ATENEO
DE MANILA
LAW SCHOOL
PHILIPPINE CORPORATE LAW
1
DEAN CESAR L. VILLANUEVA
DEAN JOSE MARIA G. HOFILEÑA
2ND SEMESTER, SY 2020-2021
ATTY. TERESA VILLANUEVA-TIANSAY
________________________________________________________________________________
MODULE 1
STRUCTURE OF PHILIPPINE CORPORATE LAW
(1ST WEEK: FEBRUARY 2 AND 4)
I. CORPORATE CONCEPTS AND DOCTRINES
1.
Common Law Nature of the Revised Corporation Code
2.
Definition and Essence of the “Corporation” (Sec. 2)
A corporation is an artificial being created by operation of law, invested by law upon coming into
existence with a personality separate and distinct from the persons composing it, and from any other legal
entity to which it may be related. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).2
FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2 DEFINITION:
3.
a. An Artificial Being: “A corporation is granted a juridical capacity to own properties, to contract and to
enter into legal relationships.”
b. Creature of the Law: “Each corporation is created by operation of law pursuant to a covenant to
pursue a business enterprise.”
c. With a Right of Succession: “A corporation has a juridical personality separate and distinct from its
shareholder or members, officers and directors or trustees.”
A corporation is invested by law with a personality separate and distinct from the persons composing
it, and from that of any other entity to which it may be related. Its artificial being makes possible the
assembling of huge amounts of capital upon which big business depends. It also has the advantage of
non-dependence on the lives of those who compose it, even as it enjoys certain rights and conducts
activities of natural persons. Reynoso IV v. Court of Appeals, 345 SCRA 335 (2000).
d. Creature of Limited Powers: “A corporation has only such powers, attributes and properties as are
expressly authorized by law or incident to its existence.”
A corporation has no powers except for those expressly conferred on it by the [Revised] Corporation
Code, and those found in its charter and those incidental to its existence. It exercises its powers through
its Board of Directors and/or its duly authorized officers and agents. Pascual and Santos, Inc. v.
Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004).3
A corporation as a creature of the State is presumed to exist for the common good; and the special
privileges and franchises it receives are subject to the laws of the State and the limitations of its charter.
There is therefore a reserved right of the State to inquire how these privileges had been employed, and
whether they have been abused. PAGCOR therefore has no power to grant franchise on internet
gambling, which power finds no basis in its charter. Jaworski v. PAGCOR, 419 SCRA 317 (2004).
4. “ TRI-LEVEL EXISTENCE ” IN THE CORPORATE SETTING
a. “ASSETS-ONLY” LEVEL: “The corporation is an aggregation of property and assets.”
b. “BUSINESS ENTERPRISE” LEVEL: “The corporation’s primary purpose is to pursue business.”
“When one buys the business of another as a going concern, he usually wishes to keep it going; he
wishes to get the location, the building, the stock in trade, and the customers. He wishes to step into the
seller's shoes and to enjoy the same business relations with other men. He is willing to pay much more
if he can get the goodwill of the business, meaning by this the good will of the customers, that they
may continue to tread the old footpath to his door and maintain with him the business relations enjoyed
by the seller.” Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).4
c. “JURIDICAL ENTITY” LEVEL: “The corporation’s juridical personality is primarily a medium through
which to pursue a business enterprise.”
1
Unless indicated otherwise, all references to sections pertain to the Revised Corporation Code of the Philippines, Republic Act No. 11232
2
CDCP v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, v. BF Corp., 556 SCRA 25 (2008).
3
De Liano v. Court of Appeals [“CA”], 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004); United
Paragon Mining Corp. v. CA, 497 SCRA 638 (2006); Cebu Bionic Builders Supply, v. DBP, 635 SCRA 13 (2010); Esguerra v. Holcim Phils., 704 SCRA 490
(2013).
4
Footnote 35: Recent cases have enlarged the concept of good will over the behavioristic resort of old customers to the old place of business. It is now
recognized that “It may include in addition to those factors all that goes with a business in excess of its mere capital and physical value; such as reputation for
promptness, fidelity, integrity, politeness, business sagacity and commercial skill in the conduct of its affairs, solicitude for the welfare of customers and other
tangible elements which contribute to successful commercial venture.”
5. “ TRI-LEVEL RELATIONSHIPS ” IN THE CORPORATE SETTING
a. “JURIDICAL ENTITY” RELATIONSHIP: Treats of the legal consequences arising from the relationship
between the State as the creator, and the corporation as its creature.
b. “INTRA-CORPORATE” RELATIONSHIPS: Treat of the legal consequences arising from “corporate
contractual relationships” —
(1) Between the corporation and its agents (directors/trustees and officers) to act in the real
world, governed by Law on Agency transmuted into Corporate Law doctrines;
(2) Between the corporation and its shareholders/members, governed primarily by Corporate
Law;
(3) Between shareholders/members and the directors/trustees and officers, governed by the
Law on Business Trusts transmuted into Corporate Law doctrines;
(4) Among the shareholders or members in common venture, governed by Corporate Law
implementing Contract Law doctrines.
 Underpinned by the “Doctrine of Maximization of Shareholder Value”
c. “EXTRA-CORPORATE” RELATIONSHIPS: Deals with legal consequences arising from the relationships of
the corporation with the public it deals with or those affected by its business enterprise —
(1)
(2)
(3)
Between the corporation and those it contracts with, governed by various Laws on Contracts;
Between the corporation and its employees, governed by Labor Laws;
Between the corporation and those affected by its enterprise, governed by Law on Torts
 Underpinned by the emerging “Stakeholder Theory”
Power to Create a Corporation Is Legislative in Character (Sec. 16, Art. XII, 1987 Constitution)
6.
Since under the Constitution, Congress cannot enact a law creating a private corporation with a
special charter, except when it is a GOCC, it follows then that Congress can create corporations with
special charters only if such are GOCCs. Thus, all water districts which are not created under the
Corporation Code but pursuant to P.D. 198, are GOCCs and within COA’s jurisdiction. Feliciano v. COA,
419 SCRA 363 (2004).5
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a private
corporation by special legislative act, as it is not a GOCC, since NDC was merely required to extend a loan
to the new corporation, and the new stocks of the corporation were to be issued to the old investors and
shareholders of the insolvent Agrix upon proof of their claims against the abolished corporation. National
Development Corporation v. Philippine Veterans Bank, 192 SCRA 257 (1990).
THEORIES ON THE FORMATION OF CORPORATIONS
7.
a. Theory of Concession:
A corporation’s claim of a juridical personality of its own and to transact business as such, is not a
matter of absolute right, but a privilege which may be enjoyed only under such terms as the State may
deem necessary to impose. cf Ang Pue & Co. v. Sec. of Commerce & Industry, 5 SCRA 645 (1962).
“There is thus a rejection of Gierke’s genossenchaft theory, the basic theme of which … ‘is the
reality of the group as a social and legal entity, independent of state recognition and concession.’ A
corporation as known to Philippine jurisprudence is a creature without any existence until it has received
the imprimatur of the state acting according to law. It is logically inconceivable therefore that it will have
rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately
refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever
called upon to do so.” Tayag v. Benguet Consolidated, 26 SCRA 242 (1968).
All corporations, big or small, must abide by the provisions of the [Revised] Corporation Code; even
a simple family corporation cannot claim an exemption nor can it have rules and practices other than
those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).
“It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act,” and the procedure and
conditions provided under the law for the acquisition of such juridical personality must be complied with.
Although the statutory grant to an association of the powers to purchase, sell, lease and encumber
property can only be construed the grant of a juridical personality to such an association,” nevertheless,
the failure to comply with the statutory procedure and conditions does not warrant a finding that such
association acquired a juridical personality, even when it adopts a constitution and a set of bylaws. Int’l
Express Travel & Tour Services v. Court of Appeals, 343 SCRA 674 (2000).
b. Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 (1947)
A corporation is but an association of individuals, allowed to transact business under a corporate
name with a distinct legal personality. In organizing itself as a collective body, the group or its members
waives no constitutional immunities and perquisites appropriate to such a body. Philippine Stock
Exchange (PSE) v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and their separate corporate personality is no shield
for the commission of injustice and inequity, such as to avoid the execution of the property of a sister
company. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
5
Veterans Federation of the Phils. v. Reyes, 483 SCRA 526 (2006).
2
ADVANTAGEOUS ATTRIBUTES AND DISADVANTAGES OF THE CORPORATION
8.
a. PRIMARY ATTRIBUTES OF THE CORPORATION UNDER CORPORATE LAW FRAMEWORK:
(1) STRONG/SOLEMN JURIDICAL PERSONALITY (Sec. 2; Arts. 44[3], 45 and 46, Civil Code)
While not in fact a person, the corporation is treated through fiction by the law as though it were
a person—an artificial person distinct and separate from its shareholders. Remo, Jr. v. IAC, 172
SCRA 405 (1989).
Shareholders are not co-owners of corporate assets; the transfer of corporate assets to the
shareholders by way of dissolution is an act of conveyance and not a partition among co-owners.
Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
Execution pending appeal may be allowed when “the prevailing party is already of advanced
age and in danger of extinction,” but not in this case a corporation whose “juridical entity’s
existence cannot be likened to a natural person —its precarious financial condition is not by itself a
compelling circumstance warranting immediate execution and does not outweigh the long standing
general policy of enforcing only final and executory judgment.” Manacop v. Equitable PCIBank, 468
SCRA 256 (2005).
(2) CENTRALIZED MANAGEMENT (Sec. 22)
Under [Sec. 22 of RCC], save in those instances where the Code requires shareholders’
approval for certain specific acts, it is the Board of Directors/Trustees which exercises all the
corporate powers in a corporation. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA
557 (2002).6
(3) LIMITED LIABILITY TO SHAREHOLDERS AND NON-LIABILITY TO DIRECTORS/TRUSTEES
AND
OFFICERS FOR THE LIABILITIES OF THE CORPORATION
An important advantage of the corporation is the limitation of an investor’s liability to the amount
of investment, which flows from the legal theory that a corporate entity is separate and distinct from
its shareholders. San Juan Structural and Steel, Inc. v. CA, 296 SCRA 631 (1998).
By virtue of the principle separate juridical personality, the corporate debts or credits are not the
those of the shareholders. This protection from corporate liability for shareholders is the principle of
limited liability. PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).7
Where the creditor sues not only the company but also all shareholders to reach their unpaid
subscription which appear to be the only visible assets of the company, the controlling doctrine is
that “a stockholder is personally liable for the financial obligations of the corporation to the extent of
his unpaid subscription.” Halley v. Printwell, Inc. 649 SCRA 116 (2011).
It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally liable under a trust receipt where he
entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust
Corp. v. Court of Appeals, 356 SCRA 671 (2001).8
Obligations incurred by the corporation through its directors and officers, are its sole liabilities.
Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001).
(4) FREE-TRANSFERABILITY OF “UNITS OF OWNERSHIP” (SHARES) (Sec. 62)
It is the inherent right of the shareholder to dispose of his shares, which he owns as any other
property, anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).9
No corporation can restrict the right of a shareholder to transfer shares, but merely has authority
to adopt regulations on the formalities and procedure to be followed in effecting such sale or
transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
b. Disadvantages of the Corporate Medium:
(1) Agency Cost: Abuse of Management; Breach of Trust
(2) Abuse of Limited Liability Feature
(3) High Cost of Maintenance of the Corporate Medium
(4) Double Taxation:

Dividends received by individuals from
domestic corporations are subject to final 10% tax for income earned on or after 01
January 1998. Sec. 24(B)(2), 1997 NIRC.

However, inter-corporate dividends between
domestic corporations are not subject to any income tax. Sec. 27(D)(4), 1997 NIRC.

Re-imposition of the 10% “improperly
accumulated earnings tax” for holding companies. Sec. 29, 1997 National Internal
Revenue Code (NIRC).
6
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
7
Aboitiz Equity Venture v. Chiongbian, 729 SCRA 580 (2014).
8
Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224 , 672 SCRA 562 (2012); Gotesco Properties
v. Fajardo, 692 SCRA 319 (2013).
9
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
3
COMPARED WITH OTHER BUSINESS MEDIA
9.
a. Sole Proprietorships
A sole proprietorship, although regulated separately from its owner for purpose of taxation and
regulation, is not vested with juridical personality to file or defend an action. Excellent Quality Apparel v.
Win Multiple-Rich Builders, 578 SCRA 272 (2009).10
b. Business Trusts (Art. 1442, Civil Code)
c. Partnerships (Arts. 1768 and 1775, Civil Code)
d. Joint Ventures
Joint venture is an association of persons or companies jointly undertaking some commercial
enterprise; generally all contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in connection therewith, and
agreement to share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
e. Joint Accounts or Cuentas en Participacion (Arts. 239-243, Code of Commerce)
Cuentas en participacion is an accidental partnership constituted in a manner that its existence was
only known to those who had an interest in the same, there being no mutual agreement between the
partners, and without a corporate name indicating to the public in some way that there were other
people besides the one who ostensibly managed and conducted the business, governed under Art. 239
of the Code of Commerce. Those who contract with the person under whose name the business of such
partnership of cuentas en participacion is conducted, shall have only a right of action against such
person and not against the other persons interested, and the latter, on the other hand, shall have no
right of action against third person who contracted with the manager unless such manager formally
transfers his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
A joint account is when a third person is financially interested in the business of a merchant but
does not give rise to the creation of a juridical person. CIR v. Cojuangco, 109 Phil. 443 (1960).
f. Cooperatives (Art. 3, R.A. No. 6938)
10. x CLASSIFICATION OF CORPORATIONS
a. In Relation to the State:
(1) Private Corporations (Sec. 3, Act 1459)
(2) Public Corporations or Local Government Units (LGUs) (Sec. 3, Act No. 1459)
(3) Quasi-Public Corporations
(4) GOVERNMENT-OWNED-OR-CONTROLLED CORPORATIONS (GOCCS) – SEE R.A. No. 10149; Villanueva &
Reyes, The Great Restructuring of the Public Corporate Sector, 59 ATENEO L.J. 41 (2014).
Local water districts created under P.D. 198 by the different local legislative bodies, with the
primary function to sell water to residents within their territory, under such schedules of rates and
charges as may be determined by their boards are considered quasi-public corporations, performing
public services and supplying public wants, Marilao Water Consumers Assn. v. IAC, 201 SCRA 437
(1991); they are clearly GOCCs, and their Board of Directors and personnel are government employees
subject to civil service laws and anti-graft laws. Feliciano v. COA, 419 SCRA 363 (2004).
The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries
under the general corporation law are governed by the Civil Service Law and not by the Labor Code,
has been supplanted by the 1987 Constitution. GOCCs created by special charter are subject the Civil
Service Law, while those incorporated under the [Revised] Corporation Code are governed by the Labor
Code. PNOC-EDC. v. NLRC, 201 SCRA 487 (1991).1
A GOCC has a personality of its own, distinct and separate from that of the government, and the
intervention of the Executive Secretary does not change the independent existence of a government
entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001).
The GOCC Governance Act (R.A. 10149), which governs compensation and position classification
systems within the GOCC Sector, does not distinguish between chartered and nonchartered GOCCs,
and its provisions apply equally to both. GSIS Family Bank Employees Union v. Villanueva, 891 SCRA
206 (2019).
A GOCC is a government agency when it is organized as a stock or non-stock corporation, and
must comply with three requisites: (a) it has a capital stock, (b) the capital stock is divided into shares,
and (c) it is authorized to distribute dividends and allotments of surplus and profits to its stockholders.
As for non-stock corporations, they must have members and must not distribute ay part of their income
to said members. However, the is now formal administrative and statutory recognition of “government
instrumentalities with corporate powers/government corporate entities,” which may not fall within the
definition of stock and non-stock corporations, but are government instrumentalities that are vested with
corporate powers. LRTA v. Quezon City, G.R. No. 221626, 09 Oct. 2019.
Under the Constitution, the COA has audit jurisdiction over both GOCCs with original charters
(subject to COA pre-audit) and those without original charters (those organized under the Corporation
Code—subject to post-audit). Alejandrino v. COA, G.R. No. 245400, 12 Nov. 2019.
10
ALPS Transportation v. Rodriguez, 698 SCRA 423 (2013); Stanley Fine Furniture v. Gallano, 743 SCRA 306 (2014).
1
Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
4
(i) Charterred GOCCs
Although Boy Scouts of the Philippines does not receive any government financial subsidy, and its
funds and assets are not considered government in nature and not subject to COA audit, the fact that it
received a special charter, its governing board are appointed by the Government, and that its purpose
are of public character, for they pertain to the educational, civic and social development of the youth
which constitute a very substantial and important part of the nation, it is not a public corporation in the
same sense that local governments are public corporation since its does not govern a portion of the
state, but it also does not have proprietary functions in the same sense that the functions or activities of
GOCCs, is may still be considered as such, or under the 1987 Administrative Code as an
instrumentality of the Government, and it employees are subject to the Civil Service Law. Boy Scouts of
the Philippines v. NLRC, 196 SCRA 176 (1991).
Although it has a special charter, the Chairman of the Philippine National Red Cross is not
appointed by the President. Although Camporendodo v. NLRC had ruled that PNRC is GOCC because
it is constituted under a special charter, it failed to consider the definition of a GOCC as provided under
Sec. 2(13) of the 1987 Administrative Code, which requires that a GOCC to be such must be owned by
the government, and in the case of a stock corporation, at least a majority of its capital stock must be
owned by the government. Liban v. Gordon, 593 SCRA 68 (2009).
When the law vests in a government instrumentality corporate powers, it does not become
necessarily a corporation. A GOCC must be organized as a stock or nonstock corporation. The MIAA is
not a GOCC because it is not constituted of capital divided into shares, and neither is it a nonstock
corporation because it has no members. MIAA is a government instrumentality vested with corporate
powers to perform efficiently its government functions. MIAA v. CA, 495 SCRA 591 (2006).
[Section 30 of the RCC] is applicable to corporations which have been organized by special
charters since Sec. 4 thereof renders the provisions supplementary to all corporations, including those
with special or individual charters, such as cooperatives organized under P.D. 269. Benguet Electric
Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
While public benefit and welfare may be attributable to the operation of the Bases Conversion and
Development Authority (BCDA), yet it is certain that the functions it performs are basically proprietary in
nature—the promotion of economic and social development and the country’s goal for enhancement.
Therefore, the rule that prescription does not run against the State will not apply to BCDA—when title of
the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the
same category as ordinary persons. Shipside Inc. v. CA, 352 SCRA 334 (2001).
In order to qualify as a GOCC, one must be organized either as a stock or nonstock corporation.
[Section 3 of RCC] defines a stock corporation as one whose “capital stock is divided into shares and …
authorized to distribute to the holders of such shares dividends.” Although BCDA has an authorized
capital of P100 Billion, however, it is not divided into shares; it has no voting shares; and has no
provision which authorizes the distribution of dividends and allotment of surplus and profits to BCDA’s
shareholders. It cannot qualify also as a nonstock corporation because its primary purpose do not fall
within the purposes enumerated under Section 88. Nonetheless, BCDA is a government instrumentality
vested with corporate powers. BCDA v. CIR, 867 SCRA 179 (2018).
(ii) Noncharterred GOCCs (Organized under the Revised Corporation Code)
Government’s majority shares does not make an entity a public corporation, for it remains a
“private corporation” having been organized under the Corporation Law. National Coal Co., v. Collector
of Internal Revenue, 46 Phil. 583 (1924).
Being a GOCC makes a private corporation liable for laws applicable to the Government and
subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).
A private corporation is created by operation of law under the [Revised] Corporation Code while a
government corporation is normally created by special law referred to often as a charter. Bliss Dev.
Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
Whether a corporation is GOCC or private in nature is simple: Is it created by its own charter for the
exercise of a public function, or by incorporation under the general corporation law? Those with special
charters, are government corporations subject to its provisions, and its employees are under the
jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS. Camparedondo
v. NLRC, 312 SCRA 47 (1999).
On the other hand, we have no doubt that SEC has jurisdiction over GOCCs established or
organized under the [Revised] Corporation Code. These GOCCs are regarded as private corporations
despite common misconceptions, inn spite of the fact that the government may own the controlling
shares in the corporation. PNCC v. Pabion, 320 SCRA 188 (1999).
That Corregidor Foundation, Inc. was organized as nonstock corporation under the old Corporation
Code, does not make it a private and non-government corporation. Firstly, R.A. 10143 includes within
the statutory definition of GOCCs those that are nonstock corporations. Secondly, it is immaterial
whether a government corporation is private or public for purposes of exercising COA’s audit—so long
as the government owns or controls the corporation, the COA may audit the corporation’s accounts.
Secondly, just because its employees are not under Civil Service jurisdiction, does not exempt it from
COA jurisdiction. Oriondo v. COA, G.R. No. 211293, 04 June 2019.
b. As to Legal Status:
(1) De Jure Corporation
(2) De Facto Corporation (Sec. 19)
(3) Corporation by Estoppel (Sec. 20)
5
c. As to the Nature of Its Business Enterprise:
(1) Corporation Whose Business Only Affects Private Interests
(2) Corporation Whose Business Is Vested with Public Interests
d. As to Existence of Shares:
(1) Stock Corporation (Sec. 3)
(2) Nonstock Corporation (Secs. 3, 86 and 87)
e. As to Purpose of Incorporation:
(1) Business (for-Profit) Corporations
(2) Nonstock and Non-profit Corporations: Charitable, Scientific or Vocational Corporations
(3) Educational Corporations (Secs. 105; Sec. 25, B.P. Blg. 232)
(4) Religious Corporation (Sec. 107)
Decisions on purely ecclesiastical matters by proper church tribunals are conclusive upon civil
tribunals—a church member who is expelled or a priest or minister who is deprived of his office by
church authorities, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113 (2001).
(5) Other Special Corporations (Sec. 4)
f. As to Number of Corporators:
(1) Aggregate Corporation—no limit of shareholders or members
(2) Close Corporation—not more than 20 shareholders of records (Sec. 95)
(3) One Person Corporation—available only for stock corporations (Sec. 115)
(4) Corporation Sole—religious corporation (Secs. 108)
A corporation sole has no nationality being an institution that existed prior to the Republic; but if
any nationality is to be accorded to it, it is to be judged from the nationality of the majority of the faithfuls
thereof. Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of
Davao City, 102 Phil. 596 (1957).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127
SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the public
domain, because of the constitutional prohibition qualifying only individuals to acquire land and the
provision under the Public Land Act which applied only to Filipino citizens or natural persons, has been
expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986); Republic v. Iglesia ni Cristo, 127
SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).
g. As to Place of Incorporation:
(1) Domestic Corporation
(2) Foreign Corporation (Sec. 140)
MODULE 2
NATURE AND ATTRIBUTES OF THE
CORPORATION
The Role of the Corporation in Business and Society
(2ND WEEK: FEBRUARY 9 AND 11)
II. CORPORATION AS A CIVIL PERSON
CORPORATION AS A “ PERSON BEFORE THE LAW ” (Arts. 44[3], 45 and 46, Civil Code)
1.
a. Entitled to Invoke the Due Process and Equal Protection Clauses
The due process clause has universal application and covers private corporations insofar as their
properties are concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920).2
The failure to formally implied a corporation in a suit for recovery of ill-gotten wealth against its
shareholders cannot bind the corporation itself; otherwise, the corporation’s fundamental right to due
process will be violated. COCOFED v. Republic, 805 SCRA 1 (2016).3
b. Protected under the Unreasonable Searches and Seizure Clause
A corporation is protected by the constitutional guarantee against unreasonable searches and
seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the
2
White Light Corp. v. City of Manila, 576 SCRA 416 (2009).
3
Citing earlier rulings in PCGG v. Sandiganbayan, 290 SCRA 639 (1998); Palm Holding Co. v. Sandiganbayan, 732 SCRA 156 (2014.
6
amount of shares of each in said corporation because the corporation has a personality distinct and
separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name, with a distinct legal
entity. In organizing itself as a collective it waives no constitutional immunities appropriate for such
body. Its property cannot be taken without compensation; can only be proceeded against by due
process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37
SCRA 823 (1971).
c. Not Entitled to Invoke the Right Against Self Incrimination
“It is elementary that the right against self-incrimination has no application to juridical persons.”
Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, a corporation, vested with special privileges and franchises by the State, may not
refuse to comply when charged with an abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906).4
2. Corporation Can Engage in Practice of Profession When Authorized by Law (Sec. 10)
Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the
practice of optometry. Samahan ng Optometrists v. Acebedo Int’l Corp., 270 SCRA 298 (1997).5
SEE: Section 37 of the ARCHITECTURE ACT OF 2004 (R.A. 9266), allows the registration with the SEC of
“Architectural professional corporations”.
3. Generally, Corporations Not Entitled to Moral Damages
Being an artificial person, a corporation cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock or social humiliation which are bases for moral damages
under Art. 2217 of Civil Code. However, a corporation may have a good reputation which, if besmirched,
may be a ground for the award of moral damages. Mambulao Lumber Co. v. PNB, 22 SCRA 359 (1968);
People v. Manero, 218 SCRA 85 (1993).6
BUT: The statements in Manero and Mambulao Lumber that a corporation may recover moral
damages if it “has a good reputation that is debased, resulting in social humiliation” are obiter dictum.
Recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, which requires a clear
proof of malice or bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).
NONETHELESS: An corporation’s claim for moral damages arising from libel falls under Article 2219(7)
of the Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or
any other form of defamation, and does not qualify whether the plaintiff is a natural or juridical person. A
juridical person can validly complain for libel or any other form of defamation and claim for moral damages.
Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448 SCRA 413 (2005).
PREVAILING RULE: A corporation, being an artificial person has no feelings, emotions nor senses;
therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced
only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which
cannot be suffered by an artificial person. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993);
Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).7
4. Corporations Can Be Held Liable for Torts/Quasi-Delicts
A corporation is civilly liable for torts in the same manner as natural persons, because the rules
governing the liability of a principal for a tort committed by an agent are the same whether the principal be
a natural person or a corporation, and whether the agent be a natural or artificial person. Philippine
National Bank v. Court of Appeals, 83 SCRA 237 (1978).
“Corporate tort” consists in the violation of a right given or the omission of a duty imposed by law; a
breach of a legal duty. The failure of the corporate employer to comply with the duty under the Labor Code
to grant separation pay to employees in case of cessation of operations constitutes tort and its shareholder
who was actively engaged in the management or operation of the business should be held personally
liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
Corporate Criminal Liability
5.
a. Generally: No Criminal Suit Can Lie Against a Corporation
Philippines courts have no common law jurisdiction. Consequently, corporations cannot be held
criminally liable under Philippine jurisdiction since at this time there is no law relating to the practice and
procedure in criminal actions whereby a corporation may be brought to court to be proceeded against
criminally. West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914).
4
Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).
5
Alfafara v. Acebedo Optical Co., 381 SCRA 293 (2002).
6
APT v. Court of Appeals, 300 SCRA 579 (1998).
7
LBC Express, Inc. v. CA, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v. CA, 260 SCRA 714 (1996); Solid Homes v. CA 275 SCRA 267
(1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and Stewards Assn. of the Phils. v. PAL, 559 SCRA 252 (2008);
Employees Union of Bayer Phils. v. Bayer Philippines, Inc., 636 SCRA 473 (2010); BUT THEN: San Fernando Regala Trading v. Cargill Philippines, 707 SCRA
187 (2013).
7
However, a corporation can be a real-party-in-interest for the purpose of bringing a civil action for
malicious prosecution for the damages suffered by the corporation for the criminal proceedings brought
against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).
Prior to the Trust Receipts Law, a corporate officer who signs the trust receipt could not be held
criminally liable for estafa punished under the Revised Penal Code, for his criminal liability could not be
proven beyond reasonable doubt under the doctrine that “the corporation was [not] directly required by
law to do an act in a given manner, and the same law makes the person who fails to perform the act in
the prescribed manner expressly liable criminally.” Sia v. CA, 121 SCRA 655 (1983).
Now, the Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment
on a corporation, hence, the law makes the officers or employees responsible for the offense liable to
suffer the penalty of imprisonment. Ong v. Court of Appeals, 401 SCRA 647 (2003).8
The Trust Receipts Law specifically makes the officers, employees or other officers or persons
responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of
directors, officers, or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise means necessary to
ensure compliance with the law and, if they fail to do so, are held criminally accountable. A corporation
cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment; however, it may be charged and prosecuted for a crime if the imposable penalty is fine.
Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted
and, if found guilty, may be fined. Ching v. Secretary of Justice, 481 SCRA 602 (2006).
b. Shareholders Per Se Cannot Be Held Liable for a Corporate Criminal Act
Shareholders, being “owners” of the corporation or being basically investors in the corporation, and
with the management of its business generally vested in the Board of Directors, cannot be held liable for
the criminal offense committed on behalf of the corporation, unless they personally took part in the
same. Espiritu v. Petron Corp., 605 SCRA 245 (2009).
c. Directors/Trustees Per Se Not Personally Liable for a Corporate Criminal Act (Sec. 171)
A criminal statute that forbids the corporation from doing an act actually extends to the Board, and
to each director individually. People v. Concepcion, 43 Phil. 653; 44 Phil. 129 (1922).
GENERAL RULE: The Board being be generally a policy-making body, directors as such cannot be
held liable under a criminal statute making those in charge of the management of the corporation liable
for the criminal acts done in pursuit of corporate operations. Even if the corporate powers of a
corporation are reposed in the Board under [Sec. 22 of RCC], it is of common knowledge and practice
that the Board is not directly engaged or charged with the running of the recurring business affairs of the
corporation. The members of the Board generally do not concern themselves with the day-to-day affairs
of the corporation, except those corporate officers who are charged with the running of the business of
the corporation and are concomitantly members of the Board, like the President. Federated Dealers
Assn. v. Del Rosario, 808 SCRA 272 (2016).
A corporation’s personality is separate and distinct from its officers, directors, and shareholders. To
be held criminally liable for the acts of a corporation, there must be a showing that its officers, directors,
and shareholders actively participated in or had the power to prevent the wrongful act. In this case,
there was no allegation of the specific acts of the corporate officers for which they could be indicted for
violations of the Securities Regulation Code and the Revised Penal Code. SEC v. Price Richardson
Corp., 832 SCRA 560 (2017)
BUT SEE: Veritably, Board members, being in direct control and supervision in the management
and conduct of the corporate affairs, must have known or were aware that the corporation is engaged in
trademark infringement and unfair competition. The existence of the corporate entity does not shield
from prosecution the corporate agent who knowingly and intentionally caused the corporation to commit
a crime. Republic Gas Corp. v. Petron Corp., 698 SCRA 666 (2013).
d. Acting Officers or Employees Shall Be Criminally Liable for the Criminal Corporate Act
A corporation can act only through its officers and agents, and where the business itself involves a
violation of the law, the correct rule is that all who participate in it are liable. Thus, when the manager of
a corporation made a false tax return of the total amount of sales made by said corporation in violation
of law, it is such manager, as the author of the illegal act, who must necessarily answer for the criminal
penalties for its consequences. People v. Tan Boon Kong, 54 Phil. 607 (1930).
Although all corporate powers are vested in the Board of Directors, it does not mean that the
officers other than directors cannot be made criminally liable for their criminal acts if it can be proven
that they participated therein. Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005).
Apart from its sweeping allegation petitioner failed to establish the particular role or actual
participation of directors in the criminal act; neither was it shown that they assented to its commission.
Only officers shown to have participated in the alleged anomalous acts may be held criminally liable.
Cruzvale, Inc. v. Eduque, 589 SCRA 534 (2009).
Rule on Employees to Be Held Criminally Liable: The existence of the corporate entity does not
shield from prosecution the corporate agent who knowingly and intentionally causes the corporation to
commit a crime. The corporation obviously can act only by and through its human agents, and it is their
conduct which the law must deter. The employee of a corporation engaged in unlawful business
naturally aids and abets in the carrying on of such business and will be prosecuted as principal if, with
knowledge of the business, its purpose and effect, he consciously contributes his efforts to its conduct
and promotion, however slight his contribution may be. Where it is shown that the employee was merely
acting under the direction of his superiors and was unaware that his acts constituted a crime, he may
8
Crisologo v. People, 686 SCRA 782 (2012).
8
not be held criminally liable for an act done for and in behalf of his employer. People v. Chowdury,
325 SCRA 572 (2000).
Under SSS Law, even when the employer is a corporation, it shall still be held liable for the nonremittance of SSS contributions; but it is, however, the head, directors or officers responsible for the
non-remittance that shall suffer the personal criminal liability. Although a corporation is invested by law
with a personality separate and distinct from that of the persons composing it, the corporate veil is
pierced when a director, trustee or officer is made personally liable by specific provision of law. Thus, a
corporation cannot invoke its separate judicial entity to escape its liability for non-payment of SSS
contributions. Ambassador Hotel, Inc. v. Social Security System, 827 SCRA 641 (2017).
e. “Corporate Criminal” under the Revised Corporation Code:
(1) SEC. 165: A corporation conducts its business through fraud.
(2) SEC. 166: A corporation used for committing or concealing fraudulent, graft and corrupt
practices.
(3) SEC. 167: A corporation appoints an intermediary who engages in graft and corrupt
practices.
(4) SEC. 170: A corporation that violates any provision of the RCC not specifically penalized.
6. CORPORATE NATIONALITY
a. Primary “Place of Incorporation Test ” (Sec. 140): The corporation is a national of the country
under whose laws it is organized or incorporated.
b. Ancillary “Control Test ”: In cases involving properties, business or industries reserved for Filipinos,
in addition to the place of incorporation test, the nationality of a corporation is determined by the
nationality of the “controlling shareholders”.
c. Sub-Sets of the CONTROL TEST:
(1) Original DOJ-SEC Grandfather Rule: For purposes of investment holdings, shares belong to
corporations at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality; but if the percentage of Filipino ownership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of Philippine nationality. 9
(2) Foreign Investment Act (FIA) Test of “Philippine National” : Section 3 of R.A. 7042
considers for purpose of investment a “Philippine National ” as a corporation organized under the
laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is
owned and held by Filipino citizens, or a trustee of funds for pension or other employee
retirement/separation benefits, where the trustee is a Philippine National and at least 60% of the
fund will accrue to the benefit of Philippine nationals. 10
(3) New SEC Control Test: The Constitution “provides for the Filipinization of public utilities by
requiring that any form of authorization for the operation of public utilities should be granted only to
‘citizens of the Philippines or to corporation or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens.’ The provision is
[an express] recognition of the sensitive and vital position of public utilities both in the
national economy and for national security.” The evident purpose of the citizenship requirement
is to prevent aliens from assuming control of public utilities, which may be inimical to the national
interest. The term “capital” in Sec. 11, Art. XII of the Constitution should (a) the control test that
covers only shares entitled to vote in the election of directors, and (b) the beneficial interest test
that shall apply to each and every class of shares, voting and non-voting. Gamboa v. Teves, 652
SCRA 690 (2011), expanded in 682 SCRA 397 (2012).
As a result of the Gamboa rulings, SEC Memorandum Circular No. 8, s. 2013, was issued
and provides that: All covered corporations shall, at all times, observe the constitutional or statutory
ownership requirement in that “the required percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in
the election of directors.” Affirmed in Roy III v. Herbosa, 810 SCRA 1 (2016).
The definition of “beneficial owner or beneficial ownership in the SRC-IRR, which is in
consonance with the concept of “full beneficial ownership” in the FIA-IRR, is relevant is resoling
only the question of who is the beneficial owner or has beneficial ownership of each “specific stock”
of the public utility whose stocks are under review. If the Filipino has the voting power of the
“specific stock”, i.e., he can vote the stock or direct another to vote for him, or the Filipino has the
investment power over the “specific stock”, i.e., he can dispose of that “specific stock” or direct
another to vote or dispose it for him, then such Filipino is the “beneficial owner” of that “specific
stock.” Being considered Filipino, that “specific stock” is them to be counted as part of the 60%
Filipino ownership requirement under the Constitution. The right to the dividents, jus fruendi—a
right emanating from ownership of that “specific stock” necessary accrues to its Filipino “beneficial
owner.” Roy III v. Herbosa, 823 SCRA 133 (2017).
(4) Beneficial Test Through “Corporate Layering”: The grandfather rule can only extend to such
levels of corporate layering as to those who have actual control of the affairs of the corporation.
Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966).
9
DOJ Opinion No. 18, s.1989, 19 Jan. 1989; SEC Opinion, 6 Nov. 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC
Opinion, 14 Dec. 1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990).
10
Affirmed in Unchuan v. Lozada, 585 SCRA 421 (2009).
9
Although the control test is the prevailing mode of determining whether a corporation is a
Filipino corporation entitled under Sec. 2, Art. II of 1987 Constitution to undertake the exploration,
development and utilization of the natural resources of the Philippines, when there is doubt in the
minds of the courts, based on the attendant facts and circumstances of the case, in the 60%-40%
Filipino-foreign equity of the corporation, they may apply the grandfather rule. Narra Nickel
Mining Corp. v. Redmont Consolidated Mines, 722 SCRA 382 (2014).
The “grandfather rule” does not eschew, but in fact supplements the “control test”, as the latter
implements Filipinization provisions of the Constitution. There should be a distinction between the
“beneficial ownership” test from the “control test”. As further defined by Dean Cesar Villanueva, the
grandfather rule is ‘the method by which the percentage of Filipino equity in a corporation engaged
in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and
other nationalization laws, is computed, in cases where corporate shareholders are present, by
attributing the nationality of the second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder.’ Narra Nickel Mining Corp. v. Redmont Consolidated
Mines Corp., (Resolution), 748 SCRA 455 (2015), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2011 ed.).
d. APPLICATIONS OF THE CONTROL TEST
(1) In Times of War – Domestic corporations under the control of nationals of the enemy country are
deemed foreign enemy corporations. Haw Pia v. China Banking Corp., 80 Phil. 604 (1948).11
(2) Exploitation of Natural Resources (Sec. 2, Art. XII, 1987 Constitution)
(3) Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution)
The donation of land to an unincorporated religious organization, whose trustees are foreigners,
would violate constitutional prohibition and the refusal would not be in violation of the freedom of religion
clause. The fact that the religious association “has no capital stock does not suffice to escape the
constitutional inhibition, since it is admitted that its members are of foreign nationality … and the spirit of
the Constitution demands that in the absence of capital stock, the controlling membership should be
composed of Filipino citizens.” Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955).
BUT: A corporation sole being a creature prior to the constitution, has no nationality. If a nationality
is sought to be determined, the same depends of the nationality of the majority of the lay members and
not on the nationality of the sole corporator. Roman Catholic Apostolic Administrator of Davao, Inc.
v. LRC and the Register of Deeds of Davao, 102 Phil. 596 (1957).
If foreign equity in a landholding corporation exceed 40%, it is not the foreign shareholders’
ownership of the shares which is adversely affected by the capacity of the corporation to own land—that
is, the corporation becomes disqualified to own land. The prohibition in the Constitution applies only to
ownership of land; it does not extend to immovable or real property as defined under Article 415 of the
Civil Code. Otherwise, we would have a strange situation where the ownership of immovable property
such as trees, plants and growing fruit attached to the land would be limited to Filipinos and Filipino
corporations only. J.G. Summit Holdings, Inc. v. CA, 450 SCRA 169 (2005).
Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not
qualified to own land in the Philippines, and therefore also disqualified to own the rights to ownership of
lands in the Philippines—it is basic that an assignor or seller cannot assign or sell something he does
not own at the time the ownership, or the rights to the ownership, are to be transferred to the assignee
or buyer. The assignment by PNCC of the real properties to a nominee to be designated by Radstock is
a circumvention of the constitutional prohibition against a private foreign corporation owning lands in the
Philippines. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
The nationality of a nonstock corporation in relation to land acquisition is computed not on
membership contribution but that the 60-40 minimum Filipino requirement applies to both the nationality
of the members, and their voting powers. SEC Opinion No. 16-15, 1 June 2016.
(4) Public Utilities (Sec. 11, Art. XII, Constitution)
The nationality test for public utilities applies not at the time of the grant of the primary franchise
that makes a corporation a juridical person, but at the grant of the secondary franchise that authorizes
the corporation to engage in a nationalized industry. People v. Quasha, 93 Phil. 333 (1953).
The primary franchise, that is, the right to exist as such, is vested in the shareholders or members
and not in the corporation itself and cannot be conveyed in the absence of a legislative authority to do
so. The secondary franchises are vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to dispose of its property, except such
special or secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial
Insurance, 11 SCRA 634 (1964).
The Constitution requires a franchise for operating a public utility; however, it does not require a
franchise before one can own the facilities needed to operate a public utility so long as it does not
operate them to serve the public. There is a clear distinction between “operation” of a public utility and
ownership of the facilities used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995).
(5) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
(6) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution; P.D. 36, amended by P.D.s 191 and 197;
Sec. 2, P.D. 576; DOJ Opinion 163, s.1973; DOJ Opinion No. 120, s.1982; SEC Opinion, 24 March
1983; SEC Opinion, 15 July 1991, XXV SEC QUARTERLY BULLETIN No. 4, p. 31.)
a. Cable Industry: “Cable TV operations shall be governed by E.O. No. 205 (s.1987). If CATV
operators offer public telecommunications services, they shall be treated just like a public
telecommunications entity.” NTC Memo Circular No. 8-9-95.
11
Filipinas Compania de Seguros v. Christern, Huenefeld & Co., 89 Phil. 54 (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).
10
Cable TV is “a form of mass media which must, therefore, be owned and managed by
Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by
Filipino citizens pursuant to the mandate of the Constitution.” DOJ Opinion No. 95, s. 1999,
citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F.2d 70.
e. NEDA May Set Limitations of Stock Ownership in Corporations Vested with Public Interests
(Sec. 176)
7.
THE GOOD CORPORATE CITIZEN
a. Corporations Vested With Public Interests (Sec. 22)
The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving
of money or as active instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and even gratitude and, most
of all, confidence. x x x The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that
the respondent bank was remiss in that duty and violated that relationship. What is especially
deplorable is that, having been informed of its error in not crediting the deposit in question to the
petitioner, the respondent bank did not immediately correct it but did so only one week later or twentythree days after the deposit was made. Simex International, Inc. v. Court of Appeals, 183 SCRA
360 (1990).
Since the banking business is impressed with public interest, of paramount importance is the trust
and confidence of the public in general. The diligence required of banks is more than that of a good
father of a family, but the highest degree of diligence, and high standards of integrity and performance
are even required. The nature of bank’s functions require it “to treat its depositors’ accounts with
meticulous care, always having in mind the fiduciary nature of their relationship.” 12 Here, even if
withdrawals were effected before passage of GBL, nonetheless, its Sec. 2 categorical declaration of the
“fiduciary nature of banking that requires high standards of integrity and performance,” is only a
statutory affirmation of Supreme Court decisions in esse at time of such withdrawals. PNB v. Pike, 470
SCRA 328 (2005).13
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors,
surgeons and medical practitioners in the conduct of its business of facilitating medical and surgical
treatment. Within that reality, three legal relationships crisscross: (1) between the hospital and the
doctor practicing within its premises; (2) between the hospital and the patient being treated or
examined within its premises; and (3) between the patient and the doctor. Regardless of its
relationship with the doctor, the hospital may be held directly liable to the patient for its own negligence
or failure to follow established standard of conduct to which it should conform as a corporation.
Professional Services, Inc. v. CA, 611 SCRA 282 (2010).
MODULE 3
ATTRIBUTE OF SEPARATE JURIDICAL PERSONALITY :
The Corporation Is Primarily a Medium for Commercial Pursuits
(3RD WEEK: FEBRUARY 16 AND 18)
III. SEPARATE JURIDICAL PERSONALITY AND THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
1.
MAIN DOCTRINE: A Corporation Has a Personality Separate and Distinct from Its Directors or
Trustees, Officers, Its Shareholders or Members (Sec. 2; Art. 44, Civil Code)
A corporation is a juridical entity with a legal personality separate and distinct from the people
comprising it, hence:
 Assets of the shareholders may not be considered as assets of the corporation, and viceversa. Situs Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012).
 It may not be made to answer for personal acts and liabilities of its shareholders or those of
legal entities to which it may be connected, and vice versa. General Credit Corp. v. Alsons
Dev. and Investment Corp., 513 SCRA 225 (2007).14
12
Philippine Bank of Commerce v. Court of Appeals [“CA”], 269 SCRA 695 (1997); Bank of P.I. v. CA, 326 SCRA 641 (2000); Bank of P.I. v. Casa
Montessori Internationale, 430 SCRA 261 (2004); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA 373 (2008); Philippine Savings Bank v.
Chowking Food Corp., 557 SCRA 318 (2008); Bank of America v. Philippine Racing Club, 594 SCRA 301 (20019); Metropolitan Bank v. Mariñas, 625
SCRA 511 (2011).
13
Associated Bank v. Tan, 446 SCRA 282 (2004); Sandejar v. Ignacio, 541 SCRA 61 (2007); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA
373 (2008); PNB v. Velasco, 564 SCRA 512 (2008); Security Bank v. RCBC, 577 SCRA 407 (2009); Equitable PCI Bank v. Tan, 628 SCRA 346
(2010); Citibank v. Dinopol, 635 SCRA 649 (2010); PCI Bank v. Balmaceda, 658 SCRA 33 (2011); Metropolitan Bank v. Tobias III, 664 SCRA 165
(2012); Metropolitan Bank v. Centro Dev. Corp., 672 SCRA 325 (2012); Comsaving Bank v. Capistrano, 704 SCRA 72 (2013).
11
Such legal fiction is only for purposes of convenience and to subserve the ends of justice—it
cannot be extended to a point beyond its reason and policy. Where, as in this case, the corporate fiction
was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the
legitimate issues, it would be discarded and the two (2) corporations would be merged as one, the first
being merely considered as the instrumentality, agency, conduit or adjunct of the other. Azcor
Manufacturing Inc. v. NLRC, 303 SCRA 26 (1999).15
a. DOCTRINES EMANATING FROM THE PRIMARY ATTRIBUTE OF SEPARATE JURIDICAL PERSONALITY:
(1) Doctrine of Limited Liability: Shareholders/Members Cannot be Held Liable for the
Liabilities of the Corporation, Except to the Extent of
Their Investments or Promised Investments.
(2) Agency Law Principle: Directors/Trustees, Officers and Other Corporate Agents Do Not
Become Personally Liable for Corporate Contracts That They
Enter Into in Behalf of the Corporation.
Corporate debt or credit is not the debt or credit of the shareholder nor is the shareholder’s debt or
credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989).
Debts incurred by directors, officers, and employees acting as corporate agents are not their direct
liability but of the corporation they represent. Crisologo v. People, 686 SCRA 782 (2012).16
The obligations of a shareholder in one corporation cannot be offset from the obligation of the
shareholder in a second corporation, since the corporation has a separate juridical personality. CKH
Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).
A consequence of a corporation’s separate personality is that its consent made through its
representatives is not consent of the representative, personally. Its obligations, incurred through official
acts of its representatives, are its own. A director or officer does not become a party to a contract just
because a corporation executed a contract through such individual. Hence, a corporation’s
representatives are generally not personally bound by the terms of the contract executed in behalf of the
corporation. Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014).17
b. APPLICATION OF THE RULES EMANATING FROM THE PRIMARY DOCTRINE:
(1) Majority Equity Ownership and Interlocking Directorship, Officership or Shareholders:
Mere ownership by a single shareholder or by another corporation of all or nearly all of the capital
stocks is not, by itself, a sufficient ground for disregarding the separate corporate personality. Other
circumstances showing that the corporation is being used to commit fraud or proof of existence of
absolute control over the corporation have to be proven. In short, before the corporate fiction can be
disregarded, alter-ego elements must first be sufficiently established. Pacific Rehouse Corp. v.
Court of Appeals, 719 SCRA 665 (2014).18
Ownership of a majority of capital stock and the fact that majority of directors of a corporation are
the directors of another corporation creates no employer-employee relationship with the latter’s
employees. DBP v. NLRC, 186 SCRA 841 (1990);19 nor would it justify the tacking of the years of
services with both corporations to determine employment rights and benefits. Freyssinet Filipinas
Corp. v. Lapuz, 897 SCRA 265 (2019).
The majority shareholder cannot be held personality liable for the attorney’s fees charged by a
lawyer for representing the corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).
Having interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.
Velarde v. Lopez, 419 SCRA 422 (2004).20
(2) On Being a Corporate Officer and Shareholder:
Being an officer or shareholder of a corporation does not by itself make one’s property also that
of the corporation, and vice-versa, for they are separate entities, and that shareholders who are
officers are in no legal sense the owners of corporate property which is owned by the corporation
as a distinct legal person. Good Earth Emporium, Inc. v. Court of Appeals, 194 SCRA 544 (1991).21
It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally (civilly) liable under a trust receipt
where he entered into and signed the contract clearly in his official capacity. Intestate Estate of
Alexander T. Ty v. Court of Appeals, 356 SCRA 61 (2001).22
14
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598
(2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Saverio v. Puyat, 710 SCRA 747 (2013).
15
Martinez v. CA 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts v. BF Corp., 556 SCRA 25
(2008); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
16
Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013); Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015); Ferro
Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
17
Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015).
18
Sunio v. NLRC, 127 SCRA 390 (1984); Asionics Phils., Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina
Integrated Wood Products v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin Suarez Fancisco, 433
SCRA 273 (2004); EDSA Shangri-La Hotel v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009);
Situs Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012); Saverio v. Puyat, 710 SCRA 747 (2013); Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016);
Mayor v. Tiu, 810 SCRA 256 (2016); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
19
Also Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Phils. v. Ong, 491 SCRA 581 (2006); Shrimp Specialists,
Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011).
20
Sesbreno v. CA, 222 SCRA 466 (1993); “G” Holdings, Inc. v. National Mines and Allied Workers Union Local, 604 SCRA 73 (2010); Malixi v. Mexicali
Phils., Inc. , 792 SCRA 586 (2016); Malixi v. Mexicali Philippines, Inc., 792 SCRA 586 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017).
21
Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Saverio v. Puyat,
710 SCRA 747 (2013).
22
Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).
12
The mere fact that one is President does not render the property he owns the property of the
corporation, since the president, as an individual, and the corporation are separate entities. Cruz v.
Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).
The President of the corporation which is liable for the accident caused by its truck driver cannot
be held solidarily liable for the judgment obligation arising from quasi-delict, since the fact alone of
being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the
corporation. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
When the compulsory counterclaim filed against corporate officers for their alleged fraudulent
act indicate that such corporate officers are indispensable parties in the litigation, the original
inclusion of the corporation in the suit does not thereby allow the denial of a specific counter-claim
being filed to make the corporate officers personally liable. Lafarge Cement Phils., Inc. v.
Continental Cement Corp., 443 SCRA 522 (2004).
(3) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be
extended to nor enjoyed even by the controlling shareholders. Manila Gas Corp. v. CIR, 62 Phil.
895 (1936).
(4) On Suits For or Against the Corporation:
A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by
its members in their individual capacity, even when the corporation is organized for the benefit of
the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).
Shareholders have no standing to intervene in a collection case covering the loans of the
corporation since shareholders’ interest in corporate property is purely inchoate. Saw v. CA, 195
SCRA 740 (1991); and vice-versa. Francisco Motors Corp. v. CA, 309 SCRA 72 (1999).
A corporate defendant against whom a writ of possession has been issued, cannot use the fact
that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement of the
writ, for they are separate juridical persons, and thus their separate business and proprietary
interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005).
Shareholders have no standing to recover damages arising from the wrongful attachment of the
corporation’s assets. Stronghold Insurance Co. v. Cuenca, 692 SCRA 473 (2013).
2. PIERCING THE VEIL OF CORPORATE FICTION
a. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals composing it will be
treated as identical, if the corporate entity is being used as a cloak or cover for fraud or illegality; as a
justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the
shareholders. Gochan v. Young, 354 SCRA 207 (2001).23
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to
cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and
similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric & Engineering Co.,
381 SCRA 244 (2002).
The legal fiction of separate corporate existence is not at all times invincible; it may be pierced when
employed as a means to perpetrate a fraud, confuse legitimate issues, used as a means to promote
unfair objectives, or to shield an otherwise blatant violation of the prohibition against forum-shopping.
While piercing of the corporate veil has to be done with caution, the corporate fiction may be
disregarded when necessary in the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA
176 (2002).
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons. The corporate entity may
also be disregarded in the interest of justice in such cases as fraud that may work inequities among
members internally, involving no rights of the public or third persons. In both instances, for the separate
juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly
established; it cannot be presumed. Suldao v. Cimech System Construction, Inc., 506 SCRA 256
(2006).
b. Classification of Piercing Cases:
 FRAUD PIERCING: When corporate entity is used to commit a crime, to undertake fraud or do a
wrong, or that the corporate veil is used as a means to evade the consequences of one’s
criminal or fraudulent acts;
 ALTER-EGO PIERCING: When the corporate entity merely a farce since the corporation is merely
the alter ego, business conduit, or instrumentality of a person or another entity;
 DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate
corporate personality would be inconsistent with the business purpose of the legal fiction or
would merely confuse legitimate issues, or when piercing the corporate fiction is necessary to
achieve justice or equity for those who deal in good faith with the corporation.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law
covers and isolates the corporation from any other legal entity to which it may be related, is allowed:
23
DBP v. CA, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R&E Transport v. Latag, 422 SCRA 698
(2004); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. CA, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222 (2007);
Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
13
(1) defeat of public convenience, as when the corporation is used as vehicle for the evasion of existing
obligation; (2) fraud cases or when the corporate entity is used to justify wrong, protect fraud, or
defend a crime; or (3) alter ego cases, where the corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007),24
citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed.), at p. 576.
c. Objectives and Effects of the Application of the Piercing Doctrine
The main effect of disregarding the corporate fiction is that shareholders will be held personally
liable for the acts and contracts of the corporation, whose existence, at least for the purpose of the
particular situation involved, is ignored. Considering that We find it justified to pierce the corporate veil in
this case, MPEI must, perforce, be treated as a mere association of persons whose assets are
unshielded by corporate fiction. Such persons’ individual liability shall now be determined with respect to
the matter at hand. Republic v. Mega Pacific eSolutions, Inc., 794 SCRA 414 (2016).25
When two business enterprises are owned, conducted and controlled by the same parties, both law
and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entitled and treat them as identical or one and the same. General Credit Corp.
v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).26
(1) Recent Attempts to Narrow the Objectives for Availing of Piercing: Piercing is not allowed
unless the remedy sought is to make the officer or another corporation pecuniarily liable for
corporate debts, unlike here were it is resorted to determine proper jurisdiction of the court. (?)
Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
The rationale for piercing in a given case is to remove the barrier between the corporation and
the persons comprising it to thwart the fraudulent schemes of those who use the corporate
personality as a shield for undertaking proscribed activities. In the case at bar, however, instead of
holding certain individuals or person responsible for an alleged corporate act, the situation has
been reversed: it is the corporation that is being ordered to answer for the personal liability of
certain directors and officers. Hence, it appears that the doctrine has been turned upside down
because of its erroneous invocation. Francisco Motors Corp. v CA, 309 SCRA 72 (1999).
BUT SEE: Reverse Piecing of the Corporate Veil: Int’l Academy of Management and
Economics v. Litton and Co., Inc., 848 SCRA 437 (2017).
(2) Applicable to “Third-Parties”: That respondents are not shareholders of record does not make
them non-parties, since it is alleged that the corporations are mere alter egos of the directorspetitioners, and that the sister corporations acquired the properties sought to be reconveyed to
FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity
will be pierced and the individuals composing it will be treated as identical if the corporate entity is
being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter
ego, an adjunct, or a business conduit for the sole benefit of the shareholders. Gochan v. Young,
354 SCRA 207 (2001).
(3) Piercing Has Only Res Judicata Effect : Application of the doctrine to a particular case does
not deny the corporation of legal personality for any and all purposes, but only for the particular
transaction or instance, or the particular obligation for which the doctrine was applied. Koppel
(Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).27
d. PIERCING DOCTRINE AS AN “EQUITABLE REMEDY”: Piercing the corporate veil is an equitable
doctrine developed to address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).28
CONSEQUENTLY:
(1) It Is a Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).
(2) Available Only to Prevent Fraud or to Achieve an Equitable End: Piercing doctrine is meant
to prevent fraud, and cannot be employed when the net result would be to perpetrate fraud or a
wrong. Gregorio Araneta, Inc. v. Tuason de Paterno, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to
shield them. Villanueva v. Adre, 172 SCRA 876 (1989).
The creation by DBP as the mother company of the three mining corporations to manage and
operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their
value, does not indicate fraud or wrongdoing and will not constitute application of the piercing
doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).
(3) Party Invoking Piercing Doctrine Must Have a “Victim Standing”: The bank cannot
successfully invoke the piercing doctrine when it was proven that the assignment of the
24
Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590
(2010); Sarona v. NLRC, 663 SCRA 394 (2012); Lanuza, Jr. v. BF Corp., 77 SCRA 275 (2014); De Castro v. CA, 805 SCRA 265 (2016); Maricalum
Mining Corp. v. Florentino, 872 SCRA 572 (2018); Montealegre v. Spouses De Vera, G.R. No. 208920, 10 July 2019.
25
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Lanuza, Jr.
v. BF Corp., 737 SCRA 275 (2014).
26
Marques v. Far East Bank, 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012); De Castro v. CA, 805 SCRA 265 (2016); Lee v. Samahang
Manggagawa ng Super Lamination, 809 SCRA 313 (2016).
27
Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
28
Commissioner of Customs v. Oilink Int’l Corp., 728 SCRA 469 (2014).
14
securities by the subsidiary company was contrary to existing rules of the Central Bank of the
Philippines, which were well-known to the officers of the lending bank. Being merely an
equitable remedy, employment of the piercing doctrine can only be for the “protection of the
interests of innocent third persons dealing with the corporate entity which the law aims to
protect by this doctrine.” Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).
(4) Not Applicable to Theorize or to Advance/Create New Rights or Interest :
Piercing of the veil of corporate fiction cannot be resorted under a theory of co-ownership to
justify continued use and possession by shareholders of corporate properties. Boyer-Roxas v.
Court of Appeals, 211 SCRA 470 (1992).
Piercing cannot be availed of to dislodge from SEC’s jurisdiction a petition for suspension of
payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as
the real petitioners to the exclusion of the petitioning corporate debtor: “doctrine only applies when
such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding company
cannot be allowed to support a theory of set-off or compensation, there being no allegation much
less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).
An employee who retires and avails of her retirement benefits, but continued as a consultant
with affiliate companies, cannot employ piercing in order to treat her stint with the affiliate
companies as part of her employment with the main company she retired from—there is no fraud
or employment of unfair shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269 (2009).
BUT SEE: Where clear evidence support the fact that a corporation’s affiliates have received
large amounts which became the consideration for the company’s execution of a real estate
mortgage over its properties, then the piercing doctrine shall be applied to support the fact that the
real estate mortgage was valid and supported by proper consideration. Siain Enterprises v.
Cupertino Realty Corp., 590 SCRA 435 (2009).
Piercing of the veil of corporate fiction cannot be used to justify service of summons on the
subsidiary to be binding on the parent company. A wholly-owned subsidiary is a distinct and
separate entity from its mother company and the fact that the latter exercises control over the firm
does not justify disregarding their separate personality. The complaint taken as a whole should be
able to convey that the subsidiary is but a business conduit of the principal or that by reason of
fraud, their separate and distinct and separate personalities should be disregarded. Luzon Iron
Dev. Group Corp. v. Bridgestone Mining and Dev. Corp., 813 SCRA 583 (2016).
(5) Piercing Must Therefore Be Based on Clear Evidence : To disregard the separate juridical
personality, it is elementary that the wrongdoing cannot be presumed and must be clearly and
convincingly established. Application of the doctrine of piercing should be done with caution.
Otherwise, an injustice that was never intended may result from an erroneous application. PNB v.
Andrada Electric & Engineering Co., 381 SCRA 244 (2002).29 CONSEQUENTLY:

Organizing the corporation when relationship between landowner and developer were still cordial
cannot be used as a basis to hold the corporation liable later on for landowner’s obligations to the
developer under the mere allegation that the corporation is being used to evade the performance of
obligation by its major shareholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999).

The Court finds that the Remington failed to discharge its burden of proving bad faith on the part of
Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to
justify the piercing of the corporate veil. DBP v. Court of Appeals, 363 SCRA 307 (2001).30

Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency conduit or adjunct of Cardale. Even
assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification
for disregarding their separate personalities, absent any showing that Merryland was purposely used
as a shield to defraud creditors and third persons. Francisco v. Mejia, 362 SCRA 738 (2001).31

The mere assertion by a Filipino litigant against the existence of a “tandem” between two Japanese
corporations cannot be the basis for piercing, which can only be applied by showing wrongdoing by
clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).

Whether a corporation is a mere alter ego is a purely a question of fact, and the party
seeking to pierce has the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule. Concept Builder, Inc. v. NLRC, 257
SCRA 149 (1996).32
(6) Piercing Is a Power Belonging to the Courts and Cannot Be Assumed Improvidently by
a Sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).33
FRAUD PIERCING CASES:
3.
a. Corporate Fiction Used to Do Wrong or Evade Consequences Thereof:
Where a shareholder, who has absolute control over the affairs of the corporation, entered into a
contract with another corporation through fraud and false representations, such shareholder shall be
29
Lim v. CA, 323 SCRA 102 (2000); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Assn. (PEAPTGWO) v. NLRC, 581 SCRA 598 (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011); Ferro Chemicals, Inc. v. Garcia, 804 528 (2016).
30
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
31
Ramoso v. CA, 347 SCRA 463 (2000); Guatson Int’l Travel and Tours v. NLRC, 230 SCRA 815 (1990).
32
Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Ramirez v. Mar Fishing Co., 672 SCRA
137 (2012); Pacific Rehouse Corp. v. CA, 719 SCRA 665 (2014); Commissioner of Customs v. Oilink Int’l Corp., 728 SCRA 469 (2014); WPM Int’l Trading v.
Labayen, 735 SCRA 299 (2014); Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
33
D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).
15
liable solidarily with co-defendant corporation even when the contract sued upon was entered into on
behalf of the corporation. NAMARCO v. Associated Finance Co., 19 SCRA 962 (1967).
Piercing is allowed where the corporation is used as a means to appropriate a property by fraud
which property was later resold to the controlling shareholders. Heirs of Ramon Durano, Sr. v. Uy, 344
SCRA 238 (2000).
Fraud and bad faith on the part of certain corporate officers or shareholders may warrant the
piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but may
be held individually and personally liable for his or her actions, Lafarge Cement Phils., Inc. v.
Continental Cement Corp., 443 SCRA 522 (2004);34 however, mere allegation of fraud or bad faith,
without evidence supporting such claims cannot warrant the piercing of the corporate veil. DBP v.
Court of Appeals, 357 SCRA 626; 358 SCRA 501; 363 SCRA 307 (2001).
PThe attempt to make the security agencies appear as two separate entities, when in reality they
were but one, was a devise to defeat the law [i.e., in this case to avoid liabilities under labor laws] and
should not be permitted. Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006).
Piercing will be applied when there is an indubitable link between CBB’s closure and Binswanger’s
incorporation: CBB ceased to exist only in name; it re-emerged in the person of Binswanger to avoid
payment by CBB of the last two installments of its monetary obligation to Livesey, as well as its other
financial liabilities. Livesey v. Binswanger Philippines, 719 SCRA 433 (2014).
While courts have authority to wield the sword which pierces through the veil of corporate fiction,
concomitant to the exercise of this power, is the responsibility to uphold the doctrine of separate entity,
when rightly so; as it has for so long encouraged businessmen to enter into economic endeavors
fraught with risks and where only a few dared to venture. Hence, any application of the doctrine of
piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it
is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be
clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application. Pacific Rehouse Corp. v. Court of Appeals,
719 SCRA 665 (2014).35
b. Shell or Fictitious Company: “Fictitious companies are by definition fraudulent and may also serve
as fronts for government officials. The typical scheme involves corrupt government officials creating a
fictitious company that will serve as a ‘vehicle’ to secure contract awards. Often, the fictitious—or ghost
—company will subcontract work to lower cost and sometimes unqualified firms. The fictitious company
may also utilize designated losers as subcontractors to deliver the work, thus indicating collusion.” They
have no significant assets, staff or operational capacity. They pose a serious red flag as a bidder on
public contracts, because they often hide the interests of project or government officials, concealing a
conflict of interest and opportunities for money laundering. Republic v. Mega Pacific eSolutions, Inc.,
794 SCRA 414 (2016), citing VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE LAW, p. 105 (2013 ed.)
c. Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?
 There must have been fraud or an evil motive in the affected transaction, and the mere proof of
control of the corporation by itself would not authorize piercing;
 Corporate fiction is used as a means to commit the fraud or avoid the consequences thereof; and
 The main action should seek for the enforcement of pecuniary claims pertaining to the corporation
against corporate officers or shareholders.
Probative Factors for Fraud Piercing: The corporate fiction must be the very means by which to
commit fraud or avoid the consequences of ones unlawful or wrongful acts. Concept Builders, Inc. v.
NLRC, 257 SCRA 149 (1996).36 The absence of these elements prevents piercing the corporate veil.
Lim v. Court of Appeals, 323 SCRA 102 (2000).37
Two corporations may engage in the same business, share the same address, or have interlocking
incorporators, directors or officers, but in the absence of fraud or other public policy consideration, does
not warrant piercing the corporate veil. McLeod v. NLRC, 512 SCRA 222 (2007).38
Mere substantial identity of incorporators does not necessarily imply fraud, nor warrant the piercing
of the corporate veil. In the absence of clear and convincing evidence to show that the corporate
personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly
treated as distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996).39
That a corporation owns all of the stocks of another corporation does not amount to fraud per se,
and does not justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well as
the subsidiary shall be confined to those arising in their respective business. Nisce v. Equitable PCI
Bank, 516 SCRA 231 (2007).40
ALTER EGO PIERCING CASES:
4.
34
Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
35
Dimson v. Chua, 811 SCRA 630 (2016).
36
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555
(2005); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Malarayat Rural Bank, 719 SCRA 565 (2014); Pacific Rehouse Corp. v.
Court of Appeals, 719 SCRA 665 (2014); Olongapo City v. Subic Water and Sewerage Co., 732 SCRA 133 (2014); Dutch Movers, Inc. v. Lequin, 824 SCRA
310 (2017); Veteran Federation of the Philippines v. Montenejo, 847 SCRA 1 (2017).
37
Child Learning Center, v. Tagorio, 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce v.
Equitable PCI Bank, 516 SCRA 231 (2007); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
38
Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992); Del Rosario v. NLRC, 187 SCRA 777 (1990); Park Hotel v. Soriano, 680 SCRA 328
(2012); Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013).
39
Martinez v. Court of Appeals, 438 SCRA 130 (2004).
40
Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997); Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).
16
a. Using the Corporation as a Mere Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit of such
individual owner [rather than the business interest for which the corporation was formed], the
corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44
Phil. 634 (1923).
When corporation is merely an adjunct, business conduit or alter ego of another corporation [i.e.,
operated for the benefit of the business enterprise of the other corporation, and not for its own benefit],
the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v.
Jarencio, 163 SCRA 205 (1988).41
Unlike in fraud piercing, alter ego piercing does not require establishing fraud or wrongdoing, but
only that the corporate personality has been used as an instrumentality for the personal agenda of its
controlling shareholder. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
c. Mixing-up Operations of Two Companies; Disrespect to the Corporate Entity
Employment of same workers; single place of business, etc., may indicate alter ego situation and
justify the Court of Industrial Relations to retain jurisdiction over the labor case. La Campana Coffee
Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
Mixing of personal accounts with corporate bank accounts would authorize piercing to protect the
judgment creditors. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
Where two business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third persons, disregard their separate legal
fictions and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).42
The fact that the majority shareholder had used his own money to pay part of the loan of the
corporation cannot be used as the basis to pierce: “It is understandable that a shareholder would want
to help his corporation and in the process, assure that his stakes in the said corporation are secured.”
LBP v. Court of Appeals, 364 SCRA 375 (2001).
The fictive veil of corporate personality holds lesser sway for subsidiary corporations whose shares
are wholly if not almost wholly owned by its parent company. The structural and systems overlap
inherent in parent and subsidiary relations often render the subsidiary as mere local branch, agency or
adjunct of the foreign parent. Thus, when the foreign parent company leased a large parcel of land
purposely for the benefit of its subsidiary, which took over possession of the leased premises, the
subsidiary was a mere alter ego. Mariano v. Petron Corp., 610 SCRA 487 (2010).
When a corporation lawfully terminates its employees based on ceasing of operations, the
terminated employees cannot make a sister company liable for their claims. Although ownership by one
corporation of all or a great majority of stocks of another corporation and their interlocking directorates
may serve as indicia of control, by themselves and without more, they are insufficient to establish an
alter ego relationship that will justify the puncturing of the latter's corporate cover. Zambrano v.
Philippine Carpet Manufacturing Corp., 828 SCRA 144 (2017).
A subsidiary company's separate corporate personality may be disregarded only when the
evidence shows that such separate personality was being used by its parent or holding corporation to
perpetrate a fraud or evade an existing obligation. Concomitantly, employees of a corporation have no
cause of action for labor-related claims against another unaffiliated corporation, which does not
exercise control over them.|| Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
d. Guiding Principles in Alter-Ego Cases:
 Doctrine applies even in the absence of evil intent, because of the direct violation of a central
corporate law principle of separating ownership from management;
 Doctrine in such cased is based on estoppel: if shareholders do not respect the separate entity,
others cannot also be expected to be bound by the separate juridical entity;
 Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced
against the shareholders or officers.
Probative Factors in Alter Ego Piercing: The instrumentality or control test requires ot mere
majority or complete stock control, but complete domination of finances, policy and business practices
with respect to the transaction in question. California Manufacturing Co., Inc. v. Advanced
Technology System, Inc., 824 SCRA 295 (2017).43
The mere existence of a parent-subsidiary relationship between two corporation, or that one
corporation is affiliated with another company does not by itself allow the application of the alter ego
piercing doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946).44
Just because two foreign companies came from the same country and closely worked together on
certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of
corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
Use of a controlling shareholder’s initials in the corporate name is not sufficient reason to pierce,
since by that practice alone does it mean that the said corporation is merely a dummy of the individual
shareholder, provided such act is lawful. LBP v. Court of Appeals, 364 SCRA 375 (2001).
If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and
the liabilities of the parent corporation and the subsidiary will be confined to those arising in their
41
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Sarona v. NLRC, 663 SCRA 394 (2012).
42
Shoemart v. NLRC, 225 SCRA 311 (1993).
43
Virata v. Ng Wee, 830 SCRA 271 (2017).
44
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Mendoza and Yotoko v. Banco
Real Dev. Bank, 470 SCRA 86 (2005).
17
respective businesses. Even when the parent corporation agreed to the terms to support a standby
credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of
the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).45
EQUITY PIERCING: “DEFEAT OF PUBLIC CONVENIENCE”
5.
a. Corporate Fiction Is Raised to Confuse Legitimate Issues:
In a situation where employee in the mother company was detailed/assigned to a sister company
whereat the employee died by reason of work-related illness, and workmen’s compensation benefits
were sought against the sister company, there would be proper basis to pierce the veil of corporate
fiction to treat the two companies as one to allow jurisdiction over the case to be retained by the
Workmen’s Compensation Commission to rule on the defense of the lack of employer-employee
relationship. The separate juridical personality should not be used to confuse legitimate issues.
Telephone Engineering and Service Co. v. WCC, 104 SCRA 354 (1981).
b. Raise Legal Technicalities:
A complaint for unfair labor practice was filed not against the employer-corporation but against the
President and controlling shareholder, field supervisor and manager, all in their official capacity; but that
the final judgment for reinstatement and damages was in the name of the company. The judgment can
be enforced against the company and its properties on the ground of equity piercing: “ No benefit can be
attained if this case were to be remanded to the court a quo merely in response to a technical
substitution of parties for such would only cause an unwarranted delay that would work to Honorata’s
prejudice. This is contrary to the spirit of the law which enjoins a speedy adjudication of labor cases
disregarding as much as possible the technicalities of procedure.” Emilio Cano Enterprises v. CIR,
13 SCRA 291 (1965).
Where the main purpose in forming the corporation was to evade one's subsidiary civil liability for
damages in a criminal case, the corporation may not be heard to say that it has a personality separate
and distinct from its members, because to allow it to do so would be a shield to further an end
subversive of justice. The Supreme Court can even substitute the real party in interest in place of the
defendant corporation in order to avoid multiplicity of suits and thereby save the parties unnecessary
expenses and delay. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).
Where a debtor registers his residence to a family corporation in exchange of shares, and
continues to live therein, then the separate juridical personality may be disregarded. PBCom v. Court of
Appeals, 195 SCRA 567 (1991).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade obligations
or confuse the legitimate issues (as in this case where the actions of management of the two
corporations created confusion as to the proper employer of claimants), the two corporations would be
merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
We have applied the piercing doctrine in cases where the employees are put in a disadvantageous
position as a result of the employers’ separate juridical personalities, pursuant to the fundamental
doctrine that corporate fiction should not be used as a subterfuge to commit injustice and circumvent
labor laws. While there is no prohibition on the mere act of engaging in a work-pooling scheme as sister
companies, that act will not be tolerated, and the sister companies’ separate juridical personalities will
be disregarded, if they use that scheme to defeat the workers right to collective bargaining. Lee v.
Samahang Manggagawa ng Super Lamination, 809 SCRA 313 (2016).
The Case for Thinly-Capitalized Corporations:
6.
a. Alter Ego Piercing: The judgment debt against the corporation can be pursued against the controlling
shareholder when it has been shown that the corporation had no existing assets of its own and the
operation of the corporation was so merged with those of the shareholders as to be practically
indistinguishable. Furthermore, they had the same office, the funds were held by the shareholders, and
the corporation had no visible assets. McConnel v. Court of Appeals, 1 SCRA 722 (1961).
b. Fraud Piercing: The DOJ Resolution explicitly identified the false pretense, fraudulent act or
fraudulent means perpetrated upon the investing public who were made to believe that ASBHI had the
financial capacity to repay the loans it enticed petitioners to extend, despite the fact that the deficient
capitalization evidenced by its articles of incorporation, the treasurer’s affidavit, the audited financial
statements. “Moreover, respondent’s argument assumes that there is legal obligation on the part of
petitioners to undertake an investigation of ASBHI before agreeing to provide the loans. There is no
such obligation. It is unfair to expect a person to procure every available public record concerning an
applicant for credit to satisfy himself of the latter’s financial standing. At least, that is not the way an
average person takes care of his concerns.” Gabionza v. Court of Appeals, 565 SCRA 38 (2008).
c. Equity Piercing: Where the corporation was under the control of its shareholders who ran-up quite a
high obligation with the printing company knowing fully well that their corporation was not in a position to
pay for the accounts, and where in fact they personally benefited from the operations of the company to
which they never paid their subscription in full, would constitute piercing of the veil to allow the creditor
to be able to collect what otherwise were debts owed by the company which has no visible assets and
has ceased all operations. Halley v. Printwell, Inc. 649 SCRA 116 (2011).
Evasion, Avoidance or Minimization of Taxes
7.
Use of dummies to constitute the corporation for the benefit of the controlling shareholder who sought
to avoid payment of war profit taxes would allow the tax authorities to levy upon the corporate properties to
enforce the tax assessment against the controlling shareholder [under the principles of alter ego piercing].
Marvel Building v. David, 9 Phil. 376 (1951).
45
Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).
18
A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits, which therefore would only constitute tax avoidance
which would allow piercing even in the absence of fraud (i.e., tax evasion) under the guise that the use of
the separate corporate veil was a means to defeat public convenience. However, when the maintenance of
the separate juridical entities serve only to minimize the collective taxes that the corporations are paying,
whereas in their operations they are operated in overlapping and informal manner, would justify the
piercing of the corporate veil based on alter ego considerations for purposes of collecting the proper taxes.
Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961).46
The plea to pierce the veil of corporate fiction on the allegation that the corporations’ true purpose is to
avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the
corporations: “With regard to their claim that [the companies] Ellice and Margo were meant to be used as
mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the
amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits,
cannot be doubted.” Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a
corporation is merely an adjunct, business conduit or alter ego of another corporation or when they practice
fraud on internal revenue laws, the fiction of their separate and distinct corporate identities shall be
disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable
transaction. Comm. of Internal Revenue v. Menguito, 565 SCRA 461 (2008).
DUE PROCESS CLAUSE CONSIDERATIONS IN PIERCING CASES
8.
a. Suit Against Controlling Shareholder Is Not a Suit Against the Corporation or the
Subsidiary That Would Allow the Piercing Doctrine to Be Applied Against the Latter:
Failure to implead the corporations as defendants and merely annexing a list of such corporations
to the complaints is a violation of due process for it would in effect be disregarding their distinct and
separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
Although both trial and appellate courts found sufficient basis for the conclusion that PKA and
Phoenix Omega were one and the same, and the former is merely a conduit of the other, We hold void
the application of a writ of execution on a judgment held only against PKA, since the RTC obtained no
jurisdiction over the person of Phoenix Omega which was never summoned as formal party to the case.
The general principle is that no person shall be affected by any proceedings to which he is a stranger,
and strangers to a case are not bound by the judgment rendered by the court. Padilla v. Court of
Appeals, 370 SCRA 208 (2001).
Piercing the veil of corporate fiction is applied only to determine established liability; it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in the case. The doctrine comes into play only during the trial of the case after the court has
already acquired jurisdiction over the corporation. Hence, before this doctrine can be even applied
based on the evidence presented, it is imperative that the court must first have jurisdiction over the
corporation. Mayor v. Tiu, 810 SCRA 256 (2016).
BUT SEE: Piercing of the corporate veil is premised on the fact that the corporation concerned must
have been properly served with summons or properly subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of execution meant for another in violation of its right to
due process. There exists, however, an exception to this rule: if it is shown "by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully employed to evade a
legitimate and binding commitment and perpetuate a fraud or like wrongdoings.” Int’l Academy of
Management and Economics v. Litton and Co., Inc., 848 SCRA 437 (2017).
HOWEVER: A suit brought against the corporate officers sued in their official capacity would allow
the application of the piercing doctrine to make the corporation liable since the corporation, although not
made a formal party to the case, was not denied due process. Emilio Cano Enterprises v. CIR, 13
SCRA 291 (1965).
b. To Make Acting Officers Personally Liable under the Piercing Doctrine, Is There a Need to
Bring a New Case Against the Officer?
Application of the piercing doctrine may be made even during the enforcement of the judgment
debt of the corporation against the controlling shareholders. McConnel v. Court of Appeals, 1 SCRA
723 (1961).
There is no denial of due process to hold officers liable under the piercing doctrine, provided that
evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of
Appeals, 198 SCRA 211 (1991).
We suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), where we found
lawful the Court of Appeal’s application of the piercing doctrine to hold the President liable for the
obligations incurred in the name of the corporation although it was not a party to the collection suit
before the trial court. Violago v. BA Finance Corp., 559 SCRA 69 (2008).
The elements of “control” laid down in Concept Builders to allow the application of the piercing
doctrine must be properly pleaded and proved during the hearing on the merits, and cannot be merely
raised for the first time in the motion for the issuance of an alias writ of execution. Pacific Rehouse
Corp. v. Court of Appeals, 719 SCRA 665 (2014).
46
Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961); CIR v. Norton and Harrison, 11 SCRA 704 (1964).
19
MODULE 4
CORPORATE CONTRACT LAW:
The Contractual Underpinning in the Formation and
Commercial Pursuits of the Corporation
(4TH WEEK: FEBRUARY 23 AND 25)
IV. CONTRACTS WITH A NON-EXISTING/DEFECTIVE
CORPORATION
Pre-Incorporation/Promoter’s Contracts
1.
a. Who Is a Promoter?
“Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing
the business or enterprise of the issuer [i.e., corporate enterprise whose shares are subscribed by
investors] and receives consideration therefor. Sec. 3.10, Securities Regulation Code (R.A. 8799)
b. Pre-incorporation Subscription Agreements (Secs. 59 and 60)
c. Liability Rules for Promoter’s Contracts:
A corporation, until organized, has no being, franchises or faculties, nor do those engaged in
bringing it into being have any power to bind it by contract—it is, as it were, a child in ventre sa mere.
The acts of promoters of a corporation may be ratified by the corporation if and when subsequently
organized, but under the peculiar facts and circumstances of the present case we decline to extend the
doctrine of ratification which would result in the commission of injustice or fraud to the candid and
unwary. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 (1937).
A franchise granted to a corporation still in the process of incorporation would nevertheless
constitute a valid contractual commitment, with the acceptance thereof subsequent to the completion of
incorporation. Rizal Light & Ice Co. v. Public Service Commission, 25 SCRA 285 (1968).
Promoter’s contracts can be pursued against the investors who were the venture’s “moving spirit”,
but not against those who were merely convinced to invest in the corporate venture on the basis of the
feasibility study undertaken by the promoters. Caram, Jr. v. CA, 151 SCRA 372 (1987).
2. De Facto Corporation Doctrine (Sec. 19)
a. Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).
By its failure to submit its bylaws on time, the AIIBP may be considered a de facto corporation
whose right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation. In fine, it is the act of registration with SEC through
the issuance of the Certificate of Incorporation that marks the beginning of an entity’s corporate
existence. Thus, a donation made in favor of the corporation after the filing of its incorporation papers
with the SEC, but before the issuance of the SEC Certificate of Incorporation requires the application,
not of the de facto corporation doctrine, but rather of the corporation by estoppel doctrine under Sec. 21.
Missionary Sisters of Our Lady of Fatima v. Alzona, 876 SCRA 309 (2018).
3. Corporation by Estoppel Doctrine (Sec. 20)
a. Jurisprudential Background:
In the absence of fraud, a person who has contracted or otherwise dealt with an association in
such a way as to recognize and in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of or involving such contract. Asia
Banking Corp. v. Standard Products, 46 Phil. 145 (1924).47
The corporation by estoppel doctrine cannot be applied against the claims of an innocent thirdparty who seeks to enforce the contract against the person who entered into a contract in behalf of a
non-existent corporation on the ground of separate juridical personality. The doctrine that is application
47
Citing Behn Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Chamber of Commerce v. Pua Te Choing, 14 Phil. 222 (1909).
20
is one found in the Law on Agency, i.e., a purported agent who enters into a contract in the name of the
non-existing principal shall be personally liable for contract so entered into. Vda. De Salvatierra v.
Garlitos, 103 Phil. 757 (1958).
We reiterate Salvatiera in that one who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter
set up against his victim the principle of corporation by estoppel. For even when there is an existing
corporate entity, we have applied the doctrine of piercing of the veil of corporate fiction to make the
actors behind the corporation personally liable for the contract entered into in the name of the
corporation. Albert v. University Publishing Co., 13 SCRA 84 (1965).
b. Nature of Doctrine: Founded on principles of equity and designed to prevent injustice and unfairness,
the doctrine applies when persons assume to form a corporation and exercise corporate functions and
enter into business relations with third persons. Where no third person is involved in the conflict, there
is no corporation by estoppel. A failed consolidation therefore cannot result in a consolidated
corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)
A party cannot challenge the personality of the plaintiff as a duly organized corporation after having
acknowledged same when entering into the contract with the plaintiff as such corporation for the
transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).48
A person who accepts employment in an unincorporated charitable association is estopped from
alleging its lack of juridical personality. Christian Children’s Fund v. NLRC, 174 SCRA 681 (1989).
[Section 20 of RCC] explicitly provides that one who assumes an obligation to an ostensible
corporation cannot resist performance thereof on the ground that there was in fact no corporation.
Clearly, petitioner is bound by his obligation under the MOA not only on estoppel but by express
provision of law. Paz v. New Int’l Environmental Universality, Inc., 756 SCRA 284 (2015).
The corporation by estoppel doctrine rest on the idea that if the Court were to disregard the
existence of an entity which entered into a transaction with a third party, unjust enrichment would result
as some form of benefit have already accrued on the part of one of the parties. Thus, in that instance,
the Court affords upon the unorganized entity corporate fiction and juridical personality for the sole
purpose of upholding the contract or transaction. Missionary Sisters of Our Lady of Fatima v.
Alzona, 876 SCRA 309 (2018).
c. Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
When the incorporators represent themselves to be officers of the corporation which was never
registered with SEC, and engaged in the name of the purported corporation in illegal recruitment, they
are estopped from claiming that they are not liable as corporate officers under [Se. 20 of RCC] which
provides that 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 the debts, liabilities and damages incurred or arising as a result
thereof. People v. Garcia, 271 SCRA 621 (1997).
The application of the doctrine applies to a third party only when he tries to escape liabilities on a
contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at
bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the
contract. However, one who deals with an unincorporated association is not estopped to deny its
corporate existence when his purpose is not to avoid liability, but precisely to enforce the contract
against the action for the purported corporation. Int’l Express Travel & Tour Services v. Court of
Appeals, 343 SCRA 674 (2000).
d. Can a Defective Attempt to Form a Corporation Result at Least into a Partnership?
While ordinarily persons who attempt, but fail, to form a corporation and who carry on business
under the corporate name occupy the position of partners inter se; such a relation, however, does not
necessarily exist, for ordinarily persons cannot be made to assume the relation of partners when their
purpose is that no partnership shall exist, and it should be implied only when necessary to do justice
between the parties. Thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so as to be liable as such in an action
for settlement of the alleged partnership and contribution. A partnership relation between certain
shareholders and other shareholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the
latter. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Under the law on estoppel including that under Sec. 21, those acting on behalf of an ostensible
corporation and those benefited by it, knowing it to be without valid existence, are held liable as general
partners. Lim Tong Lim v. Phils. Fishing Gear Industries, Inc., 317 SCRA 728 (1999).
V. ARTICLES OF INCORPORATION
Nature of Charter: The charter is in the nature of a contract between the corporation and the State.
1.
Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
The articles of incorporation defines the charter of the corporation and the contractual relationships
between the State and the corporation, the shareholders and the State, and between the corporation and
its shareholders. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
a. Commencement of Corporate Existence (Sec. 18).
Procedure and Documentary Requirements (Sec. 13 and 14)
2.
48
The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 (1911), but that case pertained to a commercial partnership which
required registration in the registry under the terms of the Code of Commerce).
21
a. SEC Guidelines on Authentication of Articles of Incorporation (SEC Memo Circular No. 162020)
b. As to Who May Be and the Number of Incorporators (Sec. 10): SEC Guidelines on
Incorporators49
It is possible for a business to be wholly owned by one individual, and the validity of its
incorporation is not affected when he gives nominal ownership of only one share of stock to each of the
other four incorporators. This arrangement is not necessarily illegal, but it valid only between and
among the incorporators privy to the agreement. It does not bind the corporation that will consider all
shareholders of record as the lawful owners of their registered shares. As between the corporation on
the one hand, and its shareholders and third persons on the other, the corporation looks only to its
books to determine who its shareholders are. Nautica Canny Corp. v. Yumul, 473 SCRA 415 (2005).
c. Corporate Name (Secs. 14[a], 17 and 18)
The name of a corporation is essential not only for its existence as a juridical person, but also in
manner of dealing with it, and in the exercise of its juridical capacities; it cannot be changed except in
the manner provided for by law. Red Line Trans. v. Rural Transit, 60 Phil. 549 (1934).
A corporation has no right to intervene in a suit using a name, not even its acronym, other than its
registered name, as the law requires and not another name which it had not registered. Laureano
Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997).
HOWEVER: There is no denial of due process when a corporation is sued and judgment is rendered
against it under an unregistered name: “A corporation may be sued under the name by which it makes
itself known to its workers.” Pison-Arceo Agri. Dev. Corp. v. NLRC, 279 SCRA 312 (1997).
A corporation’s corporate name is a property right, a right in rem, which it may assert and protect
against the world in the same manner as it may protect its tangible property, real or personal, against
trespass or conversion. The policy under [Sec. 17 of RCC] on “identical or deceptively or confusing
similar” corporate name is the avoidance of fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligation and duties, and the reduction of difficulties of
administration and supervision over corporations. De La Salle Montessori Int’l of Malolos, Inc. v. De La
Sale Brothers, Inc., 855 SCRA 38 (2018).
(1) Guidelines on the Use of Corporate Names (S SEC Memo Circular No. 13-2019)
Similarity in corporate names between two corporations would cause confusion to the public
especially when the purposes stated in their charter are also the same type of business. Universal
Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).
To fall within the prohibition of the law Revised Guidelines in the Approval of Corporate and
Partnership Names, two requisites must be proven, to wit: (a) That the complainant corporation
acquired a prior right over the use of such corporate name; and (b) the proposed name is either: (i)
identical, or (ii) deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law; or (iii) patently deceptive, confusing or contrary to existing laws.
Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992).
Incorporators must choose a name at their peril; and the use of a name similar to one adopted
by another corporation, whether a business or a nonprofit organization, if misleading or likely to
injure the exercise of its corporate functions, regardless of intent, may be prevented by the
corporation having a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng
Dios Kay Kristo Jesus, 372 SCRA 171 (2001).
The policy behind Sec. 18 which expressly prohibits the use of a corporate name which is
“identical or deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to existing laws,” is to
avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and supervision over
corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002).50
Enforcement of protection accorded by Sec. 18 to corporate names is lodged exclusively in the
SEC which has absolute jurisdiction, supervision and control over all corporations. It is the SEC’s
duty to prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority to de-register at
all times, and under all circumstances corporate names which in its estimation are likely to
generate confusion.” GSIS Family Bank v. BPI Family Bank, 771 SCRA 284 (2015).
(2) No Corporate Name Shall Be Allowed If: SEC Memo Circular No. 13-2019
 “Not Distinguishable From That Already Reserved or Registered ”
 “Name Already Protected by Law”
 “When Use of Name is Contrary to Law”
(3) SEC Power to Adjudicate Over Use of Corporate Name (Sec. 17)
By express mandate of law, the SEC has absolute jurisdiction, supervision and control over all
corporations. It is the SEC’s duty to prevent confusion in the use of corporate names not only for
the protection of the corporation involved, but more so for the protection of the public. It has the
authority to de-register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion. Indian Chamber of Commerce Phils., Inc. v. Filipino
Indian Chamber of Commerce in the Philippines, Inc., 799 SCRA 27 (2016).
49
SEC Memorandum Circular No. 16-2019.
50
Also Lyceum of the Phils. v. Court of Appeals, 219 SCRA 610 (1993).
22
(4) Effect of Change of Corporate Name: A corporation may change its name by the amendment
of its articles of incorporation, but the same is not effective until approved by the SEC. Phil. First
Insurance Co. v. Hartigan, 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation, and has no effect on the
identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of
Appeals, 216 SCRA 738 (1992).51
(5) Use of Corporate Names of Dissolved Corporations – A dissolved corporation’s name shall
not be allowed to be used within 3 years after approval of dissolution by the SEC, unless allowed
by the last shareholders representing at least majority of the outstanding capital stock. Indian
Chamber of Commerce Phils. Inc. v. Filipino Indian Chamber of Commerce in the Phils., 799 SCRA
27 (2016).
d. Purpose Clauses (Secs. 14[b] and 41)
The primary purpose clause in the articles of incorporation is meant to protect shareholders so they
will know the main business of the corporation and file derivative suits if the corporation deviates from
the primary purpose. Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 (1919).
“The best proof of the purpose of a corporation is its articles of incorporation and bylaws. The
articles of incorporation must state the primary and secondary purposes of the corporation, while the
bylaws outline the administrative organization of the corporation, which, in turn, is supposed to insure or
facilitate the accomplishment of said purpose.” Therefore, the allegation that the corporations were
organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes,
constitute prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
e. Corporate Term (Sec. 11; SEC Memo Circular No. 22-2020):
(1) DEFAULT RULE: Perpetual Term
(2) Retention/Choosing of Definite Corporate Term
(3) Extension of Definite Corporate Term: No extension of term can be effected once dissolution
stage has been reached, as it constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269
(1968).
Article 605 of Civil Code “clearly limits any usufruct constituted in favor of a corporation or
association to 50 years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a
corporation’s lifetime may be extended indefinitely. The usufruct would then be perpetual. This is
especially insidious in cases where the usufruct given to a corporation covers public land.” National
Housing Authority v. Court of Appeals, 456 SCRA 17 (2005).
(4) Revival of Expired Corporations: SEC Memo Circular No. 23-2019
 “Reincorporation” mandated in xChung Ka Bio v. IAC, 163 SCRA 534 (1988) no longer
applies.
f. Principal Place of Business (Secs. 13[c] and 50): Place of residence of the corporation is the place
of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967)
The residence of its President is not the residence of the corporation because a corporation has a
personality separate and distinct from that of its officers and shareholders. Sy v. Tyson Enterprises, Inc.,
119 SCRA 367 (1982).
Although the Rules of Court do not provide expressly, jurisprudence has settled that the place where
the principal office of a corporation is located, as stated in the articles, indeed establishes its residence.
This ruling is important in determining the venue of an action by or against a corporation, as in the
present case. Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc., 473 SCRA 705
(2005), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998), p. 162.
g. No Minimum Capitalization (Sec. 12)
 Why Is Authorized Capital Stock Required to Be Stated under Sec. 13(h)?
h. No More Subscription and Paid-Up Requirements (Sec. 13 of old Corporation Code)
 BUT SEE: 25% Subscription – 25% Paid-up Requirement under Section 37 for Increasing the
Authorized Capital Stock
Grounds for Disapproval of the Articles (Sec. 16)
3.
When the proposed articles show that the object is to organize a barrio into a separate corporation for
the purpose of taking possession and having control of all municipal property within the incorporated barrio
and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be
denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914).
Amendments to the Articles (Sec. 15)
4.
BYLAWS
VI.
Nature and Function and Contents of Bylaws (Sec. 46)
1.
51
P.C. Javier & Sons v. CA, 462 SCRA 36 (2005); Zuellig Freight and Cargo Systems v. NLRC, 701 SCRA 562 (2013).
23
The power to adopt bylaws is an inherent power on the part of those forming a corporation or any
other form of association. Gokongwei, Jr. v. SEC, 89 SCRA 337 (1979).
As the “rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders/members and directors and officers with
relation thereto and among themselves in their relation to it,” bylaws are indispensable to corporations.
These may not be essential to corporate birth but certainly, these are required for an orderly governance
and management of corporations. Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
Bylaws are traditionally defined as regulations, ordinances, rules or laws adopted by a corporation for
its internal governance, including rules for routine matters such as calling meetings and the like. If those
key bylaw provisions on matters such as quorum requirements, meetings, or on the internal governance of
the local/chapter are themselves already provided for in the constitution, then it would be feasible to
overlook the requirements for bylaws. Indeed in such an event, to insist on the submission of a separate
document denominated as “ByLaws” would be an undue technicality, as well as a redundancy. San Miguel
Corp. v. Mandaue Packing Products Plants Union-FFW, 467 SCRA 107 (2005).
Bylaws are the self-imposed rules resulting from the agreement between the country club and its
members to conduct the corporate business in a particular way. In that sense, the bylaws are the private
“statutes” by which the country club is regulated, and will function. Bylaws constitute a binding contract as
between the country club and its members, and as among the members themselves. They are selfimposed private laws binding on all members, directors, and officers of the country club. The prevailing rule
is that the provisions of the articles of incorporation and the bylaws must be strictly complied with and
applied to the letter. Ching v. Quezon City Sports Club, Inc., 807 SCRA 46 (2016).52
a. New Mandated Contents of the Bylaws (Sec 46):
 Mode by which a shareholder, member, director, or trustee may attend meetings and
cast their votes
 An arbitration agreement may be provided in the Bylaws pursuant to Section 181
Adoption Procedure for Bylaws (Sec. 45)
2.
a. Section 45 Removed the One Month from Incorporation Period to Adopt Bylaws, and has
rendered the following decisions irrelevant:
There can be no automatic dissolution simply because the incorporators failed to file the required
bylaws under Sec. 46 of old Corporation Code. Proper notice and hearing are cardinal components of
due process in any democratic institution, agency or society. In other words, the incorporators must be
given the chance to explain their neglect or omission and remedy the same. Loyola Grand Villas
Homeowners Assn. v. Court of Appeals, 276 SCRA 681 (1997).
A corporation which has failed to file its bylaws within the prescribed period does not ipso facto lose
its powers as such, and may be considered a de facto corporation whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to which such corporations may be a
party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
b. Failure to Adopt and Maintain the Bylaws Now Specifically Criminally Punishable and
Subject to SEC’s Contempt Power (Sec. 161)
3.
COMMON LAW INTRAMURAL LIMITATIONS ON BYLAWS
a. Bylaws Cannot Be Contrary to Law, Public Policy or the Charter
A bylaw provision that empowers the Board of Directors to cancel the shares of any member and
return to the owner thereof the value thereof is void for being in violation of the Corporation Law that
provided that capital can only be returned after dissolution. Government of P.I. v. El Hogar Filipino, 50
Phil. 399 (1927).
A bylaw provision granting to a shareholder permanent seat in the Board of Directors is void, even
when formally adopted by the members of the association, because it is contrary to the provision of the
[Revised] Corporation Code requiring all members of the Board to be elected by the shareholders.
Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
Bylaw provisions cannot be such or be amended to be able to go around the security of tenure
clause of employees nor impair the obligation of existing contracts or rights; otherwise, it would enable
an employer to remove any employee from his employment by the simple expediency of amending its
bylaws and providing that his/her position shall cease to exist upon occurrence of a specified event.”
Salafranca v. Philamlife (Pamplona) Village Homeowners Assn., 300 SCRA 469 (1998).
Board of Directors should act in the manner and within the formalities, if any, prescribed in its
charter or bylaws. Thus, Board must act as a body in a meeting called pursuant to the law or the
corporation’s bylaws; otherwise, any action taken therein may be questioned by the objecting director or
shareholder. Certainly, the rules set in the bylaws are mandatory for every member to respect; they are
the fundamental law with which the corporation and its officers and members must comply. It is on this
score that we cannot sustain the Bernas Group’s stance that the subsequent annual shareholders’
meetings were valid. Bernas v. Cinco, 761 SCRA 104 (2015).
b. Bylaws Cannot Be Unreasonable or Be Contrary to their Very Nature
Bylaws are intended merely for the protection of the corporation, and prescribe regulation, not
restrictions on property rights of shareholders; they are always subject to the charter of the corporation.
Rural Bank of Salinas, Inc. v. Court of Appeals, 210 SCRA 510 (1992).
52
Forest Hills Golf and Country Club v. Gardpro, Inc., 739 SCRA 28 (2014).
24
Authority granted to a corporation to regulate the transfer of its stock does not empower the
corporation to restrict the right of a shareholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be followed in effecting transfer. Thomson
v. Court of Appeals, 298 SCRA 280 (1998).
c. Bylaws Cannot Discriminate Among Its Shareholders or Members
4.
Binding Effect of Bylaws on Members of the Nonstock Corporation
In Bel Air village Association, Inc. v. Dionisio, 174 SCRA 589 (I1989), we had held that the
constitutional guarantee of freedom of association can only be invoked against the State, and does not
apply to private transactions, like a sale, where a condition was validly imposed by the vendor. Finally,
Padcom Condominium Corp. v. Ortigas Center Association, Inc., 382 SCRA 222 (2002), reiterated that the
automatic membership in a homeowners’ association does not violate lot owners’ right to freedom of
association because they were not forced to buyer their lots from the developer. Cesar Yatco Real Estate
Services, Inc. v. Bel-Air Village Association, Inc., 886 SCRA351 (2018).
5.
Generally, Bylaws Are Not Binding on the Dealing Public
Bylaw provisions on the required quorum for special meetings of the Board have the force of law and
are binding even on third-parties who deal with the properties of the corporation. Peña v. Court of
Appeals, 193 SCRA 717 (1991).
The nature of bylaws being intramural instruments would mean that they are not binding on thirdparties, except those who have actual knowledge of their contents. China Banking Corp. v. Court of
Appeals, 270 SCRA 503 (1997).
Contracts entered into on behalf of the corporation not signed by the Chairman in violation of the
specific bylaw provision are not void, since bylaws operate merely as internal rules among the
shareholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have
knowledge of the same.” PMI Colleges v. NLRC, 277 SCRA 462 (1997).
Amendments and Revisions of Bylaws (Sec. 47)
6.
VII. TRUST FUND DOCTRINE
a. Common Law Premise: Creditors Preferred Over Equity-holders to the Assets of the
Business Enterprise (Art. 2236, Civil Code)
The subscriptions to the capital stock of a 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
Co. v. Rivera, 44 Phil. 469 (1923); Lumanlan v. Cura, 59 Phil. 746 (1934).
A share of stock is not an indebtedness of the company to the owner, and therefore, it is not a credit.
Shareholders are not as to their shares creditors of the company, which can be off-setted against their
liabilities to the company. The capital stock of a corporation is a trust fund to be used more particularly for
the security of its creditors. Garcia v. Lim Chu Sing, 59 Phil. 562 (1934).
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which provides that the capital stock, property and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors. Reason: creditors of a corporation are preferred
over the shareholders in the distribution of corporate assets. There can be no distribution of assets
among the shareholders without first paying corporate creditors; any disposition of corporate funds to the
prejudice of creditors is null and void. Boman Environmental Dev. Corp. v. Court of Appeals, 167
SCRA 540 (1988).53
Even when foreclosure on corporate assets was wrongful done, shareholders have no standing to
recover for themselves moral damages; otherwise, it would amount to the appropriation by, and the
distribution to, such shareholders of part of the corporation’s assets before the dissolution and the
liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998).
The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the payment of the
debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital stock may be turned over or released to the shareholder
(except in the redemption of the redeemable shares) without violating this principle. Thus dividends must
never impair the subscribed capital stock; subscription commitments cannot be condoned or remitted; nor
can the corporation buy its own shares using the subscribed capital as the consideration therefore. NTC
v. Court of Appeals, 311 SCRA 508 (1999).
We clarify that the trust fund doctrine is not limited to reaching the shareholders’ unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts. All assets and property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the possession of the shareholders, regardless of full
payment of their subscriptions may be reached by the creditors in satisfaction of its claim. Halley v.
Printwell, Inc. 649 SCRA 116 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2001), p. 558.
b. Power to Purchase Own Shares (Secs. 8, 40, 42 and 139, last paragraph)
Under common law, there were originally conflicting views on whether a corporation had the power to
purchase its own stocks. Only a few American jurisdictions adopted the strict English rule forbidding a
corporation from purchasing its own shares. In some American states where the English rule used to be
53
CIR v. Court of Appeals, 301 SCRA 152 (1999).
25
adopted, statutes granting authority to purchase out of surplus funds were enacted, while in others,
shares might be purchased even out of capital provided the rights of creditors were not prejudiced. The
reason underlying the limitation of share purchases sprang from the necessity of imposing safeguards
against the depletion by a corporation of its assets and against the impairment of its capital needed for
the protection of creditors. Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010).
c. Rescission of Subscription Agreement
Violation of terms embodied in a Subscription Agreement, with are personal commitments, do not
constitute legal ground to rescind the such agreement: “In the instant case, the rescission of the PreSubscription Agreement will effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since the
rescission of a subscription agreement is not one of the instances when distribution of capital assets and
property of the corporation is allowed.” Distribution of corporate assets among the shareholders cannot
even be resorted to achieve “corporate peace.” Ong Yong v. Tiu, 401 SCRA 1 (2003).
VIII. ULTRA VIRES DOCTRINE
1.
Ultra Vires of the First Type: Classic Ultra Vires Acts (Secs. 2 and 44)
An ultra vires act is one committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the power conferred upon it by law. The term “ultra vires“ is
“distinguished from an illegal act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.” Atrium Management Corp. v.
Court of Appeals, 353 SCRA 23 (2001).
A corporation has no power except those expressly conferred on it by the [Revised] Corporation Code,
its charter, and those that are implied or incidental to its existence. In turn, a corporation exercises said
powers through its Board of Directors and/or its duly authorized officers and agents. Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
From a reading of Sec. 45 (now Sec. 44), it is clear that a corporation has: (1) express powers, which
are bestowed upon by law or its articles of incorporation; and (2) necessary or incidental powers to the
exercise of those expressly conferred. An act which cannot fall under a corporation's express or necessary
or incidental powers is an ultra vires act. Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016).
a. General Judicial Attitude Towards the Ultra Vires Doctrine: The plea of “ultra vires” will not be
allowed to prevail, whether interposed for or against a corporation, when it will not advance justice but,
on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good faith.
Zomer Dev. Corp. v. Int’l Exchange Bank, 581 SCRA 115 (2009).
b. Ratification of Ultra Vires Acts – Acts done by the Board of Directors which are ultra vires cannot be
set-aside if the acts have been ratified by the shareholders. Pirovano v. De la Rama Steamship Co.,
96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied powers of the
corporation, it will not be set aside when, not being malum prohibitum, the corporation, through its
senior officers or its Board of Directors, are estopped from questioning the legality of such act, contract
or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932).54
2.
Ultra Vires of the Second Type: Doctrine of Centralized Management (Sec. 22)
Acts done in excess of officers’ scope of authority cannot bind the corporation. However, when
subsequently a compromise agreement was on behalf of the corporation being represented by its President
acting pursuant to a Board of Directors’ resolution, such constituted as a confirmatory act signifying
ratification of all prior acts of its officers. NPC v. Alonzo-Legasto, 443 SCRA 342 (2004).
Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate
agent duly authorized by the Board—absent such valid delegation/authorization, the rule is that the
declaration of an individual directors relating to the affairs of the corporation, but not in the course of, or
connected with the performance of authorized duties of such director, are held not binding on the
corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Application of the First and Second Types of Ultra Vires – Third persons dealing with corporations
must determine the corporation’s competence as expressly defined by the law and their articles of
incorporation. Corporate acts that are outside those express definitions under the law or articles of
incorporation or those “committed outside the object for which a corporation is created” are ultra vires. The
only exception to this rule is when acts are necessary and incidental to carry out a corporation's purposes,
and to the exercise of powers conferred by the [Revised] Corporation Code and under a corporation's
articles of incorporation. This exception is specifically included in the general powers of a corporation under
[Sec. 35 of RCC]. University of Mindanao v. BSP, 778 SCRA 458 (2016).
3.
Ultra Vires of the Third Type: Although arrangements between the two mining companies was
prohibited under the terms of the old Corporation Law, the Supreme Court did not declare the nullity of the
agreements on the ground that only private rights and interests, not public interests, were involved in the
case.Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 (1933).
MODULE 5
54
Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. CA, 177 SCRA 594 (1989).
26
CORPORATE POWERS AND CAPACITY
(5TH WEEK: MARCH 2 AND 4)
IX. CORPORATE POWERS AND CAPACITY
Corporate Power and Juridical Capacity to Act (Art. 46, Civil Code; Secs. 36 and 45)
1.
A corporation has no power except those expressly conferred by the [Revised] Corporation Code and
those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its
Board of Directors and/or its duly authorized officers. In turn, physical acts of the corporation, like the
signing of documents, can be performed only by natural persons duly authorized for the purpose by
corporate bylaws or by a specific act of the Board. Shipside Inc. v. CA, 352 SCRA 334 (2001).55
A corporation has only such powers as are expressly granted by law and its articles of incorporation
(express powers), those which may be incidental to such conferred powers, those reasonably necessary to
accomplish its purposes (implied powers), and those which may be incident to its existence as a juridical
entity (incidental powers). Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).56
a. Express Powers Enumerated in SECTION 35
b. Implied Powers: When the articles expressly provide that the purpose was to “engage in the
transportation of person by water,” such corporation cannot engage in the business of land
transportation, which is an entirely different line of business. Luneta Motor Co. v. A.D. Santos, Inc., 5
SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to undertake
stevedoring services to unload coal into its pier since it is not reasonably necessary for the operation of
its power plant. National Power Corp. v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker. Pilipinas
Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio Pael v.
Court of Appeals, 372 SCRA 587 (2001).
c. Incidental Powers: The act of issuing checks is within the ambit of a valid corporate act, for it as for
securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
2. EXPRESS POWERS THAT REQUIRE SHAREHOLDERS’ RATIFICATION
a. Extend or Shorten Corporate Term (Secs. 11, 36 and 80[1])
b. Increase or Decrease Capital Stock (Sec. 37)
Despite the Board resolution approving the increase in capital stock and the receipt of payment on
the future issues of the shares from the increased capital stock, such funds do not constitute part of the
capital stock of until approval of the increase by SEC. Central Textile Mills v. NWPC, 260 SCRA 368
(1996).
A reduction of capital to justify the mass layoff of employees, especially of union members,
amounts to nothing but a premature and plain distribution of corporate assets to obviate a just sharing to
labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute
unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).
c. Incur, Create or Increase Bonded Indebtedness (Sec. 37)
d. Sell, Dispose, Mortgage or Encumber All or Substantially All Assets (Sec. 39; SEC Memo
Circular No. 12-2020)
Corporate property is not property of the shareholders or members, and as such, may not be sold
without express authority from the Board of Directors. Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
Sale by Board of the only corporate property without compliance with Sec. 40 requiring ratification
of members representing at least two-thirds of the membership, would make the sale null and void.
Islamic Directorate v. CA, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717 (1991).
The [Revised] Corporation Code defines a sale or disposition of substantially all assets and
property of a corporation as one by which the corporation “would be rendered incapable of continuing
the business or accomplishing the purpose for which it was incorporated” – any sale or disposition short
of this will not need shareholder ratification, and may be pursued by the majority vote of the Board of
Directors. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
e. Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 41)
Investment by a sugar central in the equity of a jute-bag manufacturing company used in packing
sugar falls within the implied powers of the sugar central as part of its primary purpose; it does not need
shareholders’ ratification. De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 (1969).
f. Enter into Management Contracts (Sec. 43)
55
Salenga v. CA, 664 SCRA 635 (2012); Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012); Ignacio v. Home Bankers Savings and Trust Co., 689
SCRA 173 (2013).
56
Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016).
27
A management contract is not an agency contract, and therefore is not revocable at will. Nielson &
Co. v. Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya, 195 SCRA 247 (1991).
3. OTHER CORPORATE POWERS (Sec. 35)
a. Sell Land and Other Properties
When the corporation’s primary purpose is to market, distribute, export and import merchandise,
the sale of land is not within the actual or apparent authority of the corporation acting through its
officers, much less when acting through the treasurer. Articles 1874 and 1878 of Civil Code requires
that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale is
void. San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).57
b. Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the corporation
to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance
with the ordinary course of business usages and practices of the corporation is devoid of merit because
the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf
of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
c. Power to Sue and Be Sued
When the power to sue is delegated by the bylaws to a particular officer, such officer may appoint
counsel to represent the corporation in a pre-trial hearing without need of a formal board resolution.
Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
As a creature of the law, the powers and attributes of a corporation are those set out, expressly or
implied, in the law. Among the general powers granted by law to a corporation is the power to sue in its
own name. This power is granted to a duly-organized corporation, unless specifically revoked by
another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).
Under [Sec. 35 in relation to Sec. 22 of RCC], where a corporation is an injured party, its power to
sue is lodged with its Board. A minority shareholder who is a member of the Board has no such power
or authority to sue on the corporation’s behalf. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).58
(1) xCertificate of Non-Forum Shopping
Where petitioner is a corporation, a Board resolution authorizing an officer to execute the certificate against forum shopping is necessary—a certification not signed by a duly authorized person
renders the petition dismissable, Gonzales v. Climax Mining Ltd., 452 SCRA 607 (2005);59 such as
the administrator or project manager, Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230 (2001); or the
General Manager, Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
The corporate veil cannot be used to blatantly violate the prohibition against forum-shopping.
Where the corporation itself has not been remiss in vigorously prosecuting or defending corporate
causes and in using and applying remedies available to it, then shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be allowed to pursue the same
claims. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
For counsel to sign the certification for the corporation, he must specifically be authorized by the
Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003).60 Nonetheless, such lack of
authority may be cured: even if the counsel executed the verification and certificate of non-forum
shopping before the board authorized him, the passing of the board resolution of authorization before
the actual filing of the complaint. Median Container Corp. v. Metropolitan Bank and Trust Co., 561
SCRA 622 (2008); the submission in the motion for reconsideration of the authority to sign the
verification and certification constitutes substantial compliance with the procedural requirements.
Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008).
When a corporate officers has been granted express power by the Board of Directors to institute
a suit, the same is considered broad enough to include the power of said corporate officer to execute
the verification and certification against forum shopping required in initiatory pleadings under the
Rules of Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620 (2009).
A President can sign the verification and certification against non-forum shopping in behalf of the
corporation without the benefit of a board resolution. South Cotabato Communications Corp. v. Sto.
Tomas, 638 SCRA 566 (2011).
However, the following officials or employees of the company can sign a verification and
certification against forum-shopping without need of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. While the above
cases do not provide a complete listing of authorized signatories to the verification and certification
required by the rules, the determination of the sufficiency of the authority was done on a case to
case basis. Pasos v. PNCC, 700 SCRA 608 (2013).
57
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003);
Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012).
58
Shipside Inc. v. CA, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. CA, 497 SCRA 638 (2006); Mediserv,
Inc. v. CA, 617 SCRA 284 (2010); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012);
Swedish Match Phils v. Treasurer of Manila, 700 SCRA 428 (2013); Esguerra v. Holcim Phils., 704 SCRA 490 (2013); Philippine Numismatic and Antiquarian
Society v. Aquino, 816 SCRA 161 (2017).
59
DBP v. CA, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); PAL v. Flight Attendance and Stewards Assn. of the Phils.
(FASAP), 479 SCRA 605 (2006); Metro Drug Distribution v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. CIR, 545 SCRA 10 (2008)
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012); Almeda v. Heirs of Ponciano Almeda, 839
SCRA 630 (2017); BSP v. BG Homes, Inc., G.R. No. 228239, 10 June 2019.
60
Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003); Nissan Car Lease Phils. v. Lica Management Inc., 780 SCRA 400 (2016); Steamship Mutual
Underwirting Assn. (Bermuda) Ltd. v. Sulpicio Lines, Inc., 840 SCRA 203 (2017).
28
(2) xService of Summons on Corporations
Section 11, Rule 14 of the Rules of Civil Procedure uses the term “general manager” and unlike
the old provision in the Rules of Court, it does not include the term “agent”. Consequently, the
enumeration of persons to whom summons may be served is “restricted, limited and exclusive”
following the rule on statutory construction expressio unios est exclusio alterius. Therefore, the
earlier cases that uphold service of summons upon a construction project manager; 61 a corporation’s
assistant manager;62 ordinary clerk of a corporation;63 private secretary of corporate executives;64
retained counsel;65 officials who had charge or control of the operations of the corporation, like the
assistant general manager;66 or the corporation’s Chief Finance and Administrative Officer; 67 no
longer apply since they were decided under the old rule that allows service of summons upon an
“agent”68 of the corporation. E.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999).69
d. Hire Employees and Appoint Agents
Except where the authority of employing servants and agents is expressly vested in the board of
directors or trustees, an officer or agent who has general control and management of the corporation’s
business, or a specific part thereof, may bind the corporation by the employment of such agents and
employees as are usual and necessary in the conduct of such business. But the contracts of
employment must be reasonable. Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924).
e. Provide Gratuity Pay for Employees (Sec. 35[j])
Providing gratuity pay for employees is an express power of a corporation under the [Revised]
Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the
resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).
f. To Make Reasonable Donations (Sec. 35[i])
g. To Enter Into a Partnership, Joint Venture and other commercial agreements with natural
and juridical persons (Sec. 35[h])
Overturns: SEC Opinion, 29 February 1980
SEC Opinion No. 16-22. 04 October 2016
While a corporation has no inherent power to enter into a partnership, it may enter into a joint
venture arrangement. Tuason & Co. v. Bolaños, 95 Phil. 106 (1954).
MODULE 6
ATTRIBUTE OF CENTRALIZED MANAGEMENT
(6TH WEEK: MARCH 9 AND 11)
X. BOARD OF DIRECTORS / TRUSTEES AND OFFICERS
Whatever may be the term used in the company charter, the “Board of Directors” is the body which (1)
exercises all powers provided for under the [Revised] Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all properties of the corporation. Its members have been characterized
as clothed with a fiduciary character. Hence, the corporation’s general counsel cannot represent the members
of the Board who have been sued by the shareholders in a derivative suit, for clearly the Board is separate and
distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).
Nonstock and other special corporations may, through their articles of incorporation or their bylaws,
designate their Governing Board by any name other than as “Board of Trustees.” (Sec. 174)
1. DOCTRINE OF CENTRALIZED MANAGEMENT (Sec. 22)
The raison d’etre behind conferment of corporate powers on the Board is not lost on the Court –
indeed, the concentration in the Board of the powers of control of corporate business and appointment of
corporate officers and managers is necessary for efficiency in any large organization. Shareholders are too
numerous, scattered and unfamiliar with the corporate business to conduct its affairs directly—so the plan
of corporate organization is for the shareholders to choose the directors who shall control and supervise
the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
[Section 22 of RCC] provides that the corporate powers of all corporations shall be exercised by the
Board of Directors. Just as a natural person may authorize another to do certain acts in his behalf, so may
the Board validly delegate some of its functions to individual officers or agents appointed by it. Thus,
contracts or acts of a corporation must be made either by the Board of Directors or by a corporate agent
duly authorized by the Board. Absent such valid delegation/authorization, the rule is that the declarations of
an individual director relating to the affairs of the corporation, but not in the course of, or connected with the
61
Kanlaon Construction Enterprises Co. v. NLRC, 279 SCRA 337 (1997).
62
Gesulgon v. NLRC, 219 SCRA 561 (1993).
63
Golden Country Farms, Inc. v. Sanvar Dev.t Corp., 214 SCRA 295 (1992); G&G Trading Corp. v. CA, 158 SCRA 466 (1988).
64
Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); Vlason Enterprises Corp. v. CA, 310 SCRA 26 (1999).
65
Republic v. Ker & Co., 18 SCRA 207 (1966).
66
Villa Rey Transit v. Far East Motor Corp., 81 SCRA 298 (1978).
67
Far Corp. v. Francisco, 146 SCRA 197 (1986).
68
Filoil Marketing Corp. v. Marine Dev. Corp. of the Phils., 177 SCRA 86 (1982).
69
Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012).
29
performance of authorized duties of such director, are held not binding on the corporation. Manila Metal
Container Corp. v. PNB, 511 SCRA 444 (2006).70
A corporation is an artificial being and can only exercise its powers and transact its business through
the instrumentalities of its Board of Directors, and through its officers and agents, when authorized by
resolution or by its bylaws. Consequently, when legal counsel was clothed with authority through formal
board resolution, his acts bind the corporation. De Liano v. Court of Appeals, 370 SCRA 349 (2001).71
Although the best proof of the authority of the officer to represent or bind the corporation would be the
board resolution itself, the Court has considered a Secretary’s Certificate of the existence of such board
resolution as sufficient proof of authority for a person named in it to represent the corporation. Meatworld
Int’l Inc. v. Hechanova, 842 SCRA 620 (2017).
a. Theories on Source of Board Power
(1) Theory of State-Vested Powers: The Board of Directors generally has a right to ignore the
resolutions of the shareholders on corporate matters, for contracts between a corporation and the
public must be made by the Board in the exercise of its business judgment, and not by the
shareholders. A Director-Treasurer has no power to bind the company even in transactions that are
pursuant to the primary purpose its corporation, especially when the bylaws specifically provided that
the acts entered into can only be done by the Board of Directors. Ramirez v. Orientalist Co., 38
Phil. 634 (1918).
The powers granted to the Board of Directors are directly vested to them by law pursuant to [Sec.
22 of RCC]. Thus, the MOA executed among the feuding shareholders that arranges that the affairs
of the corporation shall be in the hands of one set of shareholders would be void and cannot serve to
oust the duly elected Board of Directors from the exercise of corporate powers. Toms v.
Rodriguez, 761 SCRA 679 (2015); 797 SCRA 60 (2016).
(2) Theory of Shareholder-Delegated Powers: The Board of Directors is a creation of the
shareholders and controls and directs the affairs of the corporation by delegation of the
shareholders. By drawing themselves the powers of the corporation, they occupy positions of
trusteeship in relation to the shareholders. Angeles v. Santos, 64 Phil. 697 (1937).
One of the most important rights of a shareholder is the right to vote for the directors who are to
manage the corporate affairs. The right to choose the persons who will direct and manage the
corporation is significant, because it is the main way in which a shareholder can have a voice in the
management of corporate affairs, or can have a say on how the purposes and goals of the
corporation may be achieved. Once the directors are elected, the shareholders relinquish corporate
powers to the Board in accordance with law. Tan v. Sycip, 499 SCRA 216 (2006).
b. Board Must Act as a Body to Bind the Corporation (Sec. 52)
Exercise of powers by the Board of Directors may be express and formal through the adoption of a
board resolution in a meeting called for the purpose; or it may be implied where the Board collectively
and knowingly allows the President to enter into important contracts in the pursuit of the corporate
business. Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 (1967).
COMPARE: Where the President enters into speculative contracts without prior nor subsequent
Board approvals, nor were the transactions included in the reports to the Board, such contracts do not
bind the corporation. It must be pointed out that the Board of Directors, not the President, exercises
corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., 355 SCRA 559 (2001).
A corporation, through its Board of Directors, should act in the manner and within the formalities
prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called
pursuant, otherwise, any action taken therein may be questioned by any objecting director or
shareholder. Be that as it may, jurisprudence tells us that an action of the Board during a meeting,
which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the corporation’s subsequent course of conduct. Lopez
Realty v. Fontecha, 247 SCRA 183 (1995).
c. Effects of Acts by a “Bogus” Board : The acts or contracts effected by a bogus Board would be void
pursuant to Art. 1318 of Civil Code because of the lack of “consent”. Islamic Directorate of the
Philippines v. Court of Appeals, 272 SCRA 454 (1997).
d. Executive and Other Board Committees (Sec. 34): It is within the power of the Board of Directors
to authorize any person or committee to undertake corporate acts. The board has power to constitute
even an executive committee, even when no such committee is provided for in the articles and bylaws
of the corporation. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).
2. BUSINESS JUDGMENT RULE
a. BJR FIRST BRANCH: On the Transactions Entered Into: When resolutions are passed in good faith
by the Board of Directors, it is valid and binding, and whether or not it will cause losses or decrease the
corporation’s profits, the courts have no authority to review them. Questions of policy or management
are left solely to the honest decision of officers and directors of a corporation, and the court is without
authority to substitute its judgment [for that] of the Board. The Board is the corporation’s business
70
Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Gamboa v. Victoriano, 90 SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, 499 SCRA 319
(2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine Int’l, 617 SCRA 491
(2010); Olongapo City v. Subic Water and Sewerage Co., 732 SCRA 132 (2014); Philippine Stock Exchange (PSE) v. Litonjua, 812 SCRA 121 (2016); Colegio
Medico-FGarmaceutico de Filipinas, Inc. v. Lim, 869 SCRA 298 (2018).
71
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. CA, 352 SCRA 334 (2001); Lanuza, Jr. v. BF Corp., 737 SCRA 275
(2014).
30
manager, and so long as it acts in good faith its orders are not reviewable by the courts. Montelibano
v. Bacolod-Murcia Milling Co., 5 SCRA 36 (1962).72
While SEC is the agency with the primary say as to whether or not securities, including shares of a
corporation, may be traded or not in the stock exchange, it does not mean that PSE’s management
prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation authorized
by its corporate franchise to engage in its proposed and duly approved business. One of the PSE’s
main concerns, as such, is still the generation of profit for its shareholders. Philippine Stock
Exchange v. Court of Appeals, 281 SCRA 232 (1997).
No court can, in resolving the issues between squabbling shareholders, order the corporation to
undertake certain corporate acts, since it would be in violation of the business judgment rule. Ong
Yong v. Tiu, 401 SCRA 1 (2003), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p. 288.
b. BJR SECOND BRANCH: On the Personal Liability of the Acting Directors and/or Officers: Directors
and officers who purport to act for the corporation, keep within the lawful scope of their authority and act
in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts,
which are properly attributed to the corporation alone. Benguet Electric Cooperative, Inc. v. NLRC, 209
SCRA 55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad faith or
negligence, directors and/or officers are not liable. For them to be held accountable, the
mismanagement and the resulting losses must be proven to have resulted from bad faith and with
malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a
known duty through some motive or interest or ill-will partaking of the nature of fraud. Filipinas Port
Services, Inc. v. Go, 518 SCRA 453 (2007).
It is elementary in Corporation Law that the business judgment rule, which prohibits the courts from
interfering in the judgment made by the Board and its officers, admits of exceptions: bad faith being one
of them, gross negligence, another. Virata v. Ng Wee, 830 SCRA 271 (2017).
3. COUNTERVAILING DOCTRINES TO PROTECT CORPORATE CONTRACTS
a. Doctrine of Ratification or Estoppel (Art. 1910, Civil Code)
Between the act of the Board as a body affirming informally the perfection of a contract entered into
in behalf of the corporation by a senior officer, and the subsequent formal board resolution rejecting the
same contract, the former must prevail under the doctrine of estoppel. Acuña v. Batac Producers
Cooperative Marketing Assn., 20 SCRA 526 (1967).
Ratification means that the principal voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. The substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority. Ratification can be made either expressly or impliedly.
Implied ratification may take various forms—like silence or acquiescence, acts showing approval or
adoption of the act, or acceptance and retention of benefits flowing therefrom. Lopez Realty v. Spouses
Tanjangco, 739 SCRA 644 (2014).
In order to ratify the unauthorized act of an agent to bind the corporation, it must be shown that the
Board or officer authorized to ratify had full and complete knowledge of all the material facts connected
with the transaction to which it relates. Ratification can never be made by the same person who
wrongfully assume the power to make the contract, but the ratification must be by the officer or
governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973).
The admission by counsel on behalf of the corporation of the latter’s culpability for personal loans
obtained by its corporate officers cannot be given legal effect when the admission was “without any
enabling act or attendant ratification of corporate act,” as would authorize or even ratify such admission.
In the absence of such ratification or authority, such admission does not bind the corporation. Aguenza
v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).
Doctrine of Laches or Stale Demands: The failure or neglect, for an unreasonable and
unexplained length of time, to do that which by exercising due diligence could or should have been done
earlier, or the negligence or omission to assert a right within a reasonable time, warrants a presumption
that the party entitled to assert it either has abandoned it or declined to assert it. Rovels Enterprises,
Inc. v. Ocampo, 391 SCRA 176 (2002).73
When an officer in a bank arranges a credit line agreement and forwards the same to the legal
department at its head office, and the bank did no disaffirm the contract, then it is bound by it. Premier
Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004).
Under Art. 1910 of Civil Code, acts done by such officers beyond the scope of their authority
cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from
denying them. Thus, contracts entered into by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the Board. Woodchild Holdings, Inc. v.
Roxas Electric Constructions Co., 436 SCRA 235 (2004).
Acts done in excess of officers’ scope of authority cannot bind the corporation; however, when
subsequently a compromise agreement was on behalf of the corporation being represented by its
President acting pursuant to a Board resolution, such constituted as ratification of all prior acts of its
officers. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).
b. Doctrines of Apparent Authority (Art. 1883, Civil Code): If a corporation knowingly permits one of
its officers to act within the scope of an apparent authority, it holds him out to the public as possessing
72
Estacio v. Pampanga I Electric Cooperative, Inc., 596 SCRA 542 (2009); Cua, Jr. v. Tan, 607 SCRA 645 (2009).
73
Engineering Geoscience, Inc. v. Philippine Savings Bank, 890 SCRA 199 (2019).
31
the power to do those acts, 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. Francisco v. GSIS, 7 SCRA
577 (1963).74
A corporation cannot disown its President’s act of obtain a loan from the bank, on the ground that it
never authorized the President by the lack of any formal Board resolution. The following placed the
Board in estoppel in pais: (a) bylaws provides for the powers of the President, which includes executing
contracts and agreements, borrowing money, signing, indorsing and delivering checks; (b) there were
already previous transaction of discounting the checks involving the same personalities wherein any
enabling resolution from the Board was dispensed with and yet the bank was able to collect from the
corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the
principal is liable for the obligations contracted by the agent. The agent’s apparent representation yields
to the principal’s true representation and the contract is considered as entered into between the
principal and the third person. First Philippine Int’l Bank v. Court of Appeals, 252 SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the agents are acting in
excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court of
Appeals, 269 SCRA 601 (1997).
Estoppel precludes a corporation’s Board from denying the validity of the transaction entered into
by its officer with a third party who in good faith, relied on the authority of the former as manager to act
on behalf of the corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).
Naturally, the third person has little or no information as to what occurs in corporate meeting, since
what transpires in the Board room is entirely an internal matter, and must necessarily rely upon the
external manifestations of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with
law. Hence, petitioner may not impute negligence on the part of the respondents in failing to find out the
scope of Atty. Soluta’s authority. Indeed, the public has the right to rely on the trustworthiness of bank
officers and their acts. Associated Bank v. Pronstroller, 558 SCRA 113 (2008).
The general rule remains that, in the absence of authority from the Board of Directors, no person,
not even its officers, can validly bind a corporation. If a corporation, however, consciously lets one of its
officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from
denying such officer’s authority. … Unmistakably, the Court’s directive in Yao Ka Sin Trading is that a
corporation should first prove by clear evidence that its corporate officer is not in fact authorized to act
on its behalf before the burden of evidence shifts to the other party to prove, by previous specific acts,
that an officer was clothes by the corporation with apparent authority. Westmont Bank v. Inland
Construction and Dev. Corp., 582 SCRA 230 (2009).75
The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority, and it holds him out to the public as possessing the power to do those acts. The
doctrine does not apply if the principal did not commit any acts or conduct which a third party knew and
relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts
or conduct must have produced a change of position to the third party’s detriment. Advance Paper
Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).
The existence of apparent authority 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, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers. Georg v. Holy Trinity College, Inc., 797 SCRA 550 (2016).76
A corporation exercises its corporate powers through its board of directors. This power may be
validly delegated to its officers, committees, or agencies. “The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of business[.]” Apparent
or implied authority "can be measured by his or her prior acts which have been ratified by the
corporation or whose benefits have been accepted by the corporation.” Terp Construction Corp. v.
Banco Filipino Savings and Mortgage Bank, G.R. No. 221771, 18 Sept. 2019.
MODULE 7
FIDUCIARY DUTIES AND RESPONSIBILITIES
OF DIRECTORS, TRUSTEES AND OFFICERS
(7TH AND 8TH WEEKS: MARCH 16, 18, 23 AND 25)
XI. CORPORATE GOVERNANCE (CG) PRINCIPLES OF “COMPETENCE AND
INDEPENDENCE”
74
Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Soler v. CA, 358 SCRA 57 (2001); United Coconut Planters Bank v. Planters
Products, Inc., 672 SCRA 285 (2012); .
75
Calubad v. Ricarcen Dev. Corp., 838 SCRA 303 (2017); Ayala Land, Inc. v. ASB Realty Corp., 881 SCRA 56 (2018); Engineering Geoscience, Inc. v.
Phil. Savings Bank, 890 SCRA 199 (2019); Vive Eagle Land, Inc. v. NHMFC, G.R. No. 230817, 4 Sept. 2019.
76
Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003).
32
1. Qualifications and Disqualifications of Directors/Trustees (Secs. 22 and 26)
The qualifications provided for in the law are only minimum qualifications; additional qualifications and
disqualifications can be provided for but only by proper provisions in the bylaws. Gokongwei, Jr. v. SEC,
89 SCRA 336 (1979).
A director must own at least one share of stock. Peña v. Court of Appeals, 193 SCRA 717 (1991).77
Beneficial ownership under VTA no longer qualifies as a director owning at least one share of stock in
his name. Lee v. Court of Appeals, 205 SCRA 752 (1992).
Thus, while a corporate shareholder or member may rightfully designate proxies or representatives,
the latter, however, cannot be elected as directors or trustees. First, the [Revised] Corporation Code clearly
provides that a director or trustee must be a member of record of the corporation. Further, the power of the
proxy is merely to vote. If said proxy is not a member in his own right, he cannot be elected as a director or
proxy. Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
a. Implied Obligation of the Board to Remove Disqualified Director or Trustee (Sec. 27)
b. SEC’s Power to Remove Disqualified Director or Trustee (Sec. 27)
2. Election of Directors and Trustees (Secs. 23 and 25; Secs. 91)
A bylaw or company practice of giving a shareholder a permanent seat in the Board would be against
the provisions of the [Revised] Corporation Code which requires member of the Board to be elected
annually. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
The underlying policy of the [Revised] Corporation Code is that the business and affairs of a
corporation must be governed by a Board of Directors whose members have stood for election, and who
have actually been elected by the shareholders, on an annual basis. Only in that way can the directors’
continued accountability to the shareholders, and the legitimacy of their decisions that bind the
corporation’s shareholders, be assured. The shareholder vote is critical to the theory that legitimizes the
exercise of power by the directors or officers over properties that they do not own. This theory of delegated
power of the Board explains why, under [Sec. 28 of RCC], the remaining Board can fill a vacancy—it
recognizes the shareholders’ right to elect the members of the Board by limiting the period during which the
successor shall serve only to the “unexpired term of his predecessor in office.”Valle Verde Country
Club, Inc. v. Africa, 598 SCRA 202 (2009).
Since under [Sec. 25 of RCC] all corporations are mandated to submit a formal report to the SEC on
the changes in their directors and officers, then only those directors and officers appearing in such report
(General Information Sheet) to the SEC are deemed legally constituted to bind the corporation, especially
in the bringing of suits in behalf of the corporation. Premium Marble Resources v. CA, 264 SCRA 11
(1996); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
a. CUMULATIVE VOTING (Sec. 23; Cumulative Voting in Corporate Elections: Introducing Strategy
in the Equation, 35 SOUTH CAROLINA L. REV. 295)
b. Election Contests (Rule 6, Interim Rules of Procedure for Intra-Corporate Controversies)
The proper remedy to question the legality and proper qualification of persons elected to the board
is a quo warranto proceeding. Ponce v. Encarnacion, 94 Phil. 81 (1953). – Now an election contest
under the Interim Rule of Procedure for Intra-Corporate Controversies
All election contests over directors and trustees fall within the original and exclusive jurisdiction of
the RTC Special Commercial Courts and no longer with the SEC. GSIS v. CA, 585 SCRA 679 (2009).
SEC retains its regulatory power over proxy issues on matters other than election of directors or
trustees, but not on matters relating to elections of directors or trustees. The test is whether the
controversy relates to such election. All matters affecting the manner and conduct of the election of
directors are properly cognizable by the regular courts. Otherwise, these matters may be brought before
the SEC for resolution based on the regulatory powers it exercises over corporations, partnerships and
associations. SEC v. Court of Appeals, 739 SCRA 99 (2014).
Under the Interim Rules, an election contest should be dismissed when filed beyond the 15-day
prescriptive period allowed. In substance, the main issues herein are on all fours with Yujuico v.
Quiambao, 513 SCRA 243 (2007) , where we expressly ruled that where one of the reliefs sought in the
complaint is to nullify the election of the Board of Directors as the annual shareholders’ meeting, the
complaint involves an election contest. Ricafort v. Dicdican, 787 SCRA 163 (2016).
An action seeking to hold null and void the action of the Board of Directors suspending a member
of the association on the ground that they did not have valid quorum at the time the action was taken
since they invalidly constituted themselves as the new members of the Board is actually an election
contest, which under the Interim Rules of Procedure would be available only within a period of 15 days
from the time the alleged election or constitution of the new Board took place. Eizmendi Jr., v. Valle
Verde Country Club, Inc., 879 SCRA 379 (2018).
c. Report of Election and Non-Holding of Election of Directors, Trustees and Officers
(Sec. 25)
3.
INDEPENDENT DIRECTORS (Sec. 22): The Board of the following corporations “vested with public
interests” shall have independent directors constituting at least 20% of such Board:
(1) Securities Regulation Code Companies: publicly-held and publicly-listed companies, and
those whose securities are registered with the SEC;
77
Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).
33
(2) Financial Intermediaries: Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and insurance companies, and
others similar;
(3) Other Corporations Engaged in Business Vested with Public Interests Similar to Above,
as may be determined by SEC based on given factors (see also Sec. 95)
4.
Directors’ Term of Office, Holdover Principle and Removal
a. One-Year Term of Office for Directors (Sec. 22)
b. Director Ipso Facto Ceases to Hold Office in Event He Ceases to Hold Shares (Sec. 22)
c. Removal of Directors or Trustees (Sec. 27)
A shareholders’ meeting called for the removal of a director is valid only when called by at least
two-thirds of the outstanding capital stock. Roxas v. De la Rosa, 49 Phil. 609 (1926).
Only shareholders or members have the power to remove directors or trustees elected by them, as
laid down in [Sec. 27 of RCC]. Raniel v. Jochico, 517 SCRA 221 (2007).
5. Vacancies in the Board (Secs. 28 and 25)
a. Vacancy Occurring by Removal
b. Vacancy Occurring by Expiration of Term
c. Increase in the Number of the Board
d. All Vacancies Occuring Other than by Removal or Expiration of Term
e. Emergency Board
Directors may lawfully fill vacancies occurring in the Board, and such officials, as well as the original
directors, hold-over until qualification of their successors. Gov’t v. El Hogar Filipino, 50 Phil. 399 (1927).
The remaining members of the Board cannot elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The hold-over period is not part of the term of office of a member of the
board of directors. Consequently, when during the hold-over period, a director resigns from the board, the
vacancy can only be filled-up by the shareholders, since there is no term left to fill-up pursuant to the
provisions of Section 29 which mandates that a vacancy occurring in the board of directors caused by the
expiration of a member’s term shall be filled by the corporation’s shareholders. That a director continues to
serve after one year from his election (i.e., on a holdover capacity) cannot be considered as extending his
term. This hold-over period, however, is not to be considered as part of his term, which, as declared, had
already expired. Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
6. Directors’ or Trustees’ Meetings (Secs. 48, 52, 53 and 91)
a. Quorum: For stock corporations, the “quorum” referred to in Sec. [51] is based on the number of
outstanding voting stocks. For nonstock corporations, only those who are actual, living members with
voting rights shall be counted in determining the existence of a quorum during members’ meetings.
Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216 (2006).78
b. Chairman Presides Over Board and Shareholders’/Members’ Meetings (Sec. 52)
c. Modern Means of Participation in Board Meetings (Sec. 52)
Abstention: In a Board meeting, an abstention is presumed to be counted as an affirmative vote
insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but
such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary.
Lopez v. Ericta, 45 SCRA 539 (1972).
 SEC Guidelines on Attendance and Participation of Directors/Trustees in Meetings (SEC
Memo Circular No. 06-2020)
d. Recusal of Directors/Trustees with Potential Interest in RPTs (Sec. 52)
e. Minutes of Meetings: There is no provision in [Revised] Corporation Code that requires that
minutes of the meeting should be signed by all the members of the Board—the signature of
corporate secretary gives the minutes the probative value and credibility. The entries contained in
minutes are prima facie evidence of what actually took place during the meeting, pursuant to Sec.
Rule 130 of the Revised Rule on Evidence. People v. Dumlao, 580 SCRA 409 (2009).
the
the
the
44,
When there is evidence to show that other directors and the corporate secretary refused to sign the
minutes, then the presumption in Dumlao does not prevail. Lopez Realty, Inc. v. Spouses Tanjangco,
739 SCRA 644 (2014).
Resolution versus Minutes: A resolution is distinct and different from the minutes of the meeting. A
Board resolution is a formal action by a corporate board of directors or other corporate body authorizing
a particular act, transaction, or appointment; while minutes are a brief statement not only of what
transpired at a meeting, usually of shareholders/members or directors/trustees, but also at a meeting of
an executive committee. People v. Dumlao, 580 SCRA 409 (2009).
7. Compensation of Directors (Sec. 29)
Directors and trustees are not entitled to salary or other compensation when they perform nothing
more than the usual and ordinary duties of their office, founded on the presumption that directors and
trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives
78
Lim v. Moldex Land, Inc., 815 SCA 619 (2017).
34
for service, without compensation. But they can receive remunerations for acting as executive officers,
such as Chairman, President or Corporate Secretary. Western Institute of Technology, Inc. v. Salas,
278 SCRA 216 (1997).79
It is well settled that directors presumptively serve without compensation. Hence, even though director
assigning themselves additional duties which still fall within their power much less do they amount to
extraordinary or unusual services to the company, they would then be acting in excess of their authority by
voting for themselves compensation for such additional duties. Thus, transfer of corporate properties by
way of payment of compensation amounts to self-dealing covered by [Sec. 31 of RCC]. Agdao Landless
Residents Assn. v. Maramion, 806 SCRA 74 (2016).
8. MANAGEMENT AND OTHER CORPORATE OFFICERS
a. Board Power to Delegate Its Authority: Management Handles the Day-to-Day Affairs of the
Company (Sec. 24)
The Board of Directors is generally a policy making body. Even if the corporate powers of a
corporation are reposed in the Board under [Sec. 22 of RCC], it is of common knowledge and practice
that the Board does not directly engage or take charge with the running of the recurring business affairs
of the corporation; its members generally do not concern themselves with the corporation’s day-to-day
affairs, except those officers who charged with running the corporate business and are concomitantly
members of the Board, like the President. Federated Dealers Assn. v. Del Rosario, 808 SCRA 272
(2016).
Just as natural person may authorize another to do certain acts for and on his behalf, the Board, as
the repository of corporate powers, may validly delegate some of its functions and powers to officers,
committees, or agents. The authority of such individuals to bind the corporation is generally derived
from law, bylaws or authorization from the Board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. Colegio Medico-Farmaceutico de Filipinas, Inc. v.
Lim, 869 SCRA 298 (2018).
b. Rules on Corporate Officer’s Power to Bind the Corporation
Insofar as the public is concerned, a corporation may not distance itself from the acts of a senior
officer: “the dual roles of Romulo F. Sugay should not be allowed to confuse the facts.” R.F. Sugay v.
Reyes, 12 SCRA 700 (1961).
Doctrine of Implied Authority: An officer who is authorized to purchase the stock of another
corporation has implied power to perform all other obligations arising therefrom such as payment of the
shares. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
Even though a judgment or order is addressed to the corporation only, the officers as well as the
corporation itself, may be punished for contempt for disobedience to its terms, at least if they knowingly
disobey the court’s mandate, since a lawful judicial command to a corporation is in effect a command to
the officers. Heirs of Trinidad de Leon Vda. De Roxas v. CA, 422 SCRA 101 (2004).
While those who belong to the upper corporate echelons would have more privileges, it cannot be
presume the existence of such privileges or benefits—he who claims the same is burdened to prove not
only the existence of such benefits but also that he is entitled to the same. Kwok v. Philippine Carpet
Manufacturing Corp., 457 SCRA 465 (2005).
Corporate policies need not be in writing. Contracts entered into by a corporate officer or
obligations assumed by such officer for and in behalf of such corporation are binding on the said
corporation only if such officer acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contracts or obligations. Therefore, a verbal
promise given by the Chairman and President to the General Manager and COO to give the latter
unlimited sick leave and vacation leave benefits and its cash conversion upon his retirement or
resignation, when not an integral part of the company’s rules and policies, is not binding on the
company when it is without the approval of the Board of Directors. Kwok v. Philippine Carpet
Manufacturing Corp., 457 SCRA 465 (2005).
The acceptance of the offer to purchase by the clerk of the branch, and the representation that the
manager had already approved the sale (in fact not true), cannot bind the bank to the contract of sale, it
being obvious that such a clerk is not among the bank officers upon whom putative authority may be
reposed by a third party. There is, thus, no legal basis to bind the bank into any valid contract of sale
with the buyers, given the absolute absence of any approval or consent by any responsible officer of the
bank. DBP v. Ong, 460 SCRA 170 (2005).
The general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, bylaws, or relevant provisions of law—when authorized,
their acts bind the corporation; otherwise, their acts cannot bind it. Yasuma v. Heirs of Cecilio S. De
Villa, 499 SCRA 466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
As a general rule, the acts of corporate officers within the scope of their authority are binding on the
corporation, but when these officers exceeded their authority, their actions cannot bind the corporation,
unless it has ratified such acts or is estopped from disclaiming them. Reyes v. RCPI Employees Credit
Union, Inc., 499 SCRA 319 (2006).
While it is a general rule that, in the absence of authority from the Board, no person, not even its
officers, can validly bind a corporation; however, just as a natural person may authorize another to do
certain acts for and on his 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 bylaws or authorization from the board, either expressly or
79
Singson v. COA, 627 SCRA 36 (2010).
35
impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan Members
Center Inc. v. Tsukahara, 593 SCRA 172 (2009). 80
The general principles of agency govern the relationship between a corporation and its
representatives. Article 1317 of the Civil Code similarly provides that the principal must delegate the
necessary authority before anyone can act on his or her behalf. Nonetheless, law and jurisprudence
recognize actual authority and apparent authority as the two types of authorities conferred upon a
corporate officer or agent in dealing with third persons: Actual authority can either be express or implied.
Express actual authority refers to the power delegated to the agent by the corporation, while an agent's
implied authority can be measured by his or her prior acts which have been ratified by the corporation or
whose benefits have been accepted by the corporation. On the other hand, apparent authority is based
on the principle of estoppel, as provided under Articles 1431 and 1869 of the Civil Code. Calubad v.
Ricarcen Dev. Corp., 838 SCRA 303 (2017)
(1) President: In the absence of a charter or bylaw provision to the contrary, the President is presumed
to have the authority to act within the domain of the general objectives of the corporation’s
business and within the scope of his usual duties. Hence, it has been ruled in other jurisdiction that
the president of the corporation possesses the power to enter into a contract for the corporation,
when the “conduct on the part of both the president and the corporation [shows] that he had been
in the habit of acting in similar matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified his former and similar actions.”
People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998).81
Since [Section 24] mandates that the President shall be a director, it follows that a person
who cannot qualify to be a director cannot validly be appointed President. Lim v. Moldex
Land, Inc., 815 SCRA 619 (2017).
It is the Board of Directors, not the President, that exercises corporate powers. It must be
emphasized that the basis for agency is representation and a person dealing with an agent is put
upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
The President is considered as the corporation’s agent, and as such, his knowledge of the
repeal of a resolution in another juridical person in which his corporation has an interest, is
ascribed to his principal under the theory of imputed knowledge. Rovels Enterprises v. Ocampo,
392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by its truck
driver cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since
being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the
corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
The President is a corporate officers under [Section 24], and issues of dismissal relating to him
would be considered an intra-corporate dispute, not a labor dispute. Malcaba v. ProHealth Pharma
Phils., Inc., 864 SCRA 518 (2018).
(2) Vice-President: The law does not require that a Vice-President be a shareholder. Baguio v. Court
of Appeals, 226 SCRA 366 (1993).
When the Bylaws provide that the Vice-President and Secretary must have the same
qualifications as those of the President (i.e., must be a member of the Board), then the
appointment of persons who are not members to such positions would also be unlawful. Lim
v. Moldex Land, Inc., 815 SCRA 619 (2017).
(3) Corporate Secretary: The Corporate Secretary is the custodian of corporate records—he keeps
the stock and transfer book and makes proper and necessary entries therein. It is his duty and
obligation to register valid transfers of stock in the corporate books; and in the event he refuses to
comply with such duty, the transferor-shareholder may rightfully bring suit to compel performance.
Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
A sale that fails to comply with [Sec. 39 of RCC], cannot be invalidated when the buyer relies
upon a Secretary’s Certificate confirming authority. A Secretary’s Certificate regular on its face can
be relied upon by a third party who does not have to investigate the truths of the facts contained in
such certification; otherwise corporate business transactions would become tortuously slow and
unnecessarily hampered. Esguerra v. CA, 267 SCRA 380 (1997).
Although the Corporate Secretary’s duty to record transfers of stock is ministerial, he cannot be
compelled to do so when the transferee’s title to said shares has no prima facie validity or is
uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership
rights over the pledged shares and thus cannot compel the corporate secretary to record his
alleged ownership of such shares on the basis merely of the contract of pledge. Mandamus will not
issue to establish a right, but only to enforce one that is already established. Lim Tay v. Court of
Appeals, 293 SCRA 634 (1998);
Per its Secretary’s Certificate, the Foundation had given its President ostensible and apparent
authority to inter alia deal with the respondent bank, and therefore the Foundation is estopped from
questioning the President’s authority to obtain the subject loans from the respondent bank.
Lapulapu Foundation, Inc., v. Court of Appeals, 421SCRA 328 (2004).
The proper evidence of a Board resolution approving the sale of a piece of land can only the
Secretary’s Certificate embodying such resolution, since it serves as the corporation’s official
document showing the corporate actions approved by its Board of Directors, as well as the extent
80
Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. CA, 211 SCRA 470 (1992); Associated Bank
v. Pronstroller, 558 SCRA 113 (2008); Pasos v. PNCC, 700 SCRA 608 (2013).
81
Advance Paper Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).
36
and scope of authority necessarily conferred to its agents for the execution and implementation of
such actions. Lim v. People, 862 SCRA 405 (2018).
(4) Corporate Treasurer: A Corporate Treasurer’s function have generally been described as “to
receive and keeps funds of the corporation, and to disburse them in accordance with the authority
given him by the board or the properly authorized officers.” Unless duly authorized, a treasurer,
whose power are limited, cannot bind the corporation in a sale of its assets, which obviously is
foreign to a corporate treasurer’s function. San Juan Structural v. CA, 296 SCRA 631 (1998).
A Corporate Treasurer whose negligence in signing a confirmation letter for rediscounting of
crossed checks, knowing fully well that the checks were strictly endorsed for deposit only to the
payee’s account and not to be further negotiated, may be personally liable for the damaged caused
the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
(5) Compliance Officer (Sec. 24): For corporations vested with public interests, the Board shall
appoint a compliance officer.
(6) Manager: Although a branch manager of a bank, within his field and as to third persons, is the
general agent and is in general charge of the corporation, with apparent authority commensurate
with the ordinary business entrusted him and the usual course and conduct thereof, yet the power
to modify contracts of the bank remains generally with the Board. Being a branch manager alone is
insufficient to support the conclusion that he has been clothed with “apparent authority” to verbally
alter terms of the bank’s written contract, such the mortgage contract. Bañate v. Philippine
Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).
b. BOARD POWER TO APPOINT AND TERMINATE CORPORATE OFFICERS
(1) Who Is a “Corporate Officer” under the Power of the Board to Hire and Fire? (Sec. 25):
“Corporate officers” in the context of being the business judgment powers of the Board to hire and
fire are those officers who are given that character by the [Revised Corporation Code] or by the
bylaws. Gurrea v. Lezama, 103 Phil. 553 (1958).82
The position of Executive Secretary provided for in the bylaws is an “officer” position. Since the
appointment of the incumbent did not contain a fix term, the implication was that the appointee held
the appointment at the pleasure of the Board, such that when the Board opted to replace the
incumbent, technically there was no removal but only an expiration of the term. Mita Pardo de
Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).83
One who is included in the bylaws in its roster of corporate officers is an officer and not a mere
employee. Being a corporate officer, his removal is deemed to be an intra-corporate dispute
cognizable by the SEC and not by the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).84
For purposes of determining applicability of “security of tenure” under Labor Laws, one who
holds a position, no matter how high in the organization, which is not provided for by law or defined
in the bylaws, is considered still to be an employee and not an officer, the latter being within the
business judgment power of the Board to hire and fire. Pamplona Plantation Co. v. Acosta, 510
SCRA 249 (2006).85
Ordinary employees are generally employed not by action of the directors and shreholders but
by that of the Management who also determines the compensation to be paid such employees.
Corporate officers, on the other hand, are elected or appointed by the directors or shareholders,
and are those who are given that character either by the [Revised] Corporation Code or by the
bylaws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA 187 (2009).86
Even if bylaws provide expressly that the Board of Directors “shall have full power to create new
offices and to appoint the officers thereto,” any office created, and any officer appointed pursuant to
such clause does not become a “corporate officer”, but is an employee and the determination of the
rights and liabilities relating to his removal are within NLRC’s jurisdiction—they do not constitute
intra-corporate controversies. “A different interpretation can easily leave the way open for the
Board of Directors to circumvent the constitutionally guaranteed security of tenure of the employee
by the expedient inclusion in the Bylaws of an enabling clause on the creation of just any corporate
officer position.” The rulings in Tabang v. NLRC, 266 SCRA 462 (1997), and Nacpil v. International
Broadcasting Corp., 379 SCRA 653 (2002), “should no longer be controlling.” Matling Industrial
and Commercial Corp. v. Coros, 633 SCRA 12 (2010).87
Where the bylaws expressly provide for the positions of “one or more vice-president”, then the
appointment of the Executive Vice-President pursuant to said bylaw provision would make the
appointee a corporate officer within the contemplation of our ruling in Matling Industrial and
commercial Corp v. Coros. Cacho v. Balagtas, 855 SCRA 11 (2018).
Under [Sec. 24 of RCC], the President is considered a corporate officer; whereas, “Assistant
Vice President” is not among the officers stated therein, must less is it provided for in the bylaws.
The dismissal of the President is therefore an intra-corporate dispute that is beyond the jurisdiction
of the NLRC, while the dismissal of the Assistant Vice President was well within NLRC’s jurisdiction
to resolve. Malcaba v. ProHealth Pharma Phils., Inc., 864 SCRA 518 (2018).
82
Garcia v. Eastern Telecommunications Phils., 585 SCRA 450 (2009); WQPP Marketing Communications v. Galera, 616 SCRA 422 (2010).
83
PSBA v. Leaño, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications Phils.,
v. King, 478 SCRA 102 (2005); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
84
Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
85
WPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Loreche-Amit v.
Cagayan de Oro Medical Center, Inc., G.R. No. 216635, 03 June 2019.
86
Okol v. Slimmers World Int’l, 608 SCRA 97 (2009); FVR Skills and Services Exponents v. Seva, 739 SCRA 271 (2014).
87
Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, Inc., 715
SCRA 534 (2014); Ellao y Dela Vega v. Batanga I Electric Cooperative, 871 SCRA 227 (2018).
37
(2) Nature of Exercise of Power to Terminate Officers: An officer’s removal is a corporate act, its
nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors
might have in taking such action. Perforce, the matter would come within the area of corporate
affairs and management, and such a corporate controversy would call for SEC adjudicative
expertise [now RTC Special Commercial Courts], not that of NLRC. De Rossi v. NLRC, 314
SCRA 245 (1999); Okol v. Slimmers World Int’l, 608 SCRA 97 (2009).
The President, Vice-President, Secretary and Treasurer are commonly regarded as the
principal or executive officers of a corporation, usually designated as the officers; however, other
officers are sometimes created by the charter or bylaws, or the Board may be empowered under
the bylaws of a corporation to create additional offices as may be necessary. This Court
expounded that an “office” is created by the charter and the officer is elected by the directors or
shareholders, while an “employee” usually occupies no office and generally is employed not by
action of the directors or shareholders but by the managing officer who also determines the
compensation to be paid to such employee. The creation of the position is under the charter or byaws, and that the election of the officer is by the Board must concur in order for an individual to be
considered a corporate officer, as against an ordinary employee or officer. It is only when the
officer claiming to have been illegally dismissed is classified as such corporate officer that the issue
is deemed an intra-corporate dispute. Wesleyan University-Philippines v. Maglaya, Sr., 815
SCRA 171 (2017).
XII. CG PRINCIPLES OF “TRANSPARENCY, ACCOUNTABILITY AND
RESPONSIBILITY”
1.
FIDUCIARY DUTIES OF DIRECTORS, TRUSTEES AND OFFICERS
a. Directors as Fiduciaries
The following provisions in the charter of the company are unlawful under the old Corporation Law:
that contracts and transactions with other corporations shall not be affected by the fact that any of the
directors or officers of the company may be interested in or are directors or officers of such other
corporations; that persons who may become directors or officers this the company are hereby relieved
of all responsibilities which they would otherwise incur by reason of any contracted entered into which
this company either for their own benefit or for the benefit of any person, firm, or corporation to which
they may be interested. The impact of these provisions upon the traditional fiduciary relationship
between the directors and the shareholders of the company is too obvious to escape notice by the SEC
which is called upon to protect the interests of investors. Palting v. San Jose Petroleum, 18 SCRA
924 (1966).
In Philippine jurisdiction, the members of the Board of Directors have a three-fold duty: duty of
obedience, duty of diligence, and the duty of loyalty. Accordingly, the members of the Board (1) shall
direct the affairs of the corporation only in accordance with the purpose for which it was organized; (2)
shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in
bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees. Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA, PHILIPPINE
CORPORATE LAW, 2001, p. 318.
b. Duty of Obedience (Sec. 24)
The Board of Directors should act in the manner and within the formalities, if any, prescribed by its
charter or by the general law. Lopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995).
c. Duty of Diligence (Sec. 30)
The directors shall be personally liable to reimburse the corporation for the amounts of dividends
wrongfully declared and paid to shareholders, when they failed to consider that the recorded retained
earnings in the corporate books was illusory considering the various accounts receivables that had to be
written off as uncollectible. Steinberg v. Velasco, 52 Phil. 953 (1929).
To make a director personally liable for corporate debts, the wrongdoing approved or assented to
by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of
labor laws on company closure or dismissal of employees does not amount to a patently unlawful act.
Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of
such unlawful acts. There must be a law declaring the act unlawful and penalizing the act. Carag v.
NLRC, 520 SCRA 28 (2007).88
Under [Sec. 30] personal liability will only attaches to a director or officer if they are guilty of any of
the following: (1) willfully or knowingly vote or asset to patently unlawful acts of the corporation; (2)
gross negligence; or (3) bad faith. It is only in these exceptional cases when officers are solidarily liable.
PCGG v. Gutierrez, 871 SCRA 148 (2018); Kho, Sr. v. Manganua, G.R. No. 237246 29 July 2019.
d. Duty of Loyalty (Secs. 30, 31 and 33)
(1) Doctrine of Corporate Opportunity: It is well established that corporate officers are not
permitted to use their position of trust and confidence to further their private interests. The “ doctrine
of corporate opportunity” s precisely a recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities with competing interest. The doctrine
88
Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009); Montealegre v. Spouses De Vera, G.R. No. 208920, 10 July 2019.
38
rest fundamentally on the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his personal profit when the interest of the corporation justly calls
for protection. Gokongwei v. SEC, 89 SCRA 336 (1979).
(2) Using Inside Information: When a director and majority shareholder, who is the administrator of
corporate affairs directly negotiating the sale of corporate landholdings to the Government at great
prices, purchases the stocks of a shareholder without informing the latter of the on-going
negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of
deceit practiced by means of concealing his knowledge of important corporate affairs. Strong v.
Repide, 41 Phil. 947 (1909).
Doctrine of corporate opportunity applies to confidential employees of the corporation. cf. Sing
Juco v. Llorente, 43 Phil. 589 (1922).
(3) Self-Dealings of Directors and Officers (Sec. 31)
[Section 31 of RCC] on self-dealings by directors and officers merely incorporate wellestablished principles in Corporate Law. A director who enters into a distributorship agreement with
the corporation would make the contract voidable at the option of the corporation especially when
the terms are disadvantageous to the corporation. Such director cannot claim the same doctrine as
an outsider dealing in good faith with the corporation. Prime White Cement Corp. v. IAC, 220
SCRA 103 (1993).
(4) Material Related Party Transactions for PLCs (Sec. 31; SEC Memo Circular No. 10-2019)
e. Contracts Between Corporations with Interlocking Directors (Sec. 32)
The rule under [Sec. 32 of RCC] allowing annulment of contracts between corporations with
interlocking directors resulting in the prejudice to one of the corporation, has no application to cases
where fraud is alleged to have been committed to third parties. DBP v. Court of Appeals, 363 SCRA 307
(2001).
f. Duty to Maintain Records and Report on Salient Corporate Data (Sec. 161)
(1) To Adopt, Maintain and Allow Inspection of the Bylaws under Sec. 45
(2) To Keep, Maintain and Allow Inspection of Articles of Incorporation and Other
Corporate Books and Records under Sec. 73
 See Reporting in the GIS of Beneficial Ownership (SEC Memo. Circular No. 15-2019)
(3) To Keep and Update the List of Members and Proxies for Nonstock Corporations under
Sec. 92
(4) To Keep, Maintain and Update the Minutes Book for One Person Corporations (OPC)
under Section 128
(5) To Annually Submit to the SEC the General Information Sheet (GIS) and Audited
Financial Statements under Sec. 177;
 For Corporations Vested with Public Interests: Also Submit Director Compensation
Report and Director Appraisal and Performance Report
This Court takes judicial notice of the fact that audited financial statements submitted by
corporations, as required by [Sec. 177 of RCC], are made available to the public. Hence, the Court
fails to see how Atty. Castillon violated any law when he attached a copy of Ready Form’s audited
financial statements in the Petition for Blacklisting he filed with the National Publishing Office
(NPO). Ready Form, Inc. v. Castillon, Jr., 859 SCRA 531 (2018).
g. Duty/Obligations to Creditors and Other Stakeholders (Secs. 22 and 30)
(1) Who are “Stakeholders” of a Corporation? SEE: CODE OF CORPORATE GOVERNANCE FOR
PUBLICLY-LISTED COMPANIES (SEC Memo. Circular No. 19, s.2016)
Under the trust fund doctrine, it would be a violation of the right of creditors to allow the return to
the shareholders of any portion of their capital or declare dividends outside of the unrestricted
retained earnings, and that upon the corporation’s insolvency, the Board of Directors are duty
bound to hold its assets primarily for the payment of the creditors. Mead v. McCullough, 21
Phil. 95 (1911).
The Board of Directors is expected to be more than a mere rubber stamp of the corporation and
its subordinate departments. It wields all corporate powers bestowed by the [Revised] Corporation
Code, including the control over its properties and the conduct of its business. Being stewards of
the company, the Board is primarily charged with protecting the corporate property and assets in
behalf of its stakeholders. Although it cannot be shown that the (two) directors approving the credit
line where unaware of the fraudulent intent for such transactions, nevertheless, they were still liable
for the defrauded investors for gross negligence in managing the affairs of the company in not
exercising more circumspection based on the facts already known to them that resulted to the
prejudice of its clients and stakeholders. Neither can the business judgment rule apply herein for it
is elementary in Corporation Law that the doctrine admits of exception: bad faith being one of them,
gross negligence, another. Virata v. Ng Wee, 830 SCRA 271 (2017); 860 SCRA 49 (2018).
It is well-settled that electricity distribution utilities, which rely on mechanical devices and
equipment for the orderly undertaking of their business, are duty-bound to make reasonable and
proper periodic inspections of their equipment. If they are remiss in carrying out this duty due to
their own negligence, they risk forfeiting the amounts owed by the customers affected. It must be
39
emphasized that electricity is “a basic necessity whose generation and distribution is imbued with
public interest, and its provider is a public utility subject to strict regulation by the State in the
exercise of police power;” it is a business vested with public interests. The serious consequences
on a consumer, whose electric supply has been cut off, behoove a distribution utility to strictly
comply with the legal requisites before disconnection may be done. This is all the more true
considering Meralco's dominant position in the market compared to its customers' weak bargaining
position. Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).
(2) Formal Recognition of the Duty of Directors/Trustees to Good Corporate Governance:
 Directors/Trustees elected shall perform their duties as prescribed by law, rules of
good corporate governance, and bylaws (Sec. 23)
 Qualifications and disqualifications rules imposed by SEC to promote good
corporate governance (Sec. 26)
 Contents of the Bylaws for the promotion of good corporate governance (Sec. 46[k])
 Duty to present to shareholders/members at annual meetings reports, records and
such other items that the SEC may require in the interest of good corporate
governance and the protection of minority shareholders (Sec. 49[6])89
CIVIL LIABILITIES OF DIRECTORS, TRUSTEES AND OFFICERS (Sec. 30)
2.
a. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts : Since a corporation has a
juridical personality separate and distinct from its directors/trustees and officers, the obligations incurred
as a result of the directors’ and officers’ acts as corporate agents, are not their personal liability but the
direct responsibility of the corporation they represent. Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690
SCRA 519 (2013).90
ERGO: Unless they have exceeded their authority, corporate officers are not personally liable for their
official acts, because a corporation, by legal fiction, has a personality separate and distinct from its
officers, shareholders and members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008).91
Mere ownership by an officer (President) of majority of the equity of the corporation do not warrant
a piercing of the veil of corporate fiction to make such officer personally liable for the debts of the
corporation. Palay, Inc. v. Clave, 124 SCRA 638 (1993).92
A corporation has a personality separate and distinct from the persons composing or representing
it; hence, personal liability attaches only in exceptional cases, such as when the director, trustee, or
officer is guilty of bad faith or gross negligence in directing the affairs of the corporation. Continental
Cement Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).93
b. Directors/Trustees or Officers May Contractually Obligating Oneself to Corporate Debts
While the limited liability doctrine is intended to protect the shareholder by immunizing him from
personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this
protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank
Corp., 408 SCRA 544 (2003).
Officers signing as corporate representative did not undertake to guarantee personally the
payment of the corporation’s debt embodied in the trust receipts. Debts incurred by directors, officers
and employees acting as corporate agents are not theirs but the direct liability of the corporation. As an
exception, directors or officers are personally liable for the corporation’s debt if they so contractually
agree or stipulate. Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).
Where the Chairman & President has made himself accountable in the promissory note “in his
personal capacity and as authorized by the Board Resolution,” and in the absence of any representation
on the part of corporation that the obligation is all its own because of its separate corporate identity, we
see no occasion to consider piercing the corporate veil as material to the case.” Prisma Construction &
Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).
c. Breach of Duty of Diligence Vis-à-vis Section 30: When Directors/Trustees or Officers
Personally Liable for Corporate Transactions:
(1) Directors/Trustees or Officers Personally Liable in Limited Instances: Tramat
Mercantile, Inc. v. Court of Appeals, 238 SCRA 14 (1994).94
(2) Requisites to Hold Directors/Trustees or Officers Personally Liable
The general rule is that a corporation is invested by law with a personality separate and
distinct from that of the persons composing it, or from any other legal entity that it may be related
to. Therefore, to hold a director officers personally liable for corporate obligations, the following
requisites must concur: (1) complainant must allege in the complaint that the director or officer
89
Integrated Annual Corporate Governance Report under SEC Memo Circular No. 15-2017; Sustainability Reporting Guidelines for PLCs under
SEC Memo Circular No. 04-2019.
90
Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013).
91
Republic Planters Bank v. CA, 216 SCRA 738 (1992); Lowe, Inc. v. CA 596 SCRA 140 (2009); Marc II Marketing v. Joson, 662 SCRA 35 (2011); St.
Tomas v. Salac, 685 SCRA 245 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
92
Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 (1976); Mindanao Motors Lines, v. CIR, 6 SCRA 710
(1962).
93
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Peña, 659 SCRA 418 (2011) ; Gotesco Properties, v.
Fajardo, 692 SCRA 319 (2013); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014).
94
MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. CA, 311 SCRA 700 (1999); Atrium Management Corp. v. CA, 353 SCRA 23 (2001); Malayang
Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L. Carlos
Construction v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Abott Laboratories Phils. V. Alcaraz, 701 SCRA 682
(2013); SPI Technologies v. Mapua, 720 SCRA743 (2014); Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014); Montallana v. La Consolacion College Manila, 744
SCRA 163 (2014); Bank of Commerce v. Nite, 763 SCRA 520 (2015); PCGG v. Gutierrez, 871 SCRA 148 (2018).
40
assented to a 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. Mactan Rock Industries v. Germo, 850 SCRA 532 (2018).95
Finding of solidary liability on officers and directors would patently be baseless when the
decision contains no allegation or finding regarding particular acts committed by said officers and
director that show them to have been individually guilty of unmistakable malice, bad faith, or illmotive in their personal dealings with third parties. When corporate officers and directors are sued
merely as nominal parties in their official capacities as such, they cannot be held liable personal for
the judgment rendered against the corporation. NPC. v. Court of Appeals, 273 SCRA 419 (1997).96
(3) Bad Faith
To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly and
convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or negligence.
Bad faith imports a dishonest purpose. Bad faith means [a] breach of a known duty through some ill
motive or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520 SCRA 28 (2007).97
“Bad faith” does not arise just because a corporation fails to pay its obligation, because the
inability to pay one’s obligation is not synonymous with fraudulent intent not to honor the
obligations. In order to piece the veil of corporate fiction, for reasons of negligence by the director,
trustee or officer in the conduct of the transactions of the corporation, such negligence must be
“gross”. Magaling v. Ong, 562 SCRA 152 (2008).
(4) Fraud
An officer-shareholder who signs in behalf of the corporation to a fraudulent contract cannot
claim the benefit of separate juridical entity: “Thus, being a party to a simulated contract of
management, petitioner Uy cannot be permitted to escape liability under the said contract by using
the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced
to avoid injustice and inequity.” Paradise Sauna Massage Corp. v. Ng, 181 SCRA 719 (1990).
(5) Section 30 Does Not Encompass All of “Breach of Duty of Diligence”
Officers of a corporation may become liable for its loans when they have breached their duty
of diligence under [Sec. 30 of RCC]. Aratea v. Suico, 518 SCRA 501 (2007).98
Holding an officer personally liable for directing the corporate affairs with gross negligence or
in bad faith does not amount to an application of the doctrine of piercing the veil of corporate
fiction, for such personal liability is imposed directly under [Sec. 30 of RCC] to directors and
officers who are guilty of violating their duty of diligence. Sanchez v. Republic, 603 SCRA 229
(2009); BUT SEE: Virata v. Ng Wee, 830 SCRA 271 (2017).
d. xJURISPRUDENCE IN LABOR LAW: Under Article 283 of the Labor Code, since a corporate employer is
an artificial person, it must have an officer who can be presumed to be the employer, “acting in the
interest of (the) employer” and therefore the highest officer becomes personally liable for labor claims.
A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).
(1) Overturning the A.C. Ransom Ruling: Only the responsible officer who had a hand in illegally
dismissing an employee should be held personally liable for the corporate obligations arising from
such act. Maglutac v. NLRC, 189 SCRA 767 (1990);99 for the separate juridical personality of a
corporation to be disregarded as to make the highest corporate officer personally liable on labor
claims, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187
SCRA 777 (1990).
Corporate officers are not personally liable for money claims of discharged employees unless
they acted with evident malice and bad faith in terminating their employment. AHS/Philippines v.
Court of Appeals, 257 SCRA 319 (1996).100
In labor cases, directors and officers are solidarily liable for the termination of employment of
employees done with malice or in bad faith. In this case, it is undisputed that the officers have a
direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking
officers and directors, signed the Board resolution retrenching the employees on the feigned
ground of serious business losses that had no basis apart from an unsigned and unaudited Income
Statement. Uichico v. NLRC, 273 SCRA 35 (1997).
A corporation, being a juridical entity, may act only through its directors, officers and employees
and obligations incurred by them, acting as corporate agents, are not theirs but the direct
accountabilities of the corporation. In labor cases, directors and officers are solidarily liable with the
corporation for the termination of employment of employees done with malice or bad faith. Brent
Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).101
95
Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013); Abott Laboratories Phil. v. Alcaraz, 701 SCRA 682 (2013); Polymer Rubber Corp. v.
Salamuding, 702 SCRA 153 (2013); Ico v. Systems Technology Institute, 729 SCRA 439 (2014); FVR Skills and Services Exponents v. Seva, 739 SCRA 271
(2014); Bank of Commerce v. Nite, 763 SCRA 620 (2015); Dimson v. Chua, 811 SCRA 630 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017).
96
Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965); Arcilla v. CA, 215 SCRA 120 (1992).
97
Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949); EPG Constructions Co. v. CA, 210 SCRA 230 (1992); Rustan Pulp & Paper Mills v.
IAC, 214 SCRA 665 (1992); Western Agro-Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Laborte v. Pagsanjan Tourism Consumers’ Coop., 713
SCRA 536 (2014); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014); Pioneer Insurance & Surety Corp. v. Morning Star Travel & Tours, 762 SCRA 283
(2015).
98
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
99
Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
100
Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Assn. of the Phils. v. PAL, 559 SCRA 252 (2008); M+W Zander Phils. v.
Enriquez, 588 SCRA 590 (2009); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, (2009); Lowe, Inc. v. CA, 596 SCRA 140 (2009); Peñaflor v.
Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010).
101
Culili v. Eastern Telecommunications Phils., 642 SCRA 338 (2011); Grandteq Industrial Steel Products v. Estrella, 646 SCRA 391 (2011); Alert Security
and Investigation Agency, v. Pasawilan, 657 SCRA 655 (2011); Lynvil Fishing Enterprises v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading Co. v. Blas, 667
41
Officers cannot be held personally liable for damages on account of employees dismissal
because the employer corporation has a personality distinct from its officers who merely acted as
agents. Malayang Samahan… sa M. Greenfields v. Ramos, 357 SCRA 77 (2001).102
(2) Limiting the A.C. Ransom Ruling to Insolvent Corporation: A.C. Ransom is not in point
because there the corporation actually ceased operations after the decision of the court was
promulgated against it, making it necessary to enforce it against its former president. When the
corporation is still existing and able to satisfy the judgment in favor of the private respondent,
corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).
A.C. Ransom will apply only where the persons who are made personally liable for the
employees’ claims are shareholders-officers of employer corporation. Here, a mere general
manager while admittedly the highest ranking corporate representative, is nevertheless not a
shareholder and much less a member of the Board nor an officer thereof. De Guzman v. NLRC,
211 SCRA 723 (1992).
(3) A.C. Ransom Reiterated in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).103
(4) Definitive Overturning of A.C. Ransom Ruling: It is settled that in the absence of malice, bad
faith, or specific provisions of law, a shareholder or an officer of a corporation cannot be made
personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007).104
Clearly, in A.C. Ransom, President organized ROSARIO to evade payment of backwages to the
22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio,
does not obtain in the present case. [What applies therefore is the ruling [i]n Santos v. NLRC, [254
SCRA 673 (1996)]. McLeod v. NLRC, 512 SCRA 222 (2007).105
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512 SCRA 22
(2007), that Article 212(e) of Labor Code, by itself, does not make an officer personally liable for
corporate debts—the governing law on personal liability of directors or officers for debts of the
corporation is still [Sec. 30 of RCC]. Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581
SCRA 598 (2009).106
As to the liability of the impleaded corporate officers, the Court equally finds error on the part
of the CA in holding them jointly and severally liable to respondent. Case law states that to hold a
director or officer personally liable for corporate obligations, two requisites must concur: (1) it must
be alleged 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) there must be
proof that the officer acted in bad faith. Here, the twin requirements of allegation and proof of bad
faith necessary to hold the impleaded corporate officers liable for the monetary awards are clearly
lacking.||| Freyssinet Filipinas Corp. v. Lapuz, 897 SCRA 265 (2019).
e. Personal Liability of Trustees and Officers of Nonstock Corporations: The nonstock
corporation acted in clear bad faith when it sent the final notice to a member under the pretense they
believed him to be still alive, when in fact it had very well known that he had already died. Nonstock
corporations and their officers are not exempt from the obligation imposed by Articles 19, 20 and 21
under the Chapter on Human Relations of the Civil Code, which provisions enunciate a general
obligation under law for every person to act fairly and in good faith towards one another. Valley Golf and
Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).
3. ADMINISTRATIVE AND CRIMINAL SANCTIONS AGAINST DIRECTORS, TRUSTEES AND OFFICERS
a. SEC Has Been Granted the Following Powers:
(1) To Investigate and Prosecute Offenses Defined under the RCC and to Publish Its
Findings, Orders, Opinions, Advisories or Information (Sec. 154)
(2) To Administer Oaths, Subpoena Witnesses and Documents (Sec. 155)
(3) To Issue Cease and Desist Orders (Sec. 156)
(4) To Hold in Contempt and Impose Fine (Sec. 157)
(5) To Impose Administrative Sanctions (Sec. 158):
(i)
Impose a Fine ranging from P5,000 to P2.0 Million, and not more than P1,000 for
each day of continuing violation, but not to exceed P2.0 Million;
(ii) Issuance of a permanent CDO;
(iii) Suspension or revocation of the Certificate of incorporation; and
(iv) Dissolution of the corporation and forfeiture of its Assets under conditions in Title
XIV.
SCRA 727 (2012); Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013); Ico v. STI, Inc., 729 SCRA 439 (2014); De Castro v. CA, 805 SCRA 265
(2016); Lozada v. Mendoza, 805 SCRA 673 (2016).
102
AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633 (2009).
103
Villanueva v. Adre, 172 SCRA 876 (1989); Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996); NYK Int’l
Knitwear Corp. Phil. v. NLRC, 397 SCRA 607 (2003).
104
LBP v. CA, 364 SCRA 375 (2001); Bogo-Medellin Sugarcane Planters Assn., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees
Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); Coca-Cola Bottlers Phils. v. Daniel, 460 SCRA 494 (2005); Suldao v.
Cimech System Construction, 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v. Eastern Telecommunications Phils.,
642 SCRA 338 (2011). Grandteq Industrial Steel Products v. Estrella, 646 SCRA 391 (2011); Mirant (Phils.) Corp. v. Caro, 723 SCRA 465 (2014); PNOC
Energy Dev. Corp. v. Buenfiaje, 795 SCRA 79 (2016).
105
H.R. Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Co. v. Acosta, 510 SCRA 249 (2006); Elcee Farms,
Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
106
David v.National Federation of Labor Unions, 586 SCRA 100 (2009); Alert Security Investigation Agency v. Pasawilan, 657 SCRA 655 (2011).
42
(6) SEC Granted Fiscal Autonomy to Collect, Retain and Use Fees, Fines, and Other
Chargers pursuant to the RCC and its IRR (Sec. 175)
(7) SEC’s Visitorial Powers and Confidential Nature of Examination Results (Sec. 178)
b. Willful Holding of Office Despite Knowledge of Disqualification or Willful Concealing of
Such Disqualification (Sec. 160)
c. Violation of Duty to Maintain Records, To Allow Their Inspection, or Reproduction ; BUT:
Without prejudice to the SEC Exercise of Contempt Powers (Sec. 161)
SEE: Guidelines in the Filing, Investigation and Resolution of Complaints for Violation of the
Right to Inspect and/Reproduce Corporate Records (SEC Memo Circular No. 25-2020)
d. Willful Certification of Incomplete, Inaccurate, False, Misleading Statements or Reports
(Sec. 162)
e. Independent Auditor’s Collusion with Directors or Representatives, Certifies to
Incomplete or Inaccurate Reports on the Corporation’s Conditions (Sec. 163)
f. Obtaining Corporate Registration Through Fraud: Those responsible for the formation
of a corporation through fraud, or who assisted directly or indirectly therein, shall be
punished with a fine.
g. Corporation’s Conduct of Its Business Through Fraud (Sec. 165)
h. Acting as Intermediaries for Graft and Corrupt Practices: Corporation Use for Fraud, or
For Committing or Concealing Graft and Corrupt Practices as Defined by Pertinent
Statutes (Sec. 166)
i. Engaging Intermediaries for Graft and Corrupt Practices: Corporation’s Appointment of
an Intermediary Who Engages in Graft and Corrupt Practices for the Corporation’s
Benefit or Interest (Sec. 167)
j. Tolerating Graft and Corrupt Practices: A Director, Trustee, or Officer Who Knowingly
Fails to Sanction, Report, or File the Appropriate Action, Allows or Tolerates the Graft
and Corrupt Practices or Fraudulent Acts Committed by a Corporation’s Directors,
Trustees, Officers, or Employees (Sec. 168)
k. Retaliation Against Whistleblowers: Any Person Who knowingly and With Intent to
Retaliate, Commits Acts Detrimental to a Whistleblower such as Interfering with the
Lawful Employment or Livelihood of the Whistleblower (Sec. 169)
l. Violations of the RCC Not Specifically Penalized: Violations of Any Other Provisions of
the RCC, its Amendments, Not Otherwise Specifically Penalized Therein;
BUT: If Violation is Committed by a Corporation, it shall be dissolved in appropriate
proceedings with the SEC;
ALSO: Liability for the foregoing shall be separate from any other administrative, civil,
criminal liability under this Code and other laws. (Sec. 170)
(1) Historical Background of Sec. 170 (Sec. 144 of the old Corporation Code; Sec. 190 of
the old Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the (old) Corporation Law
provisions ground for involuntary dissolution of the corporation and that the court was entitled to
exercise discretion in such matters. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
Penalties imposed in Sec. 190(A) of the old Corporation Law for the violation of the prohibition
in question are of such nature that they can be enforced only by a criminal prosecution or by an
action of quo warranto. These proceedings can be maintained only by the Solicitor General in
representation of the Government. Harden v. Benguet Consolidated Mining Co., 58 Phil. 141
(1933).
(2) Doctrine on the Coverage of Section 144 of the Old Corporation Code
Section 133 of the (old) Corporation Code, unlike its counterpart Sec. 69 in the old Corporation
Law which specifically provided for penal sanctions for foreign corporations engaging in business in
the Philippines without obtaining the requisite license, should be deemed to have a penal sanction
by virtue of Sec. 144 of the (old) Corporation Code. Home Insurance Co. v. Eastern Shipping
Lines, 123 SCRA 424 (1983).
The lack of language imposing criminal liability in [Secs. 30 and 33 of RCC] shows the
legislative intent to limit the consequences of their violation to the civil liabilities mentioned therein.
Had it been the intention of the drafters of the law to define [Secs 30 and 33 of RCC] as offenses,
they could have easily included similar language as that found in [Sec. 73 of RCC]. The (old)
Corporation Code was intended as a regulatory measure, not primarily as a penal statute. Ient v.
Tullett Prebon (Phils.), Inc., 814 SCRA 184 (2017).
43
m. Liability of Directors, Trustees, Officers, or Other Employees: If the offender is a
corporation, the penalty may, at the discretion of the court, be imposed upon such
corporation and/or upon its directors, trustees, shareholders, members, officers, or
employees responsible for the violation or indispensable to its commission. (Sec. 171)
n. Aiders and Abettors: “Anyone who shall aid, abet, counsel, command, induce, or cause
any violation of the [RCC, its IRR, or SEC orders] shall be punished with a fine not
exceeding that imposed on the principal offenders, at the discretion of the court, after
taking into account their participation in the offense.” (Sec. 172)
[ MID-TERM EXAMINATIONS: 10TH & 11TH WEEKS: April 5 TO 15 ]
MODULE 8
RIGHTS OF SHAREHOLDERS AND MEMBERS
(12TH AND 13TH: APRIL 20, 22, 27 AND 29)
XIII. SHAREHOLDERS AND MEMBERS
1.
What Does a “Share of Stock” Represent?
While shares constitute personal property, they are not the property of the corporation. They are
property of the shareholders to whom issued, and they represent an aliquot part to share in its proceeds of
the liquidation of the corporation properties when distributed according to law and equity. The shareholder
is not a co-owner of corporate property, nor is he entitled to any definite portion of its assets. Stockholders
of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
The registration of shares in a shareolder’s name, the issuance of stock certificates, and the right to
receive dividends are all rights that flow from ownership. Lim Tay v. CA, 293 SCRA 634 (1998).107
As early as the case of Fisher v. Trinidad, We already declared that “[t]he distinction between the title
of a corporation, and the interest of its members or shareholders in the property of the corporation, is
familiar and well-settled. The ownership of that property is in the corporation, and not in the holders of
shares of its stock. The interest of each shareholder consists in the right to a proportionate part of the
profits whenever dividends are declared by the corporation, during its existence, under its charter, and to a
like proportion of the property remaining, upon the termination or dissolution of the corporation, after
payment of its debts.” Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005).
A person who desires to be recognized as shareholder to exercise shareholders’ right must secure
standing by having his ownership of share recorded on the stock and transfer book. Thus, only those
whose ownership of shares are duly registered in the stock and transfer book are considered shareholders
of record and are entitled to all rights of a shareholder. Guy v. Guy, 790 SCRA 288 (2016).
2.
The Preemptive Right (Sec. 38)
Pre-emptive right under [Section 38] is the right of a shareholder of a stock corporation to subscribe to
all issues or disposition of shares of any class, in proportion to their respective shareholdings. Although it
can validly be withdrawn, it cannot be done in breach of fiduciary duties such as to perpetuate control over
the corporation. Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
The early pronouncement in Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983) that pre-emptive
right only covers increases in authorized capital stock, has been corrected in Dee v. SEC, 199 SCRA 238
(1991), which took note of the new wordings under [Section 38] as to cover all issuances of shares.
3.
Right to Transfer or Dispose of Shareholdings (Sec. 62)
a. Restriction on Transfers—In General
An agreement by which a person obliges himself not to engage in competitive trade for five years is
valid and reasonable and not an undue or unreasonable “restraint of trade”, and is obligatory on the
parties who voluntarily enter into such agreement. Ollendorf v. Abrahamson, 38 Phil. 585 (1918).
A contractual undertaking on restriction of transfer of shares that has a reasonable business
purpose and limited in coverage is valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).
107
TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
44
b. RIGHT OF FIRST REFUSAL
[Section 62 of RCC] contemplates no restriction as to whom the stocks may be transferred. It does
not suggest that any discrimination may be created by the corporation in favor of, or against a certain
purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to
dispose them in favor of whomever he pleases, without limitation in this respect, than the general
provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
The indication on th face of the stock certificate that it is “Nontranferable” alone odes no compel the
corporation to buy back the shares from the shareholder, and held that “in the absence of a similar
contractual obligation and of a legal provision applicable thereto, it is logical to conclude that it would be
unjust and unreasonable to compel the corporation to comply with a non-existent or imaginary
obligation.” Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
The “right of first refusal” is primarily an attribute of ownership; and a waiver thereof is an act of
ownership. To allow the PCGG to vote the sequestered shares for this purpose would be sanctioning its
exercise of an act of strict ownership. PCGG v. SEC, G.R. No. 82188, 30 June 1988 (unrep.)
A corporation cannot by its board, its bylaws, or the act of its officers, create restrictions in stock
transfers, because “Restrictions in the traffic of stock must have their source in legislative enactment, as
the corporation itself cannot create such impediment. Bylaws are intended merely for the protection of
the corporation, and prescribe relation, not restriction; they are always subject to the charter of the
corporation.” The only limitation imposed by [Section 62] is when the corporation holds any unpaid claim
against the shares intended to be transferred. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
In a landholding corporation which by constitutional mandate is limited to 40% foreign equity, where
there is a right of first refusal t between the co-shareholders, the fact that the corporation owns land
cannot deprive shareholders of their right of first refusal. No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. J.G. Summit Holdings v. Court of Appeals, 450 SCRA
169 (2005).
c. Remedy If Registration Refused:
Mandamus will not lie to compel the corporate secretary to register the transfer of shares in the
corporate books when the petitioner is not the registered shareholder nor does he hold a power of
attorney from the latter. This is under the general rule that as between the corporation and its
shareholders, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the owner, will not
necessarily be recognized as such by the corporation and its officers, in absence of express instructions
of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such
transfer. Hager v. Bryan, 19 Phil. 138 (1911).108
BUT SEE: It is already settled jurisprudence that the registration of a transfer of shares is a
ministerial duty on the part of the corporation. Aggrieved parties may then resort to the remedy of
mandamus to compel corporations that wrongfully or unjustifiably refuse to record the transfer or to
issue new certificates of stock. This remedy is available even upon the instance of a bona fide
transferee who is able to establish a clear legal right to the registration of the transfer. Andaya v.
Rural Bank of Cabadbaran, 799 SCRA 325 (2016).
A stipulation on the stock certificate that any assignment would not be binding on the corporation
unless registered in the corporate books as required under the bylaws and without providing when
registration should be made, would mean that the cause of action and the determination of prescription
period would begin only when demand for registration is made and not at the time of the assignment of
the certificate. Won v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958).
Since the law does not prescribe a period within which the registration of purchase of shares
should be effected, the action to enforce the right does not accrue until there has been a demand and a
refusal concerning the transfer.” Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).109
The claim for damages of what the shares could have sold had the demand for their registration in
the name of the buyer been complied with is deemed to be speculative damage and non-recoverable.
Batong Buhay Gold Mines v. Court of Appeals, 147 SCRA 4 (1987).
4.
Rights to Dividends (Sec. 42)
Dividends from retained earnings can only be declared to those who are shareholders of the
corporation; dividends cannot be declared to creditors as part of the settlement of debts. Nielson & Co. v.
Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the “trust fund” of the corporation. NTC v.
Court of Appeals, 311 SCRA 508 (1999).
The term “dividend” in its technical sense and ordinary acceptation is that part of portion of the profits
of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the
holders of it capital stock—it is a payment, and the right thereto is an incident of ownership of stock. Hence,
when the Court directed that a total of 111,415 shares of PLDT be reconveyed to the Republic as the
rightful owner of said shares that necessarily included the reconveyance to the Republic of the dividends
and interest accruing thereto. Cojuangco v. Sandiganbayan, 586 SCRA 790 (2009).
[Section 42 of RCC] prohibits the issuance of any stock dividend without the approval of shareholders,
representing not less than two-thirds (2/3) of the outstanding capital stock, which underscores the fact that
payment of dividends to a shareholder is not a matter of right but a matter of consensus. Furthermore,
“interest bearing stocks”, on which the corporation agrees absolutely to pay interest before dividends are
108
Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
109
Interport Resources Corp. v. Securities Specialists, Inc., 792 SCRA 155 (2016).
45
paid to the common shareholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
The power to declare dividends under [Sec. 42 of RCC] is with the Board of Directors, and can be
declared only out of its unrestricted retained earnings. Assuming arguendo that Socorro as corporate
director was authorized by the Board to fix the monthly dividends of Sugiyama, it appears that she
committed an ultra vires act because dividends can be declared only out of unrestricted retained
earnings of a corporation, which earnings cannot obviously be fixed and pre-determined 5 years in
advance.” Ongkingco v. Sugiyama, G.R. No. 217787, 18 Sept. 2019.
5.
Right to Attend Shareholders’/Members’ Meetings (Secs. 6 and 88)
Until challenged successfully in proper proceedings, a registered shareholder has a right to participate
in any meeting, and in the absence of fraud the action of the shareholders’ meeting cannot be collaterally
attacked on account of such participation, even if it be shown later on that the shares had been previously
sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933).
a. Meetings of Shareholders or Members (Secs. 48 and 49)
 Recognition of Right to Propose the Holding of a Special Meeting and Items to Be
Included in the Agenda (Sec. 49; SEC Memo Circular No. 14-2020)
 Shareholders’ Right to Put Item on the Agenda (SEC Memo Circular No. 14-2020)
b. Place and Time of Meetings (Secs. 50 and 92)
c. Notices of Meetings (Sec. 50; SEC Memo Circular No. 03-2020)
 Specific Matters Accompanying the Notice (Sec. 50)
 Specific Rules on Waiver of Improper Notice (Sec. 49)
[Section 49 of RCC] expressly allows a shorter period of notice of shareholders’ meetings that
those provided under its default [21 days] period, provided the same is provided for in the Bylaws,
Ricafort v. Dicdican, 787 SCRA 163 (2016); such period set in the Bylaws is valid even when the period
is reckoned from the mailing of the notice rather than when it is actually received by the shareholder of
record, Guy v. Guy, 790 SCRA 288 (2016).
d. Pre-Meeting Procedures
 Closure of the Stock and Transfer Book: 20 days regular; 7 days special (Sec. 49)
 Postponing of Meeting: 2 weeks unless Bylaws provides otherwise (Sec. 49)
e. Conduct of Shareholders’ or Members’ Meetings (Secs. 51 and 52)
(1) Chairman (in his absence the President) Presides (Sec. 53)
(2) Quorum (Sec. 51)
Quorum is based on the totality of the shares which have been subscribed and issued whether
it be founders’ shares or common shares. To base the computation of quorum solely on the
obviously deficient, if not inaccurate STB, and completely disregarding the issued and outstanding
shares indicated in the articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. The STB cannot be used as the sole basis for
determining the quorum as it does not reflect the totality of shares which have been subscribed,
more so when the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court of Appeals,
454 SCRA 54 (2005).
For stock corporations, the “quorum” referred to in [Sec. 51 of RCC] is based on the number of
outstanding voting stocks. For nonstock corporations, only those who are actual, living members
with voting rights shall be counted in determining the existence of a quorum during members’
meetings. Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216 (2006).110
(3) Right to Participate Thru Remote Communication or In Absentia: When authorized in
Bylaws; EXCEPT: Corporations vested with public interests (Secs. 23 and 49)
 SEC Guidelines on Attendance and Participation of Stockholders or Members in
Regular and Special Meetings (SEC Memo Circular No. 06-2020)
(4) Matters That Board Shall Endeavor to Present to Shareholders/Members (Sec. 49)
6.
Right to Vote at Shareholders’ or Members’ Meetings
a. Right to Nominate Director or Trustee (Sec. 23)
b. Nature of the Right to Vote
One of the rights of a shareholder is the right to participate in the control and management of the
corporation that is exercised through his vote—a right inherent in and incidental to the ownership of
corporate stock, and as such is a property right. Castillo v. Balinghasay, 440 SCRA 442 (2004).
Sequestration of shares does not entitle the government to exercise acts of ownership, since even
sequestered shares may be voted upon by the registered shareholder. Cojuangco Jr. v. Roxas, 195
SCRA 797 (1991). However, inasmuch as the subject UCPB shares in the present case were
undisputably acquired with coco levy funds which are public in character, then the right to vote them
110
Lim v. Moldex Land, Inc., 815 SCA 619 (2017); Villongco v. Yabut, 854 SCRA 132 (2018).
46
shall be exercised by the PCGG. Republic v. COCOFED, 372 SCRA 462 (2001); Trans Middle East
(Phils) v. Sandiganbayan, 490 SCRA 455 (2006).
c. Instances When Shareholders Entitled to Vote:
-
Option to Maintain Fixed Term (Sec. 11)
Extension or shortening of fixed term (Secs. 11 and 36)
Amendment of articles of incorporation (Sec. 15)
Election of directors or trustees (Sec. 23)
Removal of directors or trustees and filling-up the vacancy (Sec. 27)
Granting compensation to directors or trustees (Sec. 29)
Approval of material contracts with directors/trustees (Sec. 31)
Ratifying contracts between corporations with interlocking directors (Sec. 32)
Investment in another business or corporation (Secs. 35 and 41)
Increase or decrease of capital stock (Sec. 37)
Incurring, or increasing bonded indebtedness (Sec. 37)
Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec. 39)
Declaration of stock dividends (Sec. 42)
Entering into management contracts (Sec. 43)
Adoption, amendment and repeal of bylaws (Secs. 45 and 47)
Fixing of consideration of no par value shares (Sec. 61)
Merger and consolidation (Sec. 76)
d. When Right to Vote Exercisable Thru Remote Communication or In Absentia (Sec. 23)
e. Right to Vote of Secured Creditors and Administrators (Sec. 54)
When shares are pledged by means of endorsement in blank and delivery of the covering
certificates to lender, the pledgee does not become the owner thereof simply by the failure of the
registered shareholder to pay his loan. Consequently, without proper foreclosure, the lender cannot
demand that the shares be registered in his name. Lim Tay v. CA, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to represent or to bring
suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When no
administrator has been appointed, there is all the more reason to recognize the heirs as the proper
representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).
e. Voting in Case of Joint Ownership (Sec. 55)
f. Treasury Shares Have No Voting Rights (Sec. 57) Tan v. Sycip, 499 SCRA 216 (2006).
7.
Right of Appraisal (Secs. 80 to 85 and 104)
A shareholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his shares, which right of appraisal is expressly recognized in Section 81. Clearly, the right of
appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the shareholders. It does not vest unless objectionable corporate
action is taken. It serves the purpose of enabling the dissenting shareholder to have his interest purchased
and to retire from the corporation. Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010).
8.
Contracts and Agreement Affecting Shareholdings
a. PROXY (Sec. 57)
A proxy is a form of agency created in instances when a person is unable to personally case his or
her vote; hence, the act of voting is delegated to another person. Cesar Yatco Real Estate Services, Inc.
v. Bel-Air Village Association, Inc., 886 SCRA351 (2018).
Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns
the validation of such secured and submitted proxies. It is possible that an intra-corporate controversy
may animate a disgruntled shareholder to complain to the SEC, corporation’s violations of SEC rules and
regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and
regulatory powers, especially when such powers are exercisable on a motu proprio basis. GSIS v. Court
of Appeals, 585 SCRA 679 (2009).
SEC’s power to pass upon the validity of proxies in election contests has effectively been withdrawn,
tied as it is to its abrogated jurisdictional powers. The fact that the jurisdiction of the regular courts under
Sec. 5(c) is confined to the voting on election of officers, and not on all matters which may be voted upon
by shareholders, elucidates that the power of SEC to regulate proxies remains extant and could very well
be exercised when shareholders vote on matters other than the election of directors. GSIS v. Court of
Appeals, 585 SCRA 679 (2009).
b. VOTING TRUST AGREEMENTS (Sec. 58): A VTA separates the voting rights and other rights covered of
the stock from other attributes of ownership, intended to be irrevocable for a definite period of time and
the purpose of which is to give to the trustee to acquire voting control of the corporation. Lee v. Court
of Appeals, 205 SCRA 752 (1992).
The trustor has a right to terminate the voting trust agreement for breach thereof. Everett v. Asia
Banking Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).
c. POOLING AGREEMENTS OR SHAREHOLDERS’ AGREEMENTS (Sec. 99)
9.
RIGHTS TO INSPECT AND COPY CORPORATE RECORDS
a. Basis of Right
47
The shareholder’s right of inspection of corporate books and records arises as an incident of
ownership of the assets and property of the corporation. It is therefore an incident of ownership of the
corporate property, whether such interest be termed an equitable ownership, a beneficial ownership or a
quasi-ownership. The right of inspection is predicated upon the necessity of self-protection on the part
of the shareholder. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).111
The grant of legal personality to a corporation is conditioned on its compliance with certain
obligations. Among these are its fiduciary responsibilities to its shareholders. Providing shareholders
with access to information is a fundamental basis for their intelligent participation in the governance
of the corporation as a business organization that they partially own. The law is agnostic with respect
to the amount of shares required. Generally, each individual sgareholder should be given reasonable
access so that he or she can assess or share his or her assessment of the management of the
corporation with other shareholders. The separate legal personality of a corporation is not so
absolutely separate that it divorces itself from its responsibility to its constituent owners. PASAR
Corp. v. Lim, 804 SCRA 600 (2016).
The right to inspect remains valid and enforceable during the 3-year liquidation period provided
under [Secs. 139 and 184 of RCC]. Chua v. People, 801 SCRA 436 (2016).112
b. Specified Records Covered (Secs. 73, 74 and 177)
c. Limitations and Conditions on Right of Inspection and Reproduction (Sec. 73)
 Rights Bound by Confidentiality Rules
 No Right to Non-Shareholder/member; Competitor or director, officer or controlling
shareholder or otherwise represents the interest of a competitor
As contrasted from the old Corporation Law, the old Corporation Code provided for (a) express
limitations on the right to inspect, and (b) now requires as a condition for such examination that one
requesting it must not have been guilty of using improperly any information secured through a prior
examination, and (c) that the person asking for such examination must be acting in good faith and for a
legitimate purpose in making his demand. The exercising shareholder must set forth the reasons and
the purposes for which he desires such inspection. Gonzales v. PNB, 122 SCRA 489 (1983).
The only express limitations on the right of inspection under [Sec. 734 of RCC] are: (a) it should be
exercised at reasonable hours on business days; (b) the person demanding the right to examine and
copy excerpts from the corporate records and minutes has not improperly used any information secured
through any previous examination of records; and (c) the demand is made in good faith or for a
legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992).
[Section 73 of RCC] places the burden of showing unlawful intention on the corporate officers who
refuse a registered shareholder from exercise his right to inspect. Republic v. Sandiganbayan, 199
SCRA 39 (1999); Terelay Investment and Dev. Corp. v. Yulo, 765 SCRA 1 (2015).
Summary of Rulings: The right to inspect corporate books and records:

Is exercisable through agents and representatives, otherwise it would often be useless to the
shareholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co., 40
Phil. 471 (1919).

Cannot be denied on the ground that the director is on unfriendly terms with the officers of the
corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266
(1932).

Although it includes the right to make copies, does not authorize bringing the books or records outside of
corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).

Does not include the right of access to minutes until such minutes have been written up and approved
by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).

Cannot be limited to a period of ten days shortly prior to the annual shareholders’ meeting, as such
would be an unreasonable restriction and violates the legal provision granting the exercise of such right
“at reasonable hours.” Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924).
d. Remedies If Right Denied
(1) SEC Power of Summary Investigation (Sec. 73)
(2) Mandamus
Refusal to allow shareholders or members to examine company books is not a ground for
appointing a receiver (or creating a management committee) since there are other adequate
remedies, such as a writ of mandamus. Misconduct of corporate directors or other officers is not a
ground for the appointment of a receiver where there are one or more adequate legal action
against the officers, where they are solvent, or other remedies. Ao-as v. CA, 491 SCRA 339
(2006).113
The clear provision in [Sec. 73 of RCC] is sufficient authority to conclude that an action for
injunction and, consequently, a writ of preliminary injunction filed by a corporation is generally
unavailable to prevent shareholders from exercising their right to inspection. Specifically,
shareholders cannot be prevented from gaining access to the (a) records of all business
transactions of the corporation; and (b) minutes of any meeting of shareholders or the board of
directors, including their various committees and subcommittees. PASAR Corp. v. Lim, 804
SCRA 600 (2016).
111
Puno v. Puno Enterprises, 599 SCRA 585 (2009).
112
Roque v. People, 826 SCRA 618 (2017).
113
Spouses Hiteroza v. Cruzada, 794 SCRA 511 (2016).
48
(3) Criminal Sanction under Section 161
For a violation under [Sec. 73 of RCC] and for which the penalty under [Sec. 161 of RCC] can
be imposed, it is necessary that: (1) a director, trustee, shareholder or member has made a prior
demand in writing for a copy of excerpts from the corporations records or minutes; (2) any officer or
agent of the concerned corporation shall refuse to allow the said director, trustee, shareholder or
member to examine and copy said excerpts; (3) if such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal; and (4) where the officer or
agent of the corporation sets up the defense that the person demanding to examine and copy
excerpts from the corporation’s records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the
contrary must be shown or proved. Ang-Abaya v. Ang, 573 SCRA 129 (2008).114
Officer’s refusal to allow a shareholder to review any corporate record, including the stock and
transfer book, provided for in [Sec. 73 of RCC] would constitute a criminal offense under [Sec. 161
of RCC] which anyway punishes all violations of the [Revised] Corporation Code. Yujuico v.
Quimbao, 724 SCRA 262 (2014).
While a cloud of doubt is cast upon the existence of criminal intent on the part of the corporate
officers, it is jurisprudentially settled that proof of malice or deliberate intent (men rea) is not
essential in offenses punishable by special laws, which are mala prohibita. [Section 73, in relation
to Sec. 161 of RCC], a special law, provides for penalties relative to the commission of offenses,
which cannot be trivialized, lest the public purpose for which they are crafter be defeated and put to
naught. Chua v. People, 801 SCRA 436, 451 (2016).
Sections 74 and 144 of the old Corporation Code collectively create the duty on the part of the
corporation to keep and preserve a record of all business transactions and minutes of all meetings
of stockholders, members, or the board of directors/trustees, along with the duty to make such
record available to its stockholders or members upon written request therefor; a violation of these
duties invites criminal prosecution against the erring officers to allow the eventual application of the
prescribed penalties. Keh v. People, G.R. No. 217592-93, 13 July 2020.
e. Criminal Sanction under Section 158 for Shareholder Who Abuse the Right of Inspection or
Reproduction (Sec. 73)
10. RIGHT TO FILE DERIVATIVE SUITS
Derivative suits are governed by the “Interim Rules of Procedure Governing Intra-Corporate
Controversies” (A.M. No. 01-2-04-SC, 01 April 2001). Section 1, Rule 1 thereof expressly lists derivative
suits among the cases covered by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548, 556 (2009).
A “family corporation” is not exempt from complying with the clear requirements and formalities of the
rules for filing a derivative suit. There is nothing in the pertinent laws or rules which distinguishes between
family corporations and other types of corporations in the institution by a shareholder of a derivative suit.
Ang v. Spouses Ang, 699 SCRA 272 (2013).
a. Nature of the Power to File Derivative Suit
A derivative suit is an action brought by minority shareholders in the name of the corporation to
redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy
designed by equity and has been the principal defense of the minority shareholders against abuses by
the majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).115
The whole purpose of the law authorizing a derivative suit is to allow the shareholders/member to
enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action.
R.N. Symaco Trading Corp v. Santos, 467 SCRA 312 (2005).116
While an individual suit are filed when the cause of action belong to the shareholder personally,
such a denial of the right of inspection or denial of the right to dividends, a class suit can be filed when
the cause of action belongs to a group of shareholders, such as when the rights violated belong to
preferred shareholders. A derivative suit, on the other hand, is one which is instituted by a shareholder
or a member of a corporation, for and in behalf of the corporation for its protection from acts committed
by directors, trustees, corporate officers, and even third persons. Agdao Landless Residents Assn., Inc.
v. Maramion, 806 SCRA 74 (2016), citing VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE LAW, p. 474, 2013 ed.
b. Condition Precedent: When Board Cannot Properly Exercise Its Business Judgment
GENERAL RULE: In the absence of a special authority from the Board of Directors to institute a suit in
behalf of the corporation, the President or managing director is disqualified by law to sue in her own
name or for the corporation. The power to sue and be sued is lodged in the Board that exercises its
corporate powers and not in the President. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
Under [Sec. 35 in relation to Sec. 22 of RCC] a corporation’s power to sue is lodged with its Board.
An individual shareholder is permitted to institute a derivative suit on behalf of the corporation in order to
protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the
ones to be sued, or hold the control of the corporation. In such actions, the suing shareholder is
regarded as a nominal party, with the corporation as the real party in interest. Chua v. Court of
Appeals, 443 SCRA 259 (2004).117
114
Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009); Roque v. People, 826 SCRA 618 (2017).
115
Ang v. Ang, 699 SCRA 272 (2013).
116
Hi-Yield Realty v. CA, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
117
Filipinas Port Services v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-Yield Realty v. CA, 590 SCRA 548 (2009).
49
Minority shareholders do not have any statutory right to override the business judgments of the
officers and Boards of Directors. It is settled that a shareholder's right to institute a derivative suit is not
based on any express provision of the [Revised] Corporation Code, or even the Securities Regulation
Code, but is impliedly recognized when the said laws make corporate directors or officers liable for
damages suffered by the corporation and its shareholders for violation of their fiduciary duties . Ching
v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).118
While questions of policy and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the Board of Directors; yet where the corporate directors are guilty of breach of trust—not
of mere error of judgment or abuse of discretion—and intra-corporate remedy is futile or useless, a
shareholder may institute a suit in behalf of himself and other shareholders and for the benefit of the
corporation. However, the corporation is the real party in interest in a derivative suit and the suing
shareholder is only a nominal party. A derivative suit must be differentiated from a class suit. Cua, Jr. v.
Tan, 607 SCRA 645 (2009).119
In Cua, v. Tan, We held that by virtue of ratification, the acts of the Board of Directors become the
acts of the shareholders themselves, even if those acts were, at the outset, unauthorized. To declare
the Board resolution null and void will serve no practical use or value, or affect any of the rights of the
parties, because the subsequent shareholders’ resolution approving and ratifying said acquisition and
the manner in which PRCI shall constitute the JTH Board of Directors, will still remain valid and binding.
Lopez Realty, Inc. v. Spouses Tanjangco, 739 SCRA 644 (2014).
Grounded on equity, the derivative suit has proven to be an effective tool for the protection of
minority shareholders. Such actions have for their object the vindication of a corporate injury, even
though they are not brought by the corporation, but by its stockholders. That said, derivative suits
remain an exception. As a general rule, corporate litigation must be commenced by the corporation
itself, with the imprimatur of the board of directors, which, pursuant to the law, wields the power to sue.
Therefore, since the derivative suit is a remedy of last resort, it must be shown that the board, to the
detriment of the corporation and without a valid business consideration, refuses to remedy a corporate
wrong. A derivative suit may only be instituted after such an omission. Simply put, derivative suits take a
back seat to board-sanctioned litigation whenever the corporation is willing and able to sue in its own
name. Ago Realty & Dev. Corp. v. Ago, G.R. No.s 210906 & 211203, 16 Oct. 2019. & Dev.|
c. Requisites of Derivative Suit
The foregoing requisites before a shareholder can file a derivative suit: (a) the party bringing suit
should be a shareholder during the time of the act or transaction complained of, the number of shares
not being material; (b) the party has tried to exhaust intra-corporate remedies, relief, but the latter has
failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation; the
wrongdoing or harm having been or being caused to the corporation and not to the particular
shareholder bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).120
Section 1, Rule 8 of the Interim Rules lays down the requirements for the proper filing a derivative
suit: (1) Relator was a shareholder/member at the time the acts or transactions subject of the action
occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all remedies available under the articles of
incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he
desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a
nuisance or harassment suit. Yu v. Yukayguan, 589 SCRA 588 (2009).121
(1) Who May Bring a Derivative Suit? The relators must be shareholders both at time of
occurrence of the events constituting the cause of action and at the time of the filing of the
derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911).122
A minority shareholder can file a derivative suit against the President for diverting corporate
income to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
A lawyer engaged as counsel for a corporation cannot represent members of its Board of
Directors in a derivative suit brought against them. To do so would be tantamount to representing
conflicting interests, which is prohibited by the Code of Professional Responsibility.” Hornilla v.
Salunat, 405 SCRA 220 (2003).
Since a derivative action is a suit by a shareholder to enforce a corporate cause of action, the
corporation is a necessary party to the suit, and the relief which is granted is a judgment against a
third person in favor of the corporation. Similarly, if a corporation has a defense to an action against
it and is not asserting it, a shareholder may intervene and defend on behalf of the corporation.
Chua v. Court of Appeals, 443 SCRA 259 (2004).123
In a derivative suit, a shareholder may validly institute a derivative suit to vindicate the alleged
corporate injury; in which case such shareholders is only a nominal party while the corporation is
the real party-in-interest. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
A minority shareholder-director has no power or authority to sue on the corporation’s behalf. Nor
can we uphold this as a derivative suit, since it is required that the minority shareholder suing for
and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause
of action on behalf of the corporation and all other shareholders similarly situated who may wish to
118
119
120
Yu v. Yukayguan, 589 SCRA 588 (2009); BSP v. Campa,r., 671 SCRA 461 (2012); Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
Filipinas Port Services v. Go, 518 SCRA 453 (2007); Reyes v. RTC of Makati, 561 SCRA 593 (2008); Hi-Yield Realty v. CA, 590 SCRA 548 (2009).
121
Hi-Yield Realty v. CA, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v. Tan, 607
SCRA 645 (2009); Ang v. Ang, 699 SCRA 272 (2013).
122
Gochan v. Young, 354 SCRA 207 (2001).
123
Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).
50
join him in the suit. There is now showing that petitioner has complied with the foregoing requisites.
Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).124
The status of heirs as co-owners of shares prior to the partition of decedent’s estate does not
immediately and necessarily make them shareholders—unless and until there is compliance with
the [Sec. 62 of RCC] on the manner of transferring shares, the heirs do not become registered
shareholders of the corporation. Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).125
(2) Exhaustion of Intra-Corporate Remedies: A condition precedent to the filing of a derivative suit
is that the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
Board of Directors for the appropriate relief, but the latter has failed or refused to heed his plea.
Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937).
A derivative suit to question validity of foreclosure of the mortgage on corporate assets can be
filed without prior demand upon the Board of Directors where the legality of the constitution of the
Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993).
The obvious intent behind the rule requiring the shareholder filing a derivative suit to first exert
all reasonable efforts to exhaust all remedies available under the articles of incorporation, by laws,
laws or rules governing the corporation to obtain relief he desires is to make the derivative suit the
final recourse of the shareholders, after all other remedies to obtain the relief sought had failed. Yu
v. Yukayguan, 589 SCRA 588 (2009).126
While it is true that the complaining shareholder must satisfactorily show that he has exhausted
all means to redress his grievances within the corporation, except when such remedy is complete
control of the person against whom the suit is being filed. The reason is obvious: a demand upon
the board to institute an action and prosecute the same effectively would have been useless and
an exercise in futility. Hi-Yield Realty, Inc. v. CA, 590 SCRA 548, 557 (2009).
(3) Relief/Remedies Must Be for the Benefit of the Corporation: The complaint cannot demand
for the defendants to pay the suing shareholders the value of their respective participation in the
assets that have been damaged, for a derivative suit must have cause of action for the benefit of
the corporation. Evangelista v. Santos, 86 Phil. 387 (1950).127
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of Manila,
18 SCRA 602 (1966).
A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a
temporary restraining order enjoining a person from representing the corporation will not bar such
action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation.
Lim v. Lim-Yu, 352 SCRA 216 (2001).
Allegations of injury to the relators can co-exist with those pertaining to the corporation—merely
gives an additional cause of action against the erring directors. Gochan v. Young, 354 SCRA 207
(2001).
Where directors have committed a breach of trust either by their fraud, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a
shareholder may sue on behalf of himself and other shareholders and for the benefit of the
corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to
the shareholders. In such derivative suit, the corporation is the real party in interest while the
shareholder filing suit is only nominal party. Hornilla v. Salunat, 405 SCRA 220 (2003).
Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs
prayed for must be for the benefit or interest of the corporation. When the relief prayed for does not
pertain to the corporation, then it is an improper derivative suit. Legaspi Towers 300, Inc. v. Muer,
673 SCRA 453 (2012),128 citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 1998 ed., p. 375.
A derivative suit presupposes that the corporation is the injured party and the individual
shareholder who files the suit seeks to protect or vindicate corporate rights whenever the officials of
the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. Here,
the harm or injury that Aliño sought to be prevented pertains to properties registered under Aliño
and other third-party mortgagors. x x x Furthermore, the prayer in the complaint seeks for recovery
of the properties belonging to Aliño and other third party mortgagors, some of whom are not
shareholders of VR Holdings, who mortgaged their properties to BSP. BSP v. Campa, Jr., 783
SCRA 476 (2016).
(4) Lack of Appraisal Right: An allegation that appraisal rights were not available for the acts
complained of is another requisite for filing derivative suits under Rule 8, Section 1(3) of the Interim
Rules. Also a distinction must be made between an individual shareholder’s suit, a class suit for
shareholders from derivative suits. Villamor, Jr. v. Umale, 736 SCRA 325 (2014).129
(5) Must Not Be a Nuisance or Harassment Suit : Nuisance and harassment suits are prohibited,
and in determining whether a suit is a nuisance or harassment suit, the court shall consider, among
others, the follow: (a) The extent of the shareholding or interest of the initiating shareholder or
member; (b) subject matter of the suit; (c) legal and factual basis of the complaint; (d) availability of
appraisal rights for the act or acts complained of; and (e) prejudice or damage to the corporation. In
case of nuisance or harassments suits, the court may motu proprio or upon motion dismiss the
case. Ang v. Ang, 699 SCRA 272 (2013); BSP v. Campa, Jr., 787 SCRA 476 (2016).
124
Hi-Yield Realty. v. CA, 590 SCRA 548 (2009).
125
Reyes v. RTC of Makati, Br. 142, 561 SCRA 593 (2008).
126
Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).
127
Reyes v. Tan, 3 SCRA 198 (1961); Republic Bank v. Cuaderno, 19 SCRA 671 (1967).
128
R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005); Ang v. Ang, 699 SCRA 272 (2013).
129
Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
51
d. Venue for Derivative Suit – Under Section 5, Rule 1 of the Interim Rules, the proper venue for
derivative suit would be in the RTC which has jurisdiction over the principal office of the corporation. HiYield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
11. Shareholders’ Right over change of External Auditor (SEC Memo Circular No. 08-2018)
12. Provision of Arbitration Agreement in the Articles or Bylaws (Sec. 181)
13. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 139)
In the liquidation of a corporation, after the payment of all corporate liabilities, the remaining assets, if
any, must be distributed to the shareholders in proportion to their interests in the corporation, which is
referred to as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).
MODULE 9
ATTRIBUTE OF FREE-TRANSFERABILITY OF SHARES:
The Corporation as the Medium by Which Shareholders’
Investments Are Promoted and Safeguarded
(14TH AND 15TH WEEKS: MAY 4, 6, 11 AND 13)
XIV. SHARES AND CAPITAL STOCK
A corporation may obtain funds for capital expenditures by floating either shares (equity) or bonds (debt
securities). Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
An “investment”, being in the nature of equity, is an expenditure to acquire property or other assets in
order to produce revenue. It is the placing of capital or laying out of money in a way intended to secure income
or profit from its employment. Unlike a deposit of money or a loan that earns interest, an investor cannot be
assured of a dividend or an interest on the amount invested, for dividends on investments are granted only after
profits or gains are generated. President of PDIC v. Reyes, 460 SCRA 473 (2005).
But once issued, shares are not owned nor are they assets of the corporation—they are owned by the
shareholders of record. The corporation whose shares are the subject of transfer transaction (through sale,
assignment, donation, or any other mode of conveyance) need not be a part to transaction for it to be valid.
However, to bind the corporation, it is necessary that the transfer is recorded in its books. Forest Hills Golf &
Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).
1.
Concept of “Capital Stock” (Sec. 173)
[Section 173 of RCC] defines “Paid-up Capital” as that portion of the “Authorized Capital Stock” which
has been both subscribed and paid. Not all funds or assets received by the corporation can be considered
paid-up capital; such must form part of the Authorized Capital Stock that has been subscribed and then
actually paid up. Advances by shareholders as payment of future subscriptions do not constitute part of the
“Outstanding Capital Stock”. MSCI-NACUSIP v. NWPC, 269 SCRA 173 (1997).130
Under [Sec. 173 of RCC] the term “Capital Stock” excludes treasury shares. Thus, quorum is based
on the totality of the shares that have been subscribed and issued, whether it be founders’ shares or
common shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
The “Subscribed Capital” is the total amount of the capital that persons (subscribers or shareholders)
have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the
shares. In fine, it is the amount that the corporation receives, inclusive of the premium if any, in
consideration of the original issuance of the shares. NTC v. Court of Appeals, 311 SCRA 508 (1999).
2.
Classification of Shares (Sec. 6)
a. Common Shares: “A common stock represents the residual ownership interest in the corporation. It is
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, 301 SCRA 152 (1999).
b. Preferred Shares:
Cumulative or Non-cumulative
Participating or Non-participating
(3) Priority in Asset Distribution Upon Dissolution
(4) Par Value or No-Par Value
(1)
(2)
130
Central Textile Mills v. NWPC, 260 SCRA 368 (1996); CIR v. First Express Pawnshop Co., Inc., 589 SCRA 253 (2009).
52
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset
distribution. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
Shareholders of preferred shares issued with 1% dividend rate are not entitled to the payment
thereof as a matter of right without the necessity of a prior declaration of dividends which can only come
from existing retained earnings. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
It is not correct to say that holders of the non-voting preferred shares lose all their voting rights,
since Section 6 provides for the situations where non-voting shares like preferred shares are granted
voting rights. COCOFED. v. Republic, 600 SCRA 102 (2009).
In the absence of provisions in the articles denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the corporation for income
in the same manner as bondholders. Under the [Revised] Corporation Code only preferred or
redeemable shares can be deprived of voting rights. Common shares cannot be deprived of the right to
vote, and any provision in the articles of incorporation restricting the right of common shareholders to
vote is invalid. Gamboa v. Teves, 652 SCRA 690 (2011).
c. Redeemable Shares (Sec. 8)
When the certificates of stock recognize redemption, but the option to do so is clearly vested in the
corporation, the redemption is clearly the type known as “optional” and rest entirely with the corporation,
and that the shareholder is without right to either compel or refuse the redemption of his shares.
Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
“Redemption” is repurchase, a reacquisition of stock by the issuing corporation in exchange for
money or property, whether or not the acquired stock is cancelled, retired or held in the treasury.
Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder
in payment for the stock, and continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash dividends, and therefore
subject to tax. CIR v. Court of Appeals, 301 SCRA 152 (1999).
d. Founders’ Shares (Sec. 7)131
Since Section 7 makes no distinction (and is found under General Provisions), then it must mean
that founders’ shares may be applied to both stock and nonstock corporations. Although [Section 88 of
the Revised Corporation Code] allows in a nonstock corporation to limit, broaden or deny the right of
members of any class, the specific provision of Section 7 to founders’ share must prevail, and that the
nonstock corporation can lawfully suspend or define the voting rights of its members, but with respect to
founders’ share, the exclusive right to vote and be voted for of the founders’ share should expire after
five years from the approval of the SEC. Forest Hills and Country Club, Inc. v. Kings Properties Corp.,
G.R. No. 212833, 07 Aug. 2019.
e. Treasury Shares (Sec. 9): Treasury shares are stocks issued and fully paid for and re-acquired by the
corporation either by purchase, donation, forfeiture or other means, and do not have the status of being
outstanding shares and are not entitled to be voted upon nor participate in dividend declarations.
Comm. of Internal Revenue v. Manning, 66 SCRA 14 (1975).
A treasury share, either common or preferred, may be used for a variety of corporate purposes,
such as for a stock bonus plan for management and employees, or for acquiring another company. It
may be held indefinitely, resold or retired. While held in the company’s treasury, the stock earns no
dividends and has no vote in company affairs. COCOFED v. Republic, 600 SCRA 102 (2009).
f. Stock Warrants and Stock Options
g. Re-Classification and Exchange of Shares
“Reclassification of shares does not always bring any substantial alteration in the subscriber’s
proportional interest. But the exchange is different—there would be a shifting of the balance of stock
features like priority in dividend declarations or absence of voting rights. Yet neither the reclassification
nor exchange per se yields income for tax purposes. … In this case, the exchange of shares, without
more, produces no realized income to the subscriber. There is only a modification of the subscriber’s
rights and privileges—which is not a flow of wealth for tax purposes. The issue of taxable dividend may
arise only once a subscriber disposes of his entire interests and not when there is still maintenance of
proprietary interest.” CIR v. Court of Appeals, 301 SCRA 152 (1999).
Conversion of common shares into preferred shares through amendment of articles of
incorporation, is a legitimate exercise of corporate powers. Conversion does not amount to SMC using
its funds to effect conversion, but would amount merely to a reconfiguration of said (common) shares
into preferred shares. COCFED v. Republic, 600 SCRA 102 (2009).
4. Hybrid Securities: Government v. Phil. Sugar Estates, 38 Phil. 15 (1918).
5. Quasi-Reorganization
a. Reduction of Capital Stock (Sec. 37): Reduction of capital stock cannot be employed to avoid the
corporation’s obligations under the Labor Code. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).
b. Stock Splits versus Stock Consolidations
6. Subscription Agreements (Secs. 59 and 71)
131
In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the articles of incorporation provide expressly a class of shares to have the
exclusive right to vote and be voted for into the Board of Directors, that such shares would essentially be founder’s share was raised but not resolved.
53
a. No More Contract of Sale of “Unissued Shares”: Bayla v. Silang Traffic Co., Inc., 73 Phil.
557 (1942).
b. Assignment of Subscription Agreements
When properties were assigned pursuant to a pre-incorporation subscription agreement, but the
corporation fails to issue the covered shares, the return of such properties to the subscriber is a direct
consequence of rescission and does not amount to corporate distribution of assets prior to dissolution.
Ong Yong v. Tiu, 375 SCRA 614 (2002).
The assignment of the subscription agreement is a form of novation by substitution of a new
debtor, which requires the consent of the creditor. In this case, the change of debtor took place when
R.C. Lee assigned the Oceanic shares under Subscription Agreement Nos. 1805, and 1808 to 1811 to
SSI so that the latter became obliged to settle the 75% unpaid balance on the subscription. Interport
Resources Corp. v. Securities Specialist, Inc., 792 SCRA 155 (2016).
7. CONSIDERATION FOR SUBSCRIPTION (Sec. 61):
 Actual cash paid to the corporation
 Property, tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par value or
issued value of the stock issued
 Labor performed for or services actually rendered to the corporation
 Previously incurred indebtedness of the corporation
 Amount transferred from unrestricted retained earnings to stated capital
 Outstanding shares exchanged for stocks in the event of reclassification or conversion
 Shares in another corporation; and/or
 Other generally accepted form of consideration
Stock dividends are in the nature of shares issued to the shareholders, whereby amount of
unrestricted retained earnings converted into equity in the corporation’s books. Lincoln Phil. Life v. Court
of Appeals, 293 SCRA 92 (1998).132
a. Liability of Directors for Watered Stocks (Sec. 64)
b. Unpaid Subscription (Secs. 65 and 66)
Under the trust fund doctrine, a board resolution releasing the shareholders from payment of the
balance of their subscription is wholly ineffectual; and the trustee of the insolvent corporation has still
recover the amounts waived. Philippine Trust Co. v. Rivera, 44 Phil. 469 (1923).
A stipulation that the subscription shall be payable from the first dividends to be paid on the shares
is unlawful in so far as it purports to relieve the subscriber from liability to be sued; and the subscriber is
liable for the par value of the stock to the same extent as if such stipulation had not been inserted in the
contract. National Exchange Co., Inc. v. Dexter, 51 Phil. 601 (1928).
A valid and binding subscription for shares cannot be cancelled so as to release the subscriber
from liability thereon without the consent of all the shareholders. From this rule, however, there are
exceptions: where it is given pursuant to a bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be effectual as against dissenting shareeholders
and subsequent and existing creditors. Lingayen Gulf Elect Power v. Baltazar, 93 Phil. 404 (1953).
The doctrine is established that subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims. The corporation has no power to
release a subscriber to its capital stock from the obligation of paying for his shares without valuable
consideration for such release. Against creditors, a reduction of the capital stock can take place only in
the manner prescribed by the statute. PNB v. Bitulok Sawmill, 23 SCRA 1366 (1968).
A shareholder who is employed with the company, cannot offset his unpaid subscription against his
awarded claims for wages, where there has been no call for the payment of such subscription. Apodaca
v. NLRC, 172 SCRA 442 (1989).
c. Delinquency on Subscription (Secs. 67 to 70)
In spite of a specific provision in the bylaws providing for the manner of collection of unpaid
subscriptions, the Board still has the business judgment prerogative to determine the best manner of
collecting unpaid subscriptions, which may include the filing of a collection suit. De Silva v. Aboitiz &
Co., 44 Phil. 755 (1923).
The power of the Board of Directors to make a call on unpaid subscription cannot be limited by the
provisions of the subscription contract. Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 (1932).
A stock subscription is a subsisting liability from the time the subscription is made. The subscriber
is as much bound to pay the amount of share subscribed as he would be to pay any other debt, and the
right of the company to demand payment is non less incontestable. Velasco v. Poizat, 37 Phil. 802
(1918); Lumanlan v. Cura, 59 Phil. 746 (1934).
The prescriptive period to recover on unpaid subscription commences not from the time of
subscription but from the time of demand by Board of Directors to pay the balance of subscription.
Garcia v. Suarez, 67 Phil. 441 (1939).
8. CERTIFICATE OF STOCK (Secs. 62 and 63)
132
The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited financial
statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).
54
a. Nature of Certificate: A stock certificate is a written instrument signed by the proper corporate officers
stating or acknowledging that the person named in the document is the owner of a designated number
of shares of its stock. It is prima facie evidence that the holder is a shareholder of a corporation. [Lao v.
Lao, 567 SCRA 558 (2008)]. A certificate, however, is merely a tangible evidence of ownership of
shares. [Republic v. Estate of Hans Menzi, 476 SCRA 20 (2005)]. It is not a stock in the corporation and
merely expresses the contract between the corporation and the shareholder. [Makati Sports Club v.
Cheng, 621 SCRA 103 (2010)]. The shares evidenced by said certificates, meanwhile, are regarded as
property and the owner of such shares may, as a general rule, dispose of them as he sees fit, unless
the corporation has been dissolved, or unless the right to do so is properly restricted, or the owner's
privilege of disposing of his shares has been hampered by his own action. [Padgett v. Bobcat &
Templeton, 59 Phil. 232 (1933)]. Teng v. SEC, 784 SCRA 216 (2016).
A stock certificate is not necessary to render one a shareholder in a corporation; nevertheless, it is
the paper representative or tangible evidence of the share itself and the various interests therein. The
stock certificate expresses the contract between the corporation and the shareholder, but it is not
essential to the existence of a share in or the creation of the relationship with the shareholder. Tan v.
SEC, 206 SCRA 740 (1992).133
A stock certificate could not be considered issued in contemplation of law unless signed by the
president or vice-president and countersigned by the secretary or assistance secretary. Bitong v.
Court of Appeals, 292 SCRA 503 (1998).
The fact that the stock certificates registered in the name of one person are found in the
possession of another shareholder does not prove that the possessor is the owner of the covered
shares. A stock certificate is merely a tangible evidence of ownership of shares. Its presence or
absence does not affect the right of the registered owner to dispose of the shares covered by the stock
certificate. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005).
BUT SEE: Uncertificated or Scripless Shares Traded in Trading Markets (Sec. 62)
b. Quasi-Negotiable Character of Certificate of Stock: A stock certificate is merely a quasinegotiable instrument in the sense that it may be transferred by endorsement, coupled with delivery; but
it is not negotiable because the holder thereof takes it without prejudice to such rights or defenses as
the registered owners or transferor’s creditors may have under the law, except only insofar as such
rights or defenses are subject to the limitations imposed by the principles governing estoppel. Delos
Santos v. Republic, 96 Phil. 577 (1955).
The rule is that the endorsement of the stock certificate by the owner or his attorney-in-fact or any
other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares
only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the new transferee. But to be
valid against third parties, the transfer must be recorded in the corporate books. Bitong v. Court of
Appeals, 292 SCRA 503 (1998).134
Since physical delivery of stock certificates is one of the essential requisites for the transfer of
ownership of the stocks purchased, then the failure of the seller-registered owner to delivery the stock
certificates would constitute a material breach that warrants the rescission of the sale of the shares
upon the option of the buyer. Fil-Estate Golf v. Vertex Sales and Trading, 698 SCRA 272 (2013).
c. Right to Stock Certificate for Fully Paid Shares (Sec. 63)
Board resolution which prohibited not-fully shares from voting (although certificates have been
issued) is void, since not fully paid shares which are not delinquent may not be denied their voting
rights. Unless prohibited by bylaws, stock certificates may be issued for less than the number of the
shares subscribed for provided the par value of each of the stocks represented by each of the
certificates has been paid. Baltazar v. Lingayen Gulf Elect. Power Co., 14 SCRA 522 (1965).
d. Lost or Destroyed Certificates (Sec. 72)
While [Sec. 72 of RCC] appears to be mandatory, the same admits exceptions, such that a
corporation may voluntarily issue a new certificate in lieu of the original stock certificate which has been
lost without complying with the requirements under said section. It would be an internal matter for the
corporation to find measures in ascertaining who are the real owners of shares for purposes of
liquidation. It is well-settled that unless proven otherwise, the “stock and transfer book” is the best
evidence to establish stock ownership. SEC Opinion 28 Jan. 1999, addressed to Ms. Ma. Cecilia
Salazar-Santos
e. Forged and Unauthorized Transfers
A bona fide pledgee or transferee of a share from the apparent owner is not chargeable with
knowledge of the limitations laced on said certificates by the real owner, or of any secret agreement
relating to the use which might be made of the stock by the holder. When a stock certificate has been
endorsed in blank by the owner thereof, it becomes a “street certificate” so that upon its face the holder
is entitled to demand its transfer into his name from the issuing corporation. As such the certificate if
quasi-negotiable and the transferee thereof is justified in believing that it belongs to the older and
transferor. J. Santamaria v. HSBC, 89 Phil. 780 (1951).
Since stock certificates are only quasi-negotiable instruments, a transferee in good faith under a
forged assignment acquires no title which can be asserted against the true owner, unless the true
owner’s own negligence has been such as to create an estoppel against him. Delos Santos v.
Republic, 96 Phil. 577 (1955).
133
C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Lincoln Phil. Life v. CA, 293 SCRA 92 (1998); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002);
Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); Makati Sports C;ib .
134
Rivera V. Florendo, 144 SCRA 643 (1986); Razon v. IAC, 207 SCRA 234 (1992); Rural Bank of Lipa City v. CA, 366 SCRA 188 (2001); Raquel-Santos
v. CA, 592 SCRA 169 (2009); Teng v. SEC, 784 SCRA 216 (2016); Tee Ling Kiat v. Ayala Corp., 857 SCRA 533 (2018).
55
When the stock certificates have been endorsed in blank for purposes of showing the nominee
relations, the eventual delivery and registration of the shares in violation of the trust relationship and
after their having been stolen, would be void, even when such transfers have been registered in the
stock and transfer book. Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999).
We uphold rule in Santamaria v. HSBC that when a stock certificate is endorsed in blank bythe
owner it constitutes what is termed as “street certificate” so that upon its face, the holder is entitled to
demand its transfer into his name form the issuing corporation. The ruling in Neugence Marketing, Inc.
v. Court of Appeals, is merely an exceptional one borne out of the fact that the stock certificates
endorsed in blank were stolen from the possession of the beneficial owner (i.e., there was no intention
for the certificates to go into commercial negotiation). Indeed, in this case Gilberts blank endorsement of
the certificates was effective since they were in the possession and control of the parents who were the
benefical owners over the underlying shares. Guy v. Guy, 680 SCRA 214 (2012).
9.
SALES AND OTHER DISPOSITIONS OF SHARES: “Doctrine on Free-Transferability of Shares”
a. Share Dispositions and the Stock and Transfer Book (STB) (Secs. 62, 71 and 73):
Shares are not owned or are the assets of the corporation—they are owned by the shareholders of
record. The corporation whose shares are the subject of transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need not be a part to transaction to be valid; however, to
bind the corporation as well as third parties, it is necessary that the transfer is recorded in the corporate
books. Forest Hills Golf & Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).
Under [Sec. 62 of RCC], certain minimum requisites must be complied with for there to be a valid
transfer of stocks, to wit: (a) there must be delivery of the stock certificate; (b) the certificate must have
been endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) to be valid against third parties, the transfer must be recorded in the corporate books.
Rural Bank of Lipa City v. CA, 366 SCRA 188 (2001).
[Section 62 of RCC] the manner by which a share may be transferred. Said provision is essentially
the same as Section 35 of the old Corporation Law, which, as held in Fleisher v. Botica Nolasco Co.,
defines the nature, character and transferability of shares. Fleisher also stated that the provision on the
transfer of shares contemplates no restriction as to whom they may be transferred or sold. As owner of
personal property, a shareholder is at liberty to dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the general provisions of law. Teng v. SEC, 784
SCRA 216 (2016).
When the subscriber under a Subscription Agreement assigns the shares to another party, the
same partakes of the nature of a novation through the substitution of the person of the debtor, which is
effective only with the consent of the creditor; but that in the case of the corporation issuing the shares,
such assignment would be valid and binding upon notice by the transferee of the transfer of the shares
coupled with a tender of the balance of the unpaid subscription pursuant to the call made by the
corporation. The provisions of [Sec. 62 of RCC] to the effect that a transfer of shares does not bind the
corporation unless it is registered in the corporate books cannot apply in this case since formal notice of
the transfer was given to the corporation. Interport Resources Corp. v. SSI, 792 SCRA 155 (2016).
(1) Nature of the STB: The stock and transfer book records the names and addresses of all
shareholders arranged alphabetically, the installments paid and unpaid on all shares for which
subscription has been made, and the date of payment thereof, a statement of every alienation, sale
or transfer of shares made the date thereof and by and to whom made, and such other entries as
may be prescribed by law. A stock and transfer book, like other corporate books and records, is not
in any sense a public record, and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein. Lanuza v. CA, 454 SCRA 54 (2005).
As between the General Information Sheet and the corporate books, it is the latter that is
controlling as to the number of shares held by shareholders. Lao v. Lao, 567 SCRA 558 (2008).
Who May Make Entries in the STB – Entries made on the stock and transfer book by any
person other than the corporate secretary, such as those made by the President and Chairman,
cannot be given any valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
Absence of a deed of sale evidencing sale of shares does not necessarily show irregularity
since [Sec. 62 of RCC] itself does not require any deed for the validity of the transfer of shares
stock, it being sufficient that such transfer be effected by delivery of the stock certificates duly
endorsed. It has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals, 366 SCRA 188
(2001), that the execution of a deed of sale does not necessarily make the transfer effective.
Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005).
Sales and other dispositions of shares must be registered in the stock and transfer book: (a) to
enable the corporation to know at all times who are the actual shareholders, and who have
standing to exercise the rights pertaining to the shares; (b) to afford the corporation an opportunity
to object or refuse its consent to such transfer when it has claims against such shares; and (c) to
avoid fictitious or fraudulent transfers. Escaño v. Filipinas Mining Corporation, 74 Phil. 71 (1944).135
(2) Effects of Registration/Non-Registration of Transfers in the STB: The failure to register a
sale or disposition of shares in the corporate books would render the same invalid to all persons,
including the attaching creditors of the seller. Uson v. Diosomito, 61 Phil. 535 (1935).
Until challenged in a proper proceeding, a shareholder of record has a right to participate in any
meeting; his vote can be properly counted to determine whether a shareholders’ resolution was
approved, despite the claim of the alleged transferee. On the other hand, a person who has
purchased stock, and who desires to be recognized as a shareholder for the purpose of voting,
135
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
56
must secure such a standing by having the transfer recorded on the corporate books. Until the
transfer is registered, the transferee is not a shareholder but an outsider. Batangas Laguna
Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).136
A transfer of shares which is not recorded in the corporate books is valid only as between the
parties. Hence, the transferor has the right to dividends as against the corporation without notice of
transfer but it serves as trustee of the real owner of the dividends, subject to the contract between
the transferor and transferee as to who is entitled to receive the dividends. Cojuangco v.
Sandiganbayn, 586 SCRA 790 (2009).
10. PLEDGE, MORTGAGE AND OTHER ENCUMBRANCES ON SHARES
Shares for which no stock certificate has been issued may validly be mortgaged in whole (an not just
with respect to the portion paid-up) and the corporation receiving notice thereof is bound to respect the
security arrangement. The “unpaid claims” under [Sec. 62 of RCC] refers to any unpaid subscription, and
not to any indebtedness which a shareholder may owe the corporation arising from any other transactions,
like unpaid monthly dues. Fua Cun v. Summers, 44 Phil. 704 (1923).137
When the shares are covered by a stock certificate issued in the name of the usufructuary by the
original owner with the agreement between them that they should not be disposed or sold, but the
registered owner had pledged the shares by endorsement and delivery of the certificate to one who took
them in good faith and for value, the latter shall be preferred since registration of a security arrangement
covering shares does not require, for its validity and binding effect on the world, to be registered in the
stock and transfer book. Monserrat v. Ceran, 58 Phil. 469 (1933).
In order for the chattel mortgage on shares be valid and binding on third parties, registration thereof in
the stock and transfer book is not required and not legally effective. What is necessary is that the chattel
mortgage over the shares be registered in the Registry of Deeds of the principal place of business of the
corporation, as well as in the Registry of Deeds of the shareholders’ domicile. Chua Guan v. Samahang
Magsasaka, Inc., 62 Phil. 472 (1935).
The pledge of shares covered by a certificate is valid and binding on third parties, when the stock
certificate has been endorsed and delivered to the creditor, notwithstanding the fact that the contract does
not appear in a public instrument (chattel mortgage). “Certificates of stock … are quasi-negotiable
instruments in the sense that they may be given in pledge or mortgage to secure an obligation.”
Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937).
Only fully paid shares for which stock certificates have been issued are subject to the registration
requirement in the stock and transfer book in cases dealing with their sales and absolute disposition.
Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
The process of registering lis pendens is inapplicable to shares which are personal properties;
however, however, formal notice given to the Corporate Secretary of claims to the shall be deemed
equivalent of registration of an encumbrance or assignment of the shares on the corporate books; and that
by virtue of such registration through notice to the corporation, pending litigation, third parties, or potential
transferees pendente lite, may therefore be charged with constructive notice of claimants lien/title over the
subject shares and the pending litigation involving the same. MR Holdings, Ltd. V. Bajar, 683 SCRA
336 (2012).
a. Equitable Mortgage Assignment: The assignment of voting shares as security for a loan operates to
give the assignee not only the right to vote on the shares, but would also treat the assignee as the
owner of the shares (not just an equitable mortgage): “It is true that the assignment was predicated on
the intention that it would serve as security vis-à-vis DBP’s financial accommodation extended to PJI,
but it was a valid and duly executed assignment, subject to a resolutory condition, which was the
settlement of PJI’s loan obligation with DBP.” APT v. Sandiganbayan, 341 SCRA 551, 560 (2000).
11. ATTACHMENTS, EXECUTION AND OTHER INVOLUNTARY DEALINGS ON SHARES
Attachments of shares are not included in the term “transfer” as provided in [Sec. 62 of RCC]. Both the
Revised Rules of Court and [Revised] Corporation Code do not require annotation in the stock and transfer
book for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil
Export & Import Corp. v. CA, 251 SCRA 257 (1995).
A Corporate Secretary’s obligation under [Sec. 62 of RCC] to record in the stock and transfer book
alienations involving the shares, does not cover any obligation to record the attachment of banks against
the shares of a debtor, since attachments are not transfer of shares, but merely a burden on the title of the
owner. Only absolute transfers of shares are required to be recorded in the stock and transfer book in order
to have “force and effect as against third persons.” Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a
subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice
of said transfer or not. All transfers not so entered on the corporate books are absolutely void; not because
they are without notice or fraudulent in law or fact, but because they are made so void by statute. Garcia
v. Jomouad, 323 SCRA 424 (2000).
12. Situs of Shares of Stocks
Situs of shares is the domicile of the corporation that issued them. Wells Fargo Bank and Union v.
Collector, 70 Phil. 325 (1940).138
136
Magsaysay-Labrador v. CA, 180 SCRA 266 (1989); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
137
China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
138
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
57
MODULE 10
SPECIAL CORPORATE UNDERTAKINGS
(16TH AND 17TH WEEKS: MAY 18, 20 AND 25)
XV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. ACQUISITIONS AND TRANSFERS
1.
“Assets-Only” Transfers
As a Rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets; EXCEPT: When any of the following circumstances is present: (1) where the purchasers expressly or
impliedly agrees to assume the debts; (2) where the selling corporation fraudulently enters into the
transactions to escape liability for those debts (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the transaction amounts to a consolidation or merger
of the corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).139
The disposition of the assets of a corporation 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 purposes for which it was incorporated. Such a sale or disposition must be understood
as valid only if it does not prejudice the creditors of the assignor, which necessarily implies that the
assignee assumes the debts of the assignor. Even under the provisions of the Civil Code, a creditor has a
real interest to go after any person to whom the debtor fraudulently transferred its assets. Caltex (Phils.),
Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006).
PSALM took ownership over most of NPC’s assets by operation of law—these properties may be used
to satisfy the Court’s judgment, and such being the case, the employees may go after such properties.
NPC Drivers and Mechanics Assn. (NPC DAMA) v. NPC, 606 SCRA 409 (2009).
2.
“BUSINESS ENTERPRISE” TRANSFERS
A business enterprise operated under a partnership and later incorporated, or where a corporation
assumed all the assets and liabilities of the partnership, then the corporation cannot be regarded, for
purposes of the obligations imposed under the SSS Law, as having come into being only from its incorporation but from the date the partnership commenced. Laguna Trans. Co. v. SSS, 107 Phil. 833 (1960).140
The judgment in a suit for workmen’s compensation can be pursued against the corporation organized
by the controlling shareholder who as the sole proprietor organized the corporation to insulate properties
transferred thereto against the judgment debt. A.D. Santos v. Vasquez, 22 SCRA 1156 (1968).
When the bus operations belonging to the estate of the deceased spouses is duly incorporated by the
administratrix with the intention to make the corporation liable for past and pending obligations of the estate
as the transportation business itself, then that liability on the part of the corporation, vis-à-vis the estate,
should continue to remain with it even after the percentage of the estate’s shares in the corporation should
have been diluted. Buan v. Alcantara, 127 SCRA 845 (1984).
An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by
Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity under
Article 1311 to 34 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are
valid and binding only between the contracting parties and their successors-in-interest. Thus, despite the
sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with the
contracts between the transferor corporation and its creditors. Jurisprudence has held that in a businessenterprise transfer, the transferee is liable for the debts and liabilities of his transferor arising from the
business enterprise conveyed. Many of the application of the business-enterprise transfer have been
related by the Court to the application of the piercing doctrine. Y-I Leisure Phils., Inc. v. Yu, 770 SCRA
56 (2015), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2010 ed., pp. 686, 687-689.; Maricalum Mining Corp. v.
Florentino, 872 SCRA 572 (2018).
3.
“EQUITY” TRANSFERS
The disposition by the controlling shareholder of all of its equity in the corporation warrants the
application of the alter ego piercing doctrine since it shows that the transferor had complete control of the
corporation (?). PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).
PROPER DOCTRINE: The fact that a shareholder sells his shares during the pendency of a collection
case against the corporation, does not make such shareholder personally liable for the corporate debt,
since disposing shareholder has no personal obligation to the creditor, and it is the inherent right of
shareholder to dispose of his shares anytime he desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).
B.
MERGER AND CONSOLIDATIONS
A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined business.
Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of
139
Jiao v. NLRC, 670 SCRA 184 (2012).
140
Oromeca Lumber Co. v. SSS, 4 SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).
58
shareholders and creditors, there must be an express provision of law authorizing them. PNB v. Andrada
Electric & Engineering Co., 381 SCRA 244 (2002).141
Merger is a re-organization of two or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the other
surviving. To put it another way, merger is the absorption of one or more corporations by another existing
corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims,
liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence
while the life or lives of the other corporation(s) is or are terminated. Bank of Commerce v. Radio
Philippines Network, Inc., 722 SCRA 529 (2014).
1.
PROCEDURE FOR MERGER OR CONSOLIDATION
When the [Revised] Corporation Code’s procedure for merger/consolidation are not followed, there
can be no merger or consolidation, corporate separateness between the constituent corporations remains,
and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
a. Plan of Merger or Consolidation (Sec. 75)
b. Shareholders’ or Members’ Approvals (Sec. 76)
c. Articles of Merger or Consolidation (Sec. 77)
d. Submission of Financial Statements Requirements: For applications of merger, the audited
financial statements of the constituent corporations (surviving and absorbed) as of the date not earlier
than 120 days prior to the date of filing of the application and the long-form audit report for absorbed
corporation(s) are always required. Long form audit report for the surviving corporation is required if it is
insolvent. SEC Opinion 14, s. of 2002, 15 Nov. 2002
e. Approval by SEC (Sec. 78): SEC’s issuance of the certificate of merger is crucial—not only does it
bear out SEC’s approval but also marks the moment whereupon the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist
but its rights, and properties as well as liabilities shall be taken and deemed transferred to and vested in
the surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005).142
f. Prior Notification and Approval by PCC for M&A Exceeding Threshold Value (Secs. 16 and
17, R.A. 10667; PCC Resolution No. 02-2020)
3.
Effects of Merger or Consolidation (Sec. 79)
It is settled that in the merger, one of the corporations survives and continues the business, while the
others are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation.
The surviving corporation therefore has a right to institute a collection suit on accounts of one of one of the
constituent corporations. Babst v. Court of Appeals, 350 SCRA 341 (2001).
Global is bound by the terms of the contract entered into by its predecessor-in-interest, Asian Bank.
Due to Global’s merger with Asian Bank and because it is the surviving corporation, it is as if it was the one
which entered into contract with Surecomp. In the same way, Global also has the right to exercise all
defenses, rights, privileges, and counter-claims of every kind and nature which Asian Bank may have or
invoke under the law. Global Business Holdings Inc. v. Surecompsoftware, B.V., 633 SCRA 94 (2010).
In a merger of two banks, the surviving bank cannot claim to be in good faith for the default committed
by the absorbed bank, since it is not an excuse from the legal consequences of the effects of a merger or
consolidation. Under [Sec. 79 of RCC], the surviving entity not only acquires all the rights, privileges and
assets of the absorbed corporation, but also the liabilities and obligations of the latter as if the surviving
company itself incurred it. In this case, since BSA was remised in its obligations under the loan agreement,
BPI as the surviving bank in the merger with BSA cannot feign ignorance of transactions entered into by
the former especially when it seeks to benefit from the same by foreclosing the mortgage thereon. Ong v.
BPI Family Savings Bank, Inc., 852 SCRA 614 (2017).
4.
De Facto Mergers
In his book, Dean Cesar Villanueva explained that under the [Revised] Corporation Code, “a de facto
merger can be pursued by one corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of the acquiring corporation. The acquiring corporation would end up
with the business enterprise of the target corporation; whereas, the target corporation would end up with
basically its only remaining assets being the shares of the acquiring corporation.” No de facto merger took
place in the present case simply because the TRB owners did not get in exchange for the bank’s assets
and liabilities an equivalent value in Bancommerce shares. Bancommerce and TRB agreed with BSP
approval to exclude from the sale the TRB's contingent judicial liabilities, including those owing to RPN.
Bank of Commerce v. RPN 9, 722 SCRA 520 (2014).
C. EFFECTS ON EMPLOYEES OF THE CONSTITUENT CORPORATIONS
1.
“Assets Only” Transfers
There is no law requiring that the purchaser of MDII’s assets should absorb its employees. The most
that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to give
preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. MDII
Supervisors & Confidential Employees Assn. v. Pres. Assistance on Legal Affairs, 79 SCRA 40 (1977).
Unless expressly assumed, employment contracts and CBAs are not enforceable against a transferee
of an enterprise, labor contracts being in personam, thus binding only between the parties. A labor contract
141
McLeod v. NLRC, 512 SCRA 222 (2007).
142
Associated Bank v. CA, 291 SCRA 511 (1998); Mindanao Savings and Loan Assn. v. Willkom, 634 SCRA 291 (2010).
59
merely creates an action in personam and does not create any real right which should be respected by
third parties. Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989).
2.
“Business-Enterprise” Transfers
There is no law requiring that the purchaser should absorb the employees of the selling company.
Well-established is the principle “that it is within the employer’s legitimate sphere of management control of
the business to adopt economic policies to make some changes or adjustments in their organization or
operations that would insure profit to itself or protect the investments of its shareholders. As in the exercise
of such management prerogative, the employer may merge or consolidate its business with another, or sell
or dispose all or substantially all of its assets and properties which may bring about the dismissal or
termination of its employees in the process Central Azucarera del Danao v. CA, 137 SCRA 295 (1985).
Where a corporation is closed for alleged losses and its equipment are transferred to another
company which engaged in the same operations, the separate juridical personality of the latter can be
pierced to make it liable for the labor claims of the employees of the closed company. National Federation
of Labor Union v. Ople, 143 SCRA 124 (1986).
Although a corporation may have ceased business operations and an entirely new company has been
organized to take over the same type of operations, it does not necessarily follow that no one may now be
held liable for illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA
277 (1992).143
Under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the
properties of the seller or transferor is not obliged to absorb the latter’s employees. The most that the
purchasing company may do, for reasons of public policy and social justice, is to give preference of
reemployment to the selling company’s qualified separated employees, who in its judgment are necessary
to the continued operation of the business establishment. In the case of a transfer of all or substantially all
of the assets of a corporation (i.e., business enterprise transfers), the liabilities of the previous owners to its
employees are not enforceable against the buyer or transferee, unless (a) the latter unequivocally assumes
them; or (b) the sale or transfer was made in bad faith. Barayoga v. APT, 473 SCRA 690 (2005). 144
Where a corporation transferred all its assets to another corporation “to settle its obligations” and not
amounting to a fraudulent transfer, that does not authorize application of the piercing doctrine to make the
transferee liable for labor claims against the transferor. McLeod v. NLRC, 512 SCRA 222 (2007).
Settled now is the rule that where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.
Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).
3.
“Equity” Transfers
Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the
successor-employer is deemed to have absorbed the employees and is held liable for the transgressions of
his or her predecessor. Peñafrancia Tours and Travel Transport v. Sarmiento, 634 SCRA 279 (2010).
Where transfer of ownership is in good faith, the transferee is under no legal duty to absorb the
transferor’s employees as there is no law compelling such absorption. For reasons of public policy and
social justice, transferee may give preference to the qualified separated employees in the filling of
vacancies in the facilities of the purchaser. Manlimos v. NLRC, 242 SCRA 145 (1995).145
4. Mergers and Consolidations
Employees of a predecessor-constituent corporation cannot avail of their previous tenure when
determining their termination benefits with the surviving corporation in the merger. Filipinas Port Services,
Inc. v. NLRC, 177 SCRA 203 (1989).
CONTRA: In the case of merger or consolidation, the employees have a right to their retirement benefits
computed from the time worked with the predecessor-constituent corporations, saying there was no break
in the employer-employee relationship. Filipinas Port Services v. NLRC, 200 SCRA 773 (1991).146
It is more in keeping with social justice of according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation in a merger, even in the absence of an
express stipulation in the articles of merger or the merger plan. This ruling strengthens judicial protection of
the right to security of tenure of employees affected by a merger and avoids confusion regarding the status
of their various benefits. BPI. v. BPI Employees Union, 658 SCRA 828 (2011).147
It is worthy to stress that both AMSFC and DFC are guilty of acts constitutive of constructive dismissal
performed against Baya. As such, they should be deemed as solidarily liable for the monetary awards in
favor of Baya. Meanwhile, Sumifru, as the surviving entity in its merger with DFC, must be held answer for
the latter’s liabilities, including its solidary liability with AMSFC arising herein. Verily, jurisprudence and
[Sec. 79 of RCC], state that “in merger of two existing corporations, one of the corporations survives and
continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired
by the surviving corporation.” [quoting from Babst v. Court of Appeals, 350 SCRA 341 (2001)] Sumifru
(Phils.) Corp. v. Baya, 822 SCRA 564 (2017).
5.
Spin-Offs
143
Pepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995)
144
Sunio v. NLRC, 127 SCRA 390 (1984); San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991); Yu v. NLRC, 245 SCRA 134
(1995); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999).
145
Robledo v. NLRC, 238 SCRA 52 (1994); Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 (1990); Coral v. NLRC,
258 SCRA 704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995).
146
National Union Bank Employees v. Lazaro, 156 SCRA 123 (1988); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993); Pharmacia and Upjohn,
Inc. v. Albayda, 628 SCRA 544 (2010).
147
Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc., 804 SCRA 286 (2016).
60
Where a spin-off by the corporation of a division into another corporation is done for a valid business
reason and in good faith, the employees in the spun-off unit no longer belong to the bargaining unit of the
mother company, and that the employees in the new corporations constitute new bargaining unit. SMC
Employees Union-PTGWO v. Confessor, 262 SCRA 81 (1996).
In business parlance, a corporate spin-off occurs when a department, division or portions of the
corporate business enterprise is sold-off or assigned to a new corporation that will arise by the process
which may constitute it into a subsidiary of the original corporation. To spin-off and the attendant transfer of
employees are legitimate business interests of Marsman. The transfer of employees through the
Memorandum of Agreement was proper and did not violate any existing law and jurisprudence. Thus, the
employment of the doctrine of piercing the veil of corporate fiction cannot be applied in the case of a spinoff since no fraud attended the transaction. Marsman & Company, Inc. v. Sta. Rita, 862 SCRA 211 (2018),
citing VILLANUEVA, PHILIPPINE CORPORATE LAW, p. 705 (2010).
XVI. CORPORATE DISSOLUTION AND LIQUIDATION
1.
No Vested Rights to Corporate Fiction: No person who has a claim against a juridical entity can
claim any constitutional right to the perpetual existence of such entity. Gonzales v. Sugar Regulatory
Authority, 174 SCRA 377 (1989).
2. Voluntary Dissolution (Sec. 133)
a. When There Are No Creditors Affected (Sec. 134)
b. When There Are Creditors Affected (Sec 135)
c. Shortening of Corporate Term (Sec. 136)
A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity,
since to be effective “[t]he requirements mandated by the [Revised] Corporation Code should have been
strictly complied with.” Vesagas v. Court of Appeals, 371 SCRA 509 (2002).
When a corporation is contemplating dissolution, it must submit tax return on the income earned by
it from the beginning of the year up to the date of its dissolution and pay the corresponding tax due. BPI
v. Court of Appeals, 363 SCRA 840 (2001).
d. Withdrawal of Request or Petition for Dissolution (Sec. 137)
e. Expiration of Term: Where the corporate life of a corporation as stated in its articles of incorporation
expired, without a valid extension having been effected, it was deemed dissolved by such expiration
without need of further action on the part of the corporation. Majority Stockholders of Ruby Industrial
Corp. v. Lim, 650 SCRA 461 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010 ed.), p. 841.
3. Involuntary Dissolution (Sec. 133, 138; Sec. 6(l), P.D. 902-A)
a. Involuntary Dissolution a Form of Quo Warranto: Dissolution is a serious remedy granted only in
extreme cases to ensure that there is an avoidance of prejudice to the public. Even when the prejudice
is public in nature, the remedy is to enjoin or correct the mistake; and only when it cannot be remedied
that dissolution is imposed. Government v. El Hogar Filipino, 50 Phil. 399 (1927).148
Corporate dissolution due to mismanagement of majority shareholder is too drastic a remedy,
especially when the situation can be remedied such as giving minority shareholders a veto power to any
decision. Chase v. Buencamino, 136 SCRA 365 (1985).
b. Non-User of Charter and Continuous Inoperation (Secs. 21 and 138)
To “organize” involves the election of officers, providing for the subscription and payment of the
capital stock, the adoption of bylaws, and such other steps as are necessary to endow the legal entity
with the capacity to transact the legitimate business for which the corporation was created.
“Organization” relates merely to the systematization and orderly arrangement of the internal and
managerial affairs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
The failure to file the bylaws does not automatically operate to dissolve a corporation but is now
considered only a ground for such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).
4.
Legal Effects of Dissolution
When the corporate term expires, the corporation ceases to be a body corporate for the purpose of
continuing the business for which it was organized. PNB v. CFI of Rizal, 209 SCRA 294 (1992).
A corporation that has reached the stage of dissolution is no longer qualified to receive a secondary
franchise, Buenaflor v. Camarines Industry, 108 Phil. 472 (1960); nor can it extend its life through an
amendment of the articles of incorporation, Alhambra Cigar & Cigarette Mfg. Co. v. SEC, 24 SCRA 269
(1968); since either of these two corporation actions would
The dissolution of a juridical entity does not by itself cause the extinction or diminution of the rights
and liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of
and convey its property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386 (2002).
The executed waivers and quitclaims over labor claims are valid even when executed 6 years after the
revocation of certificate of incorporation—revocation does not result in termination of liabilities. [Sections
139 and 184 of RCC] provide for a 3-year winding up period for a corporation whose charter is annulled by
forfeiture or otherwise to continue as a body corporate for the purpose, among others, of settling and
closing its affairs. Vigilla v. Philippine College of Criminology, 698 SCRA 247 (2013).
148
Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967); Republic v. Bisaya Land Trans., 81 SCRA 9 (1978).
61
Since [Secs. 139 and 184 of RCC] explicitly provide for the continuation of the body corporate for 3years after dissolution, then the rights and remedies against, or liabilities of, the officers shall not be
removed or impaired by reason of the dissolution of the corporation. Chua v. People, 801 SCRA 436,
449 (2016).
Mere revocation of the charter of a corporation does not result in the abatement of proceedings, since
the Board of Directors are considered trustees by legal implication even without Bancom conveying its
assets to a receiver/assignee. Under [Sec. 184 of RCC], the corresponding liabilities of the debtors of a
dissolved corporation remain subsisting; otherwise, this would sanction the unjust enrichment of debtors.
Reyes v. Bancom Dev. Corp., 851 SCRA 133 (2018).
Any new business in which a dissolved corporation would engage in, other than those for the purpose
of liquidation, “will be a void because of the non-existence of the corporate party.” Thus, if a dissolved
corporation enters into a real estate mortgage after dissolution, it would be void ab initio; however, if the
mortgage was entered into prior to dissolution, then the corporation’s redemption of the mortgaged
property, even if already after its dissolution, would be valid because of the liquidation/winding up powers
accorded under [Sec. 139 of RCC]. Rich v. Paloma III, 858 SCRA 27 (2018).
5. METHODS OF CORPORATE LIQUIDATION (Sec. 139)
Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the
winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process
of reducing assets to cash, discharging liabilities and dividing surplus or loss. PVB Employees UnionN.U.B.E. v. Vega, 360 SCRA 33 (2001).
A derivative suit is fundamentally distinct and independent from liquidation proceedings—they are
neither part of each other nor the necessary consequence of the other. There is therefore no basis from
one action to result in the other. Following the dissolution of a corporation, liquidation or the settlement of
its affairs consists of adjusting the debts and claims, i.e., collecting all that is due to the corporation, the
settlement and adjustment of claims against it and the payment of its just debts. Yu v. Yukayguan, 589
SCRA 588 (2009).149
a. Board of Directors/Trustees Pursuing Liquidation; Subject to the 3-Year Period
Since the old Corporation Law did not contain any provision that allowed any action after the 3-year
period for liquidation, then all actions for or against the corporation as abated after the expiration
thereof. National Abaca Corp. v. Pore, 2 SCRA 989 (1961).
After the expiration of the 3-year period, corporate creditors can still pursue their claims against
corporate assets against the officers or shareholders who have taken over the properties of the
corporation. Tan Tiong Bio v. Comm. of Internal Revenue, 100 Phil. 86 (1956).150
Although a corporate officer is not liable for corporate obligations, such as claims for wages, when,
however, such corporate officer takes corporate property to apply to his own claims against the
corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that
certain creditors had similarly valid claims, he took advantage of his position as general manager and
applied the assets exclusively to his own claims. De Guzman v. NLRC, 211 SCRA 723 (1992).
It immaterial that the present action was filed after the 3-year liquidation period, for at the very
least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite
the fact that actual liquidation has not terminated and the one in charge thereof is still holding the
corporate assets, obviously for the benefit of all the creditors thereof, the assessment made within the
three years, definitely established the Government as a creditor for whom the liquidator is supposed to
hold assets of the corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).151
A corporation’s Board is not rendered functus officio by its dissolution, since [Sec. 139 of RCC]
prohibits a dissolved corporation from continuing its business, but allows it to continue with a limited
personality in order to settle and close it affairs, including its complete liquidation. Necessarily there
must be a Board that will continue acting for that purpose. Aguirre II v. FQB+7, Inc., 688 SCRA 242
(2013).
b. Liquidation Pursued Thru a Court-Appointed Receiver
Under the Corporation Law, Legislature intended to let the shareholders have control of the assets
of the corporation upon dissolution, by having the directors and executive officers have charge of the
winding up operations, though there is the alternative method of assigning the property of the
corporation to the trustees for the benefit of its creditors and shareholders. “While the appointment of a
receiver rests within the sound judicial discretion of the court, such discretion must, however, always be
exercised with caution and governed by legal and equitable principles, the violation of which will amount
to its abuse, and in making such appointment the court should take into consideration all the facts and
weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate
business.” China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933).
When the liquidation of a dissolved corporation has been placed in the hands of a receiver or
assignee, the 3-year period prescribed by law for liquidation cannot be made to apply, and that the
receiver or trustee may institute all actions leading to the liquidation of the assets of the corporation
even after the expiration of said period. Sumera v. Valencia, 67 Phil. 721 (1939).
It is evident from the foregoing discussion of law and jurisprudence that the mere revocation of the
charter of a corporation does not result in the abatement of proceedings. Since its directors are
considered trustees by legal implication, the fact that Bancom did not convey its assets to a receiver or
assignee was of no consequence. It must also be emphasized that the dissolution of a creditorcorporation does not extinguish any right or remedy in its favor under [Se. 184 of RCC]. As a necessary
149
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
150
Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).
151
Paramount Insurance Corp. v. A.C. Ordonez Corp., 561 SCRA 327 (2008).
62
consequence of the above rule, the corresponding liability of the debtors of a dissolved corporation must
also be deemed subsisting. To rule otherwise would be to sanction the unjust enrichment of the debtor
at the expense of the corporation. Reyes v. Bancom Development Corp., 850 SCRA 544 (2018).
c. Liquidation Pursued Through a Trustee
Where the affairs of the dissolved corporation were placed in a Board of Liquidators, they were duly
constituted as trustees for the liquidation of the corporate affairs, and there being no term placed on the
Board, their power to pursue liquidation did not terminate upon the expiration of the 3-year period.
Board of Liquidators v. Kalaw, 20 SCRA 987 (1967).
For purposes of dissolution and liquidation of a corporation, the term “trustee” should include
counsel of record who may be deem to have authority to pursue pending litigation after the expiration of
the 3-year liquidation period. Gelano v. Court of Appeals, 103 SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been designated, the
Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so
continue as “trustees” to complete liquidation; and in the absence of a Board, those having pecuniary
interest in the assets, including the shareholders and the creditors of the corporation, acting for and in
its behalf, might make proper representations with the appropriate body for working out a final
settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995).152
A trustee appointed for purposes of liquidation does not become personally liable for the
outstanding obligations of the corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
There is no time limit within which the trustees must complete a liquidation placed in their hands.
What is provided in [Sec. 139 of RCC] is that the conveyance to the trustees must be made within the 3year period. But it may be found impossible to complete the work of liquidation within the 3-year period
or to reduce disputed claims to judgment. Furthermore, [Sec. 184 of RCC] clearly provides that “no right
or remedy in favor of or against any corporation, its shareholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, shareholders, members, directors, trustees,
or officers, shall be removed or impaired either by the subsequent dissolution of said corporation.”
Vigilla v. Philippine College of Criminology, Inc., 698 SCRA 247 (2013).
Trustee may continue to prosecute a case commenced by the corporation within 3 years from its
dissolution until rendition of the final judgment, even if such judgment is rendered beyond the 3-year
period allowed by [Sec. 139 of RCC]. However, there is nothing in the said cases that allows an already
defunct corporation to initiate a suit after the lapse of the said 3-year period. To allow petitioner to
initiate the subject complaint and pursue it until final judgment, on the ground that such complaint was
filed for the sole purpose of liquidating its assets, would be to circumvent the provisions of [Sec. 139 of
RCC]. Alabang Dev. Corp. v. Alabang Hills Village Assn., 724 SCRA 321 (2014).
MODULE 11
SPECIAL TYPES OF CORPORATIONS
(17TH AND 18TH WEEK: MAY 27; JUNE 1 AND 3)
XVII. CLOSE CORPORATIONS
1.
Definition (Sec. 95)
The concept of a close corporation organized for the purpose of running a family business or managing
family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino
families have been able to turn their humble, hard-earned life savings into going concerns capable of
providing them and their families with a modicum of material comfort and financial security as a reward for
years of hard work. A family corporation should serve as a reward for years of hard work— as a rallying point
for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint
themselves with the concepts of mutual aid and security that are the original driving forces behind the
formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable,
settlements of family corporate disputes. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
a. De Jure Close Corporations: Other Articles of Incorporation Requirements (Sec. 96)
(1) Restriction on Transfer of Shares (Secs. 97 and 98)
(2) Pre-Emptive Rights (Sec. 101)
(3) Amendment (Sec. 102)
The articles of incorporation of Motorich Sales Corp. does not contain any provision required under
[Sec. 95 of RCC], and therefore from its very articles of incorporation, it is not a close corporation. It does
not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The “[m]ere ownership by a single shareholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personalities.” San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).
The application of [Sec. 97 of RCC on validity of restrictions on transfer of shares] applies only to
close corporations. Before courts can allow the operation of [Sec. 97 of RCC] to a case, there must first
152
Reburiano v. CA, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002); Pepsi-Cola Products Phils. v. CA, 443 SCRA 571
(2004).
63
be a factual determination that the corporation is indeed a close corporation. There needs to be a
presentation of evidence on the relevant restrictions in the articles and bylaws. Here, there is no such
determination or even allegation based on the records or the RTC decision that would assist this Court in
ruling on these two major factual matters. Andaya v. Rural Bank of Cabadbaran, 799 SCRA 325
(2016).153
Even if the transfer of shares is made in violation of the restrictions enumerated under [Sec. 98 of
RCC], such transfer is still valid if it has been consented to by all the shareholders of the close
corporation and the corporation cannot refuse to register the transfer of shares in the name of the
transferee. Florete, Sr. v. Florete, Jr., 861 SCRA 157 (2018).
b. De Facto Close Corporation: Incorporated Family-Owned Business
The Court cannot lose sight of the fact that the enterprise is a closed family corporation where the
incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay as
president, treasurer and general manager almost had absolute control of the corporation. The
nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is
typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father
whose name identifies their corporation. Hence, the contract is valid and binding on the corporation even
without formal Board resolution. Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 (1993).
The petitioners conceded tha both CFTI and Naguiat Enterprises were “close family corporations”
owned by the Naguiat family. [Section 99(e) of RCC] states: “(e) To the extent that the shareholders are
actively engage(d) in the management or operation of the business and affairs of a close corporation, the
shareholders shall be held to strict fiduciary duties to each other and among themselves. Said
shareholders shall be personally liable for corporate tort unless the corporation has obtained adequate
liability insurance. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
2.
Liability of the Shareholders for Managing the Corporation (Secs. 96 and 99)
It was wrong to conclude that under [Sec. 96 of RCC] “in a close corporation, the shareholders and/or
officers usually manage the business of the corporation and are subject to all liabilities of directors, i.e.,
personally liable for corporate debts and obligations.” Nowhere in [Section 96] do we find any inference that
shareholders of a close corporation are automatically liable for corporate debts and obligations.
Parenthetically, only [Section 99(e) of Revised Corporation Code] explicitly provides for personal liability of
shareholders of close corporation, viz.: “5. To the extent that the shareholders are actively engaged in the
management or operation of the business and affairs of a close corporation, the shareholders shall be held
to strict fiduciary duties to each other and among themselves. Said shareholders shall be personally liable
for corporate torts unless the corporation has obtained reasonably adequate liability insurance.” As can
be read in that provision, several requisites must be present for its applicability. None of these were alleged
in the case to hold the spouses liable, and no factual circumstances where discussed for this Court to
discuss the personally liability of respondents to their creditors because of “corporate torts.” We thus apply
the general doctrine of separate juridical personality and limited liability. Bustos v. Millians Shoe, Inc.,
824 SCRA 67 (2017).
3.
Binding Agreements by Shareholders (Sec. 99)
4.
No Necessity of Board (Sec. 100)
5.
Deadlocks (Sec. 103). Missed opportunity: Ong Yong v. Tiu, 401 SCRA 1 (2003).
6.
Withdrawal and Dissolution (Sec. 104)
Even prior to the passage of the old Corporation Code formally recognizing close corporations, the
Supreme Court had on limited instances recognized the common law rights of minority shareholders to
seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
XVIII. ONE PERSON CORPORATIONS
1.
Concept and Purpose of the OPC (Secs. 10 and 95)
a. Single Stockholder: Natural Person, “Trust” or “Estate”
b. Businesses Not Allowed for OPC
2.
Incorporation of the OPC (SEC Memo Circular No. 07-2019)
a. Articles of Incorporation and Bylaws (Secs. 118 and 119)
b. Corporate Name (Sec. 120)
c. Capital Structure for OPC (Sec. 117)
3.
Corporate Officers in an OPC
a. Single Stockholder Is Sole Director and President (Sec. 121)
b. Corporate Secretary (Secs. 122 and 123)
c. Corporate Treasurer (Sec. 122)
d. Nominee and Alternate Nominee (Secs. 124, 125 and 126)
153
Bustos v. Millians Shoe, Inc., 824 SCRA 67 (2017).
64
4.
Operations and Transactions of the OPC
a. Minutes Book (Sec. 127)
b. Records in Lieu of Meetings (Sec. 128)
c. Reportorial Requirements (Sec. 129)
5.
Liability of the Single Stockholder (Sec. 130)
a. Burden to Affirmatively Show that OPC Was Adequately Financed
b. Burden to Prove that OPC Property Is Independent of the Single Stockholder’s NonInvested Property
c. Principles of Piercing Doctrine Apply with Equal Force to OPC
6.
Conversion Processes (SEC Memo Circular No. 27-2020)
a. From Ordinary Stock Corporation to OPC (Sec. 131)
b. From OPC to Ordinary Stock Corporation (Sec. 132)
c. In the Event of Death of the Single Stockholder (Sec. 132)
XIX. NONSTOCK CORPORATIONS
1. Theory on Nonstock Corporation (Secs. 13[2], 42, 86, 87 and 93[5])
It is not inconsistent with the nature of a nonstock corporation to incidentally earn profits in pursuing its
eleemosynary purpose. What is prohibited is to operate the company for profit and/or distribute any profits
so earned to its officers and members. CIR v. University of Visayas, 1 SCRA 669 (1961).
The Club Filipino Inc. de Cebu was organized for the healthful recreation and entertainment of its
shareholders and members; that upon dissolution its remaining assets would be donated to a charitable
institution; that it operated mainly with funds derived from membership fees and dues; that its bar and
restaurant catered only to its members and their guests; that ther was in fact never any dividends
distributed to it shareholders, and whatever was derived on retain from its bar and restaurant was used to
defray its overall overhead expenses and improve its golf course, it stands to reason that the Club is not
engaged in business of an operator of bar and restaurant, and remains a nonstock non-profit corporation.
Commissioner of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962).
The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and
the courts will consider whether dividends have been declared or its members or that is property, effects or
profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of
the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
A nonstock corporation may only be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage
in investment business where profit is the main or underlying purpose. Although it may obtain profits as an
incident to its operation, such profits are not to be distributed among its members but must be used for the
furtherance of its purposes. People v. Menil, 340 SCRA 125 (2000).
In a mutual life insurance company organized as a nonstock non-profit corporation, the so-called
“dividends” received by members-policyholders are not a portion of profits set aside for distribution to the
shareholders. One, a mutual company has no capital stock to which subscription is necessary; there are no
shareholders to speak of, but only members. Two, the amount they receive does not partake of the nature
of a profit or income, such distribution represents overpayment, a benefit to which the member-policyholder
is equitably entitled. Republic v. Sunlife Assurance Co., 473 SCRA 129 (2005).
2.
Non-Applicability of the Nationalization Laws to Nonstock Corporations
A foreigner may become a member or an officer of a nonstock corporation. Save for the position of the
Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens
becoming officers in corporations engaged in business does not apply to the activities of a nonstock
corporation which do not fall within the coverage of a nationalized industry or area of business reserved by
law exclusively to Filipino citizens. SEC Opinion No. 12, 21 Nov. 2002.
3.
Voting Rights of Members
Under the bylaws, membership in the corporation shall, among others, be terminated by the death of
the member. Further, applying [Section 90] that provides that termination extinguishes all the rights of a
member, unless otherwise provided in the articles of the incorporation or the bylaws, we hold that dead
members who are dropped from the membership roster in the manner for the cause provided for in the
byLaw are not to be counted in determining the requisite vote in corporate matters or the requisite quorum
for the annual members’ meeting. With 11 remaining members, the quorum in the present case should be
6; therefore, there being a quorum, the annual members’ meeting, conducted with six members present,
was valid. Tan v. Sycip, 499 SCRA 216 (2006).
When membership has not been terminated in accordance with the provisions provided for in the
articles of incorporation and/or bylaws, then such termination is void, and such individual remains a
member with concomitant rights inspect corporate books and to demand accounting of the corporate funds.
Agdao Landless Residents Assn. v. Maramion, 806 SCRA 74 (2016).
65
4. Delinquency of Membership Dues
[Section 66 of RCC] refers specifically to unpaid subscriptions to capital stock, the sale of which is
governed by [Sec. 67 of RCC], and utterly inapplicable to nonstock corporations. In such recovery claims,
Article 1140 of the Civil Code governs and provides that an action to recover movables shall prescribe in 8
years. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).
A nonstock corporation may seize and dispose of a fully-paid membership share on account of his
unpaid monthly dues, when authorized to do so under the bylaws, even when no provision on the matter
appears in the articles of incorporation, and in spite of the fact that [Sec. 67 of RCC] on delinquency sale
pertains to payment of shares subscription. [Section 90 of RCC] provides that membership shall be
terminated in the manner and for causes provided in the articles of incorporation or the bylaws of a
nonstock corporation, then the right of a nonstock corporation to expel a member through the forfeiture of
such member’s share may be established in the bylaws alone, and need not be embodied in the articles of
incorporation. Valle Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).1
5. Board of Trustees and Corporate Officers
[Section 106 of RCC], although setting the term of the members of the Board of Trustees at 5 years,
has a proviso subjecting the term to what is otherwise provided in the articles or bylaws of educational
corporations—that contrary provision control on the term of office. A trustee occupying his office in a holdover capacity could be removed at any time, without cause, upon the election or appointment of his
successor. Barayuga v. Advestist University of the Phils., 655 SCRA 640 (2011).
Bylaws provisions which allows the election of members of the Board of Trustees distributed to two
per district, is not contrary to [Sec. 23 of RCC] which requires that in the election of trustees of a nonstock
corporation it is necessary that at least “a majority of the members entitled to vote” must be present.
[Section 88 of RCC] pertaining to nonstock corporations provides that “(t)he right of the members of any
class or classes (of a nonstock corporation) to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the bylaws.” This is an exception to Section 6 that provides 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.” Ao-as v. CA, 491 SCRA 339 (2006).
Conversion of Nonstock Corporation to Stock Corporation
6.
The conversion of a nonstock educational institution into a stock corporation is not legally feasible, as
it violates [Sec. 86 of RCC] that no part of the income of a nonstock corporation may be distributable as
dividends to its members, trustees or officers. “Thus, the [SEC] has previously ruled that a nonstock
corporation cannot be converted into a stock corporation by a mere amendment of the articles of
incorporation. For purposes of transformation, it is fundamental that the nonstock corporation be dissolved
first under any of the methods specified in [Title XIV of the RCC]. Thereafter, the members may organize
as a stock corporation directed to bring profits or pecuniary gains to themselves.” SEC Opinion dated 10
December 1992; SEC Opinion dated 24 February 2003.
Conversion of Corporation Sole to Aggregate Religious Corporation
7.
By virtue of [Sec. 107 of RCC] that allows the application to religious corporations of the general
provisions governing nonstock corporations, a corporation sole may convert itself into a religious aggregate
corporation, by formally amending its articles of incorporation, by approval of its sole corporator and ratified
by at least two-thirds of its general membership, and without needlessly going through the process of
dissolution. Inglesia Evangelica Metodista en las Islas Filipino (IEMELIF) (Corporation Sole), Inc. v. Lazaro ,
624 SCRA 224 (2010).
Foundations: Tax Considerations for Nonstock Corporations
8.
a. What Is a “Foundation”? (Secs. 30 and 34(H), NIRC of 1997; Revenue Regulations No. 131998; BIR-NEDA Regulations No. 1-81, as amended and supplemented by NEDA Circular No.
01-2009)
Formal requirements of Rev. Reg. No. 2 are not mandatory and an entity may, in the absence of
compliance with such requirements, still show that it falls under the provisions of NIRC as a tax-exempt
corporation. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).
b. Income-Tax Exemption of Certain Nonstock Corporations (Sec. 30, NIRC)
“Non-profit” does not necessarily mean “charitable.” Collector of Internal Revenue v. Club Filipino
Inc. de Cebu considered a sports club organized for recreation and entertainment of its shareholders
and members and primarily funded by membership fees and due, as being non-profit because of its
purpose and there was no evidence that it was engaged in a profit-making enterprise. But that did not
make it “charitable”, which term has been defined in Lung Center of the Philippines v. Quezon City, 433
SCRA 119 (2004), as “a gift, to be applied consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of
government.” As organization may be considered as non-profit if it does not distribute any part of its
income to shareholders or members; however, despite its being a tax exempt institution, any income
such institution earns from activities conducted for profit is taxable, as expressly provided in Section 30
of the NIRC. CIR v. St. Luke’s Medical Center, 682 SCRA 66 (2012).
Right of Members to Proportionate Share of Remaining Assets Upon
Dissolution (Secs. 93 and 94; Sec. 34(H)(2)(c), 1997 NIRC)
9.
As provided for under [Secs. 93 and 94 of RCC], in the event of dissolution of a nonstock corporation,
its assets shall be distributed in accordance with the rules. Unless, it is so provided in the articles of
incorporation or bylaws, the members are not entitled to any beneficial or vested interest over the assets of
1
Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016)
66
the nonstock corporation. In other words, nonstock, non-profit corporations hold their funds in trust for the
carrying out of the objectives and purposes expressed in its charter. SEC Opinion dated 24 February
2003; SEC Opinion dated 13 May 1992.
XX. FOREIGN CORPORATIONS
Definition and Public Policy (Sec. 140)
1.
A foreign corporation owes its existence to the laws of another state, and generally, has no legal
existence within the state in which it is foreign. A foreign corporation illegally doing business here because
of its refusal or neglect to obtain the required license may not unfairly plead such lack to avoid service and
thereby impugn the jurisdiction of the local courts. Such danger, however, does not exist among foreign
corporations that are indubitably not doing business in the Philippines: there would be no reason for it to be
subject to the State’s regulation; in so far as the State is concerned, they have no legal existence.
Therefore, to subject such foreign corporation to the local courts’ jurisdiction would violate the essence of
sovereignty of the creating state. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
License to Do Business in the Philippines
2.
a. Application for License (Secs. 141 and 142)
Rationale for Requiring License: Sec. 69 of old Corporation Law was intended to subject the
foreign corporation doing business in the Philippines to the jurisdiction of our courts, not to prevent the
foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose
of business without taking the necessary steps to render it amenable to suit in the local courts.
Marshall-Wells v. Elser, 46 Phil. 71 (1924).
b. Appointment of a Resident Agent (Sec. 144 and 145)
c. Issuance of License (Sec. 143): A licensed foreign corporation should be subjected to no harsher
rules that is required of domestic corporations—it should not be subject to attachment on the pretense
that such foreign corporation is not residing in the Philippines. Claude Neon Lights v. Phil. Advertising
Corp., 57 Phil. 607 (1932).
d. Deposit of Securities (Sec. 143; SEC Memo Circular No. 17-2019)
e. Effects of Failure to Obtain License (Secs. 143): The contract itself is valid, but it is the standing
to sue of the foreign corporation that is missing, which can be remedied with the subsequent obtaining
of the license to do business. Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424
(1983).
Under [Sec. 142 of RCC], a foreign corporation must first obtain a license to do business before it
can transact business in the Philippines. Without the proper license, it cannot maintain any action or
proceeding before Philippine courts as provided in [Sec. 150 of RCC]. Cargill, Inc. v. Intra Strata
Assurance Corp., 615 SCRA 304 (2010).
Summary of Rulings on Doing Business: (1) if a foreign corporation does business in the
Philippines without a license, it cannot sue before Philippine courts; (2) if a foreign corporation is not
doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated
transaction or on a cause of action entirely independent of any business transaction; (3) if a foreign
corporation does business in the Philippines without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from challenging the foreign corporation’s corporate
personality in a suit brought before the Philippine courts; and (4) if a foreign corporation does business
in the Philippines with the required license, it can sue before Philippine courts on any transaction. MR.
Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).2
f. Amendment of License (Sec. 148)
g. Revocation of License (Sec. 151)
h. SEC Memo Circular No. 30-2020: Revision of GIS of Foreign Corporation to Include
Beneficial Ownership Information
3. CONCEPTS OF “DOING BUSINESS IN THE PHILIPPINES”
a. Effect of Doing Business in PHL Without a License (Sec. 150)
b. Statutory Definition of Doing Business (R.A. 7042, FOREIGN INVESTMENT ACT OF 1991)
FIA ’91 repealed Arts. 44-56 of the Omnibus Investments Code, and enumerates in Sec. 3(d) not
only the acts or activities which constitute “doing business” but also those activities which are not
deemed “doing business”. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
(1) Soliciting Orders or Contracts in the Philippines: When a foreign corporation, through its
affiliate company licensed to do business in the Philippines, solicits within the Philippines for the
design and supplying of equipment for the construction of a local lime plant business, said foreign
corporation is doing business in the Philippines under R.A. 5455 that defines “Soliciting orders,
purchases (sales) or service contracts,” even though the final contract was executed in Japan.
Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105 (1990).
(2) Opening of Offices or Branches in the Philippines: “The phrase ‘doing business’ shall
include … opening offices, whether called ‘liaison’ offices or branches,” leads to no other
conclusion than that Saudia is a foreign corporation doing business in the Philippines, and it may
2
Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004).
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be sued in the Philippines and is subject to the jurisdiction of Philippine tribunals. Saudi Arabian
Airlines v. Rebesencio, 746 SCRA 140 (2015).
(3) Appointment of Indentors or Broker: When it is shown that the foreign corporation exercised
control over the business of its brokers, then it is deemed doing business in the country. Granger
Associates v. Microwave Systems, Inc., 189 SCRA 631 (1990).3
Under Sec. 3(d) of FIA ‘91, and Sec. 1(f), Rule I of its IRR, the appointment of a distributor is not
sufficient to constitute “doing business” unless it is under the full control of the foreign corporation.
If the distributor is an independent entity that buys and distributes products, other than those of the
foreign corporation, for its own name and its own account, the latter cannot be considered to be
doing business in the Philippines. Steelcase, Inc. v. Design Int’l Selections, Inc., 670 SCRA 64
(2012).
(4) Foreign Investment in a Domestic Corporation : It is clear from the provision of R.A. 7042 that
the IGC’s act of subscribing shares of stocks from McCann, a duly registered domestic corporation,
maintaining investments therein, and deriving dividend income therefrom, does not qualify as
"doing business", and is not required to secure a license before it can file a claim for tax refund.
CIR v. Interpublic Group of Companies, Inc., G.R. No. 207039, 14 Aug. 2019.
c. Jurisprudential Concepts of “Doing Business”: It implies a continuity of commercial dealings and
arrangements, and the performance of acts or works or the exercise of some of the functions normally
incident to the main purpose or object for which a foreign corporation has been organized.
Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 525 (1941).
(1) “Territoriality Rule” – To be doing or “transaction business in the Philippines” for purposes of
[Sec. 150 of RCC], the foreign corporation must actually transact business in the Philippines, that
is, perform specific business transactions within the Philippine territory on a continuing basis in its
own name and for its own account. B. Van Zuiden Bros., Ltd v. GTVL Manufacturing Industries,
Inc., 523 SCRA 233 (2007), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 813 (2001).
(2) “Contract Test” – Pacific Vegetable Oil Corp. v. Singson, G.R. No. L-7917, 29 April 1955,
Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna Casualty & Surety Co.
v. Pacific Star Line, 80 SCRA 635 (1977).4
(3) “Profit-Seeking Transactions Rule” – Although each case must be judged in light of attendant
circumstances, jurisprudence has evolved several guiding principles for the application of these
tests. “By and large, to constitute ‘doing business,’ the activity to be undertaken in the Philippines is
one that is for profit-making.” Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon
Technology Phil. Corp., 427 SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq.
(1998 ed.); Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW 801-802 (2001).
Examples:
 Insurance Business – A foreign corporation with a Philippine settling agent that issues twelve
marine policies covering different shipments to the Philippines is doing business here. General
Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding policies is doing
business in the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951).
Those that file collection suits with Philippine courts arising from insurance contracts entered
into and premiums paid abroad are not doing business in the Philippines. Aetna Casualty &
Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).5
 Air Carriers – Off-line air carriers having general sales agents in the Philippines are engaged in
business in the Philippines and that their income from sales of passage here (i.e., uplifts of
passengers and cargo occur to or from the Philippines) is income from within the Philippines.
South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665 (2010).
d. Special Cases on Infringement of Business Names and Trademarks: The right to corporate
name and trade name of a foreign corporation is a property right in rem, which it may assert and protect
in any of the courts of the world even in countries where it does not personally transact any business.
Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 (1927).
Infringement of trademark may be pursued in local courts separate from the issue of whether there
is the proper license to do business in the Philippines. General Garments Corp. v. Director of Patens, 41
SCRA 50 (1971).6
e. Doctrine on Unrelated or Isolated Transactions: Isolated acts, contracts, or transactions of foreign
corporations are not regarded as carrying on of business. Typical examples: making of a single
contract, sale with the taking of a note and mortgage in the state to secure payment thereof, purchase,
or note, or the mere commission of a tort. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).7
A foreign corporation needs no license to sue before Philippine courts on an isolated transaction.
Even a series of transactions which are occasional, incidental and casual—not of a character to indicate
3
La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 (1988); Wang Laboratories v. Mendoza, 156
SCRA 44 (1974).
4
Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990).
5
Universal Shipping Lines v. IAC, 188 SCRA 170 (1990).
6
Universal Rubber Products, Inc. v. CA, 130 SCRA 104 (1988).
7
Aboitiz Shipping Corp. v. Insurance Co. of North America, 561 SCRA 262 (2008).
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a purpose to engage in business—do not constitute the doing or engaging in business as contemplated
by law. Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004).
The performance of services auxiliary to an existing isolated contract of sale which are not on a
continuing basis do not constitute “doing business in the Philippines.” Antam Consolidated v. Court
of Appeals, 143 SCRA 288 (1986).8
(1) Examples of Isolated Transactions:
 Recovery on the collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei Union v.
La Campañia Transatlantica, 8 Phil. 766 (1907).
 Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East
Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 (1968).
 Recovery of damages on cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA 1
(1986).
 Sale of construction equipment to the Government with no intent of continuity of transaction.
Gonzales v. Raquiza, 180 SCRA 254 (1989).
 Recovering a Hongkong judgment from local resident. Hang Lung Bank v. Saulog, 201 SCRA 137
(1991).
 Appointment of local lawyer by foreign movie companies who have registered intellectual
property rights over their movies in the Philippines, to protect such rights for piracy does not
constitute doing business in the country. Columbia Pictures Inc. v. CA, 261 SCRA 144 (1996).
(2) When Single Transactions Constitute Doing Business
 Where a single act or transaction is not merely incidental or casual but indicates the foreign
corporation’s intention to do other business in the Philippines, said single act or transaction
constitutes doing business. Far East Int'l v. Nankai Kogyo, 6 SCRA 725 (1962).
 When a foreign corporation engaged in the manufacture of uniforms purchases through a local
agent 7,770 dozens of soccer jerseys from a local company, it was engaged in business here
for the single act was not merely incidental or casual but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do other business in the state. Litton
Mills, Inc. v. CA, 256 SCRA 696 (1996).
 Participating in a bidding process constitutes “doing business” because it shows the foreign
corporation’s intention to engage in business in the Philippines. It is the performance by a
foreign corporation of the acts for which it was created, regardless of volume of business, that
determines whether a foreign corporation needs a license or not. European Resources and
Technologies, Inc. v. Ingenieuburo Birkhanh + Nolte, 435 SCRA 246 (2004).
Local Suits BROUGHT BY Foreign Corporations
4.
a. Need to Allege Capacity to Sue: That a foreign corporation is not doing business in the Philippines
must be alleged if a foreign corporation desires to sue in Philippines courts under the “isolated
transactions rule.” Atlantic Mutual Inc. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966).9
The filing of an action by a foreign corporation before Philippine courts would mean that by
voluntary appearance, the local courts have actually obtained jurisdiction over the “person” of the
foreign corporation. Communication Materials v. Court of Appeals, 260 SCRA 673 (1996).
b. Need to Allege Resident Agent: A complaint filed by a foreign corporation is fatally defective for
failing to allege its duly authorized representative or resident agent in Philippine jurisdiction. New York
Marine Managers, Inc. Court of Appeals, 249 SCRA 416 (1995).
c. Certificate of Non-Forum Shopping: A resident agent is not per se authorized to execute the
requisite certification against forum shopping—while a resident agent may be aware of actions filed
against his principal, he may not be aware of actions initiated by its principal, whether in the Philippines
or abroad. Expertravel & Tours, Inc. v. Court of Appeals, 459 SCRA 147 (2005).
d. Discredited Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does
business in the Philippines without license cannot maintain suit against the foreign corporation just as
the foreign corporation cannot maintain suit, under the principle of pari delicto. Top-Weld Mfg. v.
ECED, 119 SCRA 118 (1985).
e. ESTOPPEL DOCTRINE: Under the principle of estoppel, a foreign corporation doing business in the
Philippines may sue in Philippine courts even without license to do business against a Philippine citizen
who had contracted with and been benefited by said corporation and knew it to be without the
necessary license to do business. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992).10
PROPER DOCTRINE: Foreign corporations which conduct regular business should be denied any access
to courts until they secure a license so as to ensure that they will abide by the decisions of our courts,
even if adverse. Dismissal of the petition would be without prejudice to the foreign corporation
subsequently re-filing when it has obtained the license. Eriks Ltd. v. CA, 267 SCRA 567 (1997).
8
Eastboard Navigation, Ltd. v. Juan Ysmael and Co., 102 Phil. 1 (1957).
9
This overturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that the
lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. Also Commissioner of
Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
10
Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Communications Material and Design, Inc. v. CA, 260 SCRA 673 (1996); Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004); European Resources and Technologies, Inc. v.
Ingenieuburo Birkhanh+Nolte, 435 SCRA 246 (2004); Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corp. , 470 SCRA 650 (2005); Global
Business Holdings, Inc. v. Surecomp Software, B.V., 633 SCRA 470 (2010); Steelcase, Inc. v. Design International Selections, Inc., 670 SCRA 64 (2012).
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Local Suits AGAINST Foreign Corporations: A fundamental international law principle is that no
5.
state can by its laws, and no court as a creature thereof, can by its judgments and decrees directly bind or
affect property or persons beyond state limits. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
a. Jurisdiction Over Foreign Corporations (Sec. 12, Rule 14, Rules of Court)
For purposes of venue, a foreign corporation, its “residence” includes the country where it
exercises corporate functions or the place where its business is done. State Investment House v.
Citibank, 203 SCRA 9 (1991); Northwest Orient Airlines v. Court of Appeals, 241 SCRA 192 (1995).
For service of summons under Sec. 14, Rule 14, it is sufficient that it be alleged in the complaint
that the foreign corporation is doing business in the Philippines. Hahn v. CA, 266 SCRA 537 (1997).
When a foreign corporation has designated a person to receive service of summon, the designation
is exclusive and service of summons on any other person is inefficacious. H.B. Zachry Company Int’l v.
Court of Appeals, 232 SCRA 329 (1994).
When a foreign corporation is doing business in the Philippines, summons may be served on (a) its
designated resident agent; (b) if there is no resident agent, the government official designated by law to
that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the complaint
that a local company is the agent of the foreign corporation is not sufficient to allow proper service to
such alleged agent; it is necessary that there must be specific allegations that establishes the
connection between the foreign corporation and its alleged agent with respect to the transaction in
question. French Oil Mills Machinery Co. v. Court of Appeals, 295 SCRA 462 (1998).
b. Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the
tribunal’s jurisdiction over its person is not equivalent to service of summons, nor does it constitute
acquiescence to the court’s jurisdiction. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
Participation of a foreign corporation’s counsel in the trial process, e.g., cross-examination of
witnesses, agreement and objection to documentary evidence, and the introduction of witnesses and
documentary evidence, vacates the plea of lack of jurisdiction over such foreign corporation. General
Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).11
c. ODD DOCTRINE: “Indeed, if a foreign corporation, not engaged in business in the Philippines, is not
barred from seeking redress from the courts in the Philippines, a fortiori, that same corporation cannot
claim exemption from being sued in Philippine courts for acts done against a person or persons in the
Philippines.” Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979).12
CONTRA: Sine qua non requirement for service of summons and other legal processes or any such
agent or representative is that the foreign corporation is doing business in the Philippines. Signetics
Corp. v. Court of Appeals, 225 SCRA 737 (1993).13
PRESENT RULE: There is no reason to subject to Philippine jurisdiction foreign corporations not doing
business here; insofar as the State is concerned, such foreign corporations have no legal existence,
and to subject foreign corporations not doing business to the courts’ jurisdiction would violate the
essence of sovereignty. The Court is not persuaded by the position taken invoking the ruling in Facilities
Management. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
d. STIPULATION ON VENUE: When the contract sued upon has a venue clause within the Philippines, it is
deemed a confirmation by the foreign corporation, even though not doing business in the Philippines, to
be sued in local courts. Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).
Laws Applicable to Foreign Corporations (Sec. 146)
6.
The provision in the New York law which allowed only shareholders with a minimum number of
shareholdings (3%) to be entitled to exercise the right of inspection is valid in the case of a foreign
corporation licensed to do business in the Philippines which in its internal relationship was bound by the
New York law. Grey v. Insular Lumber Co., 67 Phil. 139 (1938).
7.
Amendment of Articles of Incorporation (Sec. 147)
8.
Merger and Consolidation (Sec. 149)
9.
Withdrawal of Foreign Corporation (Sec. 153)
XXI. MISCELLANY
1.
Confirmation of Powers, Functions and Jurisdiction of the SEC (Sec. 179)
2.
SEC’s Mandate to Develop and Implement Electronic Filing and Monitoring System (Sec.
180)
SEE: Requirements on Corporations to Create and/or Designate E-mail Account Address and
Cellphone Number for Transactions with the SEC (SEC Memo No. 28-2020)
BSP and Insurance Commission Shall Exercise Primary Authority Over Special
Corporations Such as Banks, Nonbank Financial Institutions and Insurance Companies
under their Supervision and Regulation (Sec. 183)
Effect of Repeal of the Code: No Right or Remedy in Favor or Against Any Corporation, Its
Shareholders, Members, Directors, Trustees or Officers, Nor any Liability Incurred by Any
3.
4.
11
Johnlo Trading Co., v. Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta, 88 Phil. 750 (1951); Pacific Micronisian Line v. Del Rosario, 96 Phil. 23
(1954); Far East Int’l Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).
12
FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Int’l v. NLRC, 178 SCRA 569 (1989); Wang Laboratories v. Mendoza, 156 SCRA 44 (1987).
13
Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1(988).
70
Such Corporation, Shareholders, Members, Directors, Trustees or Officers, Shall be Removed
or Impaired Either by the Subsequent Amendment or Repeal of this Code or Any part Thereof.
(Sec. 184)
5.
Existing Corporation at Adoption of RCC: A corporation lawfully existing and doing
business in the Philippines affected by the new requirements of the Revised Corporation Code
shall be given a period of not more than two (2) years from its effectivity (23 February 2019)
within which to comply. (Sec. 185).
[ FINAL EXAMINATIONS: WEEKS 20 AND 21: JUNE 7 TO 16 ]
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