LEX Corporation Law Midterm Reviewer

Corporation Law – Bonilla

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RRSE.RABA. DLSU College of Law 2010

1. What is a corporation and what is the role of the State in its creation?

LAW JURISPRUDENCE CONCEPTS AND DOCTRINES Sec. 1. Title of the Code. - This Code shall be known as "The Corporation Code of the Philippines". Sec. 2. Corporation defined. - 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. The present statutory definition of the corporation is a narrow and antiquated view of the corporate vehicle because it look at only one aspect – the relationship between the corporation and the State – of otherwise multifaceted relationships that a corporation represents in the business environment. (Villanueva) Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock

San Juan Structural v. CA (1998) FACTS: Motorich Sales sold a parcel of land to San Juan Structural through a document signed by Gruenberg, the former’s corporate treasurer, and by the president of the latter corporation. Despite continuous demands, Motorich Sales refuse to execute necessary documents in transferring the ownership over the parcel of land. ISSUES: 1. May a corporate treasurer, by herself sell a parcel

of land and without any authorization from the board of directors?

2. May the veil of corporate fiction be pierced on the mere ground on the ground that almost all of the shares of stocks of Motorich Sales Corporation are owned by said treasurer and her husband?

HELD: 1. No, because a corporation is a juridical person

separate and distinct from its stockholders or members. As such it may only act through its board of directors or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. The power to sell the corporation’s assets is foreign to the corporate treasurer’s function; and thus, such authority must be granted by the board or the properly authorized officer.

2. No, because San Juan Structural failed to establish any purpose of shielding any alleged fraud or illegal activities of the officers or stockholders of San Juan Structural.

Relevant Constitutional Provisions The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities. (Sec. 10, Art. XII) No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. (Sec. 11, Id.)


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corporations. Sec. 4. Corporations created by special laws or charters. - Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Sec. 5. Corporators and incorporators, stockholders and members. - Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of

NPC v. Philipp Bros. (PHIBRO) (2001) FACTS: NPC accepted a bid from PHIBRO to deliver coal. However, due to an industrial strike in Australia, PHIBRO was in delay in delivering the coal. When NPC had another public bidding, it disqualified PHIBRO from participating in it. Claiming that there was bad faith in NPC’s disqualification, PHIBRO filed a case for damages. The trial court ruled in favor of PHIBRO and awarded, among other things, moral damages. ISSUES: 1. Whether or not NPC acted wrongfully or with bad

faith in disqualifying PHIBRO from participating in the subsequent public bidding?

2. Whether or not PHIBRO is entitled to moral damages?

HELD: 1. No, because NPC was merely exercising its right to

reject bids for it was not bound any contract to re-approve PHIBRO’s pre-qualification requirements. NPC’s disapproval of PHIBRO was without any intent to injure or a purposive motive to perpetrate damage. Instead, the measure it adopted was one of self-protection. Apparently, NPC acted on the strong conviction that PHIBRO had a seriously-impaired track record.

2. No, because NPC did not act in bad faith. Moreover, moral damages are not, as a general rule, granted to a corporation. While it is true that besmirched reputation is included in moral damages, it cannot cause mental anguish to a corporation, unlike in a case of a natural person, for a corporation has no reputation in the sense that an individual has, and besides, it is inherently

The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. (Sec. 16, Id.) The rationale behind the Corporation Code may be inferred from this article because it shields the legislators from favoring private corporations. (Bonilla) In times of national emergency, when the public interest so requires, the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately-owned public utility or business affected with public interest. (Sec. 17, Id.) The State may, in the interest of national welfare or defense, establish and operate vital industries and, upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the Government. (Sec. 18, Id.) The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed. (Sec. 19, Id.) Concept of a Corporation A corporation is basically a group of individuals who decide to get together. The State participates in forming a corporation because its creation is subject to the former’s approval. (Bonilla) Attributes of the Corporation 1. Artificial Being It is the fiction of law that creates the “person” of the corporation, with the same attributes of an individual with full capacity to enter into


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incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms

impossible for a corporation to suffer mental anguish. (LBC Express Inc. v. CA)

Filipinas Broadcasting v. Ago Medical (2005) FACTS: Ago Medical filed a complaint for damages against Filipinas Broadcasting because employees of the latter made libelous statements about the former on air. The lower courts ruled that the statements were libelous per se and awarded Ago Medical damages. Among the other issues raised by Filipinas Broadcasting on appeal was that Ago Medical was not entitled to moral damages because it is a corporation. ISSUE: Whether or not moral damages may be awarded to Ago Medical? HELD: Yes, because Ago Medical’s claim for damages falls under Article 2219(7) of the Civil Code and this provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. This article does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages. Crystal v. BPI (2008) FACTS: Spouses Crystal obtained a loan from BPI in behalf of CCCC secured by real and chattel mortgages. BPI filed a complaint for a sum of money against CCCC and the spouses because CCCC an spouses Crystal failed to pay the balance of their loan. The trial court ruled in favor of BPI and thus BPI instituted extrajudicial foreclosure of the mortgages. Later, spouses filed an action for injunction to stall the foreclosure. The trial court, however, dismissed the

contractual relations. (Villanueva)

a. The assets of the corporation belong to the corporation and not co-owned by its shareholders or members. See San Juan Structural v CA.

b. The liabilities of the corporation, as a general rule, cannot be held against its directors, officers or shareholders; and vice versa. See Francisco v. CA.

c. If a corporation is guilty of a tort, it is because of the actions of the corporate officer. Thus, the corporation is liable through the action of the officer and the officer will be held solidarily liable with the corporation.

d. The corporation can be held criminally liable depending on the penal law violated. If the penal law subjects a fine will be paid, the corporation can be held liable; while if the penalty is imprisonment, the officer responsible will be penalized.

e. The corporation also has constitutional rights. i. Due process and equal protection – the constitutional

provision does not limit its application for it does not qualify the term “person”.

ii. In Stonehill v. Diokno, the SC recognized that corporations are protected by the constitutional guarantee against unreasonable searches and seizures. However, the Court ruled that the corporate officers cannot contest the legality of a seizure because such right is purely personal.

iii. Corporation have no right to claim protection on the constitutional right against self-incrimination because such right is a personal one and applies only to natural persons.

f. As a general rule, corporations, being juridical in nature, are not entitled to moral damages because they cannot experience wounded feelings, mental anguish, etc., unless provided by law. See NPC v. PhiBros to Crystal v. BPI. Moral damages are awarded because of intangible injury to a person. (Bonilla)

2. Creature of the Law


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and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on

complaint and ordered them to pay moral damages. The spouses appealed to the CA on the ground that, among others, BPI is not entitled to moral damages because it is a corporation. The CA dismissed this claim and found that BPI having been “famous and having gained its familiarity and respect not only in the Philippines but also internationally because of its good will and reputation must protect and defend the same against any unwarranted suit.” ISSUE: Whether or not BPI is entitled to moral damages? HELD: No, because although the spouses’ complaint against BPI proved to be unfounded, it does not automatically entitle BPI to moral damages. Indeed, while the Court may allow the grant of moral damages to corporations, it is not automatically granted; there must still be proof of the existence of the factual basis of the damage and its causal relations to the defendant’s acts. Reynoso v. CA (2000) FACTS: CCC (now GCC) controlled the finances of its subsidiaries but this became unlawful when the Central Bank adopted the DOSRI prohibitions – directors, officers, and stockholders are prohibited from borrowing money from their company. In order to circumvent the DOSRI prohibitions, CCC organized CCC-Equity where resident managers of CCC’s subsidiaries were appointed positions in CCC-Equity; and were told to observe illegal business practices. Reynoso, a resident manager of CCC-QC who refused to comply and thus was later fired, won a case filed against him by CCC-QC. Later, Reynoso asked the court to execute the judgment against GCC but the latter insisted that it was not a party to the case since

The juridical existence of a corporation is depended on the consent or grant of the State. From a strict legal point of view, and under the theory of concession, a corporation cannot come into being by mere consent of the parties, there must be a law granting it, and once granted, forms the primary franchise of the corporation. (Villanueva) 3. Right of Succession A corporation has the capacity for continuous existence despite the death or replacement of its shareholders or members, for it has a personality separate and distinct from those who compose it. (Villanueva) 4. Creature of Enumerated Powers, Attributes and Properties A corporation is a creature of limited powers, such as those expressly conferred on it by law and those that are implied by or are incidental to its existence. (Villanueva) Separate Legal Personality A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it; and that obligations incurred by the corporation, acting through its directors, officers and employees are its sole liabilities. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of a fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. (Villanueva) Even if an individual is the owner of the corporation, the corporation is its own person as far as managing is concerned. The corporation may run its own affairs separate from its members. In fact, the corporation may have stronger rights than its members. (Bonilla) Doctrine of Piercing the Veil of Corporation Fiction As a general rule, the corporation has a separate juridical personality


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the following matters: 1. Amendment of the articles of

incorporation; 2. Adoption and amendment of

by-laws; 3. Sale, lease, exchange,

mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. Sec. 7. Founders' shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided

the judgment was against its subsidiary. ISSUE: Whether or not Reynoso’s favorable judgment against CCC-QC may be executed against GCC? Should the veil of corporate fiction be pierced? HELD: Yes, because when the mother corporation and its subsidiary cease to act in good faith and honest business judgment, or cause injustice, the law steps in to remedy the problem. When that happens, the corporate character is not necessarily abrogated. It continues for legitimate objectives. However, it is pierced in order to remedy injustice. The court judgment would become useless if CCC is placed beyond the legal reach of the judgment creditor. COMMENTS: The DOSRI rule is still presently applicable in banking law. (Bonilla) There was an actual finding that there was a transfer of assets made from CCC to GCC, which was admitted in court. (Id.) The court favored in Reynoso in this case because of the principle that “those who have less in life, have more in law”. (Id.) Kukan v. Reyes (2010) FACTS: Morales won the bidding conducted by Kukan Inc. for the supply and installation of signages in a building. Despite his compliance with his contractual obligations, Morales was only paid almost have of the amount he was entitled to under the contract. Kukan Inc. refused to pay despite demands; and thus, Morales filed a case for a sum of money. Kukan Inc. was declared in default because they no longer participated in the trial. The trial court rendered

from its member and its subsidiaries. The exception is when you apply the doctrine of piercing the veil of corporate fiction. (Bonilla) See cases Reynoso v. CA to FMC v. CA. As a general rule, corporations cannot be part of a partnership, but corporations may enter into joint ventures. However, joint ventures do not create a separate legal entity. (Bonilla) The doctrine of piercing the veil of corporate fiction is a means of attaching liability and not applied to dissolve a corporation. (Id.) Stock Corporation v. Non-Stock Corporation

Stock Corporation Non-Stock Corporation capital stock divided into shares authorized to distribute to shareholders dividends

absent either of the two requisites of a stock corporation

A non-stock corporation may have capital stock but the corporation may not distribute shares of stock; instead they only sell them. (Bonilla) Dividends are the profits of the corporation which cannot come from the capital stock. (Id.) Private Corporation v. Public Corporation

Private Corporation Public Corporation Set up by individuals who decide to engage in profit or non-profit objectives. (Bonilla)

Set up by the government to help it administer its territory. (Bonilla)

Formed or organized for some private purpose, benefit, aim, or end.

Formed or organized for the government or a portion of the State.

Created for political purposes connected with the public good in the administration of the civil government.


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that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Sec. 8. Redeemable shares. - Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. Sec. 9. Treasury shares. - Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the

judgment, which became final and executory, in favor of Morales. When the sheriff was levying personal properties found at Kukan Inc.’s office, Kukain Internation Corporation (KIC) filed a third party claim saying that the personal properties belonged to them and not Kukan Inc. Notably, KIC was incorporated shortly after Kukan Inc. had stopped participating in the trial. In reaction, Morales filed an omnibus motion to pierce the veil of corporate fiction saying that Kukan Inc. and KIC were one and the same entity. The lower courts granted this motion. ISSUE: Was the piercing of the veil of corporate fiction proper? HELD: No, because those who seek to pierce the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate a deception. In the concrete and on the assumption that the RTC has validly acquired jurisdiction over the party concerned, Morales ought to have proved by convincing evidence that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to defraud him. OBITER: The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities are disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such service. COMMENTS: As compared to Reynoso v. CA, Morales never proved

government. Created under the Corporation Code.

Created by its own charter; the Corporation Code is only supplementary.

Public Corporation

LGUs GOCCs Private corporations of the government; solely/majority owned by the government. Generates profit for the government.

Private Character

Public Character

Structured and operates like a private corporation.

According to the Constitution, GOCCs may be created or established by special charters. (Sec. 16, Art. XII) Since public corporations have their own charters, this course will only concern itself with private corporations. (Bonilla) Domestic Corporation v. Foreign Corporation

DOMESTIC FOREIGN Formed, organized, or existing under the laws of the Philippines.

Formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and State.

A foreign corporation may be licensed by the SEC to do business in the Philippines only:

1) under the principle of reciprocity; 2) after securing a certificate of authority from the Board of

Investments under EO 226; and 3) after complying with the conditions for issuance of the license

on application forms, structural organizations and capitalization. (Villanueva)

See SBMA v UIG.


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board of directors. that there was a transfer of assets. He committed a mistake of directly going after KIC without proving this fact first. (Bonilla) PNB V. Ritratto Group (2001) FACTS: PNB-IFL, a subsidiary company of PNB, extended a letter of credit in favor of respondent corporations secured by real estate mortgages. Despite respondents repayments, their outstanding obligations stood at $ 1.5 M. PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages. This prompted respondents to file a complaint for injunction to prevent PNB from foreclosing the mortgage. PNB then filed a motion to dismiss on the ground of failure to state a cause of action and the absence of any privity between them and respondents. The lower court ruled dismissed the motion to dismiss and issued the injuction. ISSUE: Whether or not PNB is privy to the loan contracts between PNB-IFL and respondents? Was the lower court justified in piercing the veil of corporate identity? HELD: No, because (1) there is no showing of the indicative factors that PNB-IFL is a mere instrumentality of PNB; and (2) there is no demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Yamamoto v. Nishino Leather Industries (NLI) (2008) FACTS: Yamamoto and Nishino organized under Philippine laws WAKO, now known as NLI. They

The incorporation test is used to determine whether the corporation is a domestic or foreign corporation. (Bonilla) Another test to determine the nationality of a corporation is the control test where you look at the controlling stockholders of the corporation. (Id.) The grandfather rule is the method of checking the degree of percentage of ownership of nationals and foreign corporations investing in a subsidiary corporation in connection to nationalized industries. This rule is applied when there are 2 or more corporations involved, one owning the other. (Id.) Ex. Corporation A owns Corporation B. Corporation B is 40% owned by Corporation A. Corporation A is 40% Filipino-owned. Therefore, Corporation B is 16% Filipino-owned. Share of Stock The share of stock is essential to the concept of the corporation for it is the means of getting the resources from the people and even the government. Once you buy a share of stock, your investment now is owned by the corporation. (Bonilla) A share of stock merely promises that if the company earns money and if the company decides to distribute dividends, the holder thereof will be entitled to a portion of the profits. However, the company still has the decision whether or not it will distribute its profits. (Id.) The purpose of trading stock is, not so much the dividends but, more of the capital gains earned. The promise of dividends generate huge demand for a share of stock. As a result, the value of the company per share of stock may increase. In return, the company has capital coming in. (Id.) Shares of stock is an intangible property; as compared to the certificate of stock, which is the evidence owning a share of stock in a company. (Id.)


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entered into a Memorandum of Agreement under which they agreed that Nishino would only acquire 70% of the authorized capital stock of WAKO. Eventually, Nishino and his brother acquired more than 70%, reducing Yamamoto’s investment to less than 10%. When the negotiations that Nishino would buy-out the shares of stock of Yamamoto, Nishino said that Yamamoto may take out the machinery and equipment he invested, provided, the value of such machines is deducted his and WAKO’s capital contributions. Due to his frustration, Yamamoto filed a complaint for replevin against Nishino. Respondents claimed that the machineries and equipment subject of replevin form part of Yamamoto’s capital contribution and should thus be treated as the corporate property. In reversing the RTC decision, the CA ruled that Nishino was not authorized by any board resolution to offer to return the machineries and equipment. Bringing up the issue to the SC, Yamamoto argues that the Nishinos are the ones deciding for the corporation and that the WAKO is but a mere instrumentality of them. ISSUE: Whether or not the veil of corporate fiction should be pierced? HELD: No, because there is no showing that Nishino used the separate personality of NLI to unjustly act or do wrong to Yamamoto in contravention of his legal rights. COMMENTS: Francisco Motors Corporation (FMC) v. CA (1999) FACTS: FMC filed a complaint against Manuel to recover a sum of money. In his answer, Manuel interposed a counterclaim against FMC for his unpaid legal services when he represented members of the

The one who buys shares of stock executes a subscription agreement and becomes a subscriber to the shares of stock. In this case, the subscriber becomes a debtor of the corporation but when he fully pays his subscription, he is no longer indebted to the corporation. (Id.) Capital Stock The term “capital stock” or “outstanding capital stock” is the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares. (Sec. 137, CC) The SEC has ruled that the term “capital stock” or “authorized capital stock” is the amount fixed in the articles of incorporation that may be subscribed and paid by the stockholders of the corporation. (Villanueva) The definition of capital stock clearly shows that it is composed of two items, namely: (a) the portion which have been paid by the stockholders; and (b) the portion which is to be paid on the subscriptions. (Id.) Capital stock is the contributions of people for the corporation to run its business. The share of stock is the evidence that they contributed to the capital stock. (Bonilla) Composition of Corporation

Corporators Incorporators temporary Permanent was not part of the beginning of the corporation

helped start the corporation

A corporation may be a corporator but cannot be an incorporator.

A corporation cannot be an incorporator because an incorporator should be a natural person.

A corporation cannot sign in the Articles of Incorporation.

An incorporators is included in the Articles of Incorporation.


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Francisco family, who are the incorporators, directors and officers of FMC, in an intestate proceeding. The trial court decided in favor of FMC but also allowed the counterclaim. On its appeal to the CA, FMC’s position was that the counterclaim should not prosper against them because Manuel’s claim is should be against the Francisco family and not against FMC, following their separate legal personality. The CA sustained the decision of the trial court; hence this appeal by both parties. ISSUE: Was the piercing the veil of corporate fiction correctly applied? HELD: No, because instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is FMC being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. If the corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators, the same could easily prejudice the corporation, its own creditors, and even other stockholders. SBMA v. Universal International Group (UIG) (2000) FACTS: SBMA and UIG entered into a lease agreement where the latter shall lease from the former a golf course. Under the lease agreement, SBMA was authorized to pre-terminate the contract should UIG commit a material breach or violation of any of the conditions of the agreement. Later, SBMA served a letter of pre-termination because UIG failed to comply with its contractual obligations. Thus, UIG filed a complaint against SBMA for injunction and damages. The lower court denied SBMA’s motion to dismiss the case because SBMA is estopped from questioning

Articles of Incorporation. the Articles of Incorporation. Doctrine of Equality of Shares Except as otherwise provided by the Articles of Incorporation and stated in the certificate of stock, each share shall be in all respects equal to other shares. (Bonilla) Those enumerated in Section 6(5) of the Corporation Code are matters that all shares have a right to vote on even if they may have been denied because they are major changes in the Articles of Incorporation. (Id.) Different Classes of Shares

Par Value No Par Value Shares of stock with a specific money value fixed in the articles of incorporation and appearing in the certificate stock for each share of stock of the same issue. The primary purpose of par value is to fix the minimum issue price thus assuring creditors that the corporation would receive a minimum amount for its stock. It is not usually the price at which investors buy or sell the stock. (De Leon) Par value is the minimum amount the corporation can charge for each share of stock it sells to the public. (Bonilla) Full payment is necessary before the issuance of the certificate of stock. (Id.)

Shares of stock that are fully paid and non-assessable and where the holder of such shares are not liable to the corporation or to its creditors in respect thereto. These shares many not be issued for a consideration less than the value of P 5.00 per share and that the entire consideration received by the corporation for its no-par value shares be treated as capital and shall not be available as dividends. (Villanueva) The price of these shares are not specific but the law provides that it cannot go below P 5.00. (Bonilla) Payment of any amount not less that P 5.00 is deemed fully paid. (Id.) The reason why corporations issue no par value shares is to allow speculative buyers to invest so that their investments


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UIG’s capacity to sue; and granted the injunction. ISSUE: Does UIG have the capacity to sue despite being a foreign non-resident corporation not licensed by the SEC to do business in the Philippines? HELD: Yes, because after contracting with a foreign corporation, a domestic firm is estopped from denying the former’s capacity to sue. In Merril Lynch Futures v. CA, the SC explained that the principle behind this is to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such persons has received the benefits of the contract. OBITER: A corporation has legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another company has no personality to file suits in the Philippines. In order to subject a corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from the SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines.

stock. (Id.) (Id.) The reason why corporations issue no par value shares is to allow speculative buyers to invest so that their investments would be flexible. (Id.)

Common Shares Preferred Shares Shares that don’t have any special contractual rights or preferences. (Villanueva) Shares that represent the residual ownership interest in the corporation; a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. (CIR v. CA) Common shares always have voting rights. These are the shares that are being traded in the stock market. These shares, however, can only have a right to the net assets and dividends of the corporation after preferred shares. (Bonilla)

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. (Sec. 6) Share that entitles the holder thereof to certain preferences over the holders of common stock; designed to induce persons to subscribe for shares of a corporation. (RPB v. Agana) Preferred shares are rarely given voting privileges. (De Leon)


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of a corporation. (RPB v. Agana) Preferred shares are rarely given voting privileges. (De Leon) If the nature of the preference is expressly stated in the Articles of Incorporation and Certificate of Stock, it is a preferred share. Preferred shares have the first crack at the dividends and net assets. (Bonilla)

Founder’s Shares Redeemable Shares Shares classified in the articles of incorporation that may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. (Sec. 7, CC) Shares issued basically to the founders or initial organizers of the corporation, but nothing under Section 7 of the Corporation Code expressly so provide. (Villanueva) Founders shares allow the incorporators to manage the corporation during its inception years. (Bonilla)

Shares issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. (Sec. 8, CC) Shares of stock issued by a corporation which the corporation can purchase or take up from their holders as expressly provided for in its articles of incorporation and certificates of stock representing said shares. (SEC Rules) The SEC Rules also provide that redeemable shares may be redeemed, regardless of the


12


years. (Bonilla) certificates of stock representing said shares. (SEC Rules) The SEC Rules also provide that redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings, “provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock.” (Villanueva) Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. (RPB v. Agana) As a rule, stockholders can only get hold of the capital stock when the company is liquidated and dissolved. If there are net assets, then that is the only time assets are distributed. (Bonilla) The law allows some shares to be bought back by the corporation so that the corporation can attract sigurista investors and assure them that they will get their shares even after the corporation is dissolved. Redeemable


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shareholders are assured that they will get their shares even after the corporation is dissolved. The nature of redeemable shares is like a loan or bond. (Bonilla) When the company redeems the shares back, it may:

1) Cancel the shares; or 2) Purchase back the

shares and issue them again in the future.

If the shares are retained, they become treasury shares. (Id.)

Treasury Shares Shares of stock which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. (Sec. 9, CC) Treasury shares are therefore shares that a corporation acquires after it has issued them. (Villanueva) There must be unrestricted retained earnings for the company to buy back shares. (Bonilla) The corporation buying back the shares does not acquire any voting rights and treasury shares are considered as assets of the corporation. (Id.)

2. How is a corporation established?

LAW JURISPRUDENCE CONCEPTS AND DOCTRINES Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5)

International Express Travel v. CA (2000)

Steps in the Creation of a Corporation


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but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the

FACTS: IET secured airline tickets for PFF amounting to almost P 450,000. IET filed a complaint against Kahn, president of PFF, and impleaded PFF as an alternative defendant because PFF failed to pay the balance of the tickets purchased. Kahn filed his answer where he averred that IET has no cause of action against him in either in his personal or official capacity of PFF. The trial court ruled in favor of IET and declared Kahn personally liable for the unpaid obligation of PFF because PFF had no separate personality since it was not a corporation. The CA reversed this ruling by recognizing the juridical existence of PFF. ISSUE: Whether or not PFF existed as a juridical person? HELD: No, because the laws concerning national sports associations only recognize that entities like PFF may be accorded corporate status, but does not automatically create them. Before an entity acquire a separate personality, it must be recognized by the accrediting organization. There was nothing said or presented in this case

1. Promotion Once the corporation is formed, it is not liable to promoters; instead, the promoters are. As far as the corporation to be formed is concerned, the corporation cannot be made liable to whatever contracts the promoter has with the incorporators because (1) the promoter is not the agent of the corporation; and (2) the corporation is a separate juridical person from its incorporators. But the corporation may be liable if it ratifies the obligation of the incorporators to the promoter. (Bonilla) 2. Incorporation Incorporation is taking on a franchise. The primary franchise is the right to exist as a corporation. The secondary franchise, or the purpose for the existence of the corporation, certain laws will govern how the franchise is obtained depending on the business. A primary franchise is inalienable. (Bonilla)

a. Incorporators Incorporators must comply with the following requirements: 1) legal age; 2) at least 5 incorporators but not more than 15; 3) nationals 4) majority of the incorporators reside in the Philippines; and 5) owns at least 1 share of the capital stock. b. Corporate Term The corporate term must not exceed 50 years from the date of incorporation, unless sooner dissolved or extended. The corporate term cannot be extended earlier than 5 years prior to the expiration of the term, unless there are justifiable reasons for an earlier extension as determined by the SEC. Upon the expiration of the term, in the absence of compliance with the legal requisites, the corporation ceases to exist but does not produce the corporation’s immediate dissolution. (Bonilla)


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balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Sec. 14. Contents of the articles of incorporation. - All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the

corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are he secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such;

3. The place where the principal office of the corporation is to be located, which must be within the Philippines;

4. The term for which the corporation is to exist; 5. The names, nationalities and residences of the

incorporators; 6. The number of directors or trustees, which

shall not be less than five (5) nor more than fifteen (15);

7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with

that PFF was accredited. Acebedo Optical v. CA (2000) The primary purpose of the corporation should not be too specific to the point that it would limit the corporation’s operations to avoid unnecessary hassle and from courts inquiring into the corporation’s purpose. (Bonilla) Gala v. Ellice Agro-Industrial (2003) FACTS: The Galas formed and organized Ellice Agro-Industrial. As payment for their subscriptions, the Gala spouses transferred several parcels of land. Subsequently, the children incorporated Magro, Later, the Gala spouses transferred their shares in Ellice to Margo and their children. In the stockholders meeting of both corporations, Raul Gala was elected chairman, president and general manager of each. Ellice, Margo and Raul Gala filed against his siblings with the SEC a petition for the appointment of a management committee, accounting, and restititution by the directors and officers, and the dissolution of Ellice for alleged mismanagement,

The corporation may reincorporate but that does not mean the corporation is revived; instead, a new corporation is formed. The new corporation can retain the name of the expired corporation provided that the stockholders will agree to use the old name. The use of an expired corporation name will not be allowed by the SEC if it will cause confusion to the public. The new corporation must follow the same procedure as when applying for a new corporation. The liabilities of the expired corporation will depend on its dissolution with regard to its transfer to the new corporation. (Id.) The corporate term must be reasonable and in line with the purpose of the corporation. (Id.) c. Minimum Capital Stock Required There are special laws that specify the minimum capital stock for certain corporations; however, Section 13 of the Corporation Code provides that there is no minimum capital stock, but in no case shall the paid up capital be less than P 5,000.00. The authorized capital stock is the maximum amount that the corporation may distribute as shares of stock and depends on the value of the stock. (Bonilla) If the corporation decides to increase its capital stock, it must comply with Section 13. Under said section, 25% of the authorized capital stock must be subscribed and 25% of subscribed capital stock must be paid up. In no case the paid up capital be less than P 5,000.00. (Id.) d. Contents of the Article of Incorporation The Articles of Incorporation is the basic contract document defining the charter of the corporation, and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. (Government v. MRC) 1) Name of the Corporation


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this Code; 8. If it be a stock corporation, the amount of its

authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated;

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and

10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient.

The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: (Form of Articles of Incorporation)

diversion of funds, financial losses and the dissipation of assets. In turn, the siblings initiated a complaint against the them with the SEC praying for the nullification of the elections of directors and officers in both corporations. The SEC dismissed the case filed by Raul Gala and nullified the election of the new set of directors and officers in Ellice and Margo. The SEC en banc reversed this decision, which the CA affirmed. ISSUE: Whether or not the Court should disregard the separate juridical personalities of Ellice and Margo for the purpose of treating all property purportedly owned by said corporations as property owned by the Gala spouses? HELD: Collateral attacks on the legality of the purposes for which a corporation was organized are prohibited in the jurisdiction. If a corporation’s purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated. As such, the courts have no power to inquire behind what the Articles of Incorporation state as the corporation’s

The SEC requires that there must be 2 words that have to be added different to copy from the corporate name of another corporation. (Bonilla) See Industrial Refractories v. CA. 2) Purpose The primary purpose is used by the SEC and other government agencies to classify the corporation, i.e. determine what kind of taxes the corporation shall be liable for. For investors, it is used to find out what business the incorporators say it is. It also helps ascertain if an act of the corporation is ultra vires, or beyond its scope. (Bonilla) See Acebedo Optical v. CA and Gala v. Ellice. The secondary purpose may be numerous depending on the needs and objectives of the corporation. If the corporation has difficulty with its primary purpose, it can have a majority vote of the board and the stockholders representing 2/3 share in the outstanding capital stock to follow the secondary purpose. This way, the corporation does not need to go through the process of amending with the SEC. However, the secondary purpose should not be inconsistent with the primary purpose. (Bonilla) 3) Principal Office It is not advisable to be too specific in the address of the principal office because if the corporation changes its principal office, it needs to amend its Articles of Incorporation, which is a hassle. (Bonilla) 4) Specific Nationality SEC only inquires into the nationality if the law specifically requires that the specific corporation shall be owned by Filipinos. (Bonilla) 5) Number of Incorporators


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Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. - The Securities and Exchange Commission may reject the articles of incorporation or disapprove any

primary purpose. Industrial Refractories v. CA (2002) FACTS: RCP registered its corporate and business name with the Bureau of Domestic Trade on June 22, 1977. On the other hand, SMC amended its Articles of Incorporation on August 23, 1985 to change its corporate name to IRCP. Both companies are in the same industry and engaged in almost the same business. RCP filed with the SEC a petition to compel IRCP to change its corporate name on the ground that its corporate name is confusingly similar with that of IRCP’s such that the public may be confused or deceived into believing that they are one and the same corporation. The SEC decided in favor of RCP. IRCP appealed to the SEC en banc arguing that RCP has no right to the exclusive use of its corporate name as it is composed of generic or common words. The SEC en banc modified the appealed decision in that IRCP was ordered to delete or drop from its corporate name only the word “Refractors.” The CA upheld the decision of the SEC en banc.

The incorporators are the first directors of the corporation. Once the SEC issues the certificate of incorporation, the first order of the corporation is to elect its first set of directors who will serve a term of 1 year. the elected directors sends a general information sheet to the SEC thereafter. (Bonilla) 6) Capital Stock The capital stock should be expressed in Philippine currency. (Bonilla) 7) Subscribers A subscribers are not necessarily incorporators and they are not limited to the 5 natural incorporators. There may be foreign subscribers, provided that they fully pay their subscription. (Bonilla) 8) Incorporators must be Signatories It is possible that another would sign for the incorporator, provided that, the person signing is armed with an SPA. The SPA should be attached with the Articles of Incorporation. (Bonilla) 9) Treasurer’s Affidavit The incorporators or subscribers elect the treasurer-in-trust. A certification from the bank that says the paid up capital was deposited in the name of the treasurer-in-trust is necessary. (Bonilla) 10) The Articles of Incorporation must be Notarized

Under Section 15 of the Corporation, the Articles of Incorporation must substantially comply with the form provided thereby, unless otherwise specified by law. (Bonilla) 3. Formal Organization and Commencement The life of the corporation begins on the date of issuance of the certificate of incorporation.


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amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: 1. That the articles of incorporation or any

amendment thereto is not substantially in accordance with the form prescribed herein;

2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations;

3. That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid if false;

4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.

No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. Sec. 18. Corporate name. - No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any

ISSUE: Who has the right to use word “Refractors” in its corporate name? HELD: RCP has the right to use the word “Refractors” because its business name was registered on a date earlier than IRCP changed its corporate name. The SC applied the doctrine of prior use or priority of adoption – whoever used the name first or who was incorporated first is given the right over the word used in the corporate name. COMMENTS: The case mentioned the generic rule where, as a general rule, generic words cannot be used as a corporate name. The exception to the rule is the doctrine of secondary meaning – if the generic word has been used for a long period of time and it has imparted a perception in the public’s mind that the name is identified with the corporation, then the corporation may use the generic word as its corporate name.

Amendments of the Articles of Incorporation Section 6 of the Corporation Code provides the items that require the vote of the stockholders. Those enumerated require a majority vote of the board of directors and the vote of the stockholders representing 2/3 vote of the outstanding capital stock. As a rule, the votes need not be casted in a meeting; it may be via written assent, except those found in Section 3, 38 & 103 of the Corporation Code. (Bonilla) Requirements: 1) Amended Articles of Incorporation retaining the original provision and

underscoring the changes made. 2) The amended articles should be certified by the corporate secretary

and the signatures of the majority of the directors. The SEC will have to act on the amendment within 6 months, otherwise the article shall be deemed amended, unless the delay was not attributable to the corporation. (Bonilla) Grounds for Rejection of Articles of Incorporation or Amendments 1) Substantial compliance of the requirements; 2) Form; 3) Nationality if it a necessary requirement based on the primary purpose

of the corporation; 4) The capital stock, subscribed shares and paid up capital. De Facto Corporation

De Jure Corporation De Facto Corporation A corporation created in strict or substantial conformity with the mandatory statutory requirements.

A corporation that exists for all practical purposes as a corporation but has no legal right to corporate existence as against the State.

Certificate of Incorporation Substantial Compliance Colorable Compliance


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existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. Sec. 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a

The main importance of the application of the de facto corportion doctrine is the ancillary application of the rule that the defect or alleged inexistence of the juridical personality of the corporation cannot be raised collaterally, and can only be pursued in a direct suit filed that seeks to question such juridical personality. In essence it promotes the policy that a contracting party cannot avoid the legal consequences of his contractual commitment by pointing to the technical defects in the “person” of the contracting corporation. (Villanueva) For the de facto corporation doctrine to apply, the following requisites must concur: 1) The existence of a valid law under which the corporation may be

incorporated; 2) An attempt in good faith to incorporate, or existence of a colorable

compliance with provisions on incorporation; and 3) The assumption by the enterprise of corporate powers. The existence of a corporation cannot be questioned collaterally, instead, it must be done in a quo warranto proceeding. (Bonilla) Once the corporate officers are in bad faith or find out that there is an irregularity in the Articles of Incorporation, the corporation the becomes de facto and they cannot invoke its non-existence. (Id.) The liability of the corporate officers of the de facto corporation are as follows:

1) If they are in good faith, then there is still separate identity but they are liable in a limited capacity.

2) If they are in bad faith, they will be considered partners of the corporation, ad thus their liability becomes subsidiary. (Id.)

Corporation by Estoppel The corporation by estoppel doctrine presents a clear exception to the general treatment of unregistered associations. The application of the doctrine seeks to enforce a contract where clearly the element of consent is lacking because one of the parties thereto, a purported corporation,


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corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. Sec. 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. - If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.

does not in fact exist at the time of perfection. The corporation by estoppel doctrine represents therefore an exemption to the principle that a “corporation is a creature of the state,” and cannot come into existence by mere agreement of the parties to a contract. (Villanueva) Corporations by estoppel do not exist as to the state but are existent only to the persons recognizing the existence. A corporation by estoppel did not comply with the requirements and form at all; and there is no certificate of incorporation. The corporate officers cannot use the non-existence of the corporation as a defense. See International Express Travel v. CA. Inoperation of a Corporation See Section 22 of the Corporation Code. Commence means when the corporation enters into contracts and/or submits its by-laws to the SEC. The purpose of this law is to compel the corporation to operate. (Bonilla) So that there is no need to have a full blown corporation, set up a corporation shell and just collapse the shell if you no longer want to pursue the business. Section 22(2) of the Corporation Code is the most cost efficient way of setting up a corporation for limited purposes. Just make sure that there will be no creditors affected with the inoperation of 5 years. If the corporation has been inactive for 5 years and the SEC does not notice, the corporation may still resume. (Id.)

3. How is a corporation organized and managed?

LAW JURISPRUDENCE CONCEPTS AND DOCTRINES Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all

Gokongwei v. SEC (1979) FACTS: Gokongwei wanted to become a director of SMC. To

Centralized Management Doctrine The Centralized Management Doctrine is expressed Section 23 of the Corporation Code where it mandates corporate powers to be directly


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property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares

prevent him from becoming a director, SMC amended its by-laws that stockholders who are directors of a competing corporation cannot be apart of their board. Gokongwei wants to nullify the amendment. HELD: The amendment of the by-law was valid because SMC is empowered to provide certain qualifications for its directors. Aubach v. Sanitary Wares Manufacturing (1989) FACTS: ASI, a foreign corporation, entered into an agreement with Saniwares and some Filipino Investors whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and sanitary wares. The parties agreed that the business operation shall be carried on by an incorporated enterprise named Saniwares. According to its Articles of Incorporation, ASI was to own 30% of outstanding stock, which was later increased to 40%; and 3 of the 9 directors shall be designated by ASI and the other 6 shall be designated by the other stockholders. Basically, the agreement contained provisions

vested in the Board of Directors/Trustees, rather than being delegated powers coming from the stockholders/members. In any organizational set-up, the congruence of authority and responsibility in the same person, committee, or board always promotes efficiency. This is the rationale for the doctrine. (Villanueva) The centralized management doctrine defines the role of the board as being fiduciary. It is a unique situation that has to be consistent with the separate juridical personality of the corporation. The board of directors constitute the collective agent of the corporation. Stockholders cannot take this away because the separate juridical personality is preserved. (Bonilla) The stockholders have the voting power to elect the directors and to make constituent acts or fundamental changes enumerated in Sec. 6 of the Corporation Code. (Id.) The Board of Directors is basically the governing body of the corporation. They have powers of ownership and management over the assets of the corporation. They have a fiduciary relationship with the stockholders, and thus, loyalty and due diligence are required of them. (Id.) The “unless otherwise provided in this Code” of Section 23 of the Corporation Code pertains to the constituent acts. (Id.) See Gokongwei v. SEC. The Board of Directors must act as a body and not separately. They must meet and discuss as a group. They hold the fate of the corporation and have the power to dispose of corporate properties with the intervention of stockholders. (Id.) Directors/Trustees


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shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote. Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the

designed to protect ASI as a minority group. In one of Saniwares stockholder’s meeting the ASI group had 3 nominees, while the Filipino investors had 8 nominees. The chairman ruled that the last 2 nominations from the Filipino investors were out of order. Because of the dispute in this stockholders meeting, the parties filed cases against each other. ISSUES: What was the nature of the business established, a joint venture or a corporation? HELD: The parties agreed to a joint venture and not a corporation because of the history of the organization and the unusual arrangements which govern its policy making body are all contents with a joint venture and not with an ordinary corporation. The agreement uses the word “designated” and not “nominated” or “elected” in the selection of the 9 on a 6:3 ratio; each group is assured of a fixed number of directors in the board. OBITER: Under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnership. However, the SC has recognized a distinction between these two business forms, and has held that although a corporation

The Board of directors are deemed to be the fiduciary of the corporation and the stockholders are the beneficiaries. (Bonilla) 1. Qualifications Director/Trustee – Every director must own at least 1 share of the capital stock of the corporation of which he is a director, which share shall stand in his name in the books of the corporation. No person shall be elected as trustee unless he is a member of the corporation. What the law only requires is that the director has legal title to the share, thus, the fact that a director is only holding the share as a nominee of another person does not disqualify him as a director. The ownership of shares in the corporation does not give one a vested right to be elected in the Board of Directors. (Gokongwei v. SEC) A majority of the directors or trustees of all corporations organized under the Corporation Code are required to be residents of the Philippines. 2. Disqualifications A director must not have been convicted of an offense punishable by imprisonment of exceeding 6 years or has not committed any violation of the Corporation Code within 5 years prior to his election. The by-laws of the corporation can provide other qualifications and disqualifications in addition to those provided in the Corporation Code. However, the Board of Directors does not have the power, by the exercise of its business judgment expressed through a resolution, to provide for additional qualifications and/or disqualifications to those who are to be nominated and elected into the Board. (Gokongwei v. SEC) Under Section 19 of the General Banking Law of 2000, except for rural banks, no appointive or elective public official, whether full-time or part-time shall at the same time serve as officer of any private bank,


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articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission. Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. Sec. 28. Removal of directors or trustees. - Any

cannot enter into a partnership contract, it may engage in a joint venture with others. COMMENTS: The ASI group and the Filipino investors entered into a pre-incorporation contract, called shareholder’s agreement, to protect their individual rights. (Bonilla) People’s Aircargo v. CA (1998) The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. Just as a natural person may authorize another to do certain acts for and on behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Apparent authority is derived not merely from practice. Its existence may be ascertained through: 1) the general manner in which the corporation holds out an officer or agent as having the power to act; or 2) acquiescence in his acts of a particular nature, with actual or

save in the cases where such service is incidental to financial assistance provided by the government or GOCC to the bank or unless otherwise provided under existing laws. No delinquent stock shall be voted. Any meeting of the stockholders/members called for an election may adjourn from day to day from time to time but not indefinitely, for any reason, no election is held, or there are no present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock/members entitled to vote. 3. Election Under Section 24 of the Corporation Code, at all elections of directors or trustees, there must be present, either in person or by representatives authorized to act by written proxy, the owners of the majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any stockholder entitle to vote, who shall have the right to vote in person or by proxy the number of shares of stock standing at the time fixed in the by-laws, in his own name on the stock books of the corporation; or where the by-laws are silent, at the time of the election. No delinquent stock shall be voted. Any meeting of the stockholders/members called for an election may adjourn from time to time but not indefinitely, for any reason, no election is held, or if there are no present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock / majority of the members entitled to vote. For stock corporations, the general rule is cumulative voting. This is to enable minority stockholders to elect a member that will represent them in the board. No. of Shares x No. of Directors = No. of Votes


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director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of

constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts, and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Even if a certain contract is outside the usual powers of the president, the corporations ratification of the same and acceptance of benefits make it binding. In the absence of a charter or by-law provision to the contrary, the president of a corporation is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his usual duties. DBP v. Ong (2005) If a corporation knowingly permit one of its officers, or any other agent, to do acts within the scope of an apparent authority, and thus holds him out to the public as possession power to do those acts, the corporation will, as against any one

Cumulative voting cannot be deprived from the minority. (Bonilla) For non-stock corporations, only 1 vote is allowed per candidate, unless otherwise provided in the Articles of Incorporation or by-laws. As far as election of directors are concerned, when it comes to majority directors, they may be removed without cause because the law do not provide that directors must be removed with just cause. However, this does not apply to directors who are elected to represent the minority. (Bonilla) 4. Removal Under Section 28 of the Corporation Code, any director/trustee of a corporation may be removed from office by a vote of the stockholders representing 2/3 of the outstanding capital stock / by a vote of 2/3 of the members entitled to vote. The removal shall take place either at a regular or special meeting called for the removal of directors/trustees, or any of them, which must be called by the Secretary on order of the President or on the written demand of the stockholders/members representing at least majority of the outstanding capital stocks. In these cases, only the stockholders may fill the vacancy: 1) increase in the number of the board of directors; 2) expiration of the term; 3) removal by the stockholders. There is only one set of vacancy the board may fill up, provided that there is still a quorum: 1) death; 2) resignation; 3) disqualification. Corporate Officers Corporate officers are not elected, as compared to directors who are elected by the stockholders. Directors are removable anytime, except when representing the minority; while, corporate officers cannot be


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directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable pre diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or

who has in good faith dealt with the corporation through such agent, be estopped from denying his authority; and where it is said: if a corporation permits this means the same as if the thing permitted by the directing power of the corporation. Ong v. CA (2003) A corporation cannot be imprisoned. Hence, if the penal law imposes a penalty of imprisonment, the law makes the officers and employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. However, it is the corporation which are made liable for the civil liabilities arising from the criminal offense. Cebu Country Club (CCCI) v. Elizagaque (2008) FACTS: Elizagaque applied for propriety membership with CCCI who was later able to buy a share and was issued a certificate of ownership. However, the board of CCCI disapproved his application for proprietary membership and never explained why. Thus, Elizagaque filed a complaint for damages against CCCI. The RTC ruled in favor of Elizagaque and held the board solidary liable with CCCI for damages. The CA affirmed the RTC decision, hence this petition.

removed without just cause. (Bonilla) Only the president, secretary and treasurer are named as corporate officers under the law. Legally speaking, they are the only ones who are voted upon by the board of directors. Among the 3, the president is required to be a director; but the by-laws may require other officers to be directors as well. The president cannot be a secretary/treasurer because the positions are incompatible. The secretary must be a resident and citizen of the Philippines. The treasurer has no legal requirement of residence or citizenship. (Id.) As far as officers are concerned, their authority comes from the law and the by-laws of the corporation. In the current setting in the Philippines, the president has the inherent authority to commit the corporation to obligations as well as other implied powers. The treasurer has the inherent authority to manage the funds of the corporation. The secretary is responsible for the custody of the corporate books and records. (Id.) To be considered as a corporate officer, it should be in the by-laws or by virtue of a board resolution and the position is assumed by way of election in the board. Some companies, by virtue of by-laws, the board is allowed to appoint a position. This is a way for corporations to avoid security of tenure of employees. Thus, the court has become more strict in following the law where the by-laws cannot authorize someone to appoint another to be a corporate officer. Instead, the board must name such person as a corporate officer by majority vote. Mere authority from the by-laws will not make the appointed person a corporate officer. Thus, if the by-laws allow appointment, the person appointed is considered to be an employee; but if person was elected by the majority of the board, that person is a corporate officer. (Bonilla) See Nacpil v. IBC, Locsin v. Nissan Lease, Matling Industrial v. Coros and Francisco v. Mallen.


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acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee

in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was nor necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract

ISSUE: Whether in disapproving Elizagaque’s application for proprietary membership with CCCI, the board and the club are liable to Elizagaque for damages? HELD: Although the board, under CCCI’s Articles of Incorporation, has the right to approve or disapprove an application for proprietary membership, this right should not be exercised arbitrarily. In rejecting respondent’s application, the SC finds that the board violated the rules governing human relations, the basic principles to be observed for the rightful relationship between human beings. It bears stressing that the amendment to CCCI’s by-laws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form Elizagaque filled up and submitted to CCCI. What was printed thereon was the original provision which was silent on the required number of votes needed for admission. It is clear that Elizagaque was left in the dark wondering why his application was disapproved. The court below was correct in making the board solidarily liable with CCCI because, under Section 31 of the Corporation Code, the board members shall be solidarily liable with the corporation when they are guilty of bad faith in directing the

The Nacpil ruling is no longer controlling. (Bonilla) Compensation of Directors/Trustees & Officers Under Section 30 of the Corporation Code, in the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as each director, except for reasonable per diems. However, this section also provides that such compensation, other than per diems, may be granted to directors by the vote of the stockholders representing at least majority of the outstanding capital stock at a regular or special stockholder’s meeting. In no case shall the total yearly compensation of directors exceed 10% of the net income before income taxes of the corporation during the preceding year. (SEC Opinion) When it comes to officers, no prohibition from compensation is found in the Corporation Code. Liability of Directors, Trustees or Officers A corporate director has a fiduciary role and is required to exercise diligence and loyalty to the corporation. In accordance with Sec. 31 of the Corporation Code, the director must actively disagree against the unlawful act to avoid liability; mere abstaining is not enough. Also, a director should not acquire personal or pecuniary interest in conflict of their duty. This usually happens when directors acquire secret profits. In relation to the doctrine of corporate opportunity, the damages to the corporation are the secret profits the director acquired that was suppose to be for the corporation. A simple mistake or bad judgment, however, is not actionable. Bad faith implies an unlawful purpose with an ill motive, moral oblique and breach of a known duty. (Bonilla) Fiduciary Obligations of Directors/Trustees The fiduciary relationship of directors with the corporation entails that they must act in the best interest of the corporation. (Bonilla)


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may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the

affairs of the corporation. Francisco v. Mallen (2010) FACTS: Mallen was hired as a waiter for VIPS Coffee Shop. He took a number of sick leaves from which he was given a memo that he was not to go to work because he was not physically and needed to regain his health. When Mallen reported back presenting a medical certificate showing that he was fit to work, he was refused work. The labor arbiter rendered a decision in favor of respondent and found that there was constructive dismissal. When this case was appealed to the CA, the court also found that there was constructive dismissal. ISSUE: Whether petitioner is personally liable for the monetary awards granted in favor of Mallen arising from his alleged illegal termination? HELD: No, because based on the records, respondent failed to allege either in his complaint or position paper that petitioner, as Vice-President of VIPS Coffee Shop and Restaurant, acted in bad faith. Neither did respondent clearly and convincingly prove that petitioner, as Vice-President of VIPS Coffee Shop and Restaurant, acted in bad faith. In fact, there was no evidence

Doctrine of Apparent Authority This doctrine is based on the principle of estoppel. See People’s Air Cargo v. CA and DBP v. Ong. Apparent authority manifests through different sources: 1) Nature of the business; or 2) Business practices and traditions that have been long accepted as

being part of the business scenario. Corporate officers, by necessity, have to be given express authority coming from the by-laws or a board resolution. The best practice to follow when dealing with a corporate officer is to ask for their authority to act. (Bonilla) Doctrine of Corporate Opportunity Under this doctrine, a director acquires for himself an opportunity which is supposedly for the corporation. It is based on taking advantage of the opportunity of the corporation. The damage to the corporation in this case is the opportunity it lost. In this particular case, there must be manifest action by a director taking advantage of an opportunity. (Bonilla) Section 34 of the Corporation Code allows the stockholders to ratify the taking of corporate opportunity by the director. But unless ratified, even if the director uses his own funds, the taking of corporate opportunity would still be voidable by the corporation. (Id.) However, if a director obtains secret profits, this cannot be ratified. (Id.) Self-Dealing Doctrine Under this, there is a transaction between the director and the corporation. Generally the contract may be annulled by the corporation unless:


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venture. Sec. 35. Executive committee. - The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.

whatsoever to show petitioner’s participation in respondent’s alleged illegal dismissal. Clearly, the twin requisites of allegation and proof of bad faith, necessary to hold petitioner personally liable for the monetary awards to respondent, are lacking. To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

1) presence of the self-dealing director in the board meeting was not necessary for a quorum;

2) the vote of the director is not necessary for the approval; 3) the contract is fair and reasonable; and 4) the contract was previously authorized. (Bonilla)

The transaction may be ratified provided that the contract is deemed fair and reasonable. (Id.) Interlocking Directorates Under this, there is a transaction between 2 corporations with a common director. The contract is valid as long as there is no fraud and it is reasonable. (Bonilla) The transaction can only be ratified if the share of the director is more than 20%. But if the share of the interlocking director in both corporation is nominal, there is no need to comply with the requirements in Section 32 of the Corporation Code because there is a remote possibility to do evil and he will probably be overruled anyway. If it is substantial for both, there is also no need because most likely the interlocking director will protect both corporations. Thus, the only time the rules in Section 32 is necessary is when the share is nominal for one and substantial for the other because there is a tendency that the interlocking director will favor the corporation which he holds substantial shares. Executive Committee The execom must be allowed by the by-laws and at least 3 members of the board belong to it. The execom may not act upon the following:

1) approval of any matter for which the shareholders’ approval is also required;

2) amendment of the by-laws; 3) amendment of a board resolution; 4) fill vacancies in the board; and


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5) distribute cash dividends to the shareholders. The execom is used in practice to sterilize the board by stripping some powers from some directors. It may implement actions without the need of quorum of the board. Majority stockholders have the best interest in the establishment of an execom because the majority can make decisions all the time without needing the quorum of the board. For this to be possible, it must be clearly stipulated in the by-laws. (Bonilla)

Nacpil v. IBC

March 21, 2002

Matling Industrial v. Coros October 13, 2010

Locsin v. NCL October 20, 2010

FACTS Nacpil was the comptroller of IBC.

He assumed the position because he was appointed by the General Manager of IBC. Later, he filed a complaint for illegal dismissal with the labor arbiter because he was dismissed. When Nacpil brought this case on appeal to the SC, he argued that he should have been considered an employee (to give the labor arbiter and the NLRC jurisdiction), and not a corporate officer because he was only appointed and the position of comptroller was not provided in the by-laws.

Matling Industrial claimed that Coros was a member of is board aside from being its VP for Finance prior to his termination. On the other hand, Coros insist that his status as a director is doubtful, considering that he had not been formally elected and that he did not own a single share of stock. The labor arbiter granted Matling’s motion to dismiss ruling that Coros was a corporate officer of the company because he was occupying the position of VP for Finance and at the same time was a member of the board. However, the NLRC set aside the dismissal, concluding that Coros’ complaint for illegal dismissal was properly cognizable by the labor arbiter because, by virtue of his position not being among the positions listed in the by-laws, he was not a corporate officer. On its appeal to the SC, Matling argue that the power to create corporate offices and to appoint the individuals to assume the offices was delegated by its board to its president through an amendment in its by-law.

Locsin was elected EVP/Treasurer of NCL. He held this position for 13 years until he was nominated and elected chairman of the board. Seven months after his election as chairman, the board held a special meeting to elect of a new set of officers. Unfortunately, Locsin was neither re-elected chairman nor reinstated to his previous position as EVP/Treasurer. Aggrieved, Locsin filed a complaint for illegal dismissal before the labor arbiter against NCL.

ISSUE Was Nacpil a corporate officer or an employee of IBC?

Was Coros a corporate officer or an employee of Matling Industrial? May the board delegate its power to create a corporate office?

Was Locsin a corporate officer or an employee of NCL?

HELD Nacpil was a corporate officer because: 1) even assuming that he was in fact appointed, such appointment

Coros was an employee because he was appointed by Matlings's general manager and not by the board of directors of petitioner. It was also the general manager who determined Coros’ compensation package.

Locsin was a corporate officer because: 1) pursuant to NCL’s by laws, he was undoubtedly elected by the


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was subsequently approved by the board; and 2) even if his position was not expressed in the by-laws, the board is empowered to appoint such other officers as it may deem necessary.

The board of Matling could not validly delegate the power to create a corporate office to the president, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers was a discretionary power that the law exclusively vested in the board of directors, and could not be delegated to subordinate officers or agents. To emphasize, the power to create new offices and the power to appoint the officers to occupy them vested by the by-laws of Matling merely allowed its president to create non-corporate offices to be occupied by ordinary employees of Matling. Such powers were incidental to the president’s duties as the executive head of Matling to assist him in the daily operations of the business. Considering that the observations earlier made herein show that the soundness of their dicta is not unassailable, Tabang and Nacpil should no longer be controlling.

board; and 2) the position EVP/Treasurer was expressly provided in the by-laws.

An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. On the other hand, an employee occupies no office and generally is employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.

4. What are the things a corporation can and cannot do?

LAW JURISPRUDENCE CONCEPTS AND DOCTRINES Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the

period of time stated in the articles of incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in

accordance with the provisions of this Code;

PTC v. Rivera (1923) FACTS: Rivera was an incorporator of Cooperativa Naval Filipina who subscribed for 450 shares. In the course of time, the company became insolvent and went into the hands of PTC, as assignee in bankruptcy. PTC filed an action to recover ½ of the stock subscription of Rivera, which admittedly has never been paid. The reason why Rivera did not pay his entire

Express, Implied and Inherent Powers Corporations have inherent rights and they are vested upon the corporation by the mere fact of its being a corporation. In relation to the Constitution, corporations do not have the inherent right to life because state approval is necessary for its existence; nor does corporations have the inherent right to liberty because they can only do things allowed by law and provided by the Articles of Incorporation. The doctrine of limited capacity explains how corporations do not have inherent rights. Corporations, however, have the inherent right to property, such as to own property and those necessary implicated therewith. (Bonilla)


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5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;

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

8. To enter into merger or consolidation with other corporations as provided in this Code;

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

10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and

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

Sec. 37. Power to extend or shorten corporate

subscription is because it was resolved among the stockholders that the capital stock should be reduced by 50% and the subscribers be released from the obligation to pay any unpaid balance of their subscription in excess of 50%. As a result of this resolution it seems to have been supposed that the subscription of the various shareholders had been cancelled to the extent stated; and fully paid certificate were issued to each shareholders for one-half of his subscription. ISSUE: Whether or not Rivera is still liable for his unpaid subscriptions? HELD: Yes, because the resolution releasing the shareholders from their obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual. It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his

Some powers of corporations are expressed, implied or incidental all at the same time. For instance, the power to sue and be sued in its corporate name is expressly provided under Section 36 of the Corporation Code but it is also incidental upon a corporation’s existence; to issue stocks to stockholders is also another example. Thus, the classification is not a very helpful distinction to some extent. (Id.) Those that are not allowed by the code or the Articles of Incorporation are ultra vires acts. Illegal acts are not synonymous with ultra vires acts because the former are acts contrary to law; while ultra vires acts may simple be beyond the scope of the Code and the Articles of Incorporation but not necessarily illegal. The primary purpose needs to be specific because an act would be considered an ultra vires act if it is beyond the the primary purpose.Ultra vires acts of a corporation can be ratified. As a rule of thumb, if the act may be ratified by the board, then it is not an ultra vires act; only acts beyond the scope of the Code or the Articles of Incorporation can be ratified, provided that it is not illegal. (Id.) See Section 36 of the Corporation Code. Among those expressly provided in Section 36 of the Corporation, only the express provision of the power of the corporation to make donations is necessary because there are limitations provided. (Bonilla) See Gonzalez v. Climax Mining. Trust Fund Doctrine The capital stock of a corporation, or the assets of an insolvent corporation representing its capital, is a trust fund for the benefit of the corporation’s creditors. (Fletcher) It is an established doctrine that subscriptions to the capital of a


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term. - A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder's meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of

shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. PLDT v. NPC (2007) Stock dividends are part of the outstanding capital stock. Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. The SC said that "in the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account" or "it is the amount that the corporation receives in consideration of the original issuance of the shares." It is "the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned."14 Such distribution in whatever form is valued at the declared amount or monetary equivalent. Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the

corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Phil. Trust v. Rivera) The “Trust Fund Doctrine” is a corporate theory which seeks to protect the interest of corporate creditors. Under the this doctrine, it would be a violation of the rights of creditors of the corporation to allow the return to the stockholders the return of their capital, or to declare dividends outside the unrestricted retained earnings. Likewise, upon insolvency of the corporation, the board of directors are duty bound to hold the assets of the corporation primarily first for the payment of the corporation’s liabilities. (Mead v. McCullough) The trust fund doctrine was set up to protect the creditors because creditors cannot run after the stockholders of a corporation since there is a separate juridical entity. (Bonilla) The trust fund doctrine usually applies in four cases: 1. Where there has been a distribution or an attempt to distribute

corporate properties, or a return of the capital or portion thereof, to stockholders, without providing for the payment of creditors;

2. Where it had released the subscribers to the capital stock from their subscriptions without valuable consideration;

3. Where it haas transferred the corporate property in fraud of its creditors; and

4. Where the corporation is insolvent. Under the capital impairment rule and the profit rule, a fixed capital must be preserved for protecting the claims of creditors so that dividend distributions to stockholders should be limited to profits earned or accumulated by the corporation. Impliedly therefore, for a solvent corporation, the trust fund doctrine encompasses only the capital stock of the corporation, and does not cover unrestricted retained earnings. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholders (except in the


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residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have

been complied with; (2) The amount of the increase or diminution of

the capital stock; (3) If an increase of the capital stock, the

amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized;

(4) Any bonded indebtedness to be incurred, created or increased;

(5) The actual indebtedness of the corporation on the day of the meeting;

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

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the

declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either to its working capital or for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders. When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders’ equity is increased. Furthermore, the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the availability and conditioned on a certain level of retained earnings.15 Elsewise put, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock, the corporate Board of Directors is mandated to declare dividends which

redemption of redeemable shares) without violating the trust fund doctrine. Thus, dividends must never impair the subscribed capital; subscription commitment cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as a the consideration therefor. (PLDT v. NTC) The protective reach of the trust fund doctrine, when the corporation is not in a state of insolvency, would be only up to the extent of the “capital stock” of the corporation. In other words, since retained earnings, although part of stockholder’s equity, do not constitute part of “capital stock,” it is not covered by the doctrine, and the corporation is at liberty to declare and pay out assets to the stockholders by way of dividends up to the extent of its unrestricted retained earnings. In relation to the trust fund doctrine, the SC held that the funds received by the corporation to cover subscription payment on increase in authorized capital stock prior to approval thereof of the SEC would not be covered within the ambits of the trust fund doctrine. The Court held: “As a trust fund, this money is still withdrawable by any of the subscribers at any time before the issuance of the corresponding shares of stock, unless there is a pre-subscription agreement o the contrary. Consequently, if a certificate of increase has not been issued yet by the SEC, the subscribers to the unauthorized issuance are not to be deemed as stockholders possessed of such legal rights to vote and dividends.” (Textile Mills v. NWPC) The trust fund doctrine is a limitation to several powers of the corporation. (Bonilla) Power Over Corporate Term The corporation may virtually have a perpetual lifespan renewable every 50 years. The limit of a 50-year term emphasizes the contractual nature of the corporation: people would be discouraged from investing if the period could last forever. Likewise, management would theoretically be more honest because a renewal of the corporate term would be a vote of confidence by the stockholders or


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incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.

the shareholders will receive in cash unless otherwise declared as property or stock dividends, which in the latter case the stockholders are forced to forego cash in lieu of property or stocks. In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of their dividend for capital stock, and the monetary value they forego is considered the actual payment for the original issuance of the stocks given as dividends. Madrigal v. Zamora (1987) FACTS: On two occasions, M&C reduced its capital stock by distributing its marketable securities to its stockholders in exchange for their shares in an equivalent amount in the corporation because of the desire of its stockholders to phase out the operations of the corporation due to lack of business incentives and prospects, and in order to prevent further losses. After M&C’s failure to sit down with its labor union who is asking for wage increases and other economic benefits, the latter filed a complaint for unfair labor practices. M&C filed its position paper, alleging that has no substantial income to speak of, necessitating reorganization, by way of retrenchment of its employees and operations. In appealing the unfavorable judgments of the NLRC

members. (Villanueva) See Section 37 of the Corporation Code. There seems to be a conflict between Section 81(1) and Section 37 of the Corporation Code. In the former, it provides the exercise of appraisal rights in both extending and shortening the corporate term; while the latter provides that appraisal may only be exercised during the shortening of the corporate term. Upon the reading the provisions together, Section 81(1) seems to be a general rule enumerating the instances when to exercise appraisal rights; while the Section 37 is a specific rule when it comes to the corporate term. Under the rules of statutory construction, Section 37 prevails over Section 81(1) because the former is a specific provision while the latter is a general one. Thus, the appraisal right cannot be exercised during the shortening of the corporate term because the specific rule in Section 37 does not expressly provide it. (Bonilla) Section 37 is useful in practice for it is a pragmatic tool to close shop. In fact, the SEC recommends this. (Id.) In practice and essence, extension of the corporate term is the same with renewal of the corporate term. It must be noted that, in renewing, the corporate term cannot be extended earlier than 5 years prior to the expiration of the term, unless there are justifiable reasons for an earlier extension as determined by the SEC. (Id.) Capital Stock & Bonded Indebtedness See Section 38 of the Corporation Code. Increasing or decreasing capital stock deals with the equity of the corporation; while creating bonded indebtedness means incurring liabilities for the corporation. (Bonilla) Incurring bonded indebtedness is different from acquiring a loan because long periods are involved in the former. There is a need to register the bond with the SEC for the sale of the bond to the public;


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Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds

and the Office of the President, M&C contend that it was sustaining losses because whatever profit it earned, were in the nature of dividends declared on its shareholding in other companies in the earning of which the employees had no participation whatsoever; and cash dividends are the absolute property of the stockholders and cannot be made available for disposition if only to meet the employee’s economic demands. ISSUE: Whether or not the dividends received by M&C are not considered to be company profits and beyond the reach of its employees? HELD: No, because the dividends received by the corporation are corporate earnings arising from corporate investments. As found by the NLRC, M&C had entered such earnings in its financial statement as profits, which it would not have done if they were not in fact profits. Moreover, it is incorrect to say that such profits – in the form of dividends – are beyond the reach of M&C’s creditors since it received them as compensation for its management services in favor of the companies it managed as a shareholder thereof. As such shareholder, the dividends paid to it were its own money, which may be then available for wage increments. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute

issuing bond usually means selling to the public – 20 or more persons. Regardless wither the company is making profits or not, there is need to pay the bond. It must me noted that incurring bonded indebtedness requires stockholder approval. (Id.) Increasing (decreasing) capital stock may be done in either the following ways:

1) increase (decrease) the number of shares; 2) increase (decrease) the par value ; 3) increase (decrease) both.

In either case, SEC approval is necessary. More often than not, there is no problem with increasing the capital stock because it improves the situation for the corporate creditors. When the corporation needs more funds, especially when it is expanding, it may be cheaper to use other people’s money to expand. They can leverage capital stock to raise more money through borrowing. Although, this is limited because creditors might not be willing to lend/reach the limits of the borrowing capacity. In this case, the corporation must raise the capital stock to support their expansion plans. Overtime corporations may keep on losing money and start incurring losses. These losses are reflected in their equity; first in the retained earnings, then later on equity. This is called impairment of capital. Corporations would usually decrease capital stock to create a surplus which can be used to cover losses. This is called a quasi-reorganization – correcting an impaired capital situation. A quasi-reorganization helps the corporation make capital accounts look better in terms of marketing its shares and borrowing from banks. To create a surplus, it must be noted that the corporation does not have to be in a loss situation; it can be that the stocks of the corporation are not in demand. But as a rule set by the trust fund doctrine, the reduction of capital stock should not prejudice the rights of creditors. (Bonilla) There are other ways to quasi-reorganize:


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(2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business.

property of the stockholders and hence, out of reach by the creditors of the corporation. Here, M&C was acting as a stockholder itself, and in that case, the right to share in such dividends, by way of salary increases, may not be denied its employees. Lincoln Phil. v. CA (1998) FACTS: Lincoln Philippines issued 50,000 shares of stock as stock dividends, with a par value of P 100 or a total of P 5 M. The corporation paid documentary stamp taxes on each certificate on the basis of its par value. The CIR took the view that the book value of the shares should be used as a basis for determining the amount of the documentary stamp tax; and accordingly, he issued a deficiency assessment. The CTA rendered its decision holding that the amount of the documentary stamp tax should be based on the par value stated on each certificate of stock. However, the CA reversed the CTA’s decision and held that the bais should be the actual value represented by the subject shares on the assumption that stock dividends, being a distinct class of shares, are not subject to the qualification in the law as to the type of certificate of stock used (with or without par value). ISSUE: In determining the amount to be paid as documentary stamp tax, whether it is the par value of the

1. Appraisal Surplus

This only happens when the real estate properties held by the corporation appreciate in value. When the real estates owned by the corporation appreciate, the value of the assets of the corporation increase. When they do, the corporation may opt to revalue the real estate’s value to its appreciated value. By increasing the value of the assets, it follows that the equity of corporation also increases because the assets of the corporation must always be equal to the liabilities and equity of a corporation. When the corporation does revalue, the SEC must approve the change in the corporation’s books.

2. Conversion of Stockholder’s Advances to Equity

Usually, investors split their investments in a corporation into two; thus, they can either be both creditors and stockholders of a corporation. Rather than tinkering with the value of the stock or increasing the number of shares, a corporation may opt to simply convert the advances made by creditors (liability to the corporation) into subscribed capital (equity of the corporation). However, it is necessary that the stockholders and will give their approval.

What do corporations, especially multinational ones, who earn a lot and incur a lot of taxes, do to protect their profits from taxes? Initial answer would be to use charitable donations but this is limited as far as the corporation is concerned. But The best way to protect company profits is to get the foreign investment on the corporation out and let the business earn on its own. In order to do this without being subject to taxes is find ways to make it look like the company is incurring a lot of expenses, and in turn, losses. Multinational companies use transfer pricing – pricing something that the subsidiary buys domestically from abroad; the subsidiary buys it in such a way that is costly or make it seem like the expenses are incurred abroad. Basically, the trick of the trade is if you have huge profits, make it


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In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. (28 1/2a) Sec. 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of

stock dividends; 2. To collect or compromise an indebtedness to

the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (n)

Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. - Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder's or member's

certificates of stock or the book value of the shares which should be considered? HELD: Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation’s books. Thus, a stock dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus of profits. From the foregoing, it is clear that the stock dividends are shares of stock and not certificates of stock. There is, therefore, no reason for determining the actual value of such dividends for purposes of documentary stamp tax if the certificates representing them indicate a par value. PNB v. Andrada Electric (2002) FACTS: PASUMIL engaged the services of Andrada Electric, most of which were partially paid by, leaving several unpaid accounts with the latter. Later, PNB acquired the assets of PASUMIL that were foreclosed by DBP. Andrada Electric now is demanding PNB to pay the outstanding obligation

seem like you have huge expenses. Sale & Other Disposition of Assets See Section 40 of the Corporation Code. The important question to consider here is whether the sale or disposition of assets impair the ability of the corporation to continue operating. The disposition of assets may not be over the percentage of total assets. This was designed to protect the corporation’s creditors. (Bonilla) If the corporation decides to sell 80% of the value of its assets, this would be considered a sale of substantial assets. In tax terms, this is called a quasi-merger. Also, compliance with the bulk sales law is necessary. If a corporation intends to sell all of its assets, it must inform the public and its creditors: 1) Come up with a statement of liabilities stating all the creditors and

liabilities of the corporation and how the assets can cover the credits; and

2) File this statement with the DTI. If this procedure is not followed, the sale would be considered void. (Id.) Acquire Own Shares Those enumerated in Section 41 of the Corporation Code are not the only instances when a corporation may acquire its own shares because the corporation may acquire treasury shares and sell again as subscription. (Bonilla) Investment of Corporate Funds See Section 42 of the Corporation Code.


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meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) Sec. 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited

of PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of PASUMIL, and all of them benefited from the services it did. In PNB and NASUDECO’s answer, they claim that the taking over of assets of PASUMIL was solely for the purpose of recondition the sugar central of PASUMIL; and that they never assumed any of PASUMIL’s obligation. The trial court rendered a decision in favor of Andrada Electric, which the CA affirmed. The appellate court held that it was offensive to the basic tenents of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom. ISSUE: Whether or not PNB and NASUDECO should be held liable for the corporate debts of PASUMIL? HELD: No, because their takeover of the latter’s assets did not make them assignees. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation provide the former acted in good faith and paid adequate consideration for such assets, except when the following circumstances is present: 1) where the purchaser expressly or

impliedly agrees to assume the

Normally corporations are not prevented from investing in another business if the investment is necessarily included in the ordinary course of its business. What requires a majority vote is an investment not covered by the corporation’s primary purpose. Power to Declare Dividends See Section 43 of the Corporation Code. People join corporations because they want to get dividends; thus, it would be pointless if a corporation cannot declare dividends. However, there must be unrestricted retained earning before a corporation declare dividends. A corporation can declare: 1. Cash Dividends – declared by the Board 2. Property Dividends – declared by the Board 3. Stock Dividends – declared by the Board and 2/3 vote of the

stockholders See PLDT v. NTC and Lincoln Phil. v. CA. As a general rule under the trust fund doctrine, you cannot distribute any surplus including profit except unrestricted earnings. But there are instances where you can distribute surplus by stock dividends:

3. When decreasing capital stock; 4. In the case of redeemable shares; or 5. When you liquidate and dissolve the corporation and all that’s

left is capital. The law requires corporations to declare dividends because they are not allowed to exceed more that 100% of their paid up capital. Otherwise, corporaitons have to pay improperly accumulated earnings tax (IAET, which is 10% of the improperly accumulate earnings. The tax paid is a penalty for not distributing dividends. In effect, if the corporations ditribute dividends, the stockholders will shoulder the tax; while if the company retains, the company will be required to pay the tax as a penalty. (Bonilla)


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under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) Sec. 44. Power to enter into management contract. - No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation

debts; 2) where the transaction amount to a

consolidation or merger of the corporations;

3) where the purchasing corporation is merely a continuation of the selling corporation; and

4) where the transaction is fraudulently entered into in order to escape liability for those debts.

A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder at the public auction conducted. PNB, as the second mortgagee, redeemed from DBP the foreclosed assets. Thus, there was no basis for the lower courts to lift the corporate masks. Also, there was no merger or consolidation with respect to PASUMIL and PNB because the procedure under the Corporation Code was not followed and, in fact, PASUMIL’s corporate existence, had not been legally extinguished or terminated. Lastly, neither did PNB or NASUDECO expressly or impliedly agree to assume the debt of PASUMIL. Acesite v. NLRC (2004) As a rule set in Bogo-Medellin v. NLRC, unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their official acts, because a corporation has a personality separate and distinct

Pre-emptive Right Pre-emptive right refers to the common law right granted to stockholders of a corporation to be granted the first option to subscribe to any opening of the corporation’s unissued capital stock, or to any increase of its authorized capital stock. (Villanueva) See Section 39 of the Corporation Code. As a rule, pre-emptive right exists unless denied in the Articles of Incorporation. The presumption is that there is a pre-emptive right, even if not mentioned in the Articles of Incorporation. The reason behind this right is that people would want to keep the percentage of control they have over the corporation. (Bonilla) The recognition of the pre-emptive right is intended to protect both the proprietary and voting rights of a stockholder in a corporation. The proportionate interest of a stockholder in a corporation determines his proportionate power to vote in corporate affairs when the law gives the stockholders a right to affirm or deny board actions. The proportionate interest of stockholder to the outstanding capital stock also determines his proportionate share in the dividends declared by the corporation, as his proportionate right to the remaining assets of the corporation upon its dissolution. (Villanueva) The SEC has ruled that in determining the proportionate right of the stockholders to subscribe to a proposed increase of the authorized capital stock, subscription deposits are excluded because these are payments received for future issuance of stock which may or may not materialize. (Id.) The SEC has rules that a majority vote of stockholders waiving the pre-emptive right would not be valid and binding on the individual stockholder since the pre-emptive right is a personal right of a stockholder, and accordingly, the waiver should be given individually by the stockholder concerned. When a stockholder has effectively waived the exercise of his pre-emptive right to an issuance of shares,


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undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n) Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n)

from its officers, stockholders and members. Corporate directors and officers are solidarily liable with the corporation, where terminations of employment are done with malice or in bad faith. Gonzales v. Climax Mining (2005) If the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the certification against forum shopping is necessary – certification not signed by a duly authorized person renders the petition subject to dismissal.

it is not necessary that said shares should again be offered on a pro-rata basis to the stockholders who took advantage of their right of pre-emption. The use of the terms “issues or disposition” clearly provides that the pre-emptive right should not be available even to issue from the existing unsubscribed portion of the authorized capital stock when the board decides to open them for subscription, and even to re-issuance or sale of treasury stocks of the corporation. (Id.) Management Contracts In case of a management contract, a corporation can manage another corporation for 5 years. In cases of exploration/development of natural resources, however, the period is not longer than 5 years. (Bonilla)


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Documents

LEX Corporation Law Midterm Reviewer