper matter for the shareholders when the by-laws were framed; and the circumstance that, with the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would probably be necessary to secure adequate service from them is matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a mistake has been made, or the rule adopted in the by-laws meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action is in our opinion without merit.

8th CoAIssue:WoN the corporation should be dissolved because of the invalidity of two articles in the by-laws- NO. The two articles are actually not invalid.

Under the eight cause of action the alleged ground for putting an end to the corporate life of the respondent is found in the presence of other articles in the by-laws, namely, articles 70 and 76, which are alleged to be unlawful but which, as will presently be seen, are entirely valid. Article 70 of the by-laws in effect requires that persons elected to the board of directors must be holders of shares of the paid up value of P5,000 which shall be held as security may be put up in the behalf of any director by some other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors waive their right as shareholders to receive loans from the association.

It is asserted, under the eight cause of action, that article 70 is objectionable in that, under the requirement for security, a poor member, or wage-earner, cannot serve as director, irrespective of other qualifications and that as a matter of fact only men of means actually sit on the board. Article 76 is criticized on the ground that the provision requiring directors to renounce their right to loans unreasonably limits their rights and privileges as members. There is nothing of value in either of theses suggestions. Section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of

directors; and the requirement of security from them for the proper discharge of the duties of their office, in the manner prescribed in article 70, is highly prudent and in conformity with good practice. Article 76, prohibiting directors from making loans to themselves, is of course designed to prevent the possibility of the looting of the corporation by unscrupulous directors. A more discreet provision to insert in the by-laws of a building and loan association would be hard to imagine. Clearly, the eighth cause of action cannot be sustained.

Directors and officers

- Officers and directors are required in order to FORMALLY ORGANIZE the corporation. If a corporation does not formally organize and commence its business transactions within 2 years from date of incorporation, its powers cease and the corporation shall be deemed dissolved EXCEPT if this failure is due to causes beyond the control of the corporation as may be determined by the SEC (CoC 22).

- The AOI names the initial members of the BOD who are to act until the election of the first set of regular directors (as per the by-laws or as determined by the stockholders/members).

- Once the directors are elected, they must complete the formal organization by electing officers. Sec. 25 CoC requires the election of a PRESIDENT (director), TREASURER (may or may not be a director), and SECRETARY (RESIDENT and CITIZEN of the Philippines). They may also elect any other officers provided for in the by-laws.

Annual financial statements - Under the SEC rules, corporations, once organized, are required to keep proper accounting records and to file an annual financial statement with the SEC as part of its supervisory powers.

THE CORPORATE ENTITY

The Theory of Corporate Entity and its Effects (4 C; 139-148)

- Once the certificate of incorporation is issued, the corporation’s existence as a legal entity begins. - One of the key aspects of corporate entity is its existence SEPARATE and DISTINCT from its individual

stockholders/members. This has several implications:1. The corporation is not affected by the personal rights, obligations and transactions of its stockholders/members (Sulo ng Bayan v Araneta)2. Corporate property is owned by the corporation as a juridical person; stockholders not own them as owners, but only have an expectancy or inchoate right upon dissolution. As such, they cannot by themselves recover its property. (Button v Hoffman)3. Even if the stockholder’s interest is attached, corporate property cannot be used to satisfy the stockholder’s claim (and vice versa). However, stockholders may still have an insurable interest in corporate property since insurable interest DOES NOT require ownership-- only some pecuniary benefit. (Wise v Man Sun Lung; Pacific Fire Insurance v John Morris)4. The corporation has its own personality protected by the right against unreasonable searches and seizures, although the latter may only be contested by the corporation as an entity, not by individuals.5. Venue in an action against the corporation is PRINCIPAL OFFICE, not residence of the President.6. The corporation is still liable for torts committed byu its officers/agents under its express direction or authority. (apply rules on principal-agent in tort)

CASE FACTS ISSUE(S)/RATIOGallagher v Germania Brewing (1893)

Plaintiff, as assignee of Westphal, brought this action to recover goods sold and delivered Westphal to Germania Brewing. However, Barge and Vander Horck intervened, and stated that they could intervene because they owned all the capital stock of the R-company, and that no other person but themselves had an interest in its stock and property.

As R’s stockholders, they contended that they had a Cause of Action against Westphal which accrued before the assignment to P. The relief they were seeking was that to equitably set-off their claims against Westphal from those that Gallagher (as Westphal’s assignee) has against R.

Gallagher states that Barge and Vander had no such interest in the litigation as to entitle them to intervene and that their claims cannot be set off against a claim against the corporation, since a corporation is a legal entity, entirely distinct from its stockholders.

WON the claims of Barge and VanderHorck can be equitably set-off – NOThe right of equitable set-off is, of course, not derived from, or dependent upon, statute, but rests upon a distinctly equitable doctrine, the object being to effect a clear equity and prevent irremediable injustice. It may be stated as a general rule that, whenever necessary to accomplish that end, the courts will permit an equitable set-off, although the debts accrued in different rights. They will also disregard the nominal parties to the record, and consider the real parties in interest. Hence; had the plaintiff's claim been a joint one against the interveners, there would have been no doubt of their right to set off their separate claims against it. But such a case is not analogous to the present.

To allow the set-off here, it is necessary to wholly ignore the legal doctrine that a corporation is an entity separate and distinct from the body of its stockholders. In dealing with the rights of creditors, and the obligations existing between a corporation and its shareholders by reason of their contract of membership, undoubtedly the courts often find it necessary to consider the real parties in interest as the individual shareholders.

The transferable nature of stock in a corporation is also a good reason why the theory of a corporate entity should be preserved. If the rights or liabilities of a corporation could be affected by the acts of the stockholders, it can easily be seen into what confusion and chaos corporate affairs would inevitably fall.

Again, the right of set-off, if any exists, must be mutual. Hence, if stockholders can interpose their individual demands as set-offs to a demand against the corporation, it follows that a defendant can set up demands against the individual stockholders as set-offs to demands in favor of the corporation.

Stockholders of Guanzon and Sons v Register of Deeds of Manila (1962)

On Sept. 19, 1960, the five stockholders (SHs) of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the corporation reciting, among other things, that by virtue of a

WON the certificate of liquidation merely involves a distribution of the corporation's assets or should be considered a transfer or conveyance

resolution of the SHs adopted on Sept. 17, 1960, dissolving the corporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila (ROD-MNL), was denied registration on seven grounds, of which the following were disputed by the SHs:3. The number of parcels not certified to in the acknowledgment;5. P430.50 Reg. fees need be paid;6. P940.45 documentary stamps need be attached to the document;7. The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation need be presented.

Deciding the consulta elevated by the SHs, the Commissioner of Land Registration (CLR) overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6. Thus, the SHs interposed the present appeal.

**Note: The propriety or impropriety of the three grounds on which the denial of the registration of the certificate of liquidation was predicated hinges on the resolution of the issue.

P’s argument: The certificate of liquidation is NOT a conveyance or transfer but merely a distribution of the assets of the corporation which has ceased to exist for having been dissolved. This is apparent in the minutes for dissolution attached to the document. Not being a conveyance the certificate need not contain a statement of the number of parcel of land involved in the distribution in the acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to require the SHs to pay the amount of P430.50 as registration fee.

ROD-MNL and CLR’s argument: The certificate of liquidation in question, though it involves a distribution of the corporation's assets, in the last analysis represents a transfer of said assets from the corporation to the SHs. Hence, in substance it is a transfer or conveyance.

SC RULING: The certificate of liquidation is a transfer or conveyance. CLR AFFIRMED.

A corporation is a juridical person distinct from the members composing it. 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. The corporation has property of its own which consists chiefly of real estate. 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.

On the basis of the foregoing authorities, it is clear that the act of liquidation made by the SHs of the F. Guanzon and Sons, Inc. of the latter's 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 SHs. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the SHs in proportion to their shareholdings, — and this is in effect the purpose which they seek to obtain from the ROD - MNL, — that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the SHs. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.

Caran v CAPalay v Clave

Cases where the Corporate Entity is Disregarded (Piercing the veil of corporate fiction) (13 C; 151-198)

- While the general rule is that the corporate entity and the stockholders/members are distinct personalities, such may be disregarded if the ‘veil’ of corporate fiction is used for fraudulent, unfair or illegal purposes (defeat public convenience, justify wrong, protect fraud, or defend crime).

- Examples:1. Corporate entity is used to evade taxes and other requirements of law2. Confuse the issue of employee-employer relationship3. Escape liability to third parties.’

- Effect if veil is pierced: Stockholders/members become personally liable for the acts and contracts of the corporation for the situations where the veil is pierced

- For CLOSE corporations: Stockholders active in management are personally liable for CORPORATE TORTS, but the piercing doctrine is usable for OTHER OBLIGATIONS, or if the stockholders confuse their affairs and assets with those of the corporation such that the separate personalities are not kept clear and distinct, or in cases of bad faith, fraud or abuse in the exercise of control.

CASE FACTS ISSUE(S)/RATIOUS v Milwaukee Refrigerator Transit

This case involves a bill in equity for an injunction to prevent the payment of alleged rebates on freight, brought under Elkins Act. It was argued that the bill shows the creation, by the controlling interests of the brewing company of dummy corporations, with dummy directors, and scienter of its character by the carriers; and thus the transit company is merely the alter ego of the brewing corporation; both being substantially identical in interest and control, and the brewing company the ultimate beneficiary, in some form of the operations in question.

The defense argues that it appears on the face of the bill that the alleged rebates were not paid to the brewing company, but to the Refigerator Transit Company, and the payment to a soliciting agent (the transit company) of a commission. The bill carefully avoids the statement that the brewing company received the money repaid or even that it was paid back for its benefit.

Whether or not the Transit company is merely an alter ego of the Brewing company. [YES]

To resolve the issue, the court here first determined if the brewing company, in a case like this, is an association of individuals, rather than a legal entity apart from those who own and control it.

The general rule is that a corporation is a legal entity, an institution artificial, intangible, existing only by legal contemplation and separate and apart from its constituents. However, the United States Supreme Court was the first to break away from this general notion by holding that a corporation is an association of persons who may have citizenship, and following this with the adoption of a fiction of law, supported by a conclusive presumption, by which the members of a corporation are conclusively presumed to be citizens of the state creating it.

The transit company is a mere separate name for the brewing company, being in fact the same collection of persons and interests. This defeats the averment that the procurement of shipments through the contract is the mere soliciting of them for carriers; for which they are lawfully authorized to pay a part of the rate, in order to get the business.

State ex rel Atty. General v Standard Oil (1892)

The State, by its Attorney General, commenced this action to oust the defendant of its rights to be a corporation, on the ground that it had abused its corporate franchise by becoming party to an agreement that is against public policy. The agreement was entered into by the stockholders of other corporations, partners, and individuals, whereby the stock held by the contracting parties was conveyed to trustees, with power to vote and manage the corporation and enterprises thus controlled. The contracting parties received trust certificates in lieu of the stock surrendered. The purpose of this agreement was to secure a uniform control over the principal organizations engaged in the oil business. Allegedly, the purpose is contra to public policy and ultra vires.

Defendant’s answer denied that it:• “entered into or became a party to either or both of the agreements,”• “has at any time or in any manner acquiesced in or observed, performed, or carried out either or both of said agreements.”However, it does not deny the averment that:• “all of the owners and holders of its capital stock, including all the officers and directors of said company, signed said agreement.”• “it (the corporation) is informed and

W/N the act of all the stockholders, officers, and directors of the company in signing the agreement should be imputed to them as an act done in their capacity as a corporation

YES, since thereby all the property and business of the company is and was intended to be, virtually transferred to the Standard Oil Trust, and is controlled, through its trustees, as effectually as if a formal transfer had been made by the directors of the company. The general proposition that a corporation is to be regarded as a legal entity, existing separate and apart from the natural persons composing it is not disputed. It has been introduced for the convenience of the company making contracts, in acquiring property for corporate purposes, in suing and being sued, and to preserve the limited liability of the stockholder by distinguishing between corporate debts and property of the company and of the stockholders in their capacity as individuals. All fictions of law have been introduced for the purpose of convenience and to subserve the ends of justice. But when they are urged to an intent and purpose not within the reason and policy of the fiction, they have always been disregarded by the courts.

The metaphysical entity has no thought or will of its

believes that the individuals named in the agreement, being the same individuals who executed it, did enter into the agreements,” claiming that “said agreements were of individual property, and were not designed to be corporate agreements.”

o This claim is based on the argument that the corporation is a legal entity, separate from its stockholders; and in it vested all the property and powers of the company, and can only be affected by such acts & agreements executed on its behalf by corporate agencies, acting within the legitimate scope of their powers. The stockholders’ shares are argued to be individual property, and that they may each & all dispose of and make such agreements affecting their shares as best suit their private interests.

o No such acts and agreements of stockholders can be ascribed to the company as a separate entity, though done and concurred in by each and all of its stockholders.

own; that every act ascribed to it emanates from and is the act of the individuals personated by it; and it can no more do an act, or refrain from doing it, contrary to the will of these natural persons; and when an act is ascribed to it, it must be understood to be the act of the persons associated as a corporation, and whether done in their capacity as corporators or as individuals, must be determined by the nature and tendency of the act.

Where all, or a majority, of the stockholders comprising a corporation do an act which is designed to affect the property and business of the company, and which through the control their numbers give them over the selection and conduct of the corporate agencies, does affect the property and business of the company, in the same manner as if it had been a formal resolution of its board of directors, and the acts so done is ultra vires of the coporation and against public policy, and was done by them in their individual capacity for the purpose of concealing their real purpose and object, the act should be regarded as the act of the corporation; and, to prevent the abuse of corporate power, may be challenged as such by the state in a proceeding in quo warranto.

Laguna Transport v SSS (1960)

R served notice upon P requiring it to register as member of the System and to remit the premiums due from all the employees of the P and the contribution of the latter to the System beginning the month of September, 1957.

Earlier, in 1949, the Biñan Transportation Co. sold part of the lines and equipment it operates to Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador Vera Cruz. After the sale, the said vendees formed an unregistered partnership under the name of Laguna Transportation Company which continued to operate the lines and equipment bought from the Biñan Transportation Company, in addition to new lines which it was able to secure from the Public Service Commission.

The original partners forming the Laguna Transportation Company, with the addition of two new members, organized a corporation known as the Laguna Transportation Company, Inc., which was registered with the SEC on June 20, 1956, and which corporation is the plaintiff now in this case.

The corporation continued the same transportation business of the unregistered partnership. Prior to November 11, 1957, P requested for exemption from coverage by the System on the ground that it started operation only on June 20, 1956, when it was registered with the Securities and Exchange Commission, but on November 11, 1957, the Social Security System notified plaintiff that it was covered.On November 27, 1957, R said that P’s business has been in actual operation for at least two years.

On January 24, 1958, P filed with CFI to declare that it is not bound to register as a member of respondent Social Security System and, therefore, not obliged to pay to the latter the contributions required under the Social Security Act.R prayed for dismissal of petition and for a declaration that P is covered by said Act, since the latter's business has been in operation for at least 2 years prior to September 1, 1957.

CFI declared that P was an employer engaged in business as common carrier which had been in

Whether CFI erred.

No.Section 9 of the Social Security Act, in part, provides:SEC. 9 Compulsory Coverage. — Coverage in the System shall be compulsory upon all employees between the ages of sixteen and sixty years, inclusive, if they have been for at least six months in the service of an employer who is a member of the System. Provided, That the Commission may not compel any employer to become a member of the System unless he shall have been in operation for at least two years . . . .

It is not disputed that the Laguna Transportation Company, an unregistered partnership composed of Gonzalo Mercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the operation of its business as a common carrier on April 1, 1949. These 4 original partners, with 2 others (Maura Mendoza and Sabina Borja) later converted the partnership into a corporate entity, by registering its articles of incorporation with the SEC on June 20, 1956. The firm name "Laguna Transportation Company" was not altered, except with the addition of the word "Inc." to indicate that petitioner was duly incorporated under existing laws. The corporation continued the same transportation business of the unregistered partnership, using the same lines and equipment. There was, in effect, only a change in the form of the organization of the entity engaged in the business of transportation of passengers. Hence, said entity as an employer engaged in business, was already in operation for at least 3 years prior to the enactment of the Social Security Act on June 18, 1954 and for at least two years prior to the passage of the amendatory act on June 21, 1957.

P argues that, since it was registered as a corporation with the SEC only on June 20, 1956, it must be considered to have been in operation only on said date. While it is true that a corporation once formed is conferred a juridical personality separate and district from the persons composing it, it is but a legal fiction introduced for purposes of convenience and to serve the ends of justice. The concept cannot

operation for at least two years, and was subject to compulsory coverage under said law.

be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts.

A corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the motion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.

To adopt P’s argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a period of at least 2 years. The door to fraudulent circumvention of the statute would, thereby, be opened.

Moreover, P admitted that as an employer engaged in the business of a common carrier, its operation commenced on April 1, 1949 while it was a partnership and continued by the corporation upon its formation on June 20, 1956. Unlike in the conveyance made by the Biñan Transportation Company to the partners Gonzalo Mercado, Artemio Mercado, Florentino Mata, and Dominador Vera Cruz, no mention whatsoever is made either in the pleadings or in the stipulation of facts that the lines and equipment of the unregistered partnership had been sold and transferred to the corporation, P herein. This omission clearly indicates that there was, in fact, no transfer of interest, but a mere change in the form of the organization of the employer engaged in the transportation business, i.e., from an unregistered partnership to that of a corporation.

Finally, the weight of authority supports the view that where a corporation was formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefor. The reason for the rule is that the members of the partnership may be said to have simply put on a new coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership

Marvel Bldg v David (1954)

The Secretary of Finance, upon consideration of the report on the war profits tax case of Maria Castro, recommended the collection of P3.6 million as war profits taxes. The CIR seized the Aguinaldo Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion (and the land they stood on).Stockholders of Marvel Building filed to enjoin the CIR from auctioning these properties which were registered in the name of the corporation. Plaintiffs allege that the properties belong to Marvel Building and not to Castro, while the defendant claims that Castro is the true and sole owner of all the subscribed stock of the Marvel Building, including those appearing to have been subscribed and paid for by the other members, and consequently she is also the true and exclusive owner of the properties. CFI held that the evidence was mostly circumstantial and failed to show to that Castro is the true owner of

Is Castro the owner of all the shares of stocks of Marvel Building and the other stockholders mere dummies of hers? YES

The SC considered/adopted the evidence of the CIR. 1. Of the incorporators, Maximo Cristobal and Antonio Cristobal are half-brothers of Castro, Maria Cristobal is a half-sister, and Segundo Esguerra, Sr. a brother-in-law (husband of Maria Cristobal).

2. In general, the evidence offered by the plaintiffs is testimonial and direct evidence, easy of fabrication; that offered by defendant, documentary and circumstantial, not only difficult of fabrication but in most cases found in the possession of plaintiffs. There is very little room for choice as between the

all the stock certificates of the corporation, because the evidence is susceptible of two interpretations and an interpretation may not be made which would deprive one of the property without due process of law.

two. The circumstantial evidence is not only convincing; it is conclusive.

3. These are the pieces of evidence the SC considered: (a) the existence of endorsed certificates, ▪ Endorsement in blank of the shares of stock issued in the name of the other incorporators, and the possession thereof by Castro. The existence of said endorsed certificates was testified to by BIR examiners, the Usec. Of Finance (who found them while examining the books and papers, whereupon they went directly to the Usec. To show their discovery), and the bookkeeper of Marvel Building who prepared the original certificates.▪ The plaintiffs “offered a half-hearted denial” of the existence of the endorsed blank certificates, saying that no investigation was ever made, vigorously attacked the credibility of the witnesses imputing to the Usec. enmity against Castro, and to the examiners a very doubtful conduct in not divulging the existence of the certificates to their immediate chiefs. ▪ They also relied on a certification wherein the examiners declares that the certificates were regular and were not endorsed when the same were examined. The SC said that this certification pertained to a different set of certificates.(b) 25 certificates were signed by the president for no justifiable reason, ▪ Castro admitted having signed 25 stock certificates, but only 11 were issued (one for each subscriber). No explanation is given by her why. This corroborates the declaration of the bookkeeper that two sets of certificates had been prepared. It is to be remembered that it is a common practice among unscrupulous merchants to carry two sets of books, one set for themselves and another to be shown to tax collectors.(c) two sets of certificates were issued, (d) Castro had made enormous profits and, therefore, had a motive to hide them to evade taxes, while the other subscribers had no incomes of sufficient magnitude to justify their big subscriptions, ▪ The other stockholders did not have incomes in such amounts, from the organization of the corporation or immediately thereto, as to enable them to pay in full for their supposed subscriptions. This is proved by their ITRs, or the absence thereof. On the other hand, Castro had been found to have made enormous gains or profits in her business such that the taxes thereon were assessed at around P3 million. There was, therefore, a prima facie case out by the CIR that Castro had furnished all the money that the corporation had.(e) the subscriptions were not receipted for and deposited by the treasurer in the name of the corporation but were kept by Castro herself, (f) the stockholders or the directors never appeared to have ever met to discuss the business of the corporation, (g) Castro advanced big sums to the corporation without any previous arrangement or accounting, (h) and that the books of accounts were kept as if they belonged to Castro alone.

4. Lastly, it is significant that the supposed subscribers, who should have come to court to assert that they actually paid for their subscriptions and are not mere dummies, did not do so. They could not have afforded such a costly indifference, valued at from P70,000 to P100,000 each, if they

were not actual dummies. What could have been easier to disprove that they were dummies, than for them to come to court and show their receipts and testify on the payments they have paid on their subscriptions?

5. The non-production of evidence that would naturally have been produced by an honest and therefore fearless claimant permits the inference that its tenor is unfavorable to the party's cause (Wigmore). A party's silence to adverse testimony is equivalent to an admission of its truth (Wigmore).

Palacio v Fely Transport Alfredo Carillo, while driving a jeep owned and operated by defendant corporation, run over Mario Palacio, child of the plaintiff Gregorio Palacio. As a result, the child suffered a simple fracture and had to be hospitalized for 5 months. Gregorio Palacio a welder by profession had to abandon his welding shop (his source of income) to attend to his injured child. He also had to sell his equipment to meet the needs of his family while his son Mario was recovering in the hospital.

Gregorio Palacio filed this civil case for damages against defendant corporation as owner of the vehicle. FelyTransporation Company argued that the it should not be liable because it acquired said vehicle involved long after the conviction of the driver Carillo in the criminal case filed against him.The lower court held that the civil action is already barred by the judgment in the criminal case against the driver Alfredo Carillo where damages have already been awarded. Also, the lower court held that pursuant to Art. 103 of the RPC, the person subsidiarily liable is Isabel Calingasan, the driver’s employer and NOT the corporation, current owner of the vehicle.

Hence this appeal. Plaintiff contends that the sale of the vehicle is merely an attempt on the part of IsabeloCalingasan its president and general manager, to evade his subsidiary civil liability.

W/N defendant corporation is liable for the reason that it was formed only to evade the incorporators’ liability. YES.

PIERCING THE VEIL OF CORPORATE FICTIONThe Court agrees with this contention of the plaintiffs. IsabeloCalingasan and defendant Fely Transportation may be regarded as one and the same person. It is evident that IsabeloCalingasan's main purpose in forming the corporation was to evade his subsidiary civil liability resulting from the conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely Transportation are IsabeloCalingasan, his wife, his son, Dr. Calingasan, and his two daughters. We believe that this is one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice.

Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep involved strengthens the conviction that its formation was for the purpose above indicated.

And while it is true that IsabeloCalingasan is not a party in this case this Court can substitute him in place of the defendant corporation as to the real party in interest. This is so in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay. Accordingly, defendants Fely Transportation and IsabeloCalingasan should be held subsidiarily liable for P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he could not pay on account of insolvency.

RES JUDICATAThe present action is not barred by the judgment of the CFI in the criminal case. This action was filed to enforce defendants’ subsidiary civil liability which proceeds precisely from the judgment in the criminal case.

Tan Boon v Jarencio (1967)

March 25, 1958, ASSOCIATED, a domestic corporation, through its President, appellee Francisco Sycip, entered into an agreement to exchange sugar with NAMARCO, represented by its then General Manager, Benjamin Estrella, whereby the former would deliver to the latter 22,516 bags (each weighing 100 pounds) of "Victorias" and/or "National" refined sugar in exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw sugar belonging to NAMARCO, both agreeing to pay liquidated damages equivalent to 20% of the contractual value of the sugar should either party fail to comply with the terms and conditions stipulated. Pursuant thereto, on May 19,1958, NAMARCO delivered to ASSOCIATED 7,732.71 bars of

WON Francisco Sycip may be held liable, jointly and severally with his co-defendant, for the sums of money adjudged in favor of NAMARCO.

Out of the capital stock of ASSOCIATED, Sycip owned P60,000.00 worth of shares, while his wife — the second biggest stockholder — owned P20,000.00 worth of shares; that the par value of the subscribed capital stock of ASSOCIATED was only P105,000.00; that negotiations that lead to the execution of the exchange agreement in question were conducted exclusively by Sycip on behalf of ASSOCIATED; that, as a matter of fact, in the course of his testimony, Sycip referred to himself as the one who contracted or transacted the business

"Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victoria" and/or "National" refined sugar agreed upon, the latter, on January 12, 1959, demanded in writing from the ASSOCIATED either (a) immediate delivery thereof before January 20, or (b) payment of its equivalent cash value amounting to P372,639.80. A week later, ASSOCIATED, through Sycip, offered to pay NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 per bag, but the latter rejected the offer. Instead, on January 21 of the same year it demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30 per bag, amounting to P118,310.40. and of the 17,285.08 piculs of "Pasumil" raw sugar at P16.50 per picul, amounting, to P285.203.82, or a total price of P403,514.28 for both kinds of sugar. As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar delivered to it, inspite of repeated demands therefore, NAMARCO instituted the present action in the lower court to recover the sum of P403,514.28 in payment of the raw sugar received by defendants from it; P80,702.86 as liquidated damages; P10,000.00 as attorney's fees, expenses of litigation and exemplary damages, with legal interest thereon from the filing of the complaint until fully paid.

Defendants, by way of affirmative defenses, alleged that the correct value of the sugar delivered by NAMARCO to them was P259,451.09 not P403,514.38 as claimed by NAMARCO. As counterclaim they prayed for the award of P500,000.00 as moral damages, P100,000.00 as exemplary damages and P10,000.00 as attorney's fees. RTC ordered ASSOCIATED to pay NAMARCO Php403,514.38. CA certified case to SC (due to more than 200k amount)

in his personal capacity, and asserted that the exchange agreement was his personal contract; that it was Sycip who made personal representations and gave assurances that ASSOCIATED was in actual possession of the 22,516 bags of "Victorias" and/or "National" refined sugar which the latter had agreed to deliver to NAMARCO, and that the same was ready for delivery; that, as a matter of fact, ASSOCIATED was at that time already insolvent; that when NAMARCO made demands upon ASSOCIATED to deliver the 22,516 bags of refined sugar it was under obligation to deliver to the former, ASSOCIATED and Sycip, instead of making delivery of the sugar, offered to pay its value at the rate of P15.30 per bag — a clear indication that they did not have the sugar contracted for. Thus, Sycip was guilty of fraud because through false representations he succeeded in inducing NAMARCO to enter into the aforesaid exchange agreement, with full knowledge, on his part, on the fact that ASSOCIATED whom he represented and over whose business and affairs he had absolute control, was in no position to comply with the obligation it had assumed. Consequently, he can not now seek refuge behind the general principle that a corporation has a personality distinct and separate from that of its stockholders and that the latter are not personally liable for the corporate obligations. To the contrary, upon the proven facts, We feel perfectly justified in "piercing the veil of corporate fiction" and in holding Sycip personally liable, jointly and severally with his co-defendant, for the sums of money adjudged in favor of appellant. It is settled law in this and other jurisdictions that when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another.

McConnel v CANational Marketing Co v Associated FinancingClaparols v CIRVilla Rey Transit v FerrerNational Federation v OpleCease v CA (1979) In June 1908, one Forrest Cease together with 5

others organized the Tiaong Milling & Plantation Company which in the course of its existence acquired various properties. Sometime after, the original incorporators were bought out by Cease together with his children. In 1958, the charter of the company lapsed but it is unknown whether there were steps for liquidation. Thereafter Cease died and his children were divided – PRs Benjamin and Florence wanted an actual division while Ps wanted reincorporation. Those who wanted the latter option did so and incorporated themselves into the FL Cease Plantation Co and registered it with the SEC.

Meanwhile, Benjamin and Florence initiated a Special Proceeding for the settlement of the estate of their father Forrest. In said proceedings they asked that Tiaong Milling be declared identical to FL Cease and that its properties be divided among the children as intestate heirs. Apparently, the Board of Liquidators of Tiaong Milling executed an assignment and conveyance of properties and trust agreement in favor of FL Cease as trustee of Tiaong Milling.

TC: held for plaintiffs Benjamin and Florence;

WON the properties of Tiaong Milling may rightfully be considered the properties of the estate of Forrest Cease as well – YES

In sustaining PR’s theory of merger of Forrest Cease and Tiaong Milling as one personality, the trial court aptly applied the exception to the general rule by disregarding the legal fiction of separate corporate personality and regarding the corporation and the individual member one and the same.

In the course of the corporation’s existence, it developed into a close family corporation. The Board of Directors and stockholders belong to one family, with Forrest always having retained majority shares and the control of the corporation. It was really only the members of his family who benefitted from Tiaong Milling. Furthermore, the corporation never had any account with any bank; its account was carried on its behalf in the name of Forrest Cease. Hence, its operations are merged with those of the majority of stockholders which is with Forrest, who used the corporation as his own instrumentality. The corporation is only a business conduit of the father and an extension of his personality.

ordered the assets of Tiaong Milling entrusted to FL Cease be divided among the childrenCA: affirmed

Ps’ contend that no evidence has been found to support the conclusion that the registered properties of Tiaong Milling are also properties of the estate of Forrest Cease.

Thus, the application of the doctrine of piercing the veil of corporate fiction must be applied as the situation involves the corporate entity being used as an alter ego, adjunct or business conduit for the sole benefit of the stockholders or of another corporate entity.

If the veil would not be pierced, then the legal fiction of separate corporate personality shall have been used to delay and ultimately deprive and defraud PRs of their successional rights to the estate of their deceased father.

Delpher Trade v IAC (1959)

Plaintiff Garrett was employed as a wheel moulder by Lenoir Car Works, a Tennessee corporation. He claims injuries from silicosis contracted from silica dust permeating the foundry.

Southern Railway Company acquired the entire capital stock of Lenoir in 1904, the year of the latter's organization. Plaintiff claims to be an employee of Southern entitled to recover under the Federal Employers' Liability Act

Southern argued that although Lenoir sells the majority of its products to Southern or its affiliates, it does not sell to them exclusively. The management of Lenoir is vested in a manager, Henry Marius, who is paid by Lenoir, and although he holds and votes the proxy of Southern at the annual stockholders meeting, he has no other connection with Southern; Lenoir maintains a separate bank account and has never intermingled its funds with those of Southern; the companies keep separate books and Lenoir pays its own taxes; Lenoir uses no facilities/property jointly with Southern; etc.

WoN Lenoir is a mere instrumentality of Southern

No. Whether the subsidiary is an instrumentality of the owner corporation is a question to be determined from all the surrounding circumstances.

GR: stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiaryEXC: the separate corporate existence of the subsidiary is a mere sham, or the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation.

To justify the application of the instrumentality rule between parent and subsidiary corporation, there must be present in addition to the elements of control through stock ownership and common directorates and officers, elements of fraud or wrongdoing on the part of the parent corporation to the detriment of the subsidiary and third persons in their relations with the subsidiary.

The Instrumentality Rule: So far as the question of control alone is concerned, the parent corporation will be responsible for the obligations of its subsidiary when its control has been exercised to such a degree that the subsidiary has become its mere instrumentality.

The circumstances rendering the subsidiary an instrumentality:(a) The parent corpowns all or most of the capital stock of the subsidiary.(b) The parent and subsidiary corps have common directors or officers.(c) The parent corp finances the subsidiary.(d) The parent corp subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.(e) The subsidiary has grossly inadequate capital.(f) The parent corp pays the salaries and other expenses or losses of the subsidiary.(g) The subsidiary has substantially no business except with the parent corp or no assets except those conveyed to it by the parent corp.(h) 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 corp's own.(i) The parent corp uses the property of the subsidiary as its own.(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corp in the latter's interest.(k) The formal legal requirements of the subsidiary are not observed.

In the case at bar only 2 of the 11 listed indicia occur, namely, the ownership of most of the capital stock of Lenoir by Southern, and possibly subscription by Southern to the capital stock of Lenoir. The control of Southern over Lenoir was not such as to constitute the latter an adjunct of Southern. The complaint must be dismissed.

Cases of Parent-Subsidiary Relationships (7 C; 200-238)

- The rules on piercing the veil of corporate fiction apply as well to parent-subsidiary relationships. The mere fact that an entity owns almost the entirety of its subsidiary does not mean that they are a single entity. If used for legitimate functions, there will be separate treatment. Again, like in any other instance of piercing the corporate veil, if the parent-subsidiary relationship is used for wrongdoing, then they will be treated as a single entity (the subsidiary as a mere instrumentality or alter ego).

CASE FACTS ISSUE(S)/RATIOGarnett v Southern Railway Co.Koppel v Yatco (1946) 1. plaintiff is a corporation duly organized in

the Philippines, its capital is divided into 1000 shares of P100 eacha. Koppel Industrial Car and Equip Co (KICE) is organized in the USA and not licensed to do business in the PH owns 995 shares out of the total capital stock of the plaintiff.

2. Plaintiff transacted business in the PH in the following manner:a. A local buyer wanted to purchase materials and asked for price quiotations from the plaintiff. Plaintiff forwards the quotatio to KICE b. KICE sends a cable quioting its cost price. c. Plaintiff however quioted to the purchaser a selling price above the figures quoted by KICE. d. Orders were placed.e. Goods were shipped from KICE to Manila. Plaintiff would usually pay the payment of duties and were reimbused by KICE. 3. Total gross sales were 3.5M. Plaintiff shared in the profits 132K and plaid taxes of 4.2K only.

4. The CIR demanded from the plaintiff merchant sales tax which represented 1.5% of the total gross value of their sales incurred from 1929 – 1932.

5. CFI held that plaintiff is a mere dummy or branch of KICE in this particular transaction. While not denying plaintiff’s legal personality, public interest and convenience would be defeated and would amount to tax evasion unless resort is had to the doctrine of “disregard of the corporate fiction”

6. Plaintiff alleges that:a. It is not a mere branch of KICE and that its corporate existence cannot be collaterally attacked and the Gov’t is estopped from doing so.

W/N Plaintiff can be treated as a mere branch of KICE.

The court does not deny the corporate personality of plaintiff, however it is but a mere brnach/agency or dummy of KICE.- Gen Rule: a corporation will be looked upon as a legal entity until sufficient reason to the contrary appears. o but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons

As to the contention that they are a branch/subsidiary:- The entity is normally regarded but is disregared to prevent injustice, or the distortion of hiding the truth, or to let in a just defense. - Another rule, when the corporation is the mere alter ego or busines conduit of a person, it may be disregarded.

This principle is the same w/n the person is natural or articifial. - While it is recognized that a corporation does not lose its entity by the ownership of the bulk/whole of its stock by another coroporation, it is also settled that the court will look beyond the mere artificial personality which incorporation confers, and if necessary to work out equitable ends, will ignore corporate forms.

Insofar as the sales involved are concerned KICE and Koppel PH are one and the same or to use another mode of expression the latter is a mere branch, agency, subsidiary of the former. - KICE made use of its ownership of 99.5% of the capital stock to control the operations of Koppel PH to the extent tht it had the final say even as to how much should be alloted to the local entity in the so-called sharing in the profits.- The court cannot concieve how the PH corp could effectively go against the policies and decisions of KICE.

There would be a difference on w/n the corporation merely established a branch/agency or not and that would be tax liability.- To allow the taxpayer to deny this tax liability on the ground that the sales were made

through another and distinct corporation, when the the latter corporation was virtually owned by the former or that they are practically one and the same is a circumvention of our tax laws, and permit a tax evasion and consequent commission of grave injustice to the Gov’t - It would also allow the taxpayer to do by indirection what the lax laws prohibited to be done directly.

Liddell v CIR (1961) Petitioner Liddell & Co. Inc. is a domestic corporation with an authorized capital of P100K divided into 1000 shares at P100 each. Of this authorized capital, 196 shares were subscribed and paid by Frank Liddell (there were four other shares subscribed to by four other people). Its purpose was to engage in the business of importing and retailing Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks. In time, stock dividends were declared, and the capital stock of the company increased, with Frank Liddell still owning majority of the stocks.

On December 20, 1948, the Liddell Motors, Inc. was organized and registered with SEC with an authorized capital stock of P100,000 of which P20,000, 19,996 of which was owned by Irene Liddell (wife of Frank). Also, Manzano, Kurz and Kernot resigned from their respective positions in Liddell & Co. and they were taken in and employed by Liddell Motors, Inc.

In January 1949, Liddell & Co. stopped retailing cars and trucks; it conveyed them instead to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then, Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as its original sales. The CIR then determined that the latter was but an alter ego of Liddell & Co. Wherefore, for sales tax purposes, those sales made by Liddell Motors, Inc. to the public were considered as the original sales of Liddell & Co. Accordingly, the CIR assessed against Liddell & Co. a sales tax deficiency, including surcharges, in the amount of P1,317,629.61. CTA affirmed.

Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are identical corporations, the latter being merely .the alter ego of the former - YES

SC is fully convinced that Liddell & Co. is wholly owned by Frank Liddell. As of the time of its organization, 98% of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with which the company began its business was paid by him. The subsequent subscriptions to the capital stock were made by him and paid with his own money. He also had the authority to hire employees, etc.

As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He supplied the original capital funds. It is not proven that his wife Irene, ostensibly the sole incorporator of Liddell Motors, Inc. had money of her own to pay for her P20,000 initial subscription. The alleged sale of her property in Oregon might have been true, but the money received was never shown to have been saved or deposited so as to be still available at the time of the organization of the Liddell Motors, Inc.

The evidence at hand also shows that Irene Liddell had scant participation in the affairs of Liddell Motors, Inc. She could hardly be said to possess business experience. The income tax forms record no independent income of her own. As a matter of fact, the checks that represented her salary and bonus from Liddell Motors, Inc. found their way into the personal account of Frank Liddell. Her frequent absences from the country negate any active participation in the affairs of the Motors company.

There are quite a series of conspicuous circumstances that militate against the separate and distinct personality of Liddell Motors, Inc. from Liddell & Co. We notice that the bulk of the business of Liddell & Co. was channeled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co. Inc. and then sell them to the general public. These sales of vehicles by Liddell & Co. to Liddell Motors, Inc. for the most part were shown to have taken place on the same day that Liddell Motors, Inc. sold such vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality.

It is of course 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. Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. There is, however, in this instant case, a peculiar consequence of the organization and activities of Liddell Motors, Inc.

Under the law in force at the time of its incorporation the sales tax on original sales of cars was progressive, i.e. 10% of the selling price of the car if it did not exceed P5000, and 15% of the price if more than P5000 but not more than P7000, etc. This progressive rate of the sales tax naturally would tempt the taxpayer to employ a way of reducing the price of the first sale. And Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the tax liability.

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. But, where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fiction.

Yutivo v CTA (1961) 1916: Yutivo, a domestic corporation was engaged in the importation and sale of hardware supplies and equipment was incorporated. After WW1, it resumed its business and bought a number of cars and trucks from General Motors(GM), an American Corporation licensed to do business in the Philippines.

June 13, 1946: the Southern Motors Inc,(SM) was organized to engage in the business of selling cars, trucks and spare parts. One of the subscribers of stocks during its incorporation was Yu Khe Thai, Yu KheSiong and Hu Kho Jin, who are sons of Yu Tiong Yee, one of Yutivo’s founders.

After SM’s incorporation and until the withdrawal of GM from the Philippines, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which the latter sold to the public.

Yutivo was appointed importer for Visayas and Mindanao by the US manufacturer of cars and trucks sold by GM. Yutivo paid the sales tax prescribed on the basis of selling price to SM. SM paid no sales tax on its sales to the public.

An assessment was made upon Yutivo for deficiency sales tax. The Collector of Internal Revenue, contends that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being a subsidiary of the latter. The assessment was disputed by petitioner. After reinvestigation, a second assessment was made, sustaining the validity of the first assessment. Yutivo contested the second assessment, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner.

WON the corporate personality of SM could be disregarded- YES.

A corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. However, when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons, or, in the case of two corporations, merge them into one. When the corporation is a mere alter ego or business conduit of a person, it may be disregarded. SC ruled that CTA was not justified in finding that SM was organized to defraud the Government. SM was organized in June 1946, from that date until June 30, 1947, GM was the importer of the cars and trucks sold to Yutivo, which in turn was sold to SM. GM, as importer was the one solely liable for sales taxes. Neither Yutivo nor SM was subject to the sales taxes. Yutivo’s liability arose only until July 1, 1947 when it became the importer. Hence, there was no tax to evade. However, SC agreed with the respondent court that SM was actually owned and controlled by petitioner. Consideration of various circumstances indicate that Yutivo treated SM merely as its department or adjunct:

1.The founders of the corporation are closely related to each other by blood and affinity. 2.The object and purpose of the business is the same; both are engaged in sale of vehicles, spare parts, hardware supplies and equipment.

3.The accounting system maintained by Yutivo shows that it maintained high degree of control over SM accounts.

4.Several correspondences have reference to Yutivo as the head office of SM. SM may even freely use forms or stationery of Yutivo.

5.All cash collections of SM’s branches are remitted directly to Yutivo.

6.The controlling majority of the Board of Directors of Yutivo is also the controlling majority of SM.

7.The principal officers of both corporations are identical. Both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo’s president, Yu Khe Thai.

8.Yutivo, financed principally the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM.

Stone v Eacho (1942) Two corporations are involved in this case: The Parent Corporation, Tip Top, Inc. organized in Delaware (Herein “TT Delaware” for brevity) and its subsidiary, Tip Top, Inc. organized in Richmond, Virginia (herein referred to as “TT Virginia”).

The parent TT Delaware was organized in Jan 1939. In July 1939, the subsidiary, TT Virginia was organized. The following were mentioned as to how these two corporations operated (basically showing that TT Virginia was just an instrumentality of TT Delaware (the Parent Corp) and that the two corporations were substantially identical/ one and the same): 1) CONTROL OF LEDGER AND BOOKS LODGED ONLY WITH TT DELAWARE: The parent corporation operated the Richmond store on the same basis as it did the other eight stores and charged the Richmond store with its proportionate share of the main office expense. The said expense being allotted to each of the stores in the proportion that the sales of the respective stores bore to the total sales. The only corporate record pertaining to the Virginia corporation consisted of a general ledger and a general journal. All books and records of both corporations, during the entire term of the operation of the Richmond store, were kept under the supervision and control of one Henry Wegener, regular bookkeeper for the Delaware corporation2) TT Virginia's contracts as to hats, shirts, etc. were made by TT Delaware3) TT VIRGINIA OWNED NO PROPERTY: With the exception of the three shares of the par value $1 each, nothing was subscribed to the capital stock of the Virginia corporation; and, so far as the record shows, it owned no property of any sort.

On November 20, 1940, the Delaware corporation was adjudged bankrupt and appellant Stone was appointed its receiver. Two days later, two creditors attached the property in TT Virginia (the subsidiary); and on the following day an involuntary petition in bankruptcy was filed against TT Virginia by Stone as receiver of the Delaware corporation. The Virginia corporation was adjudged bankrupt on this petition and Stone, as receiver, thereupon filed claim for the sum of $39,069.67 as the amount owing by the Virginia corporation to the Delaware corporation.

Eacho, the trustee in bankruptcy of TT Virginia resisted the allowance of this claim and asked that, at all events, it be postponed to the claims of other creditors on the ground that the Virginia corporation was not a separate entity, but a mere instrumentality or department of the Delaware corporation, and that the amount claimed was not a true indebtedness arising out of loans and advancements but represented a mere advancement of operating capital.

ARGUMENTS: STONE as receiver of TT Delaware: TT Virginia has a separate corporate personality. Hence, TT Delaware, as a creditor of TT Virginia, may file a claim against it in the bankruptcy proceedings for TT Virginia. If we follow this argument, TT Delaware will get a lion's share of TT Virginia's assets, to the

1) WON TT Virginia has a separate corporate personality – NO2) WON the two bankruptcy proceedings should be consolidated – YES

NO SEPARATE CORPORATE PERSONALITY AND PIERCING THE CORPORATE VEILIt is recognized in principle that the fiction of corporate entity may be disregarded where one corporation is so organized and controlled and its affairs are so conducted that it is, in fact, a mere instrumentality or adjunct of another corporation. (see facts to know how TT Delaware substantially controlled TT Virginia)

It is well settled that courts will not be blinded by corporate forms nor permit them to be used to defeat public convenience, justify wrong or perpetrate fraud, but will look through the forms and behind the corporate entities involved to deal with the situation as justice may require. Not only is this done for the purpose of holding a stockholder or parent corporation for debts created by an insolvent corporate agent or subsidiary which is a mere instrumentality of the stockholder or parent, but also for the purpose of allowing the creditors of the stockholder or parent to reach assets held by such a subsidiary.

CONSOLIDATION IS PROPERin a case such as this, where both corporations are insolvent, where the business has been transacted by and the credit extended to the parent corporation, and where the subsidiary has no real existence whatever, there is no reason why the courts should not face the realities of the situation and ignore the subsidiary for all purposes, allowing the creditors of both corporations to share equally in the pooled assets. As said in Latty, supra: ‘Perhaps the fairest way of dealing with the situation when both the parent and the subsidiary corporations are insolvent is to let all the creditors of each share pro rata in the pooled assets of both. Such procedure would be especially equitable where the claimants are creditors of both the parent and the subsidiary.‘ In the case at bar, the court of bankruptcy, which is clothed with all the powers of a court of equity, had taken possession of assets alleged to belong to the subsidiary before the facts were disclosed which showed that, in justice to all creditors, the corporate entity should be ignored and the bankruptcy proceedings consolidated with the proceedings relating to the parent corporation.

prejudice of the other creditors of TT Virginia.

EACHO as receiver of TT Virginia + other creditors of TT Virginia: TT Virginia has NO SEPARATE CORPORATE PERSONALITY. Hence the two bankruptcy proceedings should be consolidated; TT Delaware CANNOT file a claim against TT Virginia, since the two are essentially one and the same corporation. If we follow this argument, the assets of the two corporations will be pooled, and the creditors of both corporations will have to share in such pooled resources pro rata.

RTC: denied Eacho's motion for consolidationBerkey v Third Ave. Railway Co. (1927)

Minnie Berkey boarded a street car at Fort Lee to go to Broadway and then to Columbia University. She was hurt in getting out of the car due to the negligence of the motorman in charge of it. The franchise to operate the street railroad along the route traveled by Minnie belongs to the Forty-second Street, Manhattanville and Saint Nicholas Avenue Railway Company. The Third Avenue Railway owned substantially all the stocks of that company, along with another two corporations. Third Avenue not only owned nearly all the stocks; the board of directors and executive officers were also nearly the same. MsBerkey sued the parent company, Third Avenue Railway Co, to compensate her for personal injury.

It was however contrary to New York law at the time for one street railway company to assign its franchise to another without the Railway Commission's approval. So it was argued that a transfer in any liabilities from one to the other was an illegal contract, and therefore transfer of tort liability for Ms. Berkey's personal injury was also illegal.

WON The Third Avenue Railway is liable. NO.

The Third Avenue Railway Co is not liable for the debts of the subsidiary. Stock ownership alone would be insufficient to charge the dominant company with liability for the torts of the subsidiary. It was necessary that the domination of the parent company over the subsidiary was required to be complete, in order for the parent company to be treated as liable for the debts of the subsidiary. It was needed that the subsidiary be merely the alter ego of the parent, or that the subsidiary be thinly capitalized, so as to perpetrate a fraud on the creditors.

In this instance it was contrary to statutory intent to ignore separate personality of the tram company.

The plaintiff's theory of the action requires us to assume the existence of a contract between the defendant on the one side and the Forty-second Street Company on the other. We cannot bring ourselves to believe that an agreement, criminal in conception and effect, may be inferred from conduct or circumstances so indefinite and equivocal. We do not mean that a corporation which has sent its cars with its own men over the route of another corporation may take advantage of the fact that its conduct in so doing is illegal to escape liability for the misconduct of its servant. A defendant in such circumstances is liable for the tort, however illegitimate the business, just as much as it would be if its board of directors were to order a motorman to run a traveler down. We do mean, however, that an intention to operate a route in violation of a penal statute is not to be inferred. This being so, there is no need to choose between the Federal doctrine and our own, if indeed when they are understood, there is any difference between them.

The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an 'alias' or a 'dummy.' All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice. The logical consistency of a juridical conception will indeed be sacrificed at times when the sacrifice is essential to the end that some

accepted public policy may be defended or upheld. This is so, for illustration, though agency in any proper sense is lacking, where the attempted separation between parent and subsidiary will work a fraud upon the law. At such times unity is ascribed to parts which, at least for many purposes, retain an independent life, for the reason that only thus can we overcome a perversion of the privilege to do business in a corporate form.

We find in the case at hand neither agency on the one hand, nor on the other abuse to be corrected by the implication of a merger. On the contrary, merger might beget more abuses than if stifled. Statutes carefully framed for the protection, not merely of creditors, but of all who travel upon railroads, forbid the confusion of liabilities by extending operation over one route to operation over another. In such circumstances, we thwart the public policy of the state instead of defending or upholding it, when we ignore the separation between subsidiary and parent, and treat the two as one.

La Campana Coffee Factory v Kaisahan

Application of exception in parent-subsidiary relationships; corporate entity used to defeat labor laws

Tan Tong owned La Campana Gaugau Packing (GAUGAU). He and his family later started a corporation known as La Campana Coffee Factory Co (COFFEE), with principal office at the same place as GAUGAU. A union existed (KAISAHAN) that had 66 members from both GAUGAU and COFFEE. The union wanted better conditions, which were denied by management. The case reached the CIR, where GAUGAU and COFFEE filed motions for dismissal because there were actually two separate companies, which meant two separate cases against GAUGAU and COFFEE. According to them, KAISAHAN did not have enough members to continue the case against COFFEE. CIR denied the MTDs, piercing the veil of corporate fiction.

Whether or not GAUGAU and COFFEE are one and the same corporation. (YES, as it appears that the set-up between GAUGAU and COFFEE was really meant to defeat the laws on labor relations, calling for the piercing of the veil of corporate fiction)

GR: A corporation is a legal entity separate and apart from the composing itX: In an appropriate case and in furtherance of the ends of justice, a corporation and the individual(s) composing it will be treated as identical, and the corporate entity will be disregarded for its use in fraud or illegality.

Such also covers situations of parent-subsidiary relationships if the subsidiary is merely an agency, especially if the stockholders/officers of the two corporations are substantially the same or their system of operation is unified.

The following considerations point to the application of this rule:

1. Tan Tong owns GAUGAU, while he and his family, through a corporation, owns COFFEE. 2. The factories have a single office, management and payroll. The separate payrolls were merely an afterthrought as it was done only when the case ended up in the CIR.3. The laborers of GAUGAU and COFFEE were interchangeable.

It is quite clear that this scheme was meant to make them appear as two separate businesses in order to defeat the laws on labor relations (the CIR requires at least 30 laborers for a case to be certified to it).

Nationality of Corporations

- Corporations may not have citizenships since it is a privilege belonging to natural persons. However, it may be treated as a DOMESTIC or FOREIGN corporation depending on the LAWS creating it.

- Domestic corporations are those organized under Phil. laws and is governed by such laws.- Foreign corporations are thosed organized outside Phil. law, and is governed by that nation’s law, and may only

operate within that territory. However, it may be licensed to do business in the Philippines, which would subject it to Philippine laws EXCEPT as to creation, formation, organization or dissolution, as well as those relationships between the stockholders/officers.

- However, note that the corporation being DOMESTIC or FOREIGN is distinct from the nationality of its stockholders. In some of our laws (e.g. nationalized industries), what is material is the CITIZENSHIP of thh STOCKHOLDERS, NOT the corporation’s nationality-- e.g. 60-40 rule applies to DOMESTIC corporations that have a 60% FILIPINO-owned capital stock. This limitation is embedded also in the Corporation Code as one of the required provisions in the AOI (no transfer of stock/interest that would reduce the ownership of Filipino citizens to less than that required under the laws).

PROMOTERS’ CONTRACTS PRIOR to INCORPORATION

Liability of Corporation for Promoter’s Contracts (3c; 242-252)

- Promoters, in the process of forming the corporation, may enter into contracts on behalf of the proposed corporation, suchas options on rights/property. At this point, the corporation has not yet existed-- it could not be a party to it and could not have had an agent that could legally bind it.

- However, if after incorporation, the corporation ADOPTS or RATIFIES the contracts, or ACCEPTS its BENEFITS WITH KNOWLEDGE of the TERMS thereof (all of it, not just what is beneficial), it may be adopted. Such may be express or implied from the acts of responsible officers of the corporation.

CASE FACTS ISSUE(S)/RATIOMcArthur v Times PrintingClifton v TombCagayan Fishing Dev. v Teodoro Sandiko

Corporate Rights under Promoter’s Contracts (2c; 253-257)

- Adoption/ratification of pre-incorporation contracts can already give rise to rights and obligations therein. Bringing an action based on that contract is sufficient adoption/ratification.

CASE FACTS ISSUE(S)/RATIOBuilders’ Duntilem Co. v Dunn Mfg.Rizal Light and Ice v PSC/Morong Electric

Personal Liability of Promoter under Pre-Incorporation Contracts (3c; 259-266)

- There are three possible situations which may be intended by the promoter and the other party to a pre-incorporation contract: (O’ Rorke v Geary)1. Promoter takes a continuing officer on behalf of the corporation, which if accepted, will become a contract. NO PERSONAL LIABILITY FOR THE PROMOTER w/n corporation accepts.2. Promoter may make a contract at the time binding himself, with the understand that if the corporation, once formed, accepts/adopts the contract, he will be relieved of all responsibilities.3. Promoter may bind himself personally and assume the responsibility of looking to the proposed corporation, when formed, for reimbursement.

Third situation is presumed to exist.

- Translation: General Rule: Promoter is personmally liable for contracts made by him on behalf of the proposed corporation. The fact the corporation has adopted/ratified the contract does not release him for responsiblity, unless a novation was intended.

CASE FACTS ISSUE(S)/RATIOWells v Fay and EganHow and Associates v BossQuaker Hill v Parr

Compensation of Promoters

- Prevailing view (Ballantine): The corporation is not liable to pay the promoters for their services because this would be an imposition on innocent investors. The promoter is deemed as having given his service on the chance of his being able get a reward after the corporation is formed

- Exception to prevailing view: If the corporation expressly promises to do so, or where the promoter’s services are performed partly before and partly after, and the corporation takes the benefits thereof.

- Sec. 7 Securities Act actually authorizes a promotion fee if provided for in the registration statement of the securities involved; the fee depends on the effort exerted, difficulties encountered, and the expenses incurred in promoting and organizing the corporation.

- Compensation may be in cash or in shares of stock; if stock, the fair value of the shares should at least be equal to the par/issued value, otherwise the stocks would be considered watered, in violation of Sec. 61 of the Securities Act.

Fiduciary Relationship between Corporation and Promoter (2c; 269-281)

- Promoters have a duty to exercise good faith and fairness in their acts and investments. Betrayal of this trust means they will have to account for whatever they gained to the corporation when formed.

CASE FACTS ISSUE(S)/RATIOOld Dominion Copper Mining and Smelting v BigelowOld Dominion Copper Mining and Smelting v Lewisohn