Corporation Code Reviewer Atty Ladia.doc

8/14/2019 Corporation Code Reviewer Atty Ladia.doc

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INTRODUCTION

A corporation is an artificial being created by operation of law, having the right of succession andthe powers, attributes and properties expressly authorized by law or incident to its existence.

A corporation, being a creature of law, "owes its life to the state, its birth being purely dependenton its will," it is "a creature without any existence until it has received the imprimatur of the state actingaccording to law." A corporation will have no rights and privileges of a higher priority than that of itscreator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. BenguetCorporation)

A corporation has four (4) attributes

(!) t is an artificial being#

($) %reated by operation of law#(&) 'ith right of succession#(4) as the powers, attributes, and properties as expressly authorized by law or incident to its

existence.

CLASSIFICATION OF PRIVATE CORPORATIONS

Stock Non-Stock

Definition

%orporations which have capital stocdivided into shares andare authorized to distribute to theholders of shares dividends orallotments of the surplus profits on thebasis of the shares (*&)

All other private corporations (*&)+ne where no part of its income isdistributable as dividends to itsmembers, trustees or officers. (*-)

Purpose

rimarily to mae profits for itsshareholders

/ay be formed or organized forcharitable, religious, educational,professional, cultural, fraternal, literary,scientific, social, civic service, orsimilar purposes lie trade, industry,agricultural and lie chambers, or anycombination thereof. (*)

Distribution of Profitsrofit is distributed to shareholders

'hatever incidental profit made is notdistributed among its members but is

Definition an attributes of a corporation

Stock !" Non-StockCorporations


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used for furtherance of its purpose.A+ or by0laws may provide for thedistribution of its assets among itsmembers upon its dissolution. 1eforethen, no profit may be made bymembers.

Co#position 2tocholders /embers

Scope of ri$%t to !ote

3ach stocholder votes according tothe proportion of his shares in thecorporation. o shares may bedeprived of voting rights except thoseclassified and issued as "preferred" or"redeemable" shares, and asotherwise provided by the %ode.(2ec. 5)

3ach member, regardless of class, isentitled to one (!) vote 67322 suchright to vote has been limited,broadened, or denied in the A+ or by0laws. (2ec. 8)

Votin$ b& pro'&

/ay be denied by the A+ or the by0

laws. (2ec. 8)

%annot be denied. (2ec. 9)

Votin$ b& #ai(

/ay be authorized by the by0laws,with the approval of and under theconditions prescribed by the 23%.(2ec. 8)

ot possible.

)%o e'ercises CorporatePo*ers +,

1oard of :irectors or ;rustees

/embers of the corporation

.o!ernin$ /oar

1oard of :irectors or ;rustees,consisting of 90!9 directors < trustees.

1oard of ;rustees, which may consistof more than !9 trustees unlessotherwise provided by the A+ or by0

laws. (Sec, 92)Ter# of irectors ortrustees

:irectors < trustees shall hold office for! year and until their successors areelected and =ualified (2ec. $&).

1oard classified in such a way that theterm of office of !


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Transferabi(it& of interestor #e#bers%ip

;ransferable. >enerally non0transferable sincemembership and all rights arisingtherefrom are personal. owever, the

A+ or by0laws can provide otherwise.(2ec. 8?)

Distribution of assets incase of isso(ution

See Sec. 94.

CIR VS. CLUB FILIPINO(5 SCRA 321; 1962)FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant,which is incident to the operation of the club and its gold course. The club is operated mainlywith funds derived from membership fees and dues. The !" see#s to tax the said restaurant as abusiness.$%&': The Club was organi(ed to develop and cultivate sports of all class and denominationfor the healthful recreation and entertainment of its stoc#holders and members. There was infact, no cash dividend distribution to its stoc#holders and whatever was derived on retail from itsbar and restaurants used were to defray its overhead expenses and to improve its golf course.

For a stoc# corporation to exist, ) re*uisites must be complied with:

+- a capital stoc# divided into shares+)- an authority to distribute to the holders of such shares, dividends or allotments

of the surplus profits on the basis of shares held.

!n the case at bar, nowhere in the A! or by/laws of Club Filipino could be found an authorityfor the distribution of its dividends or surplus profits.

FOR0ATION AND OR.ANI1ATION OF CORPORATION

)%o #a& for# a corporation (See SEC. 10)

INCORPORATORS RE2UIRE0ENTS CO00ENTS

Definition

stocholders or members mentioned in

the articles of incorporation asoriginally forming and composingthe corporation and who aresignatories thereof stocholders ormembers mentioned in the articlesof incorporation as originally forming

compare with %orporators which

include all stocholders or members,whether incorporators or @oining thecorporation after its incorporation.

Re3uire#ents in t%e for#ation of acorporation


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and composing the corporation andwho are signatories thereof

C%aracteristic

natural persons

excludes corporations and

partnerships

Nu#ber

not less than 9# not more than !9

may be more than !9 for non0stoccorp. except educational corp.

does not prevent the one0man

(person) corporationB wherein theother incorporators may have onlynominal ownership of only one shareof stoc# not necessarily illegal

A$e

of legal age

Resience

ma@ority should be residents of the

hilippines

residence a re=uirement# citizenship

re=uirement only in certain areassuch as public utilities, retail tradebans, investment houses, savingsand loan associations, schools

Mutual Agreement to perform certain acts required for organizing a corporation

/ +rganize and establish a corporation)/ %omply with re=uirements of corporation code0/ %ontribute capital


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b. Draftin$ artic(es of incorporation(2ee 23%. !4)

4see c%art be(o*5

c" Fi(in$ of artic(es6 paent of fees"

A+ C the treasurerDs affidavit duly signed Cacnowledged

must be filed w< the 23% C the corresponding fees paid

failure to file the A+ will prevent due incorporation of the

proposed corporation C will not give rise to its @uridicalpersonality. t will not even be a de facto corp.

6nder present 23% rules, the A+ once filed , will be

published in the 23% 'eely 1ulletin at the expense ofthe corp. (23% %ircular E 4, !8$).

" E'a#ination of artic(es6 appro!a( orre7ection b& SEC"

Process a) 23% shall examine them in order to determine

whether they are in conformity w< law. b) f not, the 23% must give the incorporators areasonable time w


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t is only upon such issuance that the corporation

ac=uires @uridical personality.(2ee 2ec. !8. %ommencement of corporate existence)

2hould it be subse=uently found that the incorporators

were guilty of fraud in procuring the certificate ofincorporation, the same may be revoed by the 23%,after proper notice C hearing.

%. &rafting articles of incorporation (See SEC. 1')

CONTENTS OF AOI CO00ENTS

Corporate Na#e 3ssential to its existence since it is through it that the corporation

can sue and be sued and perform all legal acts

A corporate name shall be disallowed by the 23% if the proposed

name is either

(!) identical or deceptively or confusingly similar to that ofany existing corporation or to any other name alreadyprotected by law# or

($) patently deceptive, confusing or contrary to existing

laws. (2ec. !)

L9CEU0 OF T:E P:ILS" VS" CA (219 SCRA 610);he policy underlying the prohibition against the registration of acorporate name which is identical or deceptively or confusingly similarBto that of any existing corporation or which is patently deceptive orpatently confusingB or contrary to existing laws is

!. the avoidance of fraud upon the public which would haveoccasion to deal with the entity concerned#

$. the prevention of evasion of legal obligations and duties,and

&. the reduction of difficulties of administration and

supervision over corporations.

Purpose C(ause

A corporation can only have one (!) primary purpose. owever, it

can have several secondary purposes.

A corporation has only such powers as are expressly granted to it

by law C by its articles of incorporation, those which may beincidental to such conferred powers , those reasonably necessary


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to accomplish its purposes C those which may be incident to itsexistence.

%orporation may not be formed for the purpose of practicing a

profession lie law, medicine or accountancy

Principa( Office must be within the hilippines

specify city or province

street


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An& corporation #a& be incorporate as a c(ose corporation; e'cept8

a) mining or oil companies# b) stoc exchanges# c) bans# d) insurance companies#

e) public utilities# f) educational institutions# C g) corporations declared to be vested w< public interest

ser of Corporate Poers

)%at is a

A Ide factoD corporation is a defectively organized corporation, which has all the powersand liabilities of a Ide @ureD corporation and, except as to the 2tate, has a @uridicalpersonality distinct and separate from its shareholders, provided that the followingre=uisites are concurrently present

(!) ;hat there is an apparently valid statute under which the corporation with itspurposes may be formed#

($) ;hat there has been colorable compliance with the legal re=uirements in good

faith# and,

(&) ;hat there has been use of corporate powers, i.e., the transaction of business in

some way as if it were a corporation.

Can a corporation transact business as a

o. n the case of all v. iccio (86 Pi!. 60"# 19$0), where the supposedcorporation transacted business as a corporation pending action by the 23% on itsarticles of incorporation, the %ourt held that there was no Ide factoD corporation on theground that the corporation cannot claim to be in Igood faithD to be a corporation when ithas not yet obtained its certificate of incorporation.

*ormation under apparentl+ !alid statute.MUNICIPALITY OF MALABANG V. BENITO+29 SCRA 533; 1969)

34 a corporation organi(ed under a statute subse*uently declared void ac*uires statusas 5de facto6 corporation.

De Facto Corporations8Re3uisites


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4o. A corporation organi(ed under a statute subse*uently declared invalid cannot ac*uire

the status of a 5de facto6 corporation unless there is some other statute under which the supposedcorporation may be validly organi(ed. $ence, in the case at bar, the mere fact that themunicipality was organi(ed before the statute had been invalidated cannot conceivably ma#e it a

5de facto6 corporation since there is no other valid statute to give color of authority to itscreation.

Colora%le compliance it, t,e legal requirements in good fait,.BERGERON V. HOBBS+71 N.W. 1056, 65 Am. St. Rep. 85)

The constitutive documents of the proposed corporation were deposited with the "egisterof 'eeds but not on file in said office. ne of the re*uirements for valid incorporation is thefiling of constitutive documents in the "egister of 'eeds.

3as there 5colorable6 compliance enough to give the supposed corporation at least thestatus of a 5de facto6 corporation7

4o. The filing of the constitutive documents in the "egister of 'eeds is a conditionprecedent to the right to act as a corporate body. As long as an act, re*uired as a conditionprecedent, remains undone, no immunity from individual liability is secured.

HARRIL V. DAVIS +168 F. 187; 1909)

The constitutive documents were filed with the cler# of the Court of Appeals but not withthe cler# of court in the 8udicial district where the business was located. Ar#ansas law re*uiresfiling in both offices.

3as there 5colorable6 compliance enough to give the supposed corporation at least thestatus of a 5de facto6 corporation7

4o. 4either the hope, the belief, nor the statement by parties that they are incorporated,nor the signing of the articles of incorporation which are not filed, where filing is re*uisite tocreate the corporation, nor the use of the pretended franchise of the nonexistent corporation, willconstitute such a corporation de facto as will exempt those who actively and #nowingly use sname to incur legal obligations from their individual liability to pay them. There could be noincorporation or color of it under the law until the articles were filed +re*uisites for validincorporation-.


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HALL v. PICCIO +29 SCRA 533; 1969)

!n the case of $all v. 9iccio, where the supposed corporation transacted business as acorporation pending action by the S%C on its articles of incorporation, the Court held that there

was no 5de facto6 corporation on the ground that the corporation cannot claim to be in 5goodfaith6 to be a corporation when it has not yet obtained its certificate of incorporation.

NOTE8 ;he validity of incorporation cannot be in=uired into collaterally in any private suitto which such corporation may be a party. 2uch in=uiry must be through a =uowarranto proceeding made by the 2olicitor >eneral. (2ec. $?)

+Sec. 21)

Distin$uis% a e facto corporation fro# a corporation b& estoppe("

;he Ide factoD doctrine differs from the estoppel doctrine in that where all the

re=uisites of a Ide factoD corporation are present, then the defectively organizedcorporation will have the status of a Ide @ureD corporation in all cases brought by andagainst it, except only as to the 2tate in a direct proceeding. +n the other hand, if any ofthe re=uisites are absent, then the estoppel doctrine can apply only if under thecircumstances of the particular case then before the court, either the defendantassociation is estopped from defending on the ground of lac of capacity to be sued, orthe defendant third party had dealt with the plaintiff as a corporation and is deemed tohave admitted its existence.

(:e facto J has status of Ide @ureD corpo, except separate personality against 2tate, provided all re=uisites

are present)

)%at are t%e effects of a Corporation b& Estoppe( in suits brou$%t8

(!) a$ainst t%e Corporation> %onsidered a corporation in suits brought against it if

it held itself out as such and denies capacity to be sued#($) a$ainst t%ir part&> ;hird party cannot deny existence of corporation if it

dealt with it as such.

EMPIRE vs. STUART +46 Mich. 482, 9 N.W. 527; 1881)

Company was sued on a promissory note. !ts defense was that at the time of its issuance,

it was defectively organi(ed and therefore could not be sued as such.

The Corporation cannot repudiate the transaction or evade responsibility when suedthereon by setting up its own mista#e affecting the original organi(ation.

CORPORATION /9 ESTOPPEL


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LOWELL-WOODWARD vs. WOODS+104 !". 729; 1919)

Corporation sued a partnership on a promissory note. The latter as defense alleged thatthe plaintiff was not a corporation.

ne who enters into a contract with a party described therein as a corporation isprecluded, in an action brought thereon by such party under the same designation, from denyingits corporate existence.

ASIA BANKING VS STANDARD PRODUCTS+46 #hi$. 145; 1924)

The corporation sued another corporation a promissory note. The defense was that theplaintiff was not able to prove the corporate existence of both parties.

The defendant is estopped from denying its own corporate existence. !t is also estoppedfrom denying the other6s corporate existence. The general rule is that in the absence of fraud, aperson who has contracted or otherwise dealt with an association is such a way as to recogni(eand in effect admit its legal existence as a corporate body is thereby estopped from denying itscorporate existence.

CRANSON VS IBM+234 M%. 477, 200 A. 2% 33 ; 1964)

! sued Cranson in his personal capacity regarding a typewriter bought by him as9resident of a defectively organi(ed company whose Articles were not yet filed when theobligation was contracted.

!, having dealt with the defectively organi(ed company as if it were properlyorgani(ed and having relied on its credit instead of Cranson6s, is estopped from asserting that itwas not incorporated. !t cannot sue Cranson personally.

SALVATIERRA VS GARLITOS+103 #hi$. 757; 1958)

Salvatierra leased his land to the corporation. $e filed a suit for accounting, rescissionand damages against the corporation and its president for his share of the produce. ;udgmentagainst both was obtained. 9resident complains for being held personally liable.

$e is liable. An agent who acts for a non/existent principal is himself the principal. !nacting on behalf of a corporation which he #new to be unregistered, he assumed the ris# arisingfrom the transaction.ALBERT VS UNIVERSITY PUBLISHING CO., INC. +&!". 30, 1965)


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ariano Albert entered into a contract with


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bans or baning institutions

building and loan associations

trust companies

insurance companies

public utilities

educational institutions

other special corporations governed by special laws

Contents of /&-(a*s0 2ub@ect to the provisions of the %onstitution, this %ode, otherspecial laws, and the articles of incorporation, a private corporation mayprovide in its by0laws for

!) the time, place and manner of calling and conducting regular or special meetings of thedirectors or trustees#

$) the time and manner of calling and conducting regular and special meetings of the

stocholders or members#

&) the re=uired =uorum in meetings of stocholders or members and the manner of votingherein#

4) the form for proxies of stocholders and members and the manner of voting them#

9) the =ualifications, duties and compensation of directors or trustees, officers and

employees#

5) the time for holding the annual election of directors or trustees and the mode or mannerof giving notice thereof#

-) the manner of election or appointment and the term of office of all officers other than

directors or trustees#

) the penalties for violation of the by0laws#8) in the case of stoc corporations, the manner of issuing certificates# and!?) such other matters as may be necessary for the proper or convenient transaction of its

corporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO.+47 #hi$. 583; 1925)

As a general rule, the by/laws of a corporation are valid if they are reasonable andcalculated to carry into effect the ob8ective of the corporation and are not contradictory to the

general policy of the laws of the land.


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4o. !t is a patent nullity, being in direct conflict with Sec. >? of the Corp. &aw which

prohibits forced surrender of unmatured stoc#s except in case of dissolution.

' ! p*+ii*" i" the -$!/ ii" the !$!- * iect* +!$i

@es. Since the Corporation &aw does not prescribe the rate of compensation, the powerto fix compensation lies with the corporation.' ! p*+ii*" eii" pe*" e$ecte t* the *! * %iect* t* */" !t $e!t # 5,000 h!e

+!$i

@es. The Corporation &aw gives the corporation the power to provide *ualifications of

its directors.CITIBANK, N.A. v. CHUA (220 SCRA 75)

3here the S%C grants a license to a foreign corporation, it is deemed to have approvedits

foreign/enacted by/laws. Sec. 1 of the Corporation Code which states that by/laws arenot valid without S%C approval applies only to domestic corporations.

A board resolution appointing an attorney/in/fact to represent the corporation during pre/

trial is not necessary where the by/laws authori(e an officer of the corporation to ma#esuch appointment.

LOYOLA GRAND VILLAS v. CA(276 SCRA 681)

!SS

T%e T%eor& of Corporate Entit&


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6pon issuance by the 23% of the certificate of incorporation (2ec. !8)

)%at ri$%ts oes t%e corporation ac3uire>

;he right to

!) sue and be sued#$) hold property in its own name#&) enter into contracts with third persons# C4) perform all other legal acts.2ince corporate property is owned by the corporation as a @uridical person, thestocholders have no claim on it as owners, but have merely an expectancy or inchoateright to the same should any of it remain upon the dissolution of the corporation after allcorporate creditors have been paid. %onversely, a corporation has no interest in theindividual property of its stocholders, unless transferred to the corporation. Fememberthat the liability of the stocholders is limited to the amount of shares.

SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631)A corporation is a 8uridical person separate and distinct from its stoc#holders or

members. Accordingly, the property of the corporation is not the property of its stoc#holders ormembers and may not be sold by the stoc#holders or members without express authori(ationfrom the corporation=s oard of 'irectors.

!n this case, the sale of a piece of land belonging to otorich Corporation by thecorporation treasurer +Bruenberg- was held to be invalid in the absence of evidence that saidcorporate treasurer was authori(ed to enter into the contract of sale, or that the said contract wasratified by otorich. %ven though Bruenberg and her husband owned .>D of otorich, heract could not bind the corporation since she was not the sole controlling stoc#holder.

STOCKHOLDERS OF F. GUANON V. REGISTER OF DEEDS (6 SCRA 373)

9roperties registered in the name of the corporation are owned by it as an entity separate

and distinct from its members. 3hile shares of stoc# constitute personal property, they do notrepresent property of the corporation. A share of stoc# only typifies an ali*uot part of thecorporation=s property or the right to share in its proceeds to that extent when distributedaccording to law and e*uity, but its holder is not the owner of any part of the capital of thecorporation. 4or is he entitled to the possession of any definite portion of its property or assets.

The act of li*uidation made by the stoc#holders of the corp of the latter6s assets is not andcannot be considered a partition of community property, but rather a transfer or conveyance ofthe title of its assets to the individual stoc#holders. Since the purpose of the li*uidation, as wellas the distribution of the assets, is to transfer their title from the corporation to the stoc#holdersin proportion to their shareholdings, that transfer cannot be effected without the correspondingdeed of conveyance from the corporation to the stoc#holders. !t is, therefore, fair and logical toconsider the certificate of li*uidation as one in the nature of a transfer or conveyance.


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3hile a share of stoc# represents a proportionate or ali*uot interest in the property of thecorp, it does not vest the owner thereof with any legal right or title to any of the property, hisinterest in the corporate property being e*uitable and beneficial in nature. Shareholders are in nolegal sense the owners of corporate property, which is owned by the corp as a distinct legalperson.

28 )%at is t%e t%eor& of corporate entit&>

A ;hat a corporation has a personality distinct from its stocholders, and is not affectedby the personal rights, obligations and transactions of the latter.

28 )%en Can t%e Vei( of Corporate Entit& be Pierce>

A ;he veil of corporate fiction may be pierced when it is used as a shield to furtheran end subversive of @ustice, or for purposes that could not have been intended by lawthat created it or to defeat public convenience, @ustify wrong, protect fraud or defendcrime or to perpetuate fraud or confuse legitimate issues or to circumvent the law orperpetuate deception or as an alter ego, ad@unct or business conduit for the sole benefitof the stocholders.

28 )%at are t%e effects of isre$arin$ t%e corporate !ei(>(!) 2tocholders would be personally liable for the acts and contracts of the corporationwhose existence at least for the purpose of the particular situation involved is ignored.($) %ourt is not denying corporate existence for all purposes but merely refuses to allowthe corporation to use the corporate privilege for the particular purpose involved.

Contrar+ to la - pu%lic polic+ e!asion of lia%ilit+ to go!ernmentSTATE V. STANDARD OIL+49 hi*, St., 137, N.:. 279, 15; 1892)

3here all or a ma8ority of stoc#holders comprising a corporation do an act which isdesigned to affect the property and business of the company, as if it had been a formal resolutionof its oard of 'irectors and the acts done is ultra vires, the act should be regarded as the act ofthe corporation, and may be challenged by the state in a *uo warrranto proceeding.

LAGUNA TRANS V. SSS+107 #hi$. 833; 1960)

3here the corporation was formed by and consisted of the members of a partnershipwhose business and property was conveyed to the corporation for the purpose of continuing itsbusiness, such corporation is presumed to have assumed partnership debts.

PIERCIN. T:E CORPORATE VEIL


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issues. There was no clear cut delimitation between the personality of ;acinto and thecorporation.

E!asion of lia%ilit+ - o%ligation to emplo+ees

CLAPAROLS V. CIR+65 SCRA 613; 1975)

oth predecessor and successor were owned and controlled by petitioner and there wasno brea# in the succession and continuity of the same business. All the assets of the dissolved9lant were turned over to the emerging corporation. The veil of corporate fiction must be piercedas it was deliberately and maliciously designed to evade its financial obligation to its employees.

INDOPHIL TE$TILE MILL WORKERS UNION V. CALICA+205 SCRA 698)

"ule: The doctrine of piercing the veil of corporate entity applies when corporate fictionis used to defeat public convenience, 8ustify wrong, protect fraud or defend crime, or when it ismade as a shield to confuse the legitimate issues or where a corporation is the mere alter ego orbusiness conduit of a person, or where the corporation is so organi(ed and controlled and itsaffairs are so conducted as to ma#e it merely an instrumentality, agency, conduit or ad8unct ofanother corporation.Case at bar:


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ASIONICS PHILS. v. NLRC (290 SCRA 164)

A corporation is invested by law with a personality separate and distinct from those of thepersons composing it as well as from that of any other legal entity to which it may be related.

ere ownership by a single stoc#holder or by another corporation of all or nearly all of thecapital stoc# of a corporation is not of itself sufficient ground for disregarding the separatecorporate personality.

3here there is nothing on record to indicate the 9resident and ma8ority stoc#holder of acorporation had acted in bad faith or with malice in carrying out the retrenchment program of thecompany, he cannot be held solidarily and personally liable with the corporation.

E!asion of lia%ilit+ on contract

VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968);ose . Iillarama, operator of a bus company, Iilla "ey Transit, which was authori(ed

to operate 0) units from 9angasinan to anila and vice/versa, sold ) C9Cs to 9antranco. ne ofthe conditions included in the contract of sale was that the seller +Iillarama- Eshall not, for aperiod of G years from the date of the sale, apply for any T9< service identical or competingwith the buyer +9antranco-.E

arely 0 months after the sale, a corporation called Iilla "ey Transit, !nc. was organi(ed,with the wife of ;ose . Iillarama as one of the incorporators and who was subse*uently electedas treasurer of the Corporation. arely a month after its registration with the S%C, the

corporation bought 2 C9Cs and 1 buses from one Ialentin Fernando, and applied with the9ublic Service Commission +9SC- for approval of the sale. efore the 9SC could ta#e finalaction on the said application, however, ) of the 2 C9Cs were levied upon pursuant to a writ ofexecution issued by the CF! in favor of %usebio Ferrer, 8udgment creditor, against IalentinFernando, 8udgment debtor. 'uring the public sale conducted, Ferrer was the highest bidder, anda certificate of sale was issued in his name. Shortly thereafter, he sold the said C9Cs to9antranco, and they 8ointly submitted their contract of sale to the 9SC for approval.

The 9SC issued an order that pending resolution of the applications, 9antranco shall havethe authority to provisionally operate the service under the ) C9CS that were the sub8ect of thecontract between Ferrer and 9antranco. Iilla "ey Transit too# issue with this, and filed a

complaint for annulment of the sheriff=s sale of the C9Cs and prayed that all the orders of the9SC relative to the dispute over the C9Cs in *uestion be annulled. 9antranco filed a third/partycomplaint against ;ose . Iillarama, alleging that Iillarama and Iilla "ey Transit are one andthe same, and that Iillarama andHor the Corporation is *ualified from operating the C9Cs byvirtue of the agreement entered into between Iillarama and 9antranco.

Biven the evidence, the Court found that the finances of Iilla/"ey, !nc. were managed asif they were the private funds of Iillarama and in such a way and extent that Iillarama appeared


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to be the actual owner of the business without regard to the rights of the stoc#holders. Iillaramaeven admitted that he mingled the corporate funds with his own money. These circumstancesnegate Iillarama=s claim that he was only a part/time Beneral anager, and show beyond doubtthat the corporation is his alter ego. Thus, the restrictive clause with 9antranco applies. A s%%"'() *!+ '(% s% ! ( /!"#!"(+% %*+0+) (s ( '%(*s ! %v(10*2 +3% !b02(+0!* ! 30s

/!v%*(*+. W3%"% +3% C!"#!"(+0!* 0s sbs+(*+0() +3% (+%" %2! ! !*% ! +3% #("+0%s +! +3%/!v%*(*+ !" +3% "%s+"0/+0v% (2"%%'%*+, 0+ /(* b% %*4!0*%1 "!' /!'#%+0*2 50+3 +3%

/!v%*(*+%%.

Close CorporationsCEASE V. CA+93 SCRA 483; 1979)

The Cease plantation was solely composed of the assets and properties of the defunctTiaong plantation whose license to operate already expired. The legal fiction of separate

corporate personality was attempted to be used to delay and deprive the respondents of theirsuccession rights to the estate of their deceased father.3hile originally, there were other incorporators of Tiaong, it has developed into a closed

family corporation +Cease-. The head of the corporation, Cease, used the Tiaong plantation as hisinstrumentality. !t was his business conduit and an extension of his personality. There is not evena showing that his children were subscribers or purchasers of the stoc#s they own.

DELPHER TRADES V. CA+157 SCRA 349; 1988)

The 'elpher Trades Corp. is a business conduit of the 9achecos. 3hat they really didwas to invest their properties and change the nature of their ownership from unincorporated toincorporated form by organi(ing 'elpher and placing the control of their properties under thecorporation. This saved them inheritance taxes.

This is the reverse of Cease however, it does not modify the other cases. !t stands on itsown because of the facts.

28 )%at is t%e $enera( ru(e $o!ernin$ parent-subsiiar& re(ations%ip>

A ;he mere fact that a corporation owns all or substantially all of the stocs of anothercorporation is not alone sufficient to @ustify their being treated as one entity.

28 )%en #a& it be isre$are b& t%e courts>

Parent-Subsiiar&Re(ations%ip


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(!) if the subsidiary was formed for the payment of evading the payment of highertaxes

($) where it was controlled by the parent that its separate identity was hardly

discernible(&) parent corporations may be held responsible for the contracts as well as the

torts of the subsidiary

28 )%at are t%e criteria b& *%ic% t%e subsiiar& can be consiere a #ereinstru#enta(it& of t%e parent co#pan&>

!. the parent corp. owns all or most of the capital stoc of the subsidiary.$. the parent and subsidiary have common directors and officers&. the parent finances the subsidiary4. the parent subscribes to all the capital stoc of the subsidiary or otherwise

causes its incorporation9. the subsidiary has grossly inade=uate capital5. the parent pays the salaries and other expenses or losses of the subsidiary-. the subsidiary has substantially no business except with the parent corp. or no

assets except those conveyed to or by the parent corp.. 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 itsbusiness or financial responsibility is referred as the parentDs own

8. the parent uses the property of the subsidiary as its own!?. the directors or the executives of the subsidiary do not act independently in the

interest of the subsidiary but tae their orders from the parent corp. in the latterDsinterest

!!. the formal legal re=uirements of the subsidiary are not observed

6G(""%++ vs. S!+3%"* R(05()7%&ote' Sir (ac *ai+ tat e -u*t not *top ater e/ve gone troug te 11 point* in or+erto +eter-ine eter or not tere i* a *u*i+iary or in*tru-enta!ity. e -u*t go urteran+ con*i+er oter circu-*tance* ic -ay e!p +eter-ine c!ear!y te true nature ote re!ation*ip. 3-)

GARRETT VS. SOUTHERN RAILWAY+173 F. Spp. 915, :.%. e"". 1959)

This case involved a 3or#ers Compensation claim by a wheel moulder employed by&enoir Car 3or#s. The plaintiff sought to claim from Southern "ailway Company, whichac*uired the entire capital stoc# of &enoir Car 3or#s. 9laintiff contended that Southern so

completely dominated &enoir that the latter was a mere ad8unct or instrumentality of Southern.The general rule is that stoc# ownership alone by one corporation of the stoc# of another

does not thereby render the dominant corporation liable for the torts of the subsidiary, unless theseparate corporate existence of the subsidiary is a mere sham, or unless the control of thesubsidiary is such that it is but an instrumentality or ad8unct of the dominant corporation.


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!n the case, it was found that there were two distinct operations. There was no evidencethat Southern dictated the management of &enoir. !n fact, evidence shows that arius, themanager of the subsidiary, was in full control of the operation. $e established prices, handlednegotiations in CAs, etc. &enoir paid local taxes, had local counsel and maintain a 3or#men6sCompensation Fund. There was also no evidence that &enoir was run solely for the benefit of

Southern. !n fact, a substantial part of its re*uirements in the field of operation of &enoir wasbought elsewhere. &enoir sold substantial *uantities to other companies. 9olicy decisionsremained in the hands of arius. $ence, the complaint against Southern "ailway wasdismissed.

KOPPEL VS. YATCO+77 #hi$. 496; 1946)

This case involved a complaint for the recovery of merchant sales tax paid by Joppel+9hilippines-, !nc. under protest to the Collector of !nternal "evenue. Although the Court ofFirst !nstance did not deny legal personality to Joppel +9hilippines-, !nc. for any and all

purposes, it dismissed the complaint saying that in the transactions involved in the case, thepublic interest and convenience would be defeated and would amount to a perpetration of taxevasion unless resort was had to the doctrine of Edisregard of the corporate fiction.E

The facts show that .2D of the shares of stoc#s of J/9hil were owned by J/


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credit of the latter . At all times, @utivo, through the officers and directors common to it and theSouthern otors exercised full control over the cash funds, policies, expenditures andobligations of the latter. $ence, Southern otors, being a mere instrumentality or ad8unct of@utivo, the CTA correctly disregarded the technical defense of separate corporate identity inorder to arrive at the true tax liability of @utivo.

LA CAMPANA VS. KAISAHAN+93 #hi$. 160; 1953)

The &a Campana Baugau 9ac#ing and &a Campana Coffee Factory were operating underone single business although with ) trade names. !t is a settled doctrine that the fiction of law ofhaving the corporate identity separate and distinct from the identity of the persons running itcannot be invo#ed to further the end subversive of the purpose for which it was created. !n thecase at bar, the attempt to ma#e the two businesses appear as one is but a device to defeat theends of the law governing capital and labor relations and should not be permitted to prevail.

PRO0OTER=S CONTRACTS PRIOR TO INCORPORATION

'hile a corporation could not have been a party to a promoterKs contractsince it did yet exist at the time the contract was entered into and thus could notpossibly have had an agent who could legally bind it, the corporation may maethe contracts its own and become bound thereon if, after incorporation, it

(!) Adopts or ratifies the contract# or

($) Accepts its benefits with nowledge of the terms thereof.t must be noted, however, that the contract must be adopted in its entirety# thecorporation cannot adopt only the part that is beneficial to it and discard thatwhich is burdensome. /oreover, the contract must be one which is within thepowers of the corporation to enter, and one which the usual agents of thecompany have express or implied authority to enter.

M/ARTHUR V. TIMES PRINTING CO.+48 Mi"". 319, 51 N.W. 216; 1892)

!t is not a re*uisite that a corporation=s adoption or acceptance of a promoter=s contract be

expressed, but it may be inferred from acts or ac*uiescence on the part of the corporation, or itsauthori(ed agents, as any similar original contract might be shown.

The right of agents to adopt an agreement originally made by promoters depends uponthe purposes of the corporation and the nature of the agreement. The agreement must be onewhich the corporation itself could ma#e and one which the usual agents of the company haveexpress or implied authority to enter into.

Liabi(it& of Corporation for Pro#oter=sContracts


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CLIFTON v. TOMB+21 F. 2 893; 1921)

3hatever may be the proper legal theory by which a corporation may be bound by thecontract +ratification, adoption, novation, a continuing offer to be accepted or re8ected by thecorporation-, it is necessary in all cases that the corporation should have full #nowledge of the

facts, or at least should be put upon such notice as would lead, upon reasonable in*uiry, to the#nowledge of the facts.CAGAYAN FISHING DEV. CO. v. SANDIKO+65 #hi$. 223; 1937)

A promoter could not have acted as agent for a corporation that had no legal existence.A corporation, until organi(ed, has no life therefore no faculties. The corporation had no8uridical personality to enter into a contract.

A$* ee C!!m +. CA

2hould the other contracting party fail to perform its part of the bargain, thecorporation which has adopted or ratified the contract may either sue for

(!) 2pecific performance# or($) :amages resulting from breach of contract.

;he fact of bringing an action on the contract has been held to constitutesufficient adoption or ratification to give the corporation a cause of action.

BUILDERS DUNTILE CO. v. DUNN +229 -. 569, 17 S.W. 2 715; 1929)

3hen the corporation was formed, the incorporators too# upon themselves the wholething, and ratified all that had been done on its behalf. Though there was no formal assignmentof the contract to the corporation, the acts of the incorporators were an adoption of the contract.Therefore the corporation has the right to sue for damages for the breach of contract.RIAL LIGHT V. PSC+25 SCRA 285; 1968)

The incorporation of +orong- and its acceptance of the franchise as shown by this action

in prosecuting the application filed with the Commission for approval of said franchise, not onlyperfected a contract between the municipality and orong but also cured the deficiency pointedout by the petition. The fact that orong did not have a corporate existence on the day thefranchise was granted does not render the franchise invalid, as orong later obtained itscertificate of incorporation and accepted the franchise.

Corporate Ri$%ts uner Pro#oter=sContracts


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.ENERAL RULE8 romoters are personally liable on their contracts made on behalfof a corporation to be formed.

ECEPTION8 f there is an express or implied agreement to the contrary. t must benoted that the fact that the corporation when formed has adopted orratified the contract does notrelease the promoter fromresponsibility unless a novation was intended.

WELLS VS. FAY & EGAN CO.+143

!ndividual promoters cannot escape liability where they buy machinery, receive them in

their possession and authori(e one member to issue a note, in contemplation of organi(ing acorporation which was not formed. +see Campos= notes p. )2>/)2-. The agent is personallyliable for contracts if there is no principal. The ma#ing of partial payments by the corporation,when later formed, does not release the promoters here from liability because the corporationacted as a mere stranger paying the debt of another, the acceptance of which by the creditor doesnot release the debtors from liability over the balance. $ence, there is no adoption or ratification.

HOW & ASSOCIATES INC. VS. BOSS+222 F. Spp. 936; 1963)

The rule is that if the contract is partly to be performed before incorporation, the

promoters solely are liable. %ven if the promoter signed Eon behalf of corporation to be formed,who will be obligor,E there was here an intention of the parties to have a present obligor, becausethree/fourths of the payment are to be made at the time the drawings or plans in the architecturalcontract are completed, with or without incorporation. A purported adoption by the corporationof the contract must be expressed in a novation or agreement to that effect. The promoter is liableunless the contract is to be construed to mean: - that the creditor agreed to loo# solely to thenew corporation for payment or )- that the promoter did not have any duty toward the creditorto form the corporation and give the corporation the opportunity to assume and pay the liability.

8UAKER HILL VS. PARR+148 C*$*. 45, 364 #. 2 1056; 1961)

The promoters here are not liable because the contract imposed no obligation on them toform a corporation and they were not named there as obligorsHpromissors. The creditor/plaintiffwas aware of the inexistence of the corporation but insisted on naming it as obligor because theplanting season was fast approaching and he needed to dispose of the seedlings. There was nointent here by plaintiff/creditor to loo# to the promoters for the performance of the obligation.This is an exception to the general rule that promoters are personally liable on their contracts,though made on behalf of a corporation to be formed.

Persona( Liabi(it& of Pro#oter on Pre-IncorporationContracts


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OLD DOMINION VS. BIGELOW+203 M!. 159, 89 N.:. 193; 1909)

A promoter, notwithstanding his fiduciary duties to the corporation, may still sellproperties to it, but he must pursue one of four courses to ma#e the contract binding. These are:- provide an independent board of officers in no respect directly or indirectly under his control,and ma#e full disclosure to the corporation through them )- ma#e full disclosure of all materialfacts to each original subscriber of shares in the corporation 0- procure a ratification of thecontract after disclosing its circumstances by vote of the stoc#holders of the completelyestablished corporation or 1- be himself the real subscriber of all the shares of the capital stoc#contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the

stoc# of the corporation at the time of the transaction, if further original subscription to capitalstoc# contemplated as an essential part of the scheme of promotion came in after suchtransaction.

CORPORATE PO)ERS

;o sue and be sued in its corporate name#

+f succession by its corporate name for the period of time stated in the articles of

incorporation and the certificate of incorporation#

;o adopt and use a corporate seal#

;o amend its articles of incorporation in accordance with the provisions of this %ode#

;o adopt by0laws not contrary to law, morals, or public policy, and to amend or

repeal the same in accordance with this %ode#

n case of stoc corporations, to issue of sell stocs to subscribers and to sell

treasury stocs in accordance with the provisions of this %ode# and to admitmembers to the corporation if it be a non0stoc corporation#

;o purchase, receive, tae, grant, hold, convey, sell, lease, pledge, mortgage and

otherwise deal with such real and personal property, including securities and bondsof other corporations, as the transaction of the lawful business of the corporation mayreasonably and necessarily re=uire, sub@ect to the limitations prescribed by law andthe %onstitution#

Fiuciar& re(ations%ip bet*een corporation anpro#oter

.enera( Po*ers of Corporation 4Sec"5


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%/"E' Tere are to %2) genera! re*triction* on te poer o te corp. toacuire an+ o!+ propertie*'

+- tat te property -u*t e rea*ona!e an+ nece**ari!y reuire+ y te tran*action o it* !au! u*ine**, an+

+)- tat te poer *a!! e *u5ect to te !i-itation* pre*crie+ y oter *pecia! !a* an+ te Con*titution.)

;o adopt any plan of merger or consolidation as provided in this %ode#

;o mae reasonable donations, including those for the public welfare of for hospital,

charitable, cultural, scientific, civic, or similar purposes

rovided that no corporation, domestic or foreign, shall give donations inaid of any political party or candidate or for purposes of partisanpolitical activity#

;o establish pension, retirement and other plans for the benefit of its directors,trustees, officers and employees# and

;o exercise such other powers as may be essential or necessary to carry out its

purpose or purposes as stated in its articles of incorporation.

3xtension or shortening of the corporate term (2ec. &-)

ncrease or decrease of the capital stoc (2ec. &)

ncur, create or increase bonded indebtedness (2ec. &)

:enial of the pre0emptive right (2ec. &8)

2ale or other disposition of substantially all its assets. (2ec. 4?)

A sale is deemed to substantially cover all the corporate property and assets

if such sale renders the corporation incapable of continuing the business oraccomplishing the purpose for which it was incorporated.

Ac=uisition of its own shares. (2ec. 4!)

nvestment in another corporation or business. (2ec. 4$)

:eclaration of dividends. (2ec. 4&)

3ntering into management contracts. (2ec. 44)

Specific Po*ers ofCorporation


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6nder 2ec. &5, a corporation is given such powers as are essential or necessary to carry out itspurpose or purposes as stated in the articles of incorporation. ;his phrase gives rise to such a wide rangeof implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is

ultra vires.

A corporation is presumed to act within its powers and when a contract is not its face necessarilybeyond its authority# it will, in the absence of proof to the contrary, be presumed valid.

B!ac/* a 7ictionary 7einition'

!tra vire* acts are those acts beyond the scope of the powers of the corporation, as defined byits charter or laws of state of incorporation. ;he term has a broad application and includes not only actsprohibited by the charter, but acts which are in excess of powers granted and not prohibited, andgenerally applied either when a corporation has no power whatever to do an act, or when the corporationhas the power but exercises it irregularly.

28 )%at are t%e conse3uences of ultra !iresacts>

;he corporation may be dissolved under a =uo warrranto proceeding.

;he %ertificate of Fegistration may be suspended or revoed by the 23%.

arties to the ultra vires contract will be left as they are, if the contract has been fully

executed on both sides. either party can as for specific performance, if thecontract is executory on both sides. ;he contract, provided that it is not illegal, will beenforced, where one party has performed his part, and the other has not with thelatter having benefited from the formerDs performance.

Any stocholder may bring an individual or derivative suit to en@oin a threatened ultra

vires act or contract. f the act or contract has already been performed, a derivativesuit for damages against the directors maybe filed, but their liability will depend onwhether they acted in good faith and with reasonable diligence in entering into thecontracts. 'hen the suit against the in@ured party who had no nowledge that thecorporation was engaging in an act not included expressly or impliedly in its purposes

clause.

6ltra vires acts may become binding by the ratification of all the stocholders, unless

third parties are pre@udiced thereby, or unless the acts are illegal.

REPUBLIC OF THE PHILS. v. ACOJE MINING (7 SCRA 361; 1963-

I#p(ie Po*ers

T%e U(tra ViresDoctrine


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"esolution adopted by the company to open a post office branch at the mining camp andto assume sole and direct responsibility for any dishonest, careless or negligent act of itsappointed postmaster is 4T


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$eld: first two valid, but the third is ultra vires bec. the administration of property in thatmanner is more befitting of the business of a real estate agent or trust company and not of abuilding and loan ass=n.

1. Compensation to the promoter and organi(er allegedly excessive and unconscionable.

$eld: Court cannot dwell on the issue since the promoter is not a party in the proceeding andit is the corp. or its S$s who may bring a complaint on such.

2. !ssuance of special shares did not affect %l $ogar=s character as a building and loan ass=n norma#e its loans usurious.. Corporate policy of using a depreciation rate of G D per annum is not excessive, bec. accdg.to the SC, the by/laws expressly authori(es the ' to determine each year the amount to bewritten down upon the expenses of installation and the property of the corp.

?. The Corp. &aw does not expressly grant the power of maintaining reserve funds but suchpower is implied. All business enterprises encounter periods of gains and losses, and its officerswould usually provide for the creation of a reserve to act as a buffer for such circumstances.>. That loans issued to member borrowers are being used for purposes other than the bldg. ofhomes not invalid bec. there is no statute which expressly declares that loans may be made bythese ass=ns solely for the purpose of bldg. homes.. Sec. ?0 of the Corp. &aw provides that Eany personE may become a S$ on a bldg. and loanass=n. The word EpersonE is used on a broad sense including not only natural persons but alsoartificial persons.

BISSEL v. MICHIGAN SOUTHERN( 22 N= 258; 1860)

Two railroad corporations contend that they transcended their own powers and violated

their own organic laws. $ence, they should not be held liable for the in8ury of the plaintiff whowas a passenger in one of their trains.$eld: The contract between the two corporations was an ultra vires act. $owever, it is not onetainted with illegality, therefore, the accompanying rights and obligations based on the contractof carriage between them and the plaintiff cannot be avoided by raising such a defense.PIROVANO v. DELA RAMA STEAMSHIP 6:; P30


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$eld: 4.

The A! of the corporation provided two relevant items:

K+- to invest and deal with moneys of the company not immediately re*uired, in

such manner as from time to time may be determined and+)- to aid in any other manner any person, association or corporation of which anyobligation or in which any interest is held by this corporation or in the affairs ofprosperity of which this corporation has a lawful interest.L

From this, it is obvious that the corporation properly exercised within its chartered

powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer.

HARDEN v. BENGUET CONSOLIDATED(58 #hi$ 141)

A contract between enguet and alatoc provided that enguet will bring in capital,e*pt. and technical expertise in exchange for capital shares in alatoc. $arden was a S$ ofalatoc and he contends that this contract violated the Corp.&aw which restricts the ac*uisitionof interest by amining corp. in another mining corp.$eld: $arden has no standing bec. if any violation has been committed, the same can be enforcedonly in a criminal prosecution by an action of *uo warranto which may be maintained only bythe Attorney/Beneral.

CONTROL AND 0ANA.E0ENT

28 )%at are t%e t%ree (e!e(s of corporate contro(po*er>Boar+ o +irector* or tru*tee*responsible for corporate policies and the generalmanagement of the business and affairs of the corporation.icer*execute the policies laid down by the board.

Stoco!+er* or -e-er*have residual power over fundamental corporate changes lieamendments of articles of incorporation.

A((ocation of Po*er anContro(

)%o E'ercises CorporatePo*ers


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oard of directors or trustees

28 )%at are t%e po*ers of t%e /OD>;he 1+: is responsible for corporate policies and the general management of thebusiness affairs of the corporation. %See Citian v Cua)

4a5 Aut%orit& 4Sec. 2')4b5 Re3uire#ents

(i) Lualifying share (Sec. 24)(ii) Fesidence (Sec. 24)

(iii) ationality(iv) :is=ualifications (Sec. 2:)

/ conviction by final @udgment of offense punishable M 5 yrs. prison

/ violation of %orporation code within 9 years prior to date of election orappointment

4c5 :o* e(ecte 4Sec. 2')

;he formula for determining the number of shares needed to elect a given number of directors is asfollows

N O P x ! Q ! Q !

N O being the number of shares needed to elect a given number of directors P O being the total number of shares present or represented at the meeting

! O being the number of directors desired to be elected O being the total number of directors to be elected

45 :o* re#o!e 4Sec. 23)

1y a vote of the 2s holding or representing at least $


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in nu-er o +irector* meeting duly called for the purpose, or in thesame or tru*tee*' meeting authorizing the increase ofdirectors or trustees

if so stated in the notice of the meeting.

A!! oter vacancie*' /ay be filled by the vote of at least a ma@ority of the remaining directors or trustees, if still constituting a =uorum.

&ote' :irectors or trustees so elected to fill vacancies shall be elected only for the unexpired

term of their predecessors in office.

4f5 :o* co#pensate 4Sec. 50)

; provi+e+ in y!a*' ;hat compensation stated in the by0laws.

; not provi+e+ in y!a*' :irectors shall not receive any compensation other thanreasonable per diems, as directors. >oever, compensationother than per diems may be granted to directors by a ma@ority

vote of the 2s at a regular or special stocholdersK meeting.&ote' n no case shall the total yearly compensation of directors, as such directors, exceed !?G

of the net income before income tax of the corporation during the preceding year.

(g) /atters re=uiring 1oard of :irectorsK action4%5 Liabi(it& 4See su%sequent discussion under &uties of &irectors and Controlling

Stoc6,olders.)

%i) ;n genera! %Sec. "1)%ii) Bu*ine** 5u+g-ent ru!e

%iii) 7ea!ing* it te corporation %Sec. "2)%iv) Contract* eteen corporation* it inter!ocing +irector* %Sec. "")(v) 7i*!oya!ty %Sec. "4)(vi) atere+ *toc* %Sec. 6$)

4i5 E'ecuti!e Co##ittee 4Sec. 57)

See *u*euent +i*cu**ion un+er Boar+ Co--ittee*.

RAMIRE VS. ORIENTALIST CO AND FERNANDE +38 #hi$. 634; 1918)

!n this case, the board of directors, before the financial inability of the corporation toproceed with the pro8ect was revealed, had already recogni(ed the contracts as being in existenceand had proceed with the necessary steps to utili(e the films. The subse*uent action by thestoc#holders in not ratifying the contract must be ignored. The functions of the stoc#holders arelimited of nature. The theory of a corporation is that the stoc#holders may have all the profits but


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shall return over the complete management of the enterprise to their representatives and agents,called directors. Accordingly, there is little for the stoc#holders to do beyond electing directors,ma#ing by/laws, and exercising certain other special powers defined by law. !n conformity withthis idea, it is settled that contracts between a corporation and a third person must be made bydirectors and not stoc#holders.

LOPE VS. ERICTA+45 SCRA 539; 1972)

!n this case, the oard of "egents of the


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4a5 0ini#u# set of officers an t%eir 3ua(ifications 4Sec. 27)

;he minimum set of officers are

(!) president (who shall be a director)#

($) secretary (who shall be a resident and Hilipino citizen)# and(&) treasurer (who may or may not be a director)

;he by0laws, however, may provide for other officers.

Any $ or more positions may be held concurrently by the same person, except that noone shall act as (a) president and secretary, or (b) president and treasurer at the same time.

4b5 Dis3ua(ifications 4Sec. 28)

0 %onviction by final @udgment of an offense punishable by imprisonment M 5 yrs.

0 Riolation of %orporation %ode committed within 5 yrs. prior to the date of election or appointment

4c5 Liabi(it& in $enera( 4Sec. 51)

See +i*cu**ion un+er 7utie* o 7irector* an+ Contro!!ing Stoco!+er*. .

45 Dea(in$s *it% t%e corporation 4Sec. 52)

0 >enerally voidable (See +i*cu**ion un+er 7utie* o 7irector* an+ Contro!!ingStoco!+er*)

)%at is t%e octrine of apparent aut%orit&>

;he doctrine of apparent authority provides that a corporation will be

liable to innocent third persons for the acts of its agent where the representationwas made by the agent in the course of business and acting within his


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their employment nor will it be permitted to shrin# from itsresponsibility for such frauds, even though no benefit may accrueto the ban# therefrom.

Accordingly, a ban# is liable to innocent third persons where the representation is made

in the course of its business by its agent acting within the general scope of his authority eventhough, in the particular case, the agent is secretly abusing his authority and attempting toperpetrate a fraud upon his principal or some other person for his own ultimate benefit.Application of these principles is especially necessary because ban#s have a fiduciaryrelationship with the public and their stability depends on the confidence of the people in theirhonesty and efficiency. Such faith will be eroded where ban#s do not exercise strict care in theselection and supervision of its employees, resulting in pre8udice to their depositors.

YU CHUCK V. KONG LI PO+46 #hi$. 608; 1924)

The power to bind a corporation by contract lies with its board of directors or trustees.Such power may be expressly or impliedly be delegated to other officers and agents of thecorporation. !t is also well settled that except where the authority of employing servants oragents is expressly vested in the board, officers or agents who have general control andmanagement of the corporation=s business, or at least a specific part thereof, may bind thecorporation by the employment of such agents and employees as are usual and necessary in theconduct of such business. Those contracts of employment should be reasonable. Case at bar:contract of employment in the printing business was too long and onerous to the business +0/yearemployment shall receive salary even if corp. is insolvent-.

THE BOARD OF LI8UIDATORS V. HEIRS OF MA$IMO KALAW+20 SCRA 987;1967)

Jalaw was a corporate officer entrusted with general management and control of4ACC. $e had implied authority to ma#e any contract or do any act which is necessary forthe conduct of the business. $e may, without authority from the board, perform acts of ordinarynature for as long as these redound to the interest of the corporation. 9articularly, he contractedforward sales with business entities. &ong before some of these contracts were disputed, hecontracted by himself alone, without board approval. All of the members of the board #newabout this practice and have entrusted fully such decisions with Jalaw. $e was never *uestionednor reprimanded nor prevented from this practice. !n fact, the board itself, through its acts andby ac*uiescence, have laid aside the by/law re*uirement of prior board approval. Thus, it cannotnow declare that these contracts +failures- are not binding on 4ACC.AMBOANGA TRANSPO V. BACHRACH MOTORS+52 #hi$. 244; 1928)

A chattel mortgage, although not approved by the board of directors as stipulated in theby/laws, shall still be valid and binding when the corporation, through the board, tacitlyapproved and ratified it. The following acts of the board constitute implied ratification:


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. %r*uiaga is one of the largest stoc#holder, and was the all/in/one officer +he was the

9resident, B, Attorney, Auditor, etc.-). Two other directors approved his actions and expressed satisfaction with the advantages

obtained by him in securing the chattel mortgage.0. The corporation too# advantage of the benefits of the chattel mortgage. There were even

partial payments made with the #nowledge of the three directors.

ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION+20SCRA 526; 1967)

Acuna entered into an agreement with Ierano, manager of 9"CA, in which the

former would be constituted as the latter=s agent in anila. Acuna diligently went about hisbusiness and even used personal funds for the benefit of the corporation. 'uring the face/to/face

meeting with the board, Acuna was assured that there need not be any board approval for hisconstitution as agent for it would only be a mere formality. &ater on, the board disapproved theagency and did not pay him. The SC ruled that the agreement was valid due to the ratification ofthe corp. proven by these acts:

. $e was assured by the board that no board approval was necessary.). $e delivered 9 )G,GGG, performed his wor# with the #nowledge of the board.0. 'ue to ac*uiescence, the board cannot disown or disapprove the contract.

oard Committees

;he 1y0laws of the corporation may create an executive committee, composed ofnot less than & members of the 1oard, to be appointed by the 1oard. ;he executivecommittee may act, by ma@ority vote of all its members, on such specific matters withinthe competence of the board, as may be delegated to it in either (!) the 1y0laws, or ($) ona ma@ority vote of the board.owever, the following acts may never be delegated to an executive committee

(!) approval of any action for which shareholdersK approval is also re=uired#($) the filling of vacancies in the board (reer to Sec. 29)#(&) the amendment or repeal of by0laws or the adoption of new by0laws#(4) the amendment or repeal of any resolution of the board which by its

express terms is not so amendable or repealable# and(9) a distribution of cash dividends to the shareholders.

HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD.+181 F. 289; 1910)!n this case, the %xecutive Committee:

a- removed the Treasurer and appointed a new oneb- fixed the annual salary of the members of the %xecutive Committee


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c- amended the by/laws by giving the 9resident the sole authority to call a stoc#holder=smeeting and a board of directors meeting

d- amended the composition of the %xeCom by limiting it to 8ust ) persons.W! thee !cti*" +!$i

4o, because the %xecutive Commmittee usurped the powers vested in the board and thestoc#holders. !f their actions was valid, it would put the corp. in a situation wherein only twomen, acting in their own pecuniary interests, would have absorbed the powers of the entirecorporation. EFull powersE should be interpreted only in the ordinary conduct of business andnot total abdication of board and stoc#holders= powers to the %xeCom. EF


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$owever, the proceedings can be nullified if the wal#out was for a reasonable and8ustifiable cause. !n this case, F. &ogan ;ohnston, who owned andHor represented more than 2GDof the corporation=s outstanding shares, was prohibited from voting the shares of the Silos family+which he had validly purchased- and of the minor children of Albert S. ;ohnston +of whom hewas guardian- on the ground that such shares must first be registered in the names of the wards,

thereby prompting the wal#out. The Court of Appeals held that the wal#out was neitherunreasonable nor un8ustifiable. !t noted however that there was no formal declaration of a*uorum before the withdrawal from the meeting by F. &ogan ;ohnston.

PONCE VS. ENCARNACION+94 #hi$. 81; 1953)


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The stoc#holders have an implied power to remove a director for cause. %ven when thereis cumulative voting, stoc#holders can still remove directors for cause.DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC.+27 SCRA 247; 1969)

A corporation may use its funds to invest in another corporation without the approval ofthe stoc#holders if done in pursuance of a corporate purpose. $owever, if it is purely forinvestment, the vote of the stoc#holders is necessary.

P(e$ors; #ort$a$ors; e'ecutors; recei!ers; an a#inistrators 4Sec. 77)

0 ledgors or mortgagors have the right to attend and vote at stocholdersK meetings.

3


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Votin$ trust (Sec. $9)

0 Roting trusts must be in writing, notarized, specifying the terms and conditionsthereof, certified copy filed with 23%. Hailure to comply with this re=uirement rendersthe agreement ineffective and unenforceable.

0 As a general rule, voting trusts are valid for a period not exceeding 9 years at anyone time, and automatically expire at the end of the agreed period unless expresslyrenewed.

>oever, in the case of a voting trust specifically re=uired as a condition in aloan agreement, said voting trust may exceed 9 years but shall automaticallyexpire upon payment of the loan.

0 Roting trusts may be voted by proxy unless the agreement provides otherwise.(Sec. $9)

Poo(in$ a$ree#ent

- ooling agreements refer to agreements between $ or more 2s to vote theirshares the same way. ;hey are different from voting trust agreements in that they donot involve a transfer of stocs but are merely private agreements between $ or more2s to vote in the same way.

0 2ec. !??, par. $ of the %orporation %ode provides for pooling and votingagreements in close corporations. Although there is no e=uivalent provision forwidely0held corporations, Sustice and rof. %ampos are of the opinion that 2s ofwidely0held corporations should not be precluded from entering into votingagreements if these are otherwise valid and are not intended to commit any wrong orfraud on the other 2s that are not parties to the agreement.

Non-!otin$ s%ares (Sec. 6)- referred or redeemable shares.

ITF s%ares

Anor s%ares (Sec. $6)

0 Any one of the @oint owners can vote said shares or appoint a proxy thereof.

Pro9+ &e!ice

S%/ =@. #*ie.O Stoc#holders and members may vote in person or by proxy in all meetings ofstoc#holders or members. 9roxies shall be in writing, signed by the stoc#holder or member and

De!ices Affectin$Contro(


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filed before the scheduled meeting with the corporate secretary.

A n the case of Fosenfeld v. Hairchild 3ngine and Airplane %orp. (128 &.3. 2+ 291#19$$),it was held that in a contest over policy (as opposed to a purely personal powercontest), corporate directors have the right to mae reasonable and proper expenditures,sub@ect to the scrutiny of the courts when duly challenged, from the corporate treasury forthe purpose of persuading the 2s of the correctness of their position and soliciting theirsupport for policies which the directors believe, in all good faith, are in the best interestsof the corporation. ;he 2s, moreover, have the right to reimburse successfulcontestants for the reasonable and ona i+eexpenses incurred by them in any such

policy contest, sub@ect to lie court scrutiny. owever, where it is established that such monies have been spent for personalpower, individual gain or private advantage, and not in the belief that such expendituresare in the best interest of the stocholders and the corporation, or where the fairness andreasonableness of the amounts allegedly expended are duly and successfullychallenged, the courts will not hesitate to disallow them.

ROSENFELD V. FAIRCHILD +128 N.:. 2 291; 1955)


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!n a contest over policy, as compared to a purely personal power contest, corporatedirectors have the right to ma#e reasonable and proper expenditures. "eason: in these days ofgiant corporations with vast numbers of S$6s, if directors are not allowed to authori(e reasonableexpenses in soliciting proxies, corporate business may be hampered by difficulty in procuring*uorum or corporations may be at the mercy of persons see#ing to wrest control for their

purposes if the directors may not freely answer their challenge. ut corp expense may bedisallowed by courts where money was shown to have been spent for personal power, individualgain or private advantage, or where fairness and reasonableness of amount spent has beensuccessfully challenged.

:oting rust

A Roting ;rust Agreement (R;A) is an agreement whereby the real ownership of the shares isseparated from the voting rights, the usual aim being to insure the retention of incumbent directors andremove from the stocholders the power to change the management for the duration of the trust.

Ad!antages

Accumulates power. 2mall shareholders are given the chance to have a representation in the

1+: or at least a spoesperson during stocholdersD meetings.

%ontinuity of management.

/ore effective than proxies because it is irrevocable.

3nsures that the re=uired number of stocholders is met thereby facilitating smooth corporate

operations.

&isad!antages

2tocholders give up rights (voting and naed title)

2usceptible to abuse ot used in widely held corporations

;ig,ts gi!en up %+ t,e s,are,older in a :A in e9c,ange for t,e fiduciar+ o%ligation oft,e trustee$

Roting rights

roprietary rights


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(!) A R;A is prepared in writing, notarized, and filed with the corporation and 23%.($) ;he certificates of stoc covered by the R;A are cancelled and new ones (voting trust

certificates) are issued in the name of the trustee


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&isad!antages$

!. possibility of disagreement thus the need for an arbitration clause$. there is no compelling reason for stocholders to act together

)%at ri$%ts oes a s%are%o(er $i!e up retain *it% a poo(in$ a$ree#ent>2hareholders retain their right to vote because the parties are not constituted as agents.owever, the will of the parties may not be carried out due to non0compliance with thepooling agreement.

RINGLING v. RINGLING+29 %e$. Ch. 318, 49 A. 2 603; 1946)

Benerally, agreements and combinations to vote stoc# or control corporate fiction Mpolicy are valid if they see# without fraud to accomplish only what parties might do asstoc#holders and do not attempt it by illegal proxies, trusts or other means in contravention of

statutes or law.BUCK RETAIL STORE v. HARKERT+62 N.W. 2 288; 1954)

Stoc#holders6 control agreements are valid where it is for the benefit of corporationwhere it wor#s no fraud upon creditors or other stoc#holders and where it violates no statute orrecogni(ed public policy.

MC8UADE v. STONEHAM+189 N.:. 234; 1934)

An agreement among stoc#holders to divest directors of their power to discharge an

unfaithful employee is illegal as against public policy. Stoc#holders may not by agreementamong themselves control the directors in the exercise of the 8udgment vested in them by virtueof their office to elect officers and fix salaries.CLARK v. DODGE+199 N.:. 641; 1936)

!f the enforcement of a particular contract damages nobody/not even the public, there isno reason for holding it illegal. Test is 34 it causes damage to the corporation andstoc#holders.

Cumulati!e !oting (see sec. 2')0et%os of Votin$

. Strai$%t !otin$8 f A has !?? shares and there are 9 directors to be elected, he shallmultiply !?? by five (e=uals 9??) and distribute e=ually among the fivecandidates without preference


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). Cu#u(ati!e !otin$ f A has !?? shares and there are 9 directors to be elected, he shall4one caniate5 multiply !?? by five (e=uals 9??) and he can vote the 9?? for only one

candidate.

0. Cu#u(ati!e !otin$8 f A has !?? shares, there are 9 directors to be elected, and he only4#u(tip(e caniates5 wants to vote for two nominees, he can divide 9?? votes between the

two, giving each one $9? votes.

:o* to co#pute !otes neee to $et a irector e(ecte b& cu#u(ati!e !otin$8. Fre&=s for#u(a (minimum no. of votes to elect one director)

NO E of shares re=uired PO E of outstanding votes TO E of directors to be elected

N O U PUU Q ! T Q !

). /aker B Car&=s for#u(a(minimum no. of votes needed to elect multiple directors)NO E of shares re=uired

PO E of shares represented at meeting :O E of directors the minority wants to elect

:DO total E of directors to be elected

N O P x : Q ! :K Q !

/"ES

7evels playing field or at least ensures that the minority can elect at least one representative

to the board of directors (1+:)

%annot of itself give the minority control of corporate affairs, but may affect and limit the

extent of the ma@orityDs control

1y0laws cannot provide against cumulative voting since this right is mandated by law in

2ection $4.

Classification of s,ares (see sec. >)T&pe of s%ares

. Co##on share with right to vote). Preferre share has preference over dividends and distribution of assets upon li=uidation#

right to vote may be restricted (2ec. 5)


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0. Reee#ab(e share is purchased or taen up by the corporation upon the expiration of a fixedperiod (2ec. )# right to vote may be restricted (2ec. 5)

/"ES

2toc can also be both preferred and redeemable.

3ven though the right to vote of preferred and redeemable shares may be restricted, owners

of these shares can still vote on certain matter provided for in 2ec. 5.

23% re=uires that where no dividends are declared for three consecutive years, in spite of

available profits, preferred stocs will be given the right to vote until dividends are declared.

GOTTSCHALK V. AVALON REALTY+23 N.W. 2 606; 1946)

9rovision granting right to vote to preferred stoc# previously prohibited from voting,

constitutes diminution of the voting power of common stoc#.

9rovision in the articles of incorporation granting holders of preferred stoc# right to vote in

case of default in payment of dividends after ;uly , 2 was construed as denial bynecessary implication of the right to vote even prior to ;uly , 2.

;estriction on transfer of s,ares

eculiar to close corporations.

/ost common restriction granting first option to the other stocholders and


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According to @oongei v*. S3C, aside from prescribing =ualifications, by0laws can also provide

for the dis=ualification of anyone in direct competition with the corporation.

Founer=s s%aresSee Sec. : or +einition

3xception to the rule in sec. 5 that non0voting shares shall be limited to preferred and

redeemable shares

f founderDs shares en@oy the right to vote, this privilege is limited to 9 years upon 23%Ds approval,

so as to prevent the perpetual dis=ualification of other stocholders.

Management contracts (sec. '')

%ontract to manage the day0to0day affairs of the corporation in accordance with the policies laid

down by the board of the managed corporation.

1+: can and usually delegate many of its functions but it canDt abdicate its responsibility to act

as a governing body by giving absolute power to officers or others, by way of a managementcontract or otherwise. t must retain its control over such officers so that it may recall thedelegation of power whenever the interests of the corporation are seriously pre@udiced thereby.

SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY+41 F. 2 588; 1930)

Although corporations may, for a limited period, delegate to a stranger certain dutiesusually performed by the officers, there are duties, the performance of which may not beindefinitely delegated to outsiders.

/SA :"#/G A/& B";M ;EB#;EME/S (Sec. 27@ 48 for closecorporationsD)

ncreases veto power of the minority in some cases.

n exchange for the numerical ma@ority in the 1+:, minority can as for a stronger veto

power in ma@or corporate decisions.

BENITENDI VS. KENTON HOTEL+60 N.:. 2 829; 1945)

A re*uirement that there shall be no election of directors at all unless every single vote be

cast for the same nominees, is in direct opposition to the statutory rule that the receipt ofplurality of the votes entitles a nominee to election. +See Sec. )1-


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"e*uiring unanimity before the ' can ta#e action on any corporate matter ma#es it

impossible for the directors to act on any matter at all. !n all acts done by the corporation, thema8or number must bind the lesser, or else differences could never be determined nor settled.

The State has decreed that every stoc# corporation must have a representative government,

with voting conducted conformably to the statutes, and the power of decision lodged incertain fractions, always more than half, of the stoc#. This whole concept is destroyed whenthe stoc#holders, by agreement, by/law or certificates of corporation provides for unanimousaction, giving the minority an absolute, permanent and all/inclusive power of veto.

The re*uirement of unanimous vote to amend by/laws is valid. nce proper by/laws have

been adopted, the matter of amending them is no concern of the State.

De!ice Fa!orab(e To8 Li#itations

Cu#u(ati!e !otin$

/+F;P assures them ofrepresentation on the board

%anDt give minority control of corp.affairs

C(assification of s%ares

/+F;P so long as they holdmore common stoc as opposed tothe ma@ority who holds morepreferred stoc

referred and redeemable stoccan still vote on certain matters asprovided in 2ec. 5 or as may beprovided by the corp.

Restriction on transfer ofs%aresGapp(icab(e on(& to c(osecorporations

/AS+F;P they can choosewhether to eep or release sharesand they can prevent oppositionfrom ac=uiring shares

See Sec. 98

Prescribin$ 3ua(ificationsfor irectors6 founer=ss%ares

/AS+F;P theyDre the ones whocan prescribe the =ualifications inthe by0laws

Lualifications must be reasonableand do not deprive minority ofrepresentation on the board

0ana$e#ent contracts

/AS+F;P allows them todelegate certain functions andduties without losing control overthe corporation

%annot exceed five years

1+: must retain control over

corp. policies

1+: must have power to recall

contract

Unusua( !otin$ an 3uoru#re3uire#ents

/+F;P gives them strongerveto power in certain corp. affairs

2ub@ect to the limitations in 2ec.!?&.

0EETIN.S

HINDS8 /eetings of the 1oard of :irectors or ;rustees may be either regular orspecial. (Sec. 49)

0eetin$s of Directors Trustees


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RE.ULAR8 eld monthly, unless otherwise provided in the by0laws.

(Sec. $")SPECIAL8 At any time upon call of the president or as provided in the by0

laws.NOTICE8 /ust be sent at least ? a& prior to the scheduled meeting, unless

otherwise provided by the by0laws.

&ote' &otice -ay e aive+ e


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2UORU08 >enerally, a =uorum shall consist of the stocholders representing a

ma@ority of the outstanding capital stoc, or a ma@ority of the members.

3


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n such cases, the directors or trustees shall be liable @ointly and severally for alldamages resulting therefrom suffered by the corporation, its stocholders or membersand other persons.

'hen a director, trustee or officer attempts to ac=uire or ac=uires, in violation ofhis duty, any interest adverse to the corporation in respect of any matter which has beenreposed in him in confidence, as to which e=uity imposes a disability upon him to deal inhis own behalf, he shall be liable as a trustee for the corporation and must account for theprofits which would otherwise have accrued to the corporation. (Sec. "1)

n addition to this general liability, the %orporation %ode provides for specific rulesto govern the following situations

(!) 2elf0dealing directors (Sec. "2)($) %ontracts between interlocing directors (Sec. "")(&) :isloyalty to the corporation (Sec. "4)(4) 'atered stocs (Sec. 6$)

):AT IS T:E /USINESS UD.0ENT RULE>

As a general rule, directors and trustees of the corporation cannot be held liablefor mistaes or errors in the exercise of their business @udgment, provided they haveacted in good faith and with due care and prudence. %ontracts intra vire*entered into bythe board of directors are binding upon the corporation, and the courts will not interfereunless such contracts are so unconscionable and oppressive as to amount to a wantondestruction of the rights of the minority.

owever, if due to the fault or negligence of the directors the assets of thecorporation are wasted or lost, each of them may be held responsible for any amount ofloss which may have been proximately caused by his wrongful acts or omissions. 'herethere exists gross negligence or fraud in the management of the corporation, thedirectors, besides being liable for damages, may be removed by the stocholders inaccordance with 2ec. $ of the %ode. (Ca-po* Ca-po*)

@3&3RA R3' %ontractsintra vire* entered into by 1o: are binding upon thecorporation and courts will not interfere.

3C3PT;&' 'hen such contracts are so unconscionable and oppressive as

to amount to a wanton destruction of the rights of the minority.

):AT HIND OF DILI.ENCE IS EPECTED OF DIRECTORS>

:irectors are expected to manage the corporation with reasonable diligence, careand prudence, i.e. the degree of care and diligence which men prompted by self0interestgenerally exercise in their own affairs. ;hus, they can be held liable not onlyfor willful dishonesty but also for negligence.

Although they are not expected to interfere with the day0to0day administrative detailsof the business of the corporation, they should eep themselves sufficiently informedabout the general condition of the business.

Dut& of Di(i$ence8 /usiness u$#entRu(e"


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):AT FACTORS S:OULD /E CONSIDERED IN DETER0ININ. ):ET:ERREASONA/LE DILI.ENCE :AS /EEN EERCISED>

;he nature of the business, as well as the particular circumstances of each case.

;he court should loo at the facts as they exist at the time of their occurrence, not aidedor enlightened by those which subse=uently too place. (7itwin v. Allen)

OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. +155 F. 2 522; 1946)

!f in the course of management, the directors arrive at a decision for which there is areasonable basis and they acted in good faith, as a res

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