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2020
IES
- NCE ON
VISED
PORATION CODE
OF THE PHILIPPINES
2
2
EDITION
Timoteo B. Aquino
Maria Margaret Bernadette A. Aquino
Commentaries and Jurisprudence on
THE REVISED
CORPORATION CODE
OF THE PHILIPPINES
TIMOTEO 8. AQUINO
Professor of Law and Pre-Bar Review and MCLE Lecturer
LLB, San Beda College of Law (Valedictorian,Class 1988 and 8th Place,
1988 Bar Examinations)
Author and Co-Author: Reviewer on Civil Law, Reviewer on Commercial Law, Torts and
Damages, Revised Corporation Code A Short Introduction, Philippine Corporate Law
Compendium, Essentials of Insurance Law, Essentials of Credit Transactions and
Insolvency Law. Notes and Cases on Negotiable Instruments Law and Banking Law,
Essentials of Transportation and Public Utilities Law, Fundamentals of Banking
Law, Fundamentals of Negotiable Instruments Law, Fundamentals of Obligations and
Contracts, Revised Rules on Summary Procedure: Revisited, Handbook on Summary and
Small Claims Procedure and Bouncing Checks Law
MARIA MARGARET BERNADETTE A. AQUINO
A.B. Political Science, Silliman University (Summa Cum Laude)
LLB, Silliman University College of Law (Magna Cum Laude)
Former Assistant Vice President, Legal Department and International Banking Sector,
Philippine National Bank; Former Corporate Secretary, PNB General Insurers, Inc.;
Former Professor/Instructor, Arellano University Law Foundation, Silliman University
Graduate School and College of Arts and Sciences;
Co-Author, Revised Corporation Code A Short Introduction, Fundamentals of Banking
Law, Fundamentals of Negotiable Instruments Law,
Fundamentals of Obligations and Contracts
1i/EDITION
2020
� A.lblished & Distributed by
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Philippin
opyri ht
by
i��TEO B.
O
QlITNO
/
MARlA MARGARET�ADETTE A. AQUINO
For our children, Leona Isabelle, Lean Carlo, and
Lauren Margaret, our parents, Bernabe C. Aquino, Sr.,
Obdulia B. Aquino, Salvador B. Austria, and Amparo C.
Austria.
ISBN 978-621-04-0461-6
TIMOTEO B. AQUINO
No portion of this book may be copied or
reproduced in books, pamphlets, outlines or notes,
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ALL RIGHTS RESERVED
BY THE AUTHORS
0 01
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iii
PREFACE
The term "corporation" is derived from the Latin word "corpus"
which means body. A corporation is perceived to be a body of persons
that act as one entity. It is an investment device that is resorted to
when persons decide to organize and contribute funds and labor to
conduct business together as an enterprise. The corporate form, to­
gether with partnerships, is one of the most widely accepted business
organizations in this jurisdiction. Allan Hutchinson aptly observed
that we are living in the age of corpocracy. Based on the data posted
in the website of the Securities and Exchange Commission (SEC),
as of June, 2019, there are 1,038,644 companies that are registered
and/or licensed to do business in the Philippines, 675,865 of which
are active. In 2018 alone, 20,067 domestic corporations were regis­
tered with the SEC. The previous year, 2017, about 24,176 domestic
corporations were registered in the Philippines. The dominance of
the corporations in business and their consequent pivotal influence
on the economy makes the study of the regulatory norms on corpora­
tions one of the most important part of the study of law.
This work is an effort to contribute to the study of the regula­
tory norms by providing _notes and commentaries on the provisions
of the Revised Corporation Code of the Philippines (RCCP) as well
as on important jurisprudence, Securities and Exchange Commission
opinions and rules and securities regulations. The Introduction to
Part I is a discussion of the laws and jurisprudence on the different
types of business organizations while the rest of Part I are the notes
to the provisions of the Revised Corporation Code. Part II contains
a topical presentation of the basic concepts of securities regulations.
The additional rules brought about by the passage of the
Philippine Competition Act (Republic Act No. 10667) and the
Person�l Property Security Act (Republic Act No. 11057) are included
in the discussion. The 2015 Implementing Rules and Regulations of
the Securities Regulation Code (2015 IRR-SRC), the 11th Foreign
Invest-ment Negative List issued by the Office of the President, as
well as other relevant regulations issued by different government
agencies are likewise taken into consideration in the discussion.
iv
V
p cial thank ar du t M .
n abi r Ms. R ali
Tortosa-Dayao, Ms. Mary Ann Est ban, Mr. H inrick Rabara, Ms.
Lydia L. Buhain, Ms. Mirasol Lozano, and the rest of the staff of
Rex Book Store, Inc. for their patience and assistance in preparing
the manuscript.
The authors are also grateful for the continued inspiration and
support of their children Leona Isabelle, Lean Carlo, and Lauren
Margaret.
THE AUTHORS
Teresa, Rizal
CONTENTS
Preface
V
PART I
CORPORATIONS
Introduction to Business Organizations ................................
1. Types of Business Organizations...................................
2. Sole Proprietorship ............................................ .............
2.01. Business Name...................................................
2.02. Merchant;............................................................
2.03. Disqualifications Under the Constitution ........
3. Partnership......................................................................
4. Joint Accounts (Sociedad de Cuentas en
Participacion) ..........................................................
5. Business Trust.................................................................
6. Joint Venture...................................................................
7. Cooperatives ....................................................................
8. Syndicate .........................................................................
9. Homeowners' Associations..............................................
10. Unincorporated Associations..........................................
11. Corporations....................................................................
11.01. Core Features.....................................................
11.02. Advantages of Corporations..............................
11.03. Disadvantages of Corporations ...... :..................
11.04. Tax Treatment....................................................
11.05. Opinions Regarding the Corporate Form.........
11.06. Purposes of Corporate Law ...............................
11.07. Purpose of the RCCP .........................................
11.08. Good Governance under RCCP ........................
1
1
3
5
9
14
15
18
21
22
24
26
26
29
29
30
31
31
32
32
34
35
40
THE REVISED CORPORATION CODE OF THE PHILIPPINES
TITLE I - GENERAL PROVISIONS
Definitions and Classifications ...............................................
Sec. 1.
Title of the Code.....................................................
Sec. 2.
Corporation defined................................................
vi
vii
41
41
47
c.
Sec. 4.
Sec. 5.
Sec. 6.
Sec. 7.
Sec. 8.
Sec. 9.
la·
of o ·poration ..................................., .... ..
Corporation r ated by p cial Laws
or Charters ..............................................................
Corporators and Incorporators, Stockholders
and Members ......................................................... .
Classification of Shares ..........................................
Founders' Shares ....................................................
Redeemable Shares .....................................I...........
Treasury Shares .....................................................
134
134
149
152
168
169
174
TITLE II - INCORPORATION AND
ORGANIZATION OF PRIVATE
CORPORATIONS
Sec. 10.
Sec. 11.
Sec. 12.
Sec. 13.
Sec. 14.
Sec. 15.
Sec. 16.
Sec. 17.
Sec. 18.
Sec. 19.
Sec. 20.
Sec. 21.
Number and Qualifications of Incorporators........
Corporate Term ......................................................
Minimum Capital Stock Not Required of
Stock Corporations .................................................
Contents of the Articles of Incorporation .............
Forms of Articles of Incorporation ........................
Amendment of Articles of Incorporation ..............
Grounds When Articles of Incorporation or
Amendment May be Disapproved .........................
Corporate Name .....................................................
Registration, Incorporation, and
Commencement of Corporate Existence ...............
De facto Corporations.................................. :.: ........
Corporation by Estoppel ........................................
Effects of Non-Use of Corporate Charter
and Continuous Inoperation ..................................
181
187
194
197
199
228
234
238
· 261
265
270
276
Sec. 23.
Sec. 24.
Sec. 25.
Sec. 26.
Sec. 27.
The Board of Directors or Trustees of
a Corporation; Qualification and Term.................
Election of Directors or Trustees ..........................
Corporate Officers...................................................
Report of Election of Directors, Trustees
and Officers; Non-holding of Election and
Cessation from Office .............................................
Disqualification of Directors, Trustees
or Officers ................................................................
Removal of Directors or Trustees ..........................
viii
ec. 32.
ec. 33.
ec. 34.
acanci in th
ffi.c of Director or Trustee;
'l'rustee; Emergency Board ....................................
ompensation of Directors or Trustees ................
Liability of Directors, Trustees or Officers ...........
Dealings of Directors, Trustees or Officers
with the Corporation ............................................. .
Contracts Between Corporations with
Interlocking Directors ............................................
Disloyalty of a Director ..........................................
Executive, Management, and Other
Special Committees ................................................
374
381
385
404
410
413
421
TITLE IV - POWERS OF
CORPORATIONS
Sec. 35.
Sec. 36.
Sec. 37.
Sec. 38.
Sec. 39.
Sec. 40.
Sec. 41.
Sec. 42.
Sec. 43.
Sec. 44.
Corporate Powers and Capacity ............................
Power to Extend or Shorten Corporate
Term ..............................................................•.........
Power to Increase or Decrease Capital Stock;
Incur, Create or Increase Bonded
Indebtedness ...........................................................
Power to Deny Preemptive Right ..;.......................
Sale or Other Disposition of Assets ......................
Power to Acquire Own Shares...............................
Power to Invest Corporate Funds in Another
Corporation or Business or for Any
Other Purpose ........................................................
Power to Declare Dividends...................................
Power to Enter into Management Contract .........
Ultra Vires Acts of Corporations ...........................
426
449
452
465
472
485
489
495
516
519
TITLE V - BYLAWS
TITLE Ill - BOARD OF DIRECTORS/
TRUSTEES/OFFICERS
Sec. 22.
.2
281
325
335
364
367
370
Sec. 45.
Sec. 46.
Sec. 47.
Adoption of Bylaws................................:................
Contents of Bylaws .................................................
Amendments to Bylaws .........................................
526
527
537
TITLE VI - MEETINGS
Sec. 48.
Sec. 49.
Sec. 50.
Sec. 51.
Kinds of meetings ...................................................
Regular and Special Meetings of
Stockholders or Members.......................................
Place and Time of Meetings of Stockholders
or Members .............................................................
Quorum in Meetings ..............................................
ix
543
543
546
563
C. 62.
Sec. 53.
Sec. 54.
Sec. 55.
Sec. 56.
Sec. 57.
Sec. 58.
Regular and p cial M -ting of i ,.- tor
or Trustees; Quorum ..............................................
Who Shall Preside at Meetings .............................
Right to Vote of Secured Creditors and
Administrators........................................................
Voting in Case of Joint Ownership of Stock ........
Voting Right for Treasury Shares .........................
Manner of Voting; Proxies .....................................
Voting Trusts ..........................................................
?ff t f mand and T rminati n of Right ........
Wh n Right to Payment a e ............................
Who Bears Costs of Appraisal...............................
Notation on Certificates; Rights of Transferee ....
567
578
579
580
581
581
590
TITLE XI - NON-STOCK CORPORATIONS
Sec. 86.
Sec. 87.
Subscription Contract ...., .......................................
Pre-incorporation Subscription.......: ......................
Consideration for Stocks ....................................... .
Certificate of Stock and Transfer of Shares .........
Issuance of Stock Certificates ................................
Liability of Directors for Watered Stocks .............
Interest on Unpaid Subscriptions .........................
Payment of Balance of Subscription .....................
Delinquency Sale ....................................................
When Sale May be Questioned..............................
Court Action to Recover Unpaid Subscription .....
Effect of Delinquency .............................................
Rights of Unpaid Shares, Nondelinquent .............
Lost or Destroyed Certificates···················:···········
597
612
613
621
640
646
646
647
650
651
652
654
656
669
TITLE VIII - CORPORATE BOOKS
AND RECORDS
Sec. 73.
Sec. 74.
Books to be Kept; Stock Transfer Agent ..............
Right to Financial Statements ..............................
Plan or Merger of Consolidation ...........................
Stockholders' or Members' Approval.....................
Articles of Merger or Consolidation ......................
Effectivity of Merger or Consolidation..................
Effects of Merger or Consolidation........................
673
688
When the Right of Appraisal May Be Exercised ...
How Right is Exercised ..........................................
X
Sec. 88.
Sec. 89.
Sec. 90.
Right to Vote ...........................................................
Nontransferability of Membership ........................
Termination of Membership ..................................
741
743
744
Chapter II - TRUSTEES AND
OFFICERS
Sec. 91.
Sec. 92.
Sec. 93.
Sec. 94.
Sec. 95.
Sec. 96.
Sec. 97.
Sec. 98.
693
693
694
695
696
TITLE X - APPRAISAL RIGHT
Sec. 80.
Sec. 81.
731
731
Election and Term of Trustees ..............................
List of Members and Proxies, Place of Meetings...
Chapter Ill - DISTRIBUTION OF
ASSETS IN NONSTOCK
CORPORATIONS
Rules of Distribution ..............................................
Plan of Distribution of Assets ...............................
752
752
756
757
TITLE XII - CLOSE CORPORATIONS
TITLE IX - MERGER AND CONSOLIDATION
Sec. 75.
Sec. 76.
Sec. 77.
Sec. 78.
Sec. 79.
Definition.................................................................
Purposes ..................................................................
Chapter I - MEMBERS
TITLE VII - STOCKS AND STOCKHOLDERS
Sec. 59.
Sec. 60.
Sec. 61.
Sec. 62.
Sec. 63.
Sec. 64.
Sec. 65.
Sec. 66.
Sec. 67.
Sec. 68.
Sec. 69.
Sec. 70.
Sec. 71.
Sec. 72.
722
722
722
723
716
721
Sec. 99.
Sec. 100.
Sec. 101.
Sec. 102.
Sec. 103.
Sec. 104.
Definition and Applicability of Title .....................
Articles of Incorporation ........................................
Validity of Restrictions on Transfer of
Shares .................................................... ,.................
Effects of Issuance or Transfer of Stock in
Breach of Qualifying Conditions ...........................
Agreements by Stockholders .................................
When a Board Meeting is Unnecessary or
Improperly Held .....................................................
Preemptive Right in Close Corporations ..............
Amendment of Articles of Incorporation ..............
Deadlocks ................................................................
Withdrawal of Stockholder or Dissolution
of Corporation .........................................................
xi
760
765
766
767
768
772
774
774
774
775
TITLE XIV - DISSOLUTION
TITLE XIII - SPECIAL CORPORATIONS
Chapter I - EDUCATIONAL
CORPORATIONS
Sec. 105. Incorporation...........................................................
Sec. 106. Board of Trustees ...................................................
781
781
Chapter II - RELIGIOUS CORPORATIONS
Sec. 107. Classes of Religious Corporations ..........................
Sec. 108. Corporation Sole ......................................................
Sec. 109. Articles of Incorporation .........................................
Sec. 110. Submission of the Articles. of Incorporation ..........
Sec. 111. Acquisition and Alienation of Property..................
Sec. 112. Filling of Vacancies .................................................
Sec. 113. Dissolution................................................................
Sec. 114. Religious Societies ...................................................
789
789
789
790
791
791
792
792
Chapter Ill - ONE PERSON CORPORATIONS
Sec. 115. Applicability of Provisions to One Person
Corporations........................................................... .
Sec. 116. One Person Corporation.........................................
Sec. 117. Minimum Capital Stock Not Required for
One Person Corporation.........................................
Sec. 118. Articles of Incorporation ........................................
Sec. 119. Bylaws .......................................................... :..........
Sec. 120. Display of Corporate Name ...................................
Sec. 121. Single Stockholder as Director, President ............
Sec. 122. Treasurer, Corporate Secretary, and Other
Officers ...................................................................
Sec. 123. Special Functions of the Corporate Secretary......
Sec. 124. Nominee and Alternate Nominee ..........................
Sec. 125. Term of Nominee and Alternate Nominee ...........
Sec. 126. Change of Nominee or Alternate Nominee ..........
Sec. 127. Minutes Book ..........................................................
Sec. 128. Records in Lieu of Meetings ..................................
Sec. 129. Reportorial Requirements ......................................
Sec. 130. Liability of Single Shareholder .............................
Sec. 131. Conversion from an Ordinary Corporation
to a One Person Corporation ...............................
Sec. 132. Conversion from a One Person Corporation
to an Ordinary Stock Corporation .......................
Xll
799
799
801
802
802
802
807
807
808
810
810
811
812
812
812
814
815
815
, '". 133. M thod of Dissolution ..... ......................................
4. Voluntary Dissolution Where No Creditors
re Affected .............................................................
. 136. Voluntary Dissolution Where Creditors
are Affected; Procedure and Contents of
Petition ................................................................... .
• c. 136. Dissolution by Shortening Corporate Term .........
ec. 137. Withdrawal of Request and Petition
for Dissolution.........................................................
ec. 138. Involuntary Dissolution .........................................
Sec. 139. Corporate Liquidation ............................................
817
817
818
819
820
820
829
TITLE XV - FOREIGN CORPORATIONS
Sec. 140. Definition and Rights of Foreign
Corporations............................................................
Sec. 141. Application to Existing Foreign
Corporations................................................•••·•......•
Sec. 142. Application for a License .......................................
Sec. 143. Issuance of a License .............................................
Sec. 144. Who May be a Resident Agent ..............................
Sec. 145. Resident Agent; Service of Process .......................
Sec. 146. Law Applicable .......................................................
Sec. 147. Amendments to Articles oflncorporation
or Bylaws of Foreign Corporations .......................
Sec. 148. Amended License....................................................
Sec. 149. Merger or Consolidation Involving a
Foreign Corporation Licensed in the
Philippines ............................................................. .
Sec. 150. Doing Business Without a License .......................
Sec. 151. Revocation of License ........................... :.................
Sec. 152. Issuance of Certificate of Revocation ....................
Sec. 153. Withdrawal of Foreign Corporations ....................
861
861
861
863
880
880
882
882
883
883
885
894
895
896
TITLE XVI - INVESTIGATIONS, OFFENSES,
AND PENALTIES
Sec. 154. Investigation and Prosecution of Offenses ...........
Sec. 155. Administration of Oaths, Subpoena of
Witnesses and Documents ....................................
Sec. 156. Cease and Desists Orders ......................................
Sec. 157. Contempt ................................................................ .
xiii
897
897
897
898
ec. 15 . Admini tr ti
n .......................................
Sec. 159. Unauthorized
of orporation Nam ;
Penalties ..................................................................
Sec. 160. Violation of Disqualification Provision;
Penalties ..................................................................
Sec. 161. Violation of Duty to Maintain Records, to
Allow their Inspection or Reproduction;
Penalties ..................................................................
Sec. 162. Willful Certification of Incomplete,
Inaccurate, False, or Misleading
Statements or Reports; Penalties .......................
Sec. 163. Independent Auditor Collusion; Penalties ............
Sec. 164. Obtaining Corporate Registration Through
Fraud; Penalties .............. :......................................
Sec. 165. Fraudulent Conduct of Business; Penalties .........
Sec. 166. Acting as Intermediaries for Graft and
Corrupt Practices; Penalties ..................................
Sec. 167. Engaging Intermediaries for Graft and
Corrupt Practices; Penalties ..................................
Sec. 168. Tolerating Graft and Corrupt Practices;
Penalties ..................................................................
Sec. 169. Retaliation Against Whistleblowers......................
Sec. 170. Other Violations of the Code; Separate
Liability ...................................................................
Sec. 171. Liability of Directors, Trustess, Officers, or
Other Employees ....................................................
Sec. 172. Liability of Aiders and Abettors and Other
Secondary Liability.................................................
9
900
901
901
901
902
902
902
902
903
903
903
904
904
904
TITLE XVII - MISCELLANEOUS PROVISIONS
Sec. 173. Outstanding Capital Stock Defined ......................
Sec. 174. Designation of Governing Boards .........................
Sec. 175. Collection and Use of Registration,
Incorporation and Other Fees ...............................
Sec. 176. Stock Ownership in Corporations .........................
Sec. 177. Reportorial Requirements of Corporations ...........
Sec. 178. Visitorial Powers and Confidential Nature
of Examination Results ..........................................
Sec. 179. Powers, Functions, and Jurisdiction of the
Commission .............................................................
Sec. 180. Development and Implementation of
Electronic Filing and Monitoring System.............
xiv
913
913
913
913
914
915
916
918
Arbitration £ r
i-porut ons ................................ ..
Juri diction v r Party-Li t rganization ..........
Applicability of the Code........................................
Effect of Amendment or Repeal of This Code,
or the Dissolution of a Corporation.......................
Applicability to Existing Corporation ...................
Separability Clause ................................................
Repealing Clause ....................................................
Effectivity ................................................................
928
930
930
931
931
931
931
931
PART II
SECURITIES REGULATION CODE:
NOTES ON SECURITIES REGULATION
1. Governing Law ................................................................
1.01. Aspects of Regulation ...........................................
2. Definition of Securities ...................................................
3. Kinds of Securities ..........................................................
3.01. Equity and Debt Securities ..............................
3.02. Debt Securities/Instruments ........................... .
3.03. Investment Contracts .......................................
3.04. Derivatives .........................................................
3.05. Commodity Futures Contracts .........................
3.06. Fractional Shares in Oil, Gas, and
Mineral Rights .................................................
3.07. Other Instruments ............................................
3.08. Pre-Need Contracts ...........................................
4. Mandatory Disclosure .............................................
4.01. Test of Materiality ............................................
5. Registration of Securities ...............................................
5.01. Exempt Securities ........................................ :....
5.02. Exempt Transactions ........................................
6. Securitization ..................................................................
7. Revocation and/or Rejection of the Registration
of Securities .....................................................................
8. Person Involved in the Issuance and
Distribution ....................................................................
8.01. Underwriting ......................................................
9. Securities Market ............................................................
10. Regulation of Securities Market ....................................
10.01. Manipulation of Security Prices....................... .
10.02. "Put," "Call," and "Straddle." ............................
10.03. Unlawful Practices in Purchase and
Sale of Securities ...............................................
xv
932
933
934
935
935
935
936
947
948
948
949
949
949
950
951
953
955
958
960
961
961
962
962
962
964
964
ho:rt 'ul s .................................................................... .
11.01. Mandatory lo ed ut ··················-··················
12. Insider Trading Rules ....... _ .................._ ..........................
12.01. Duties of an Insider ···········································
12.02. Presumption ......................................................
12.03. Material Non-Public Information
12.04. Short Swing Profits ...........................................
13. Tender Offer
13.01. Filing of a Declaration ......................................
13.02. When tender offer is mandatory ......................
13.03. When not required to make tender offer..........
13.04. Exempt from Mandatory Tender Offer
Requirement ......................................................
13.05. How to Make Tender· Offer ······························
13.06. Beachhead Acquisition .....................................
13.07. Defenses .............................................................
13.08. Direct and Indirect Acquisition .......................
14. Margin Trading ...............................................................
14.01. Prohibitions .......................................................
14.02. Mandatory Close-out Rule ································
1.
0
964
964
965
966
966
966
970
972
973
973
974
974
975
975
975
976
976
978
979
APPENDICES
Appendix A. Securities Regulation Code
(Republic Act No. 8799) .....................................
Appendix B. Foreign Investments Act of 1991
(Republic Act No. 7042) .....................................
Appendix C. SEC Reorganization Act
(Presidential Decree No. 902-A) ........................
Appendix D. 2009 Code of Corporate Governance ................
980
1038
1046
1051
PART I
CORPORATIONS
INTRODUCTION TO BUSINESS
ORGANIZATIONS
"Every system of law that has attained a certain degree of
maturity seems compelled by the everlasting complexity of human
affairs to create persons who are not men, or rather to recognize that
such persons have come and are coming into existence, and to regulate
their rights and duties. ''I There is now a proliferation of business
organizations with their own form and substance, advantages and
disadvantages, and pertinent rules.
If a person wants to engage in business, he must resolve the
threshold problem of choosing the form of business organization
that he will use in his undertaking. His lawyer will be confronted
with a situation where he will present alternative business forms
and recommend what vehicle best suits his client.
This introduction presents the basic types of business
organizations. It is believed that by presenting the basic laws and
jurisprudence on the different types of business organizations, one
can arrive at a better understanding of the statutory rules and
jurisprudence on the corporate form.
1. Types of Business Organizations. The basic types
of business organizations that are available in the country are
the following: (1) Sole Proprietorship, (2) Partnerships, (3) Joint
Accounts or Cuentas en Participacion, (4) Business Trusts, (5) Joint
Venture, (6) Cooperative, (7) Syndicate, and (8) Corporations.
Pollock and Maitland, The History of English Law Before the Time of Edward L
2nd Ed., 1952, p. 486.
1
xvi
1
' MMENT.
TH• R•
l p
Tl
PIN
a.
When the Philippines was still under Spain, the Code of
· Commerce governed business organizations. The Code of Commerce
provided for different business organizations including: (1) sociedad
en comandita (limited partnership), (2) sociedad regular colectiva
(general partnership), (3) sociedad anonima, and (4) sociedad de
cuentas en participacion (joint accounts). The Code of Commerce
provisions on sociedad en comandita and sociedad regular colectiva
were repealed by the New Civil Code while the provisions on
sociedad anonima were earlier repealed by Section 191 of the Old
Corporation Law or Act No. 1459._ Only the provisions on sociedad
de c_uentas en participacion or joint accounts remain in our statute
books.
b.
The business organization under the Spanish regime
that is an approximation and has an affinity with, but is not exactly
the same as a corporation, is sociedad anonima. 2 For instance, the
limited liability rule was, to a certain extent, applicable to sociedad
anonima. As mentioned earlier, the Corporation Law abrogated the
rules allowing the creation of sociedad anonima. Those that were
already in existence at the time of the enactment of the Corporation
Law were allowed to formally organize into corporations or to
continue as such. The purpose of the Philippine Commission3
in repealing this part of the Code of Commerce was to compel
commercial entities thereafter organized to incorporate under the
Corporation Law, unless they should prefer to adopt some form of
partnership. 4
c.
The Corporation Law likewise contains a provision to the
effect that existing sociedades anonimas, which elected to continue
their business as such, instead of reforming and reorganizing under
the Corporation Law, should continue to be governed by the laws that
were in force prior to the passage of Act No. 1459 "in relation to their
organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the
public and public officials shall be governed by the provisions" of the
Corporation Law. 5 In other words, the sociedad anonimas, which
opted to continue as such, were already governed by the Corporation
2
Harden v. Benguet Consolidated Mining Co., G.R. No. L-37331, March 18,
1933, 58 Phil. 145.
3The law-making body in the Philippines at that time.
4
Harden v. Benguet Consolidated Mining Co., supra.
Ibid.
5
lid 'Pl- ' R
Ll'\l1·orlu ·ti n t lJusin
tat . For instance, a sociedad
n 1 n r allow d to xt nd its term because extension
n t 11 w d under the Corporation Law.6
Proprietorship. This is a for� of _ b�s�ness
ol
n with only one proprietary owner; a smgle mdividual
bu in - under his own name or under a business name. It
n id that the specialists of primitive society were the first
t p i rs. A sole proprietorship is _the ol�est, sim_Plest, �n�
7
r val nt form of business enterpnse. With the mc�easmg
1 , ·ty of everyday life came more specialists. As t�e busmess of
• . cialists/proprietors became more complex so did the form of
bu iness enterprise. 8
A sole proprietorship may be the only choice f�r certain
_ .
nerating undertakings because there are activities that
n t open to a corporate form. For instan�e, generally, the
Ill' ·t·
of profession cannot be undertaken usmg the corporate
_
ht 1 . Thus, lawyers, and doctors, cannot form a corporation for
· h purpose of practicing their respective professions.9
a.
b.
A sole proprietorship is neither a creature of statute n�r of
ntra.ct; hence, it involves none of the compl�xity or expense req�ire�
r bu, iness associations such as corporations and partner�hips.
Th r portorial requirements imposed on �orpora_tions and registered
artn rships do not apply to a sole proprietorship.
c.
In effect, a single proprietorship is an unorganized
bu iness owned by a person. The sole proprietor m�nages and
rcises complete control over the conduct of his busmess. Only
hi or his agent's acts may bind the business. He is the only one to
6See Benguet Consolidated Mining Co. v. Pineda, G.R. No. L-7231_ , Mar�h �8,
1956, 98 Phil. 711; See SEC Opinion, June 22, 1995 referrin_g to the M_anila Bu1ldmg
and Loan Association which was allegedly a �ociedad m1:omma organized under _the
ode of Commerce thereby showing that sociedad anonima as a b�smess organiza­
tion survived the repeal of the old Corporation Law by the Corporat10n Code.
7Excellent Quality Apparel, Inc. v. Win Multi Rich Builders, Inc., G.R. No.
175058, February 10, 2009.
BHarold Gill Reuschlein and William Gregory, Handbook on the Law of
Agency and Partnership, 1979 Ed., p. 235, hereinafter referred to as "Reucshlein and
Gregory."
.
.
9See Annotations in Section 35 concerning the exception with respect to
architects and other professions.
10Reucshlein and Gregory, p. 238.
MMENTARifi,
DJ RI
RP RATI N
THE REVI ED
OF THE PHILIPPINES
PAR'l' Introdu tion to u fo
N
share in the profits. The individual proprietor is the only one who is
_
personally liable for business debts.11
A so!e proprietorship has no legal personality separate
�fro� �ts proprietor or owner of the enterprise.12 The owner has
unhmit �d person�! !iabili!y for all the debts and obligations of
the busmes , a d it is agamst him or her that a judgment against
� �
the ei:iterpri e is to be enforced. 13 Under the same prin ciple, a sole
�
proprietorship has no legal personality to file or defend an action in
co�rt separate from the proprietor. The law merely recognizes the
existence of a sole proprietorship as a form of business organization
conducted for pro�t by a single individual and requires its proprietor
owner to secure licenses and permits, register its business name
and pay taxes to �he national government. The law does not vest �
separate personality on the sole proprietorship or empower it to file
or defen d an action in court apart from the proprietor.14
e.
No mally, the only available methods of obtaining
�
funds for a smgle proprietorship are personal contributions of the
_
proprietor and loans from financial institutions or private sources.
Neverthel�ss, the propr�etor's a?ility to borrow money is limited by
t�e potenti�l of the busmess, his credit standing and the extent of
his properties that may serve as collateral. 1s
f.
A sol� proprietorship is totally dependent upon the
.
hfe of the prop�ietor.16 Upon the proprietor's death or disability,
.
busm�ss operat10ns may cease. He will have to rely on his heirs or
othe mtereste� persons in order to ensure that his business will
�
�ontm_ue afte� his death. However, if the goodwill of the business is
me�tricably l�nked to the proprietor, the business will wither and
perish upon his death.
11 xcellent Quality Apparel, I;.c. v. Win Multi Rich Builders, Inc., supra·
�
Reucshlem and Gr�gory, P- 239; John E. Moye, The Law of Business Organization/'
4th Ed p. 17, heremafter referred to as "Moye, p. 17."
;; PS Transportation v. Rodriguez, G.R. No. 186732, June 13, 20l3.
13�
bid.; Fernandez v. Anifion, G.R. No. 138967, April 24, 2007.
1/
Mendez v: People, G.R. No. 179962, June 11, 2014· Ejercito et al v M.R
Vargas Construct10n, et al., G.R. No. 172595, April 10, 2008; Mangila v. ·c;urt of
Appeals, G.R. No. 125027, August 12, 2002, 435 Phil. 870, 886 (2002)·' Juasing
Hardware v. Hon. Mendoza, et al., 201 Phil. 369 (1982).
15Moye, p. 17.
16Reucshlein and Gregory, p. 241.
5
of one
Th r gistration of the trade name in the name
on
clusi
n
co
the
to
lead
ly
J r n - woman - does not necessari
n
whe
ly
cular
parti
ne,
o
al
hat th tradename as a property is hers
the
g
n
duri
ired
acqu
s
ertie
prop
· h woman is married. By law, all
have been made,
I arriage, whether the acquisition appears to
both spouses, is
r
o
e
n
o
f
o
ame
n
ntracted or registered in the
lished.17
estab
is
rary
nt
co
he
t
s
pt urned to be conjugal unles
treats sole
h. There are instances, however, where the law
m natural
o
fr
rate
proprietorships as organizations that are sepa
ise known
herw
ot
2
1014
p rsons. For example, under Republic Act No.
(FRIA),
2010
of
Act
cy
n
a the Financial Rehabilitation and Insolve
with
ered
t
regis
duly
p
th term debtor refers to a sole proprietorshi
duly
ip
ersh
tn
par
a
),
(DTI
ry
the Department of Trade and Indust
),
(SEC
n
issio
Comm
ange
Exch
r gistered with the Securities and
,
laws
ppine
Phili
der
n
u
g
n
i
t
exis
a corporation duly organized and
18
n
itio
n
defi
The
t.
n
lve
o
s
n
i
me
o
r an individual debtor who has bec
ately from a sole
indicates that an individual debtor is treated separ
n file a petition
ca
or
debt
l
idua
indiv
proprietorship. Thus, only an
torship is not given
for suspension of payments while a sole proprie
file a petition for
such right. However, only a sole proprietorship can
file such petition.
rehabilitation while an individual debtor cannot
do business
2.01. Business Name. A single pro prietor may
another
der
n
u
ess
busin
g
under a business name. However, doin
ting
opera
on
pers
he
t
m
o
fr
ct
name does not create an entity distin
r
rieto
prop
le
o
s
a
as
ess
n
busi
the business. The individual who does
er
his/h
for
liable
ally
n
perso
s
n
under one or several names remai
19
obligations.
a.
A "Business Name" refers to any name that is different
from the true name of an individual which is used or signed in
connection with her/his business on any written or printed receipts
including receipts for business taxes, duties and fees and withdrawal
or delivery receipts; any written or prin ted evidence of any agreement
or business t ransaction; and any billboard conspicuously exhibited
in plain view in or at the place of her/his business or elsewhere,
announcing her/his business.20
17Navarro v. Hon. Escobido, G.R. No. 153788, November 27, 2009.
Section 3, FRIA.
19Duval v. Midwest Auto City, Inc., 425 SCRA F.Supp. 1381 (D.Neb. 1977).
20Section 4.4, DTI Department Order No. 10-01, Series of 2010, as amended
18
by Department Order No. 10-03, Series of 2010 and Department Order No. 10-08,
Series of 2010.
MM
TH
rI N
E N
.NES
b.
When a proprietor uses another name (other than his/her
true name) as a busi ness name, he/she is req uired to register his/
her business name, firm name or style with the Bureau of Trade
Regulation and Consumer Protection of the Department of Trade
and Industry pursuant to Section 1 of Act No. 3883 otherwise known
as the ''Business Name Law."The law provides :
SECTION 1. It shall be unlawful for any person to
use or sign, on any written or printed receipt, including
receipt for tax on business, or on any written or
printed contract not verified by a Notary Public, or on
any written or printed evidence of any agreement or
business transactions, any name used in connection
with his business other than his true name, or keep
conspicuously exhibited in plain view in or at the place
where his business is concluded, if he is engaged in a
business, any sign announcing a firm name or business
name or style, without first registering such other name,
or such firm name, or business name, or style, in the
Bureau of Commerce (now Department of Trade and
Industry) together with his true name and that of any
other person having a joint or common interest with him
in such contract, agreement, business transaction, or
business. (As amended by Act No. 4147.)
· SECTION 2. The Director of Commerce (now
Secretary of Trade and Industry) shall collect a
registration fee of ten pesos for each name registered,
renewable every five years, such renewal to be made
during the first three months following the expiration of
the five-year period from the date of original registration.
The fee for each renewal registration shall also be
ten pesos if renewed within the said three months,
otherwise a surcharge of fifty percent shall be added in
case of delinquency.
It shall be the duty of the Director of Commerce
(now Secretary of Trade and Industry) to satisfy himself,
before effecting any original or renewal registration,
concerning the identity and citizenship of the person
or persons for whose registration is to be made under
PART IRP RATI N
Intl' ducti n t Busin
rganizations
7
n shall be made in
this Act. Hereafter, renewal registratio
Act. (As amended
accordance with the provisions of this
by Rep. Act No. 863.)
SECTION 3. The Director of the Bureau of Com­
merce and Industry (now Secretary of Trade and
Industry) shall from time to time make such rules and
regulations as he may deem necessary for the efficient
execution of the provisions of this Act.
the provisions
SECTION 4. Any person violating
deemed guilty of a
of Section One of this Act shall be
ion thereof shall be
misdemeanor, and upon convict
not more than two
fined not less than fifty pesos and
less than twenty
hundred pesos, or imprisoned not
nths, or both, in the
days and not more than three mo
discretion of the court.
effect upon its
SECTION 5. This Act shall take
approval.
ister his/her busin�ss
A proprietor who does not reg
c.
3883 is subj ect to the followmg
name as required under Act No.
prohibitions:
the bu_siness na�e in
(1) He/she cannot use or sign
on any written or prmted
connection with his/her business
nt' or other documents ; and
receipts or any evidence of agreeme
business name or sign
(2) He/she cannot exhibit the
thereof in plain view.
inistrative Order No. 18-07,
d. Rule IV of Department Adm
2018 issued by t_he Depart�ent
Series of 2018 dated August 13,
vised Rules and Regulations
of Trade and Industry (DTI) ("Re
s that a Business �ame _(BN)
Implementing Act No. 3883) stat�
ticular order) of _ the_ Dommant
should be comprised (in no par
words or a combmation ofletters
Portion" which is a word or group of
" which is a word or ��up_ of
and numerals and the "Descriptor
business based on the Ph1hppm�
words describing the nature of the
8
MM l 'l'ARI
THE REVI
I
J l p
· P RAT
OF THE PHILIPPIN
Standard Industrial Classification (PSIC). 21 Section 3 of the same
Rule IV provides that the following words/group of words shall not
be registered as BN:
(1) Those that connote activities or norms that are
unlawful, immoral, scandalous or contrary to propriety;
(2) Those names, words, terms or expressions used to
designate or distinguish, or suggestive of quality, of any class
of goods, articles, merchandise, products or services;
(3) Those that are registered as trade names,
trademarks, or business names by any government agency
authorized to register names or trademarks;
(4)
State;
Those that are inimical to the security of the
(5)
words;
Those that are composed purely of generic word or
(6) Those that by law or regulation are restricted or
cannot be appropriated;
(7) Those that are officially used by the government in
its non-proprietary functions;
.(8) Those names or abbreviations of any nation, intergovernmental or international organization unless authorized
by competent authority of that nation, inter-government or
international organization;
(9) Those ordered or declared by administrative
agencies/bodies or regular court not to be registered;
(10) Those names of other persons; and
(11) Those names which are deceptive, misleading or
which misrepresent the nature of the business. 22
e.
Paragraph 4 of SEC Memorandum Circular No. 13,
Series of 2019 dated June 21, 2019 entitled "Amended Guidelines
and Procedures on the Use of Corporate and Partnership Names"
21Section 2, Rule IV of Department Administrative Order (A.O.) No. 18-07,
Series of 2018 dated August 13, 2018. (Note that under Rule V of the same A.O., the
registration is geographical and is subject to territorial scope.)
22Section 3 (3.1 to 3.11), Rule IV of Department A.O. No. 18-07, Series of 2018
dated August 13, 2018.
P
TI-
RATl
I 1� 'odu ti n to Busin ss rganization
9
'bu in
r trade name which is different from the
artn r hip na,me shall be indicated in the articles of
r p rtner9hip." It is further provided therein �?at
may have more than one business or trade name. If,
h·i · ', a orporation has no business name, its corporate name is
11 pr t t d under the law.
f.
It hould also be noted that a DTI Certificate of Business
N m mu t be submitted to the Bureau of Internal Revenue (BIR).
b �- , th latter can issue a certificate of registration. 23
,
The use of the DTI-issued Certificate of Business Name
n, 1 tra.tion by any person other than the registered owner for
what -v -r purpose is prohibited.24 The Certificate is valid for a per�od
_
£:flv y ars from the date of the issuance of ther�of. 25 T�e r�gi�trat10n
- renewed within 90 calendar days after its exp1rat10n (called
ru a, filing). 26 The registration shall be automatically cancelled
· h registrant fails to file an application for renewal within the
t 0-calendar day grace period from the time of expiration of the
iod for regular filing. 27
2.02. Merchant. The Code of Commerce provides for rules
1 1 m rchants. Although the concept of merchant is now rendered
b ol te by provisions of other laws that provide for different
qualifications and requirements for engaging in commerce, it is
important to note that such term is still referred to in the Code of
mmerce provisions that are still in force. 28 For instance, the Code
f mmerce provisions on Joint Accounts that are still in force use
Ll term merchant.
a.
The pertinent provisions of the Code of Commerce on
M rchants are Articles 1 to 4, 8, 13, and 15 of the Code of Commerce.
The New Civil Code and other pertinent laws have already repealed
. ticles 6, 7, 9, 10, 11, and 12 of the Code. Article 5 of the Code
23BIR Form 1901.
24Section 5, Rule VIII of Department Administrative Order No. 18'-07, Series
of2018
26Section 3, Rule VIII of Department Administrative Order No. 18-07, Series
f2018.
26Sections 2, Rule VII of Department Administrative Order No. 18-07, Series
of 2018.
27
Section 3, Rule VII and Section 1.3.1, Rule IX of Department Administrative
rder No. 18-07, Series of 2018.
28
Jose R. Sundiang and Timoteo B. Aquino, Reviewer on Commercial Law,
2019 Ed., hereinafter referred to as "Sundiang and Aquino."
MM •NTARl I
J RI PR
RP RATI N
TH• R•VI ED
OF THE PHILIPPINES
N
of Commerce with respect to the capacity of minors and Article 6
that provides for rules on married women are also modified by the
provisions of the Family Code. The provisions that are still in force
state as follows:
Art. 1. For purposes of this Code, merchants are:
1.
Those who, having legal capacity to engage
in commerce, habitually devote themselves to it;
2.
The commercial or industrial companies
which may be created in accordance with [this Code]
existing legislation.
11
Art. 2. Acts of commerce, whether those who
execute them be merchants or not, and whether
specified in this Code or not, should be governed by
the provisions contained in it, in their absence, by the
usages of commerce generally observed in each place;
and in the absence of both rules, by those of the civil
law.
Those acts contained in this Code and all others of
analogous character shall be deemed acts of commerce.
Art. 3. The legal presymption of habitually engaging
in commerce shall exist from the moment the person who
intends to engage therein announces through circulars,
newspapers, handbills, posters exhibited to the public,
or in any other manner whatsoever, an establishment
which has for its object some commercial operation.
Art. 4. Persons who possess the following
qualifications shall have legal capacity to habitually
engage in commerce:
1.
years.
Having completed the age of twenty-one
2.
Not being subject to the authority of the father
or of the mother nor to marital authority.
3.
Having the free disposition of their property.
P 'l'IRP RATl N
lntr d'U Li n t Busin s rganization
11
Art. 13. The following may not engage in commerce
nor hold office or have any direct administrative or
'flnancial intervention in commercial or industrial
_ Otnpanies:
1.
Those sentenced to the penalty of civil
11terdiction, while they have not served their sentence
or have not been amnestied or pardoned.
2.
Those declared bankrupt, while they have not
obtained their discharge or have not been authorized, by
virtue of an agreement accepted at a general meeting of
creditors and approved by judicial authority, to continue
at the head of the establishment, the authority being
understood in such case as limited to that expressed in
the agreement.
3.
Those who on account of special laws or
provisions can not trade.
Art. 15. Foreigners and companies created abroad
may engage in commerce in the Philippines, subject to
the laws of their country with respect to their capacity to
contract, and to the provisions of this Code as regard the
creation of their establishments in Philippine territory,
their mercantile operations, and the jurisdiction of the
courts of the nation.
The provisions of the article shall be understood
to be without prejudice to what, in particular cases, may
be established by treaties or agreements with other
powers.
b.
Article 14 of the Code of Commerce enumerates the
persons who are subject to relative disqualification. Article 14
provides:
Art. 14. The following cannot engage in the
mercantile profession, in person or through another, nor
hold office or have any direct administrative or financial
intervention in commercial or industrial associations,
within the limits of the districts, provinces or towns in
which they discharg_e their duties:
MMf�N·r
trn
TH'• REVI
I
OF THE PHILIPPINES
N
1.
Justices, judges and officials of the fiscals'
office in active service.
This provision shall not be applicable to the
municipal mayors, judges and prosecuting attorneys,
nor to those who may temporarily discharge judicial or
prosecution duties.
2.
Administrative, economic or military heads of
districts, provinces, or posts.
3.
Those employed in the collection and
administration of funds of the State, appointed by the
Government.
Those who administer and collect under contract
and their representative are excepted.
I
4.
Stock and commercial brokers of whatever
class they may be.
I
5.
Those who, under special laws and provisions
· '
cannot trade in specified territory.
c.
Legal writers still cite the above-quoted Article 14 of the
C�de of Commerce as one of the provisions of the said law that is
_
still i? �orce. 1:fowever, it is believed that Article 14 is no longer in
_
force m its entirety. In Macarwla v. Asuncion, 29 [the Court] held that
_
Artic�e 14 of the Code of Commerce is in the nature of political law
_
and smce it was extended to this country by Spain, it was necessarily
abrogated upon the change of sovereignty from Spain to the United
St�tes. Nevertheless, the Supreme Court admonished a judge in the
said case �ho had been found to have been engaged in business to
be more discreet in his private and business activities because his
conduct �s a member of the Judiciary must not only be characterized
by propriety but must always be above suspicion.
(1) The Supreme Court likewise explained in Berin v.
Barte, 30 that Rule 5.02 of the Code of Judicial Conduct, which
took effect on October 20, 1989, supplies the void left by the
29A.M. No. 133-J, May 31, 1982, 114 SCRA 77.
30A.M. No. MTJ-02-1443, July 31, 2002.
1 AR'l' 1- ' RP RA'rI .N
rganiz.ati ns
ntr du ti n to Busin
13
a i n of Articl 14 of the Spanish Code of Commerce.
.02 provides that a judge shall refrain from financial and
bu ·n
dealings that tend to reflect adversely on the court's
·mp rtiality, interfere with the proper performance of judicial
a tivities, or increase involvement with lawyers or persons likely
t come before the court. A judge should manage investments
and other financial interests as to minimize the number of cases
giving grounds for disqualification. Nevertheless, under Rule
.03, a judge may hold and manage investments but should·
not serve as an officer, director, manager, advisor, or employee
of any business except as director of a family business of the
judge.
(2) While it may be true that Macariola v. Asuncion31
and Berin v. Barte32 involve only the relative disqualification of
judges, it is believed that all other disqualifications in Article
14 are no longer in force because it is Article 14 itself, which is
in the nature of political law, that was abrogated. As explained
in Macariola v. Asuncion, 33 "upon the transfer of sovereignty
from Spain to the United States and later on from the United
States to the Republic of the Philippines, Article 14 of this Code
of Commerce must be deemed to have been abrogated because
where there is change of sovereignty, the political laws of the
former sovereign, whether compatible or not with those of the
new sovereign, are automatically abrogated, unless they are
expressly re-enacted by affirmative act of the new sovereign."
Nevertheless, in relation to judges, Berin v. Barte 34 states that
Rule 5.02 of the Code of Judicial Conduct supplies the void left
by the abrogation of Article 14.
(3) With respect to other government officers, the void
left by the abrogation of Article 14 is filled by Republic Act
No. 3019, as amended, otherwise known as the ''Anti-Graft and
Corrupt Practices Act"35 and Republic Act No. 6713, otherwise
known as "Conduct and Ethical Standards for Public Official
and Employees." 36
31Supra.
32Supra.
33Supra.
34Supra.
35See Section 3(b) and (c), Republic Act No. 3019.
36See Section 7(a) and (b), Republic Act No. 6713.
14
MM • TARIE A"
J I I PR DE
THE R •VI E
RP RATI N
OF THE PHILIPPINES
E N
E
2.03. Disqualifications Under the Constitution. The
Constitution prohibits a number of government officers from
engaging in business or profession, from entering into certain
contracts or being financially interested in specified transactions.
These persons and their disqualifications are as follows:
(1) Senators and Congressmen are enjoined not to be
directly or indirectly, interested financially in any contract
with, or in any franchise or special privilege granted by the
Government during his term of office. He shall not intervene
in any matter before any office of the Government for his
pecuniary benefit or where he may be called upon to act on his
office.37
(2) The President, Vice-President, Members of the
cabinet, and their deputies or assistants are prohibited, during
their tenure, from practicing any profession, participate in any
business, be financially interested in any contract or franchise
granted by the Government. They are also required to avoid
conflict of interest in the conduct of their office.38
PAR.TI-
(5) The practice of profession is limited to Filipino
citizens, save in cases prescribed by law. 41 The Eleventh
Foreign Negative List (Executive Order No. 65, Series of 2018)
recognizes that foreigners are now allowed by different laws to
practice a number of professions.
Section 14, Article VI, Constitution.
Section 13, Article VII, ibid.
39
Section 2, Article IX, ibid.
40
Section 16, Article XI, ibid.
41Section 14, Article XII, ibid.
37
38
A'l'I N
15
Pit fiLEM :
I,
J,
Wh ar m rchants for the purposes of the Code of Commerce?
A:
M rchants under the Code of Commerce are (1) natural persons,
those who, having legal capacity to engage in commerce,
habitually devote themselves to it and (2) partnerships and
corporations organized under existing laws and who are
considered merchants from the time they are registered with
the Securities and Exchange Commission. (1967 Bar)
Q:
A has three cars. He sells one to B; mortgages the second to C;
and the third he delivers to D for sale to other persons. (1) Is A
a merchant? Reason out your answers.
A:
No, A is not a merchant. The Code of Commerce requires
habituality for a natural person to be considered a merchant.
The same element does not appear in the problem. Disposal
of the three cars that A owned does not indicate a desire to
habitually engage in the business. (1967 Bar)
Q:
Lita, 26 years old, wife of Jimmy, wants to put up a betamax
rental outlet with a capital of P200,000.00, using the name
"Genta Beta ni Lita." a. May Lita lawfully engage in commerce
and put up a betamax outlet? Can Jimmy object?
(3) Members of the Constitutional Commissions are
not allowed to engage in the practice of any profession or
active management of any business that may be affected by
the functions of his office. They are also not allowed to be
financially interested with any contract or franchise with the
Government. 39
(4) The President, Vice-President, Members of the
Cabinet, Congress, Supreme Court and the Constitutional
Commissions, Ombudsman are prohibited during their tenure
from obtaining any loan, guaranty, or other form of financial
accommodation for any business purpose from any government­
owned or controlled bank. 40
RP
Ii t du ti n t Busin ss rganizations
b.
Because most of Lita's customers were her friends
and relatives and did not pay rentals for the betamax tapes,
the business failed and resulted in losses. If Jimmy opposed
the business ventures, what properties shall answer for Lita's
obligations?
A:
a. Yes, Lita may lawfully engage in commerce and put up a
betamax outlet. Article 73 of the Family Code allows either
spouse to exercise any legitimate business or activity without
the consent of the other. If the wife intends to engage in
business, the husband may object only on valid, serious, and
moral grounds.
b.
The properties of the community property shall
answer for obligations that accrued before the objection was
made by Jimmy. However, obligations accruing thereafter shall
be borne by the separate property of Lita (Art. 73, Family Code).
(1988 Bar)
Partnership. Under the Civil Code, there is a partnership
3.
when two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of_
dividing the profits among themselves. 42 The partnership exists even
42Article 1767, New Civil Code, hereinafter referred to as "NCC."
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· if the partners do not use the word "partnership" and "partners. "43
The elements of the contract are as follows:
(1) Two or more persons bound themselves to contribute
money, property, or industry to a common fund; and
(2)
They intend to divide the profits among themselves.4•
Registration with the Securities and Exchange
a.
�ommission (SEC) is necessary where the capital of the partnership
1s P3,000.00 or more.45 However, the juridical personality still exists
even if not registered with the SEC. Mere failure to register with the
SEC does not invalidate a contract that has all essential requisites
of a partnership. The purpose of registration is to give notice to third
parties. Failure to register the contract does not affect the liability of
the partnership and of the partners to third persons. 46
The basic requirements for the registration of a
b.
partnership with the SEC are as follows: (1) Name verification slip;
_
(2) Articles of Partnership; and (3) Affidavit of a partner undertaking
to change the partnership name if the name already belongs to
another person or entity.
(1) The partnership name shall bear the word
"Company" or "Co." and if it is a limited partnership, the word
"Limited" or "Ltd." A professional partnership name may bear
the word "Company," "Associates," or "Partners," or other
similar descriptions. 47
(2) Additionally, partnerships may be required to secure
an endorsement or clearance from other government agencies
like the Insurance Commission, if applicable. Foreign partners
must submit a bank certificate on the capital contribution of
the partners.
43Angeles v. Secretary of Justice, G.R. No. 142612, July 29, 2005, 465 SCRA
106, 115.
44
Heirs of Tan Eng Kee v. Court of Appeals, G.R. No. 126881, October 3, 2000
341 SCRA 740, 752.
45
Article 1772, NCC.
46Angeles v. Secretary of Justice, supra.
47
Paragraph l(c), SEC Memorandum Circular No. 13 Series of 2019 dated June
21, 2019 entitled "Amended Guidelines and Procedures on the Use of Corporate and
Partnership Names"; Paragraph l(a), SEC Memorandum Circular No. 14, Series of
2017 dated December 8, 2017; SEC Memorandum Circular No. 21, Series of 2013
dated December 4, 2013; Memorandum Circular No. 5, Series of 2008.
U · wi
A partn r hip may be distinguished from a corporation in
·'8
(1) As to manner of creation - Partnership is created
by mere agreement while the existence of the corporation
commences only from the issuance of a Certificate of
Incorporation by the SEC or in proper cases, passage of a
special law.
(2) As to the number of organizers -Two or more persons·
may form a partnership while in the case of a corporation, a
single person may form a corporation (called a One Person
Corporation under Republic Act No. 11232 or the Revised
Corporation Code of the Philippines [RCCP]). Note: The
requirement under Batas Pambansa Blg. 68 (the Corporation
Code of the Philippines) that there be at least five incorporators
to form a corporation was deleted under the RCCP.
(3) As to powers - A corporation is more restricted in its
powers because of its limited personality while a partnership is
subject only to such limitations as may be agreed upon by the
partners.
( 4) Authority of those who compose - There is mutual
agency in partnership and each general partner can represent
and bind the partnership while stockholders are not agents of
the corporation in the absence of express authority.
(5) Transfer of interest - Corporate shares are freely
transferable without the consent of other stockholders (unless
there is a stipulation) while interest in the partnership cannot
be transferred without the consent of the other partners.
(6) As to liability of those who compose - The liability of
stockholders and members for corporate obligations is limited
to their investment49 while partners may be liable beyond their
investment.
(7) Right of Succession - Unlike in a corporation, there
is no right of succession in partnership as death of a general
partner dissolves the partnership.
48 Sundiang
49 See
and Aquino, pp. 182-183.
Notes Section 2 of this work.
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(8) As to capacity to be partner Istockholder - A
partnership can be an incorporator/stockholder of a corporation
[Section 10, RCCPJ, and under Section 35 of the RCCP, a
corporation can now also enter into a partnership or joint
venture.
A partnership is similar to a corporation with respect to
d.
the following features: 50
(1) Both have juridical personality distinct from their
components (stockholders or. partners);
(2) Both are groups of persons (exception: One Person
Corporation);
(3)
Capitals of both are derived from their components;
(4) There is distribution of profits in stock corporations
and in partnerships;
(5)
They both act only through their agents; and
(6) They can be organized only where there is a law
authorizing their organization.
4. Joint Accounts (Sociedad de Cuentas en
Participacion). A Joint Account is present when the�e is an
b.
.nn
J int a
unt may b distinguished from partnerships as
(1) As to juridical personality. A joint account has no
·uridical personality while a partnership has a personality
s parate and distinct from the partners.
(2) As to business name. No commercial name common to
all participants can be adopted in joint accounts. A partnership
an adopt a partnership name.
(3) As to management. The general partners are all
managers in partnership while in a joint account only the
o tensible partner manages and transacts business in his own
name and under his individual liability.
(4) As to parties in cases. In a joint account, only the
ostensible partner - the person carrying on the joint business
- can be sued by and is liable to persons transacting with the
former. In partnership, all general partners may be liable even
up to the extent of their personal properties and may therefore
be sued by third persons.54
The Code of Commerce provisions on Joint Accounts are
c.
-tides 239 to 243 which state as follows:
arrangement whereby merchants may interest themselves in the
transaction of other merchants, contributing thereto the amount of
capital they may agree upon, and participating in the favorable and
unfavorable results thereof in the proportion they may determine. 51
This is also commonly called as "accidental partnership."
ARTICLE 239. Merchants may interest themselves
in the transaction of other merchants, contributing
thereto the amount of capital they may agree upon, and
participating in the favorable or unfavorable results
thereof in the proportion they may determine.
In Bourns v. D.M. Carman, et al., 52 the Supreme Court
a.
defined a joint account as a partnership constituted in such a
manner that "the existence of which is only known to those who had
an interest in the same, there being no mutual agreements 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." Such is exactly
the accidental partnership of cuentas en participacion defined in
Article 239 of the Code of Commerce.
ARTICLE 240. With regard to their formation, joint
accounts shall not be subjected to any formality, and
may be privately contracted orally or in writing, and their
existence may be proved by any of the means accepted
by law, in accordance with the provisions of Article 51.
50Alvendia, p. 27.
Article 239, Code of Commerce.
52
G.R. No. 2800, December 4, 1906, 7 Phil. 117, 119.
51
19
ARTICLE 241. In the transactions treated of in the
foregoing articles, no commercial name common to all
the participants can be adopted, nor can any further
direct credit be made use of except that of the merchant
53
Sundiang and Aquino, pp. 165-166.
Bourns v. D.M. Carman, G.R. No. 2800, December 4, 1906.
54
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who transacts and manages the business in his own
name and under his individual liability.
ARTICLE 242. Persons transacting business with
the merchant carrying on the joint business shall only
have a right of action against the latter and not against
the other persons interested, and the latter, on the other
hand, shall have no right of action against the third
person who made the transaction with the manager
unless said manager formally cedes his rights to them.
ARTICLE 243. The manager shall effect the
liquidation, and after the transactions have been
concluded, he shall render a proper account of its
results.
d.
The duty to liquidate is imposed on the manager under
Article 243 of the Code of Commerce. The express statutory obligation
imposed upon the manager makes it an imperative obligation for
the manager to proceed without delay to the liquidation of the
joint account and to account the proceeds of the liquidation to the
partners. 55 If the manager failed to comply with his statutory duty
to account the proceeds to the partners, the partners are entitled
to file an action to compel an accounting, and the payment of their
respective shares of the capital invested, together with damages. 56
e.
In case of the liquidation of a joint account partnership,
the sale of the firm assets is necessarily uncertain and eventual
because the selling price that may be obtained from the property
and effects that comprise such assets is uncertain. Hence, the price
received should be allotted in the same proportion as that fixed in
the contract for the division of the profits and losses, for otherwise
one of the partners would be benefited to the detriment and loss of
his co-partners. 57
f.
For instance, if it is duly and fully proved that the
managing firm acquired realty in the name and at the expense of the
joint account partnership with the firm, it is just that, in liquidating
the property of common ownership, such realty should be divided
55
Lichauco, et al. v. Lichauco, G.R. No. L-10040, January 31, 1916.
/bid.
57
Aldecoa & Co. v. Warner and Barnes Company Ltd., G.R. No. L-5242, August
6, 1910.
56
T I-
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rganiz tions
21
nth sam manner as were the profits and
nc of the business, from the beginning of the
of its dissolution. 58 This doctrine is perfectly
with justice, as no person should enrich himself
xpense of another.
Business Trust. It is a legal relation whereby one person,
"tru tor," conveys a property to another for the benefit of
11 d the "beneficiary." The person in whom confidence is.
d a r gards the property is called the "trustee. "59
a.
Trusts are either express or implied. Express trusts are
, nt d by the intention of the trustor or of the parties. Implied trust
into being by operation of law. 60
b.
There are only few provisions on express trust under the
N w ivil Code. However, the New Civil Code adopts the principles
,l n ral law of trusts, insofar as they are not in conflict with the
·d
de, the Code of Commerce, the Rules of Court, and special
01 G
enerally, the rights and obligations of the parties are
ly provided for in their agreement called a Trust Agreement.62
A trust agreement can actually be entered into with
1 cru t department of a commercial or universal bank. Pertinent
1
lations issued by the Bangko Sentral ng Pilipinas (BSP) define
Lh t rm "trust business" as any activity resulting from a trustor­
cru t relationship (trusteeship) involving the appointment of a
Lr t by a trustor for the administration, holding, management
f funds and/or properties of the trustor by the trustee for the use,
b n fit or advantage of the trustor or of others called beneficiaries.63
d.
In the United States, a business trust is called
th ''Massachusetts Trust" because they were developed in
Ma achusetts. 64 It is defined as an unincorporated business
ociation established by a declaration or deed of trust, and
overned to a great extent by the general law of trust. Legal title
68Supra.
Article 1440, NCC.
Article 1441, NCC.
61Article 1442, NCC.
62
See Advent Capital and Finance Corporation v. Alcantara, G.R. No. 183050, _
January 25, 2012.
63
Section X 403(a), Manual of Regulations for Banks; see Aquino and Aquino,
Fundamentals of Banking Law, 2019 Ed.
64
Henn and Alexander, p. 117.
59
60
2
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23
is with the trustee who holds and manages the property for the
benefit of members, who are beneficiaries of the trust with equitable
interests, usually represented by transferable certificates. 65
A member of the joint venture may gain possible
, p litic 1 or public relations advantages by organizing
·n rporating where activities are to be conducted; and
A "Real Estate Investment Trust" within the
e.
contemplation of Republic Act No. 9856, otherwise known as "The
Real Estate Investment Trust (REIT) Act of 2009" has certain
features of a business trust. However, a REIT is not a real business
trust. A REIT "is a stock corporation established in accordance
with the Corporation Code of the Philippines and the rules and
regulations promulgated by the ·Commission [SEC] principally for
the purpose of owning income-generating real estate assets."66 The
law clarifies that "a REIT, although designated as a 'trust', does
not have the same technical meaning as 'trust' under existing laws
and regulations but is used... for the sole purpose of adopting the
internationally accepted description of the company in accordance
with global best practices."67
(4) A member may avoid government scrutiny of
porate expansion.
Joint Venture. Joint venture is an association of persons
6.
or companies jointly undertaking some commercial enterprise;
generally all contribute assets and share risks. It requires a
community interest in the performance of the subject, a right to
direct and govern the policy connected therewith, and duty, which
may be altered by agreement to share both in profit and losses. 68
Rationale for Joint Ventures. Joint venture are used
a.
as a business organization for the following reasons: 69
(1) Joint ventures reduce the investment required
of any one company and distribute the risk of undertaking
an expensive and risky venture because some projects are
of such magnitude that they strain the financial reserves of
corporations;
(2) Joint ventures pool "know-how," thereby permitting
the members to achieve diversification that it would have
difficulty achieving alone;
65Supra.
66Section 2(cc), Republic Act No. 9856.
67Ibid.
68Kilosbayan, Inc., et al. v. Guingona, Jr., G.R. No. 113375, May 5, 1994, 232
SCRA 110, 144.
69F. Hodge O'Neal and Robert B. Thompson, O'Neil's Close Corporations, 3rd
Ed., Section 1.06, p. 19, hereinafter referred to as "O'Neil's, p. 19."
In Aurbach v. Sanitary Wares Manufacturing
tion, 70 the Supreme Court adopted the view that a joint
i an organization formed for some temporary purpose. "It·
l rdly distinguishable from the partnership, since their elements
:r · milar - community of interest in the business, sharing profits
es, and mutual right of control." It was further explained
1nd 1
U ·: 'it would seem that under Philippine law, a joint venture is
11 r n of a partnership and should thus be governed by the law of
1 art 1 rships."11
b.
It is the substance, rather than the form of the agreement
c.
that determines if the parties entered into a joint venture agreement.
Th- intention of the parties that is reflected in the agreement
crov rns. Hence, even if the parties called the agreement a Power
f Attorney, the agreement may also be considered a joint venture
err ement if the terms and conditions thereof indicate that it is a
Corporations can enter into joint venture agreements. 73
d.
Two or more corporations may enter into a joint venture through a
contract or agreement if the nature of the venture is in line with the
business authorized by their charters. The contract or agreement
need not be registered with the Securities and Exchange Commission
provided that the joint venture will not result in the formation of a
partnership or corporation. 74
It follows that Joint Ventures may result in the formation
e.
of a joint venture corporation. In such case, it must comply with
applicable nationalization laws. In addition, the joint venture may
70
G.R. Nos. 75875, 75951, and 75975-76, December 15, 1989, 180 SCRA 130,
146-147; Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines Corp., G.R. No. 195580, April 21, 2014.
71 See Note 66, p. 19, citing Campos and Campos, Comments, Notes and Selected
Cases, Corporation Code, 1981 Ed. and Tuazon v. Bolanos, 95 Phil. 906 (1954); Philex
Mining Corporation v. Bureau of Internal Revenue, G.R. No. 148187, April 16, 2008.
72
Philex Mining Corporation v. Bureau of Internal Revenue, ibid.
73Section 35, Revised Corporation Code of the Philippines or "RCCP" for short.
74SEC Opinion dated March 30, 1995.
4
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give certain shareholders or groups of shareholders power to select
or nominate a specified number of directors, give to the shareholders
control over the selection and retention of employees, or set up
procedure for settlement of disputes. 75
f.
However, the joint venture corporation itself is subject to
corporate law not to partnership law. The Supreme Court explained:
"By choosing to adopt a corporate entity as the medium to pursue
the joint venture enterprise, the parties to the joint venture are
bound by corporate law principles under which the entity must
operate. Among these principles is the limited liability doctrine. The
use of a joint venture corporation allows the co-venturers to take
full advantage of the limited liability feature of the corporate vehicle
which is not present in a formal partnership arrangement."76 The
parties to the joint venture agreement cannot cite the provisions of
the law on partnership with respect to the corporation itself and its
relationship with its shareholders.
g.
It follows that violation of the provisions of the Joint
Venture Agreement will not necessarily prejudice subsequent
shareholders who are not parties thereto. For example, the
provisions of the Joint Venture Agreement granting preference to
holders of certain shares, which are not reproduced in the Articles
of Incorporation and the certificates, will not be binding on c�editors
and other shareholders who are not part of the agreement.
7.
Cooperatives. A cooperative is an autonomous and duly
registered association of persons, with a common bond of interest,
who have voluntarily joined together to achieve their social,
economic, and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and
services and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative
principles. 77
a.
The governing law is Republic Act No. 9520 otherwise
known as "The Philippine Cooperative Code of 2008. "Article 2 of the
said law states that it is "the declared policy of the State to foster
75
Aurbach v. Sanitary Wares Manufacturing Corp., G.R. Nos. 75875, 75951,
and 75975-5, December 15, 1989.
76
Mabuhay Holdings Corporation v. Sembcorp Logistics Limited, G.R. No.
212734, December 5, 2018.
77
Article 3, Republic Act No. 9520.
J;ll\TI N
tg-anization
25
and gr wth of cooperatives as a practical vehicle for
liance and harnessing people power towards the
nt f conomic development and social justice. The State
ura
the private sector to undertake the actual formation
r anization to cooperatives and endeavors to create an
ph r that is conducive to the growth and development of
operatives."
-lf- ·
b.
It is also declared as a policy that the Government and
11 it branches, subdivisions, instrumentalities and agencies shall
sur the provision of technical guidance, financial assistance and
oth r services to enable said cooperatives to develop into viable
and. r sponsive economic enterprises and thereby bring
_ . about a
tr ng cooperative movement that is free from any condition� that
mi ht infringe upon the autonomy or organizational integrity of
p ratives.78
c.
Further, the State recognizes the principle of subsidiarity
under which the cooperative sector will initiate and regulate within
it own ranks the promotion and organization, training and research,
audit and support services relating to cooperatives with government
a sistance where necessary. 79
d.
Although cooperatives are not primarily governed by the
Corporation Code, they are also treated as a corporate entity with
their own acts and liabilities. A cooperative is vested with powers
and capacities under Article 9 of the Philippine Cooperative Code
of 2008, including the power to the exclusive use of its re�stered
name, the power to sue and be sued and the right of success10n.
The
_
law also expressly provides that a duly registered cooperative shall
have limited liability. 80
e.
It is the General Assembly that is the highest policy­
making body of the cooperative. 81 On the �ther hand, the Boa�d � f
Directors of a cooperative shall be responsible for the cooperative s
strategic planning, direction-setting and policy formulation
activities. 82
Article 2, 2nd paragraph, supra.
2, 3rd paragraph, ibid.
Article 12, ibid.
81
Article 33, ibid.
82
Article 38, ibid.
78
9
7 Article
80
26
' P .i\ll.'t 1RP 11ATI
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8. Syndicate. A syndicate is a group of people who come
together to work for a common aim.83 This unincorporated business
association is often encountered among insurance companies who
may be underwriting a large risk or banks that are lending a huge
amount. Syndication is therefore the practice of dividing investment
risk between several persons in order to minimize individual risk.84
a. It has been observed that "as banks have gotten bigger,
so have their lending limits, but there may be times when a credit
facility exceeds the lending limit _of one bank. Banks also wish to
diversify their loan portfolios and may not wish to extend credit to one
borrower up to the maximum legal amount. In such cases, the lead
lender may sell participating interests in the loan to other lenders or
may arrange a syndicated credit facility."85 It was explained further
that in syndicated loan, each lender is a member of the syndicate and
a party to the loan documents. The borrower has a direct contractual
relationship with each member of the lending syndicate. Syndicated
credit facilities often involve a revolving credit arrangement used
by the borrower for working capital and a term loan that is used to
refinance the borrower's existing debt."86
b. In syndicated loans, the lead bank may initially be the only
lender. However, it may not have sufficient available cash to lend
the whole amount needed by the borrower. Thus, after extending
the loan to the borrower to partially cover the latter's needs, the
lead bank may propose loan syndication to other banks with the
undertaking to share the collateral that was already given by the
borrower. The agreement to share the collateral is perfected the
moment there is a meeting of minds thereon among the participating
banks and the same agreement is consummated with the execution
of the documents contemplated like a "mortgage trust indenture" or
a "joint real estate mortgage." 87
Homeowners' Associations. Homeowners' associations
9.
may acquire juridical personality and corporate powers. Homeowners'
association is defined as:
John O.E. Clark, Dictionary ofBanking and Finance Terms, 2000 Ed., p. 314.
83
84
Supra.
Lissa L. Broome and Jerry W. Markham, Regulation of Bank Financial Ser­
vice Activities, 2001 Ed., p. 319.
85
86Ibid.
87
Gateway Electronics Corporation v. Land Bank of the Philippines, G.R. Nos.
155217 and 156393, July 30, 2003.
27
(b) "Association" refers to the homeowners'
sociation which is a non-stock, non-profit corporation
rogi.stered with the Housing and Land Use Regulatory
Board (HLURB), or one previously registered with
the Home Insurance Guarantee Corporation (now
Home Guaranty Corporation) or the Securities and
_ xchange Commission (SEC), organized by owners
or purchasers of a lot in a subdivision/village or other
residential real property located within the jurisdiction
of the association; or awardees, usufructuaries, legal
occupants and/or lessees of a housing unit and/or
lot in a government socialized or economic housing
or relocation project and other urban estates; or
underprivileged and homeless citizens as defined under
existing laws in the process of being accredited as
usufructuaries or awardees of ownership rights under
the Community Mortgage Program (CMP), Land Tenure
Assistance Program (LTAP) and other similar programs
in relation to a socialized housing project actually being
implemented by the national government or the LGU.88
Registration of a homeowner's association is with the
a.
Housing and Land Use Regulatory Board (HLURB).89 This authority
t nds to all associations, federations, confederations or umbrella
r-ganizations of the associations.90 The governing law is Republic
t No. 9904 otherwise known as "The Magna Carta for Homeowners
incl Homeowners Association." The underlying State policy is stated
in ection 2 of Republic Act No. 9904 that states:
Section 2. Declaration of Policy. - In fulfillment
of the constitutional principles directing the State to
encourage, promote and respect nongovernmental,
community-based and people's organizations in serving
their legitimate collective interests in our participatory
democracy, it is hereby declared the policy of the State
to uphold the rights of the people to form unions,
associations, or societies, and to recognize and promote
the rights and the roles of homeowners as individuals
and as members of the society and of homeowners'
88
Section 3(b), Republic Act No. 9904.
Section 4, ibid.; Section 26, Republic Act No. 8763.
90
Section 20, ibid.
89
PARTI­
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associations. To this end, the State shall endeavor to
make available resources and assistance that will help
them fulfill their roles in serving the needs and interests
of their communities, in complementing the efforts of
local government units (LGUs) in providing vital and
basic services to our citizens, and in helping implement
local and national government policies, programs, rules
and ordinances for the development of the nation.
b.
Originally, homeowners' associations were within the
regulatory powers of the SEC. Pursuant to Section 2 of Executive
Order No. 535, these powers were later transferred to the Home
Insurance and Guaranty Corporation (HIGC). In 2000, the powers
and responsibilities over homeowners' associations were transferred
by Section 26 of the "Home Guaranty Corporation Act of 2000" or
Republic Act No. 8763 to the Housing and Land Use Regulatory
Board (HLURB). 91
c.
The HLURB is also vested with the quasi-judicial
functions regarding homeowners' associations in subdivisions and
condominiums. 92 For instance, it has exclusive jurisdiction over
controversies between the homeowners and its members. 93
d. The term ''homeowners" as contemplated under the
special law includes:
(1)
village;
An owner or purchaser of a lot in a subdivision/
(2) An awardee, usufructuary, or legal occupant of a
unit, house and/or lot in a government socialized or economic
housing or relocation project and other urban estates; or
(3) An informal settler in the process of being accredited
as beneficiary or awardee of ownership rights under the CMP,
LTAP, and other similar programs. 94
Maria Luisa Park Association, Inc. v. Almendras, et al., G.R. No. 171763,
June 5, 2009.
92
Section 20, Republic Act No. 9904.
93
Section 20, ibid.; Maria Luisa Park Association, Inc. v. Almendras, et al.,
supra.
94
Section 3G), ibid.; See also Section l(d), Rule I, Part I, Rules on the Regis­
tration and Supervision of Homeowners Associations, HLURB Board Resolution No.
R-771, Series of 2004; Section l(a), Framework of Governance of Homeowners Asso­
ciations, HLURB Board Resolution No. 770, Series of 2004.
91
29
1in orporated Associations. Unincorporated asso11 r r anizations of persons, that do not claim to be part of a
, D r Li n, may also act as a group in pursuing certain activities.
n .if unr i t red, the members of an association or organization,
r m nt, may perform acts not contrary to law, morals, good
l! ms, public order or public policy.95 The applicable law or rule
uld p nd on the circumstances. Thus, in some cases, the N_ew
11 d provisions on partnership or agency may apply dependmg
press or implied agreement of the parties. In other cases,
t,h in mbers of these unincorporated associations or organizations
m , -11 ign an agreement as parties but may expressly provide for
ni t r ditors and/or debtors or solidary creditors and/or debtors.
a.
The Rules of Court recognized the existence of associations
, ' ntity without juridical personality" by providing in Section 8 of
It tl 14 thereof the rule on service of summons thereto.
11. Corporations. In 1776, Adam Smith wrote in his
• noni al Wealth of Nations that "companies, though they may,
es
p ·haps, have been useful for the first introduction of so�e branc�
which
ment
experi
an
e,
expens
own
their
at
f mmerce, by making,
n
Lh tate might not think it prudent to make, have in the long-ru
either
have
and
,
useless
or
some
burden
I r v d, universally, either
rn.i managed or confined the trade." His aversion for companies was
{\uth r magnified when he observed in the same work that the same
,_ restra�nt
• mpanies were involved in collusion to limit competition
_
t10n
circula
of
ction
obstru
and
t,
cemen
enhan
f trade, market price
c f mployment.
a.
The corporate form has evolved into something that is
f .r different from the companies of Adam Smith's time. However,
it is not unusual to hear the same complaints against corporations
n w as it was then. Constant friction between some segments of
iety and "big business" is apparently inevitable and, whether
unfounded or not, accusations that corporations are involved in
llusion, obstruction, suppression and other irregularities are the
in scapable results. Nevertheless, corporations continue their role
a important components of the economy. Instead of doing away
with corporations, the State subjects them to regulations and tries
t make them develop a "social conscience."
95
SEC Opinion dated December 3, 1998.
MMENTARI ' AND J um PRUDEN E
THE REVI ED ORPORATION ODE
OF THE PHILIPPINES
30
p
N
b.
Corporations have their origin in Roman law. The republic
- Populus Romanus, Senatus Popolusque Romanus, Res public is said to be the "original" corporation.96 It was during the early
republic that corporate forms and other organizations gradually
developed including the religious sodalitas, the universitas, the
collegium, the governmental municipium and the societas. 97
•01
(2) Limited liability of shareholders;
(3) Transferability of shares;
(4) Delegated management under a board structure, and
(5) Investor ownership. 101
a. The core characteristics respond to the exigencies of
the large modern business enterprise and are therefore uniquely
attractive for organizing productive activities. 102 As will be discussed
further elsewhere in this book, the core characteristics appear even
in a One Person Corporation although in a limited sense with respect
to centralized management. There is no separate Board because the
single shareholder is the sole director although there may also be
officers who manage the corporation.
(1)
Ibid.
97
The capacity to act as a legal unit;
(2) Limitation of or exemption from, individual liability
f hareholders;
and
(3)
Continuity of existence;
(4)
Transferability of shares;
(5)
Centralized management of board of directors;
(6)
Professional management;
(7)
Standardized method of organization, and finance;
(8)
Easy capital generation.
11.03. Disadvantages of Corporations. The disadvantages
fa corporate form are as follows: 104
(1)
It is prone to "double taxation";
(2) They are subject to greater governmental regulation
and control;
(3) A corporation may be burdened with an inefficient
management if stockholders cannot organize to oppose
management;
(4) Limited liability of stockholders may at times
translate into limited ability to raise creditor capital;
(5) It is harder to organize compared to other business
organizations;
(6)
96Harry Henn and John Alexa�der, Law of Corporations, 1983 Ed., p. 14, hereinafter referred to as "Henn and Alexander, p. 14."
31
l"" nizations
11.0 . Advantages of Corporations. The advantages of a
r tion a bu in ss organization are as follows: 103
11.01.
Core Features. Its separate personality (under
the Doctrine of Separate Personality98) and the limited liability
of its components (Limited Liability Rule)99 make a corporation
the most desirable business organization for many businessmen.
Corporations as investment vehicles involve the pooling of money
capital from shareholders and human capital from management. 100
Business corporations have five core characteristics, namely:
(1) Legal personality;
T -
I �roch.1 ·ti n t Busit1 ss
It is harder or more complicated to maintain; and
(7) The "owners" or stockholders do not participate in
the day-to-day management.
98
See Notes under Section 2 of this work.
Notes under Section 2 of this work.
1 00A.lan R. Palmiter, Corporations, 8th 2015 Ed., p. xxxiv.
1 0 1John Armour, Henry Hansmann and Reinier Kraakman, The Essential Ele­
ments of Corporation Law: What is Corporate Law?, Discussion Paper No. 643 (2009),
p. 2; http://www.law.harvard.edu/programs/olin_center (Accessed on June 5, 2014 Ed.) hereinafter referred to as "Armour, Hansmann & Kraakman, p. 2."
1 02Armour, Hansmann and Kraakman, pp. 2 and 6.
99See
3
10 Jovito Salonga, Philippine Law on Private Corporations, 3rd Ed., p. 9, herein.
after referred to as "Salonga, p. 9"; Roger H. Hermanson and James Don Edwards,
Financial Accounting, 5th Ed., p. 608, hereinafter referred to as "Hermanson and
Edwards."
104
Hermanson and Edwards, p. 609.
32
MME TAl1(!];
nm REVI 'ED
J RT
.R DE
RP RA'I'I . N
OF THE PHILIPPINES
E
DE
P
N
.
11.04.
Tax Treatment. The law treats corporations and
other business organizations exactly the same for certain specific
purposes. For example, for income tax purposes, the term corporation
includes other business organizations. Section 22(B) of National
Internal Revenue Code105 provides that the term corporation
'.'s�all include partnerships, no matter how created or organized,
Jomt-�to�k com?anies, joint accounts (cuentas en participacion),
associat10n, or msurance companies, but does not include general
professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy, operations pursuant
to an operating consortium agreement under a service contract with
the Government.
11.05.
Opinions Regarding the Corporate Form. It
should be noted that early on, there were those who were reluctant
to accept corporations as business vehicles. It is well to bear this
in mind not only for historical purposes but also for the purpose
of a voiding, if possible, the perceived pitfalls that accompany a
corporation without putting an end to the corporate form:
"The prevalence of the corporation in America has led men of this
generation to act, at times, as if the privilege of doing business in corporate
form were inherent in the citizen; and has led them to accept the evils
attendant upon the free and unrestricted use of the corporate mechanism
as if these evils were the inescapable price of civilized life, and, hence, to
b? borne �ith resignation. Throughout the greater part of our history a
_
different view prevailed. Although the value of this instrumentality in
commerce and industry was fully recognized, incorporation for business
was co_mmonly denied long after it had been freely granted for religious,
educat10nal, and charitable purposes. It was denied because of fear. Fear of
encroachment upon the liberties and opportunities of the individual. Fear of
the subjection of labor to capital. Fear of monopoly. Fear that the absorption
of capital by corporations, and their perpetual life, might bring evils similar
to those which attended mortmain. There was a sense of some insidious
menace inherent in large aggregations of capital, particularly when held by
corporations. So at first the corporate privilege was granted sparingly; and
only when the grant seemed necessary in order to procure for the community
_
�ome spec1�c benefit otherwise unattainable. The later enactment of general
mcorporat10n laws does not signify that the apprehension of corporate
domination had been overcome. The desire for business expansion created
an irresistible demand for more charters; and it was believed that under
general laws embodying safeguards of universal application the scandals
NIRC for short.
RP MTI
3
n incid nt to special incorporation could be avoided. The
which long embodied severe restrictions upon size and upon
·orporate activity, were, in part, expressions of the desire for
port unity." lOG
a.
Notwithstanding such objection, corporations continue
pr liferate. In this jurisdiction, the contribution of corporations
national development cannot be ignored. The importance of
rp rations was in fact emphasized in the Sponsorship Speech
· hat was made when the bill introducing the Corporation Code was
n idered on Second Reading by the Batasang Pambansa, viz.:
"The formation and organization of private corporations, and I
underscore private corporations as distinguished from corporations owned
or controlled by the government or any subdivision or instrumentality
th reof, gives wider dimensions to free enterprise or free trade. For not only
i the right of individuals to organize collectively recognized; the collective
rganization is vested with a juridical personality distinct from their own.
Thus, 'the skill, dexterity, and judgment' of a nation's labor force need not
be constricted in their application to those of an individual or that which he
alone may assemble but to those of a collective organization.
While a code, such as the proposed code now before us, may appear
essentially regulatory in nature, it does not, and is not intended, to curb or
stifle the use of the corporate entity as a business organization. Rather, the
proposed code recognizes the value, and seeks to inspire confidence in the
value of the corporate vehicle in the economic life of society.
There are those who see a 'curse in bigness.' The corporation code carries
no inherent bias against 'bigness.' On the contrary, the code acknowledges
'the economic and technological necessity of bigness in modern industry.' It
thus seeks to assure that the corporate entity does not survive but becomes
an attractive and effective vehicle for the accumulation of capital and the
production of goods. This is not to suggest that corporations must of necessity
be big. What I emphasize is that no provision in the code is designed to
impede growth; rather, growth is encouraged. But use of the corporate
entity by those groups who do not desire to be public thereby providing for
themselves more limited access to resources is not discouraged. A whole
new title on closed corporations has in fact been included in the Code.
The provisions of the code demonstrate an awareness that corporations
are not mere business organizations exclusively intended to serve the
106
5
10
Tl-
Inti· du tion t Busin s rganizations
(1933).
Dissenting Opinion in Louis K. Liggett Co. v. Lee, 288 U.S. 517, 548-567
34
MMENTARIE AND J URl PR DEN E N
THE REVI ED ORPORATION ODE
OF THE PHILIPPINES
personal interests of shareholders or managers but are social institutions in
whic? all sectors of society have an interest. Whil e inanimate, th ey cannot
be without moral values or ethical concerns; nor can they be bereft of social
an� civil r�sponsibilities. Thus, as an assurance of a welcome place in
soc�ety, whil_e !h e c�d e does not directly mandate th e p erformance of sp ecific
social and civil obligations, it encourages and provides corporations with
ev ery means of b ecoming valuable social institutions."101
11.06.
Purposes of Corporate Law. Laws on corporations
like the laws governing other business organizations - are
p�in�ipall� concerned with the following: (a) defining the area
withm w�ich the parties are free to allocate risk, control, and profit
as they wish and (b) prescribing the allocati on of these elements in
the absence of express agreement.108
1
a.
The Revised Corporation Code of the Philippines, the
.
Corporat10n Code and the old Corporati on Law provide for the
formati?n and organi zation of corporati ons, define their powers, fix
_
the d�ties o! directors and other officers thereof, declare the rights
.
_
and _ habihties of shareholders and members and prescribe the
_
conditions
under which corporations may transact business _ 109
?·
The main groups of persons that are affected by corporate
law mclude stockholders, di rectors and officers, and creditors.
Corporate law seeks to regulate both the relations between the
gro_ups and w�t�in the groups. It regulates "the mechanisms by
which people Jorn, or leave, one of these groups as well as their
r�ghts and duties once they have joined a group."no Nevertheless,
smce a separate juridical entity is present, corporate law may not
nece�sarily estab!ish direct legal relati ons between the groups but
may mstead mediate these relationships through the other juridical
entity, the corporation. n 1
c.
Corporate law also allocates risks between the owners
(s�are�olders) and management (directors and officers) to
.
_
mmimize confhct between the components. A structure for business
107Records of the Batasang Pambansa, Second Regular Session, 1979-1980,
Vol. III, pp.1212-1213 , hereinafter referred to as "IIIBP Records, pp.1212-1213."
108Salonga, p.15, citing Katz, W., The Philosophy of Midcentury Corporation,
Statutes, Law and Contemporary Problems, p.177 (1958).
109Nate v.Manila Railroad, G.R.No.L-11730 , March 24, 1917, 36 Phil. 534.
noPaul Davies, Introduction to Company Law, 2002 Ed., p. 5 , hereinafter
referred to as "Davies , p.5."
lllJbid., p. 10.
In
P U'L' -
1'
Jl.P RA'fl
du i.on to Bu in ss rgarrizations
to control or prevent conflicts
nd d vi
ded for. 112 Corporate law seeks
provi
mpon nt ar
ngoing costs of organizing business through the
coordination
•011 1 I, f rm. orporate law does this by facilitating
reducing the
we n parti ipants in corporate enterprise, and by
g different
I), f alu - reducing forms of opportunism amon
l
· itu n i
Code
Th legislator who authored the Corporation
.
s
ation
regul
and
rules
pl 'n d thatthe law was designed "tolay down
of
ction
prote
the
to
view
r anization of corporations with a
q l
mic and
c interest, but at the same time, promote the econo
publi
111
of the
nt
opme
devel
the
ry through
1 , ' 1 d velopment of the count
s." 114
ppine
Phili
the
in
·porat vehicle as a means of doing business
to prosper and
orporation Code makes it possible for business
'! 1 1
all the people,
g
amon
t,hi · would spread the benefits of prosperity
iations which
assoc
and
sp ially the employees of the corporati ons
Code." 115 The
n
oratio
nay be organized under the aegis of the Corp
serves the
se
i
kew
i
l
s
R vi d Corporation Code of the Phili ppine
n Code. It
oratio
Corp
p·1rposes sought to be accomplished under the
wa. xplained that:
d in 1980, or
"...th e Corporation Code of the Philippines was enacte
world, we
ancial
n
fi
the
of
36 years ago. If we are to keep up with the rest
archaic
the
ss
addre
and
ces
practi
ate
n d to codify best international corpor
ity
minor
ting
protec
and
ess,
busin
a
ng
starti
of
b ttlenecks in the areas
to
just
not
cive
condu
t
investors. We must likewise provide an environmen
for
ect
prosp
ling
appea
an
le
vehic
big businesses, but make the 6corporate
11
tartups and entrepreneurs."
11.07.
Purpose of the RCCP. The RCCP was passed
by Congress mainly to introduce four (4) main reform clusters,
namely: (1) Policies that would enhance the ease of doing
business in the Philippines; (2) Rules that prioritize corporate and
tockholder protection; (3) Provisions that instill corporate and
civic responsibility; and (4) Amendments that will strengthen the
ts are re­
Alan R. Palmiter, Corporations, 8th 2015 Ed., p. 7. ·(The conflic
ms).
proble
ferred to as agency
3
Anatomy of Corporate Law, A Comparative
11 Kraakman, Armour, et al., The
2.
p.
,
Ed.
2017
and Functional Approach,
114 IIIRecord, p.1715 , December 11, 1979.
112
115/bid.
116
Journal of the Senate, December 13, 2016, pp. 723-724.
m
ru
7
M E '1'
J
l H D , 'E
RP RA'rl N
D,
THE R • VI B
OF THE PHILIPPINES
country's policy and regulatory corporate framework. 117 These reform
clusters are further explained by Senator Franklin Drilon as follows:
Enhancing the Ease of Doing Business
To contribute to the ease of doing business, the proposed Revised
_
Corporat1on C�de would streamline the process of incorporation - with the
_
name venfica�10n process simplified. In addition, the proposed measure will
allow compames to perpetually exist. It will permit a single person to form a
"one-person corporation." Likewise, stockholder voting may now be through
remote communication, or in absentia..
T e present name v�ri�cation system, with the "confusingly
. . ?
.
,
similar standard imposed, 1s mdeed confusing. Hence a shift to the
"distinguishability'' test will no doubt allow the full and sea�less automation
of name registration. For example, under the law today, you cannot register
"XYZ Dream Network" because of a previously registered "XYZ Dream
Hospital." Un�er �he proposed amendment, you can do so, because one of
the key words 1s different, that is network and hospital.
The common stumbling block for many investors to incorporate is the
.
requirement for a corporation to have at least five (5) stockholders. This has
ma�e dec�arations of trust and nominee shareholders indispensable to doing
busme�s m the country. Investors name individuals as incorporators, with
_
no real mterest m the corporation, just to comply with the legal requirement.
_
For local busm�ss own�rs, naming the entire household as incorporators from cook to driver - 1s not unusual because of the requirement that you
should have five incorporators.
It is for this reason that we seek to introduce the concept of the "One
Person Corporation" in our jurisdiction.
The Philippines, moreover, is one of the few countries that sets limits
�o the cor�orate term. Those who actually go through the arduous task of
mcorporatmg, run the risk of having their corporations dissolved simply by
forgetting to renew their corporate term.
The proposal for a perpetual corporate term as the default option
seeks to address this problem.
On another aspect, although no one will confess to it, many lawyers do
what we call as "paper minutes." The resort to paper minutes is due to the
fact that shareholders are required to be present during meetings in person,
117Journal of the Senate, December 13, 2016, p. 726; Journal of the House of
_
Representatives, No. 24, October 8, 2018, p. 21; Congressional Records, October 8,
2018, p. 17.
,• l
J
11
p · . Lile wi , dir ctors are required to be present during meetings
· 1 n, or through video/teleconferencing.
Th proposed amendments acknowledge the need to adapt to
in times, by allowing the use of alternative modes of communication
r available through technology. Stockholders and directors need not
hy ically present in meetings. Remote communication can facilitate
ttLL ndance in meetings, allowing the stockholders to actively participate in
lio u sions and come up with more informed decisions. Votes may, in some
i tances, be cast in absentia.
On the electronic filing of requirements with the SEC, the Commission
ha noted that although it has already opened up several satellite offices
in M tro Manila and all over the country, compliance with reportorial
f quirements is not satisfactory. Only 500,000, out of 800,000 registered
mpanies, are reported to be still operating or doing business. With the
proposed adoption of an electronic filing system, we hope that the compliance
number will improve.
Prioritizing Corporate and Stockholder Protection
The second reform cluster includes provisions on: (a) the creation of
mergency boards; (b) the revised rules on the right to inspect corporate
books; (c) modified quorum requirements; and (d) expanded grounds for
disqualification of directors.
The creation and recognition of an emergency board would address
the situation where a corporation's board of directors or trustees goes on
a perpetual holdover because it cannot muster a quorum. An emergency
board can operate for a limited period and purpose, allowing the corporation
to continue its daily operations despite vacancies in the board.
It is recognized that some stockholders may not be well versed to
interpret the contents of corporate documents. Hence, we propose to allow a
representative or counsel to exercise the right to inspect the corporate books
on behalf of the stockholder.
We are likewise introducing a more stringent and expanded set of
grounds for disqualification of directors towards a more principled corporate
decision -making.
Instilling Corporate and Civic Responsibility
In crafting the amendments to the 36-year old Code, we want to create
corporate entities which would be effective vehicles for the accumulation
of capital, production of goods, and delivery of services. In the words of the
sponsor of Batas Pambansa Bilang 68, "corporations are not mere business
3
MMENTARlE AND
RI PR
E
-AR'rI-
RP Il TI
9
THE REVI ED ORPORATI N ODE
OF THE PHILIPPINES
Intl' du tio1 to Busin ss rganizati n ·
organizations exclusively intended to serve personal interests, but are social
institutions in which all sectors of society have an interest."
I fl
ral, th propo d amendments promote efficiency and encourage
,1 p n yin ·orporate dealings - from formation to daily operations.
J pr p -d amendments are in line with global best practices. Having
1
1
pla will allow the Philippines to compete with other countries as
1 1 'nv
tment destination and business-friendly jurisdiction. A reform
rp rate sector will certainly make the country more investment­
,1 iiU.
L'v and, therefore, investments can generate jobs that can help our
l' t' and our people." 11 8
The third reform cluster therefore is on the imposition of more
stringent Corporate and Civic Responsibility. In the public sector, we have
imposed stricter good governance standards when we authored the GOCC
Governance Act in the 15th Congress.
On another aspect, criminals hide behind the separate personality
given to corporations. Shareholders have little incentive to be vigilant
because the corporation itself is not subject to criTT?-inal liability.
In compliance therefore with our obligations under the United Nations
Convention Against Corruption, or the UNCAC, to prevent the use of the
corporation as a vehicle for committing crimes, we hereby seek to impose
corporate criminal liability and penalties for graft and corruption. Aside
from having to pay hefty fines, the corporation may also suffer revocation
of its registration.
In addition, corporations vested with public interest are now required
to have independent directors as part of the board. Further, the board of
directors of such corporations shall elect a compliance officer. Educational
institutions, banks, insurance, transportation, telecommunication
companies, publicly listed companies, among others, are examples of
corporations vested with public interest. The SEC, in the interest of the
public, may expand the list of corporations vested with public interest.
Strengthening the Policy and Regulatory Corporate Framework
The fourth and last reform cluster includes provisions on (a)
arbitration of commercial disputes; (b) amendments on dissolution; and
(c) the alignment of SEC's powers under the Corporation Code with the
Securities Regulation Code. Presently, the SEC is equipped under the
Securities Regulation Code with powers that are proper to an investigative
and regulatory agency. It can issue subpoenas, cease and desist orders, and
it can cite persons in contempt.
The amendments we are presenting to this Chamber seek to vest the
same power in the SEC over ordinary corporations.
The proposed amendments will also provide expanded grounds
for dissolution and a more streamlined process for both voluntary and
involuntary dissolution.
Finally, a provision on arbitration is included in the proposed
amendments, recognizing that methods alternative to litigation can resolve
disputes in a more practical and efficient manner.
, 1
a.
In the House of Representatives, one of the sponsors of
ill that eventually became the RCCP explained that:
'The Bill at hand seeks to remedy this situation by updating the law
n d making it more attuned to the current world order and bringing the
untry' legal framework for corporations into the 21st century. Among
th rs, the Bill:
1) enables corporations registered in the Philippines to compete
lobully by codifying international corporate best practices;
2) encourages entrepreneurship and the formation of small
businesses by authorizing the establishment of one person corporations;
3) contributes to the ease of doing business by a) mandating the
·urities and Exchange Commission (SEC) to develop and implement
l ctronic filing and monitoring systems, and b) permitting corporations
to exist perpetually, unless their Certificates of Incorporation specify
therwise;
4) enhances the country's competitiveness by favorably impacting
two ease-of-doing-business indicators, particularly in starting a business
and protecting minority stockholders;
5) promotes stockholders' rights by a) expanding the right of a
tockholder to inspect the books of the corporation to include a stockholder's
representative who may be more knowledgeable in corporate issues; b)
affording stockholders and members of the Boards to remotely participate
in meetings and to vote in the same;
6) deters corporate abuse by a) requiring the election of independent
directors in entities vested with public interest; b) providing for corporate
criminal liability, holding not only the individuals responsible for their
violations but the corporation itself, subjecting the latter to hefty fines;
c) streamlining cooperation between various regulatory agencies and the
118
Journal of the Senate, December 13, 2016, pp. 724-882.
OMMENTARIE AND JURI PR DEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
40
· SEC; and d) end�wing the SEC with additional powers, including the power
to hold persons m contempt for failing to comply with any of the SEC's
orders or subpoenas." 119
11.08.
Good Governance under RCCP. In addition, a
good number of the amendments to the Corporation Code under the
R�CP are intended to strengthen good corporate governance, which
will also protect the rights of stockholders, and deter corporate
12
�buses and fraud as well as graft and corrupt practices. 0 The intent
1s to apply good governance principles not only on listed companies
but on all corpora�ions as well.121 The Good Governance principles
that are adopted m the RCCP are identified and discussed in the
notes to Section 22 of this book.
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
Republic Act No. 11232
TITLE I
GENERAL PROVISIONS
Definitions and Classifications
SECTION 1. Title of the Code. - This Code shall
be known as the "Revised Corporation Code of the
Philippines".
NOTES
History of Philippine Corporate Law. The first
1.
g neral law on corporations in the Philippines was Act No. 1459,
known as the Corporation Law, which was passed by the Philippine
ommission in 1906 and took effect on April 1, 1906. Act No. 1459
was practically a codification of the American law on corporations. 1
a.
Batas Pambansa Blg. 68, otherwise known as "The
Corporation Code of the Philippines", repealed Act No. 1459 in 1980.2
The Corporation Code took effect on May 1, 1980.
1
119 Congressional Records, October 8, 2018, pp. 17-18.
120
Note to S.B. No. 1011; Explanatory Note
and 528.
121
Explanatory
Explanatory Note to S.B. Nos. 1011 and 231.
to House Bill Nos. 877
Harden v. Benguet Consolidated Mining Co., G.R. No. L-37331, March 18,
1933, 58 Phil. 141, 145.
2 Hereinafter referred to as Corporation Code or "Corp. Code."
41
MME TARIE AN
J R
R
THE REV! ED
RP RATI N
OF THE PHILIPPINES
'1 N E
DE
N
b.
The Corporation Code was expressly repealed by Republic
·Act No. 11232, otherwise known as the "Revised Corporation Code
of the Philippines" (RCCP). Section 187 of the RCCP provides that:
"Batas Pambansa Blg. 68, otherwise known as 'The Corporation Code
of the Philippines', is hereby repealed. Any law, presidential decree
or issuance, executive order, letter of instruction, administrative
order, rule or regulation contrary to or inconsistent with any
provision of this Act is hereby repealed or modified accordingly."
Most of the provisions of the Corporation Code were retained and
became part of the RCCP. However, the RCCP did not merely amend
the Corporation Code. The RCCP is a complete code on corporations
that embodies the provisions of the Corporation Code that Congress
opted to reenact.
1.01. Effectivity of RCCP. Section 188 of the RCCP provides
that the law "shall take effect upon completion of its publication
in the Official Gazette or in at least two (2) newspapers of general
circulation." The entire RCCP was published in the Manila Bulletin
and the Business Mirror on February 23, 2019. Accordingly,
pursuant to Section 188, the RCCP took effect on February 23, 2019
since it is no longer necessary for fifteen days from publication to
expire before the law takes effect. This view is expressed in the
Notice dated February 28, 2019 of the Office of the Commission
Secretary of the Securities and Exchange Commission (SEC).
2.
Applicability of RCCP. The Revised Corporation
Code applies to all corporations already in existence at the time the
RCCP took effect. The RCCP is consistent with the mandate under
Section 16, Article XII of the Constitution for Congress to prescribe
all the criteria for the "formation, organization, or regulation"
of private corporations in a general law applicable to all without
discrimination. 3
2.01. Effect of Repeal of the Corporation Code. Section 185
of the RCCP provides that "a corporation lawfully existing and doing
business in the Philippines affected by the new requirements of this
Code shall be given a period of not more than two (2) years from the
effectivity of this Act within which to comply." However, there are
also provisions of the RCCP that, in effect, directly modify the Articles
of Incorporation of existing corporations, whether incorporated under
the Corporation Code or the old Corporation Law. For example, the
r1
111
i
l!'
I
ti
H J_,J PPTNI!.:
d limit d th corporate t rm to 50 years while the
p i-ati n Law allow d p rpetual term for cer�ain types of
_
_
· i O • Thu , a corporation that was registered m 1967 with
1
1 t rm was deemed to exist for 50 years only under the
p ati n ode but reckoned from � ay 1, 1980 or � p to M� y 1
:
o Ul 1- dissolved or extended withm the prescribed period.
.
1 J i TI,
pr turned to the previous rule under the Corporat10n �aw.
• l tl passage of the RCCP, therefore, all existing corporat10ns
1
w h v p rpetual term unless they choose to have a fixed term. 5•
a.
It should be recalled that Section 148 of the Corp? ration
d al O contained substantially the same provisions a� Sectio� 185
of th RCCP. All corporations lawfully existing and domg busm�ss
i.n th Philippines on the date of the effectivity _ of the Corporation
d. and thereafter authorized, licensed or registere� by the SEC
w r deemed to have been authorized, licensed or registered under
th provisions of the Corporation Code, subject to t� e terms and
.
. nditions of its license, and governed by the provisi�ns o� t�e
ode. Existing corporations were also given a 2-year period wit�m
_
which to comply with the provisions of the Corporati? n Code. Like
he RCCP, there were also provisions of the Corporat� on Code t�at,
_
in effect, directly modified the Articles of Incorporat10n of exis�mg
corporations. For example, the rule giving all sh�reho�ders the right
to vote was applied to a corporation that was m ex�stence at the
time of the effectivity of the Corporation Code despit� � co�trary
provision in the Articles of Incorporation. 6 The provis10n m the
Articles of Incorporation was valid under Act No. 1459 but was later
considered invalid under the Corporation Code.
b.
Mandatory Provisions. The rule is the same under �he
RCCP such that existing corporations are bound to comply with
.
the mandatory provisions of the RCCP. All corporat10_ns that � re
registered and existing under the Corporation Code contmue to exist
under the RCCP. Nevertheless, all the mandatory provisions ?f �he
RCCP are binding on existing corporations. For �xample, existmg
_
corporations must comply with all the reportorial requirements
imposed under the RCCP although the required reports were not
previously filed by corporations.
SEC-SGC Opinion No. 16-24, October 13, 2016.
Sec. 11, RCCP.
, October 18, 2004, 440
scastillo, et al. v. Balinghasay, et al., G.R. No. 150976
SCRA442.
4
5
3League of Cities of the Philippines, et al. v. Commission on Elections, et al.,
G.R. Nos. 176951 and 177499, November 18, 2008.
r1•1
K
s
4
MMEl�'fARI;
N
b.
The Corporation Code was expressly repealed by Republic
Act No. 11232, otherwise known as the "Revised Corporation Code
of the Philippines" (RCCP). Section 187 of the RCCP provides that:
"Batas Pambansa Blg. 68, otherwise known as 'The Corporation Code
of the Philippines', is hereby repealed. Any law, presidential decree
or issuance, executive order, letter of instruction, administrative
order, rule or regulation contrary to or inconsistent with any
provision of this Act is hereby repealed or modified accordingly."
Most of the provisions of the Corporation Code were retained and
became part of the RCCP. However, the RCCP did not merely amend
the Corporation Code. The RCCP is a complete code on corporations
that embodies the provisions of the Corporation Code that Congress
opted to reenact.
1.01. Effectivity of RCCP. Section 188 of the RCCP provides
that the law "shall take effect upon completion of its publication
in the Official Gazette or in at least two (2) newspapers of general
circulation." The entire RCCP was published in the Manila Bulletin
and the Business Mirror on February 23, 2019. Accordingly,
pursuant to Section 188, the RCCP took effect on February 23, 2019
since it is no longer necessary for fifteen days from publication to
expire before the law takes effect. This view is expressed in the
Notice dated February 28, 2019 of the Office of the Commission
Secretary of the Securities and Exchange Commission (SEC).
2.
Applicability of RCCP.
The Revised Corporation
Code applies to all corporations already in existence at the time the
RCCP took effect. The RCCP is consistent with the mandate under
Section 16, Article XII of the Constitution for Congress to prescribe
all the criteria for the "formation, organization, or regulation"
of private corporations in a general law applicable to all without
discrimination.3
2.01. Effect of Repeal of the Corporation Code. Section 185
of the RCCP provides that "a corporation lawfully existing and doing
business in the Philippines affected by the new requirements of this
Code shall be given a period of not more than two (2) years from the
effectivity of this Act within which to comply." However, there are
also provisions of the RCCP that, in effect, directly modify the Articles
of Incorporation of existing corporations, whether incorporated under
the Corporation Code or the old Corporation Law. For example, the
TrrfLE
fin
ions
Li
od limit d th c rporate term to 50 year� while the
p r. Li n L w allow d perpetual term for cer�am types of
_
_
1 1 nr i n . Thu , a corporation that was registered m 1967 with
Ill
al t· rm was deemed to exist for 50 years only under the
v1 oro.ti n ode but reckoned from May 1, 1980 or 1:1-P to M3:y 1
:
o
\. tnl
dissolved or extended within the prescribed period.
.
1h
pr turned to the previous rule under the Corporation �aw.
, , l th pa sage of the RCCP, therefore, all existing corporat10ns
w hav p rpetual term unless they choose to have a fixed term.5•
1
a.
It should be recalled that Section 148 of the Corp?ration
od -1 0 contained substantially the same provisions a� Sectio� 185
f th RCCP. All corporations lawfully existing and domg busm�ss
i l th Philippines on the date of the effectivity of the Corporat10n
.
cl. and thereafter authorized, licensed or registere� by the SEC
w r deemed to have been authorized, licensed or registered under
tl provisions of the Corporation Code, subject to t� e terms and
.
. nditions of its license, and governed by the provisi� ns o� t� e
ode. Existing corporations were also given a 2-year period wit�m
_
which to comply with the provisions of the Corporati?n Code. Like
the RCCP, there were also provisions of the Corporat�on Code_ t� at,
in effect, directly modified the Articles of Incorporat10n of exis� mg
corporations. For example, the rule giving all sh�reho�ders the right
to vote was applied to a corporation that was m ex�stence at the
time of the effectivity of the Corporation Code despit": � co�trary
provision in the Articles of Incorporation.6 The provision m the
Articles oflncorporation was valid under Act No. 1459 but was later
considered invalid under the Corporation Code.
b.
Mandatory Provisions. The rule is the same under �he
RCCP such that existing corporations are bound to comply with
.
the mandatory provisions of the RCCP. All corporat10ns that �re
_
registered and existing under the Corporation Code cont�n_ue to exist
under the RCCP. Nevertheless, all the mandatory provis10ns ? f � he
RCCP are binding on existing corporations. For � xample,_ existmg
corporations must comply with all the reportorial reqmrements
imposed under the RCCP although the required reports were not
previously filed by corporations.
SEC-SGC Opinion No. 16-24, October 13, 2016.
Sec. 11, RCCP.
er 18, 2004, 440
6Castillo, et al. v. Balinghasay, et al., G.R. No. 150976, Octob
SCRA442.
4
5
3League of Cities of the Philippines, et al. v. Commission on Elections, et al.,
G.R. Nos. 176951 and 177499, November 18, 2008.
l'llll,11 IN!);
nP
J
THE REVI ED RP RATI N
OF THE PHILIPPINE
'J'
'!'UI� R l VI
MMENTARlE
THE R •VI ED
RP RATI N
OF THE PHILIPPINES
44
D
c.
Vested Rights under the Corporation Code. Section
145 of the Corporation Code provided that vested rights of and
liabilities incurred by any corporation, its stockholders, members,
directors, trustees, or officers under the Corporation Code are not
removed or impaired by any subsequent amendment or repeal of
the said Code or of any part thereof. Therefore, vested rights and
liabilities of existing corporations are not affected by the amendment
and repeal of the Corporation Code. This is consistent with Section
10 of Article III of the Constitution that provides that "no law
impairing the obligation of contrac;ts shall be passed."
I
d. Vested Rights under the RCCP. Consistently, existing
rights and remedies will not be affected if the RCCP is subsequently
amended or if a corporation is dissolved. The provisions of Section
184 of the RCCP are identical to the wordings of Section 145 of
the Corporation Code. Hence, under Section 184, the following are
not removed or impaired either by the subsequent dissolution of
the corporation or by any subsequent amendment or repeal of the
RCCP or of any part thereof: (1) Vested rights or remedies in favor
of or against any corporation, its stockholders, members, directors,
trustees, or officers; and (2) Any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers.
3. When the RCCP Applies Suppletorily. The general
rule is that the Corporation Code, now the RCCP, is the primary law
that should be applied in the regulation of corporations. However,
there are exceptional cases when the RCCP is not the primary law
that governs specific types of corporations. For example, the General
Banking Law and the New Central Bank Act are the primary laws on
banks. The RCCP applies only suppletorily.7 The RCCP is a general
law that applies to all types of corporations while the New Central
Bank Act and the General Banking Law regulate specifically banks
and other financial institutions. As between a general and special law,
the latter shall prevail- generalia specialibus non derogant. 8 This is
the reason for the provisions of Section 184 of the RCCP which state
that nothing in the RCCP "shall be construed as amending existing
provisions of special laws governing the registration, regulation,
monitoring and supervision of special corporations such as banks,
Koruga v. Arcenas, Jr., G.R. Nos. 168332 and 169053, June 19, 2009.
IPPINE
46
E
s
n
n ial in titutions and insurance companies." Sectio
the
to
sion
pr vid s that "notwithstanding any provi
ko Sentral ng Pilipinas and
1 r , r gul tors such as the Bang
rity over
11, I l uranc Commission shall exercise primary autho
n nancial institu:io��•
IJI iul rporations such as banks, _nonba � �
.
urance companies under their supervis10n and regulation
111 l l
es
Similarly, the Insurance Code of the Philippines appli
RCC;p
the
while
te
statu
ry
Ip in ur nee corporations as prima
like
uppletorily. Accordingly, insurance corporations,
1ppli
rate
corpo
as
SEC
the
of
rs
l l are still under the regulatory powe
comply with
ri 'ti . For example, insurance corporations must still
mandated
as
SEC
the
to
nts
l,h ubmission of reportorial requireme
ct to the
subje
are
s
ration
th RCCP. However, insurance corpo
it of
pursu
the
in
ission
Comm
rrulatory powers of the Insurance
al
Sentr
ko
Bang
the
that
er
mann
11 u ·ance business, in the same
nce,
insta
for
,
Thus
such.
as
Pilipinas (BSP) regulates banks
Insurance
l minimum paid-up capital may be imposed by the
on banks,
BSP
the
by
and
s
om.mission on insurance corporation
1 p ctively.
and
In other words, certain facets of the organization
b.
T
ws.
l
ial
�e
are governed by spe�
�
t gulation of specific companies
while
nly
p ial laws governing those corporations apply pnma
ple, the Pre­
h RCCP applies suppletorily. Thus, as another exam
pre-need
d Code or Republic Act No. 9829 is the primary law on
mpanies.
c.
The same rule was applied in one case where the Supreme
urt observed that: "Without doubt, the Corporation Code is the
neral law providing for the formation, organization and regulation
f private corporations. On the other hand, Republic Act No. 6657
i the special law on agrarian reform."9 Hence, the said special law
pr vails on matters involving agrarian reform.
4.
Other Applicable Laws and Rules. There are also
p cial laws that apply to corporations. Thus, Republic Act �o. 87�9
therwise known as the Securities Regulation Code, Presidential
D cree No. 902-A, Republic Act No. 7041 otherwise known as The
Foreign Investment Act of 1991, among other laws, contain regulatory
7
1bid.; In Re: Petition for Assistance in the Liquidation of the Rural Bank
8
of Bokod (Benguet), Inc., PDIC v. Bureau of Internal Revenue, G.R. No. 158261,
December 18, 2006, 511 SCRA 123, 141; Laureano v. Court of Appeals, 381 Phil. 403,
411-412 (2000).
9Hacienda Luisita, Incorporated v. Presidential Agrarian Reform Council, G.R.
ine Kingford, Inc., G.R. No.
No. 171101, July 5, 2011; Tuna Processing, Inc. v. Philipp
1 5582, February 29, 2012.
MMEN'.f'ARJE AND J URI PR DEN E
DE
'l'HE REVI ED
RP RATION
OF THE PHILIPPINES
46
N
. norms that are part of Corporate law. Similarly, corporate law rules
are included in Commonwealth Act No. 108, otherwise known as the
Anti-Dummy Law. 10 In addition, the RCCP takes into consideration
various laws such as Republic Act No. 10173 otherwise known as
the Data Privacy Act, 11 Republic Act No. 8293, otherwise known as
the Intellectual Property Code of the Philippines, 12 and Republic Act
No. 10667, otherwise known as the Philippine Competition Act.13
4.01. New Civil Code Supplements Corporate Law.
There are missing details of Corporate Law that are supplied by the
New Civil Code. For instance, age.ncy rules apply to certain acts of
directors, officers or stockholders in the absence of any applicable
provision in the Corporation Code. 14
4.02. SEC Rules and Regulations. Rules and regulations
issued by the SEC are likewise cited in this work. However, opinions
of SEC Legal Officers do not have the force and effect of SEC Rules
and Regulations because as a collegial body only the SEC en bane
can adopt rules and regulations. 15 Only the SEC en bane can issue
opinions that have the force and effect of regulations. 16
a.
Nevertheless, it does not mean that opinions of SEC
Officers are not given any weight.17 Opinions of SEC Officers are
cited in this work because SEC Officers implement the statutory
provisions and even act in a specific way in the absence of statutory
rules or rules and regulations promulgated by the SEC en bane.
Until the Supreme Court makes doctrinal pronouncements on the
specific matters regulated/acted upon by SEC Officers, it is advisable
for Corporate law "practitioners" to be familiar with the opinions of
SEC Officers. In addition, in many cases, SEC officers, including the
See Section 7, RCCP.
11 See Sections 73 and 154, RCCP.
10
12
See Section 73, RCCP.
See Sections 26, 37, 39, and 176, RCCP.
13
Litonjua, Jr. v. Eternit Corporation, G.R. No. 144805 ' June 8' 2006' 490
SCRA 204.
15
Gamboa v. Teves, G.R. No. 176579, October 9, 2012 citing 4.6 and 5.l(g),
Securities Regulation Code.
16
Ibid., citing 4.6 and 5.l(g), Securities Regulation Code.
17See SEC Memorandum Circular No. 15, Series of 2003 that provides for the
rules on requests for Legal Opinions from the SEC. This Memorandum Circular not
only provides for the procedure for making request but likewise enumerates cases
when the Commission will refrain from giving opinions.
14
TJT
47
si,
1, it p r ua iv authorities that are usually
nee of onstitutional and statutory provisions.
SEC. 2. Corporation defined. - A corporation is
n artificial being created by operation of law, having
tho right of succession and the powers, attributes and
properties expressly authorized by law or incident to its
~xlstence.
NOTES
I.
Definition and Concept. Chief Justice Marshall of the
I Jnll d tates Supreme Court described a corporation as "an artificial
I ina, invisible, intangible and existing only in contemplation
11
111 ." 18 A corporation was also defined as a collection of many
1lt1i iduals united into one body, under a special denomination,
111 in perpetual succession under an artificial form, and vested_ by
h p licy of the law with the capacity of acting in several respect
n individual, according to the design of the institution or the
r conferred upon it either at the time of its creation or any
quent period of its existence. 19
2.
Attributes of a Corporation. The following attributes
c, n b derived from the definition of corporation under Section 2:
(1)
It is an artificial being;
(2)
It is created by operation of law;
(3)
It has the right of succession; and
(4) It has the powers, attributes and properties expressly
authorized by law or incident to its existence.
Juridical Personality. A corporation is a being; it
3.
is · separate juridical entity. A corporation is one of the juridical
p rsons as provided for under Article 44 of the New Civil Code. As
a juridical entity, the corporation has rights and obligations under
xisting laws.
8Trustees ofDarmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819).
t 91. Maurice Wormser, WML. Clark, Jr., Handbook of the Law of Private
orporations, 3rd Ed., p. 3, hereinafter referred to as "Clark on Corporations."
1
4
Jl
MM
AR1
THE REVI •
RP RA'I'I
OF 'l'HE PHILIPPINE
'l'l J� I LWJ E
a.
For example, "when an entity has no separate juridical
personality, it has no legal capacity to sue. Section 2, Rule 3 of
the Rules of Court states that 'only natural or juridical persons or
entities authorized by law may be parties in a civil action."20
4.
Concession Theory. Section 2 expresses the basic
postulate in corporation law that "a corporation is an artificial being
created by operation of law." It owes its life to the State and its birth
is purely dependent on the State's will. A corporation is a creation of
statute that defines its powers and prescribes rules for the regulation
of its internal as well as its business affairs. As Berle so aptly stated:
"Classically, a corporation was conceived as an artificial person,
owing its existence through creatio� by a sovereign power. As a
matter of fact, the statutory language employed owes much to Chief
Justice Marshall, who in the Dartmouth College decision defined
a corporation precisely as 'an artificial being invisible, intangible,
and existing only in contemplation of law."21 This theory is the
Concession Theory and is also sometimes called the "Fiat Theory,"
"Government Paternity Theory," or the ''Franchise Theory."
a.
The well-known authority, Fletcher, summarized the
matter thus: "A corporation is not in fact and in reality a person, but
the law treats it as though it were a person by process of fiction, or
by regarding it as an artificial person distinct and separate from its
individual stockholders. It owes its existence to law. It is an artificial
person created by law for certain specific purposes, the extent of
whose existence, powers and liberties is fixed by its charter." Dean
Pound's terse summary, that a corporation is a juristic person
resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.22
b.
There is thus a rejection of Gierke's Genossenchaft
Theory, the basic theme of which to quote from Friedmann, "is
the reality of the group as a social and legal entity, independent
of state recognition and concession." A corporation, as known in
20National Electrification Administration v. Maguindanao Electric Cooperative,
Inc., G.R. Nos. 192595-96, April 11, 2018 citing Alabang Development Corporation v.
Alabang Hills Village Association, G.R. No. 187456, June 2, 2014 and S.C. Megaworld
Construction and Development Corporation v. Parada, G.R. No. 183804, September
11, 2013.
21Tayag v. Benguet Consolidated, Inc., G.R. No. 23145, November 29, 1968.
22Tayag v. Benguet Consolidated, Inc., Ibid.
l• THE P II IPPINE
TIT
VI ION
D finitions and Classifications
49
juri prudenc , is a creature without any existence until
iv d the imprimatur of the State acting according to law.
ally inconceivable therefore that it will have rights and
of a higher priority than that of its creator. More than
·1
annot
legitimately refuse to yield obedience to acts of its
l·
ns, certainly not excluding the judiciary, whenever called
Aside from the Genossenchaft Theory, other theories.
.
t, nc :rning corporations that may influence the development of
, 1 p ration law, although not espoused in this jurisdiction, are as
11
(1) Realist or Inherence Theory. A corporation under
this theory is the legal recognition of group interests that, as
a practical matter, already exists. This theory tends to view
the corporation as a group whose (group) activities are such
as to require separate legal recognition, with many of the
attributes of a natural person, and by its focus on the voluntary
associational activities of individuals provides a basis for
invoking the usual constitutional and other legal protection for
individuals. 24
(2) Enterprise Theory. This theory stresses the
underlying commercial enterprise without emphasis on entity­
aggregate distinctions of the components.25
(3) Symbol Theory. Under this theory, a corporation
is a symbol for the aggregate of the associates in their group
personalities. A corporation is regarded as the symbol for the
aggregate of group jural relations of the persons composing the
enterprise. 26
5.
Franchises. A corporation is granted by the State the
right to exist by virtue of a primary franchise. A franchise is a special
privilege conferred by governmental authority, and which does not
belong to citizens of the country generally as a matter of common
23Ibid.
Henn and Alexander, pp. 145-146.
24
25Jbid. Note however that this doctrine is being used in support of other­
doctrines.
26Jbid.; R. Stevens, Handbook on the Law of Private Corporations, 2nd 1949
Ed., Section l.
50
'rim R�Vl
OMMENTARI • AND JURI PRUDEN E N
THE REVI ED CORPORATION ODE
OF THE PHILIPPINES
ti n, th r for cannot b created except by or under a special
. it fr m th tate. 30
right. Its meaning depends more or less upon the connection in
which the word is employed and the property and corporation to
which it is applied. It may have different significations. 27
a.
For practical purposes, franchises, so far as relating to
corporations, are divisible into (1) corporate or general franchise;
and (2) special or secondary franchise. The former is the franchise to
exist as a corporation, while the latter, refers to certain rights and
privileges conferred upon existing corporations, such as the right to
use the streets of a municipality to lay pipes of ,tracks, erect poles or
string wires. 28
b.
The primary franchise of a corporation, that is, the
right to exist as such, is vested in the individuals who compose the
corporation and not in the corporation itself, and cannot be conveyed
in the absence of legislative authority to do so; the special or
secondary franchises of a corporation 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. 29
c.
If individuals elect a set of officers after which they
merely folded their arms and exerted no further effort to effec.tuate
the necessary registration, no juridical personality as a corporation
shall be bestowed on the group. Such group of individuals would
only be considered an association or at most a partnership. The right
to be and to act as a corporation is not a natural or civil right of any
person; such right as well as the right to enjoy the immunities and
privileges resulting from incorporation constitute a franchise and a
27
J.R.S. Business Corporation v. Imperial Insurance, Inc., G.R. No. L-19891,
July 31, 1964, 11 SCRA 634 (1964).
28
/bid., citing 2 Fletcher's Cyclopedia Corp. Sec. 1148; 14 C. J. p. 160; Adams
v. Yazon & M. V. R. Co. 24 So. 200, 317, 28 So. 956, 77 Miss. 253, 60 L.R A. 33 et seq.
29J.R.S. Business Corporation v. Imperial Insurance, Inc., ibid., citing 14 C.J.
pp. 169, 161; Adams v. Railroad, ibid.; 2 Fletcher's Cyclopedia Corp., Secs. 1153,
1158; 3 Thompson on Corporations [2d Ed.] Secs. 2863, 2864, 14A C.J. 543, 557; 1
Fletcher's Cyc. Corp. Sec. 1224; Memphis and L.R.R. Co. v. Berry, 5 S. Ct. 299, 112
U.S. 609, 28 L. Ed 837; Vicksburg Waterworks Co. v. Vicksburg, 26 S. Ct. 660, 202
U.S. 453, 50 L. Ed. 1102, 6 Ann. Cas. 253; Arthur v. Commercial and Railroad Bank,
9 Smedes and M. 394, 48 Am. Dec. 719; Adams v. Railroad, ibid.; 14A C.J. 542, 557;
3 Thompson on Corp. [2d Ed.] Sec. 2909, except such special or secondary franchises
as are charged, with a public use (2 Fletcher's Cyc. Corp. sec. 1225; 14A C.J. 544; 3
Thompson on Corp. [2d Ed.] sec. 2908); Arthur v. Commercial & R.R. Bank, supra;
McAllister v. Plant, 54 Miss. 106.
51
, t,
111
d.
A corporation is therefore created by operation of law when
[P'tmt d a franchise through a special law or if it is organized
I r a i; neral law. The general law under which a corporation can
d in the Philippines is the Corporation Code, now the
Examples of secondary franchises are those issued by the
E
ompanies that issue securities. Franchises issued to public
u L' iti-s are also in the nature of secondary franchises.
l
.01. Creation by Special Law. The Constitution provides
hut only government-owned and controlled corporations are the
l d at corporations that may be created by special law.
a.
Special laws may also recognize that certain entities may
quire juridical personality without directly conferring corporate
to tu automatically by the mere passage of the law. For instance in
n case, the special law, without directly creating national sports
a ociations, recognized the existence of the said national sports
1,
ciations and provided for the manner by which these entities
may acquire juridical personality. 31
1.1
b.
Other examples are Local Water Districts (LWD) that are
n idered government-owned corporations with special charters
in they are created pursuant to Presidential Decree No. 198. 32
'l'h y are not created under the Corporation Code. Note, however, that
f WDs do not exist automatically upon the passage of Presidential
cree No. 198. They are created pursuant to Presidential Decree
N . 198 that constitutes their special charter.
PROBLEMS:
l.
Q:
Petitioner J. R. Da Silva, is the President of the J.R.S. Business
Corporation (JRS), an establishment duly franchised by the
Congress of the Philippines, to conduct a messenger and
30
Recreation and Amusement Association of the Philippines v. The City
of Manila, et al., G.R. No. L-7922, February 22, 1957, citing Vol. II, Tolentino's
ommentaries and Jurisprudence on the Commercial Law of the Philippines, p. 734.
31
International Express Travel & Tour Services, Inc. v. Court of Appeals, G.R.
No. 119002, October 19, 2000, citing Section 11 of Republic Act No. 3135 and Section
7 of Presidential Decree No. 60
32
Feliciano v. Aranez, G.R. No. 165641, August 25, 2010.
OMMENTARI • AND J RI PR EN •
THE REVISED ORPORATI N ODE
OF THE PHILIPPINES
62
N
'T'H
delivery express service. On July 12, 1961, the respondent
Imperial Insurance, Inc. (Imperial), presented with the CFI of
Manila a complaint (Civ. Case No. 47520), for sum of money
against JRS. After JRS submitted its answer, Imperial and JRS
entered into a compromise agreement whereby JRS admitted
its liability. However, the judgment obligation was not paid by
JRS. A writ of execution was issued by the CFI and the following
properties were sold at the execution sale: "whole capital stocks
of the defendants J.R.S. Business Corporation, the business
(corporate) name, right of operation, the whole assets, furniture,
and equipment, the total liabilities, a�d Net Worth, b�oks of
accounts, etc." Was the sale of the (1) secondary franchise, (2)
corporate name, and (3) the shares of stock valid?
A:
flEVI
3
ld I ah lad P rkins, who died on March 27, 1960 in New York
it , 1 ft among other properties, two stock certificates covering
· ,002 shares of Benguet Consolidated, Inc., the certificates
b ing in the possession of the County Trust Company of New
York, which, is the domiciliary administrator of the estate of
the deceased. On August 12, 1960, Prospero Sanidad instituted
ancillary administration proceedings in the Court of First
Instance (CFI) of Manila; Lazaro A. Marquez was appointed
ancillary administrator but was later substituted by Renato
D. Tayag. On January 27, 1964, the CFI of Manila ordered'
the domiciliary administrator, County Trust Company, to
"produce and deposit" the stock certificates with the ancillary
administrator or with the Clerk of Court. The domiciliary
administrator did not comply with the order, and so upon motion
of the ancillary administrator, the Court (1) considered as lost
for all purposes in connection with the administration and
liquidation of the Philippine estate of ldonah Slade Perkins the
stock certificates covering the 33,002 shares of stock standing
in her name in the books of the Benguet Consolidated, Inc.
(Benguet), (2) ordered said certificates cancelled, and (3) directed
Benguet to issue new certificates in lieu of the ones deemed lost,
the same to be delivered by Benguet to either the incumbent
ancillary administrator or to the Probate Division of the Court.
Benguet questioned the order invoking, among others, one of the
provisions of its by-laws which would set forth the procedure to
be followed in case of a lost, stolen or destroyed stock certificate
which provides that in the event of a contest or the pendency of
an action regarding ownership of-such certificate or certificates
of stock allegedly lost, stolen or destroyed, the issuance of a new
certificate or certificates would await the "final decision by [a]
court regarding the ownership [thereof]." Did Benguet validly
rely on the by-laws provision?
No. The sale was not valid. The right to operate a messenger and
express delivery service, by virtue of a legislative enactment,
is admittedly a secondary franchise (Republic Act No. 3260,
entitled "An Act granting the J.R.S. Business Corporation a
franchise to conduct a messenger and express service") and,
as such, under our corporation law, is subject to levy and sale
on execution together and including all the property necessary
for the enjoyment thereof. The law, however, indicates the
procedure under which the same (secondary franchise and
the properties necessary for its enjoyment) may be sold under
execution. Said franchise can be sold under execution, when
such sale is especially decreed and ordered in the judgment and
it becomes effective only when the sale is confirmed by the Court
after due notice (Section 56, Corporation Law). The compromise
agreement and the judgment based thereon do not contain any
special decree or order making the franchise answerable for the
judgment debt.
The same thing may be stated with respect to corporate
name of JRS and its capital stock. A corporate name and
capital stock are necessarily included in the enjoyment of the
franchise. Like that of a franchise, the law mandates that
property necessary for the enjoyment of said franchise, can only
be sold to satisfy a judgment debt if the decision especially so
provides. No such directive appears in the decision. Moreover, a
trade name or business name cannot be sold separately from the
franchise, and the capital stock of JRS or any other corporation,
for that matter, represents the interest and is the property
of stockholders in the corporation, who can only be deprived
thereof in the manner provided by law. It, therefore, results that
the inclusion of the franchise, the trade name and/or business
name and the capital stock of JRS in the execution sale has no
justification. (J.R.S. Business Corporation, et al. v. Imperial
Insurance, Inc., G.R. No. L-19891, July 31, 1964)
l
A:
No. Such reliance is misplaced. In the first place, there is no
such occasion to apply such by-law. Assuming that a contrariety
exists between the above by-law and the command of a court
decree, the latter is to be followed. The view adopted by Benguet
is fraught with implications at war with the basic postulates of
corporate theory. It is undeniable premise that, "a corporation is
an artificial being created by operation of law..." "A corporation
as known to Philippine jurisprudence is a creature without
any existence until it has received the imprimatur of the state
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, Inc., G.R. No. 23145, November 29, 1968)
RP RATI
OMMENTARIE AND JURI PRUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
54
6.
Contract Theory. Under the contract theory,
incorporation is deemed to involve contracts among the members,
between the members and the corporation, and between the
members or the corporation and the State.33
a.
Thus, because of the contract between the State and
the corporation, the corporation is entitled to the right against
impairment of contracts. 34 The State cannot likewise take the life of
the corporation without due process.
b.
Incorporation is a contra.ct among those who compose
the corporation and their contract is governed and evidenced by the
Articles of Incorporation.
c.
There is also a contract between the corporation and its
stockholders or members. Therefore, stockholders and members
cannot disregard the provisions of the Articles of Incorporation
and By-laws of the corporation. The corporation, in turn, cannot
disregard the rights of the shareholders or members provided for in
the Articles of Incorporation and By-laws.
7.
Right of Succession. Chief Justice Marshall explained
that a corporation, being a mere creature of law, "possesses only
those properties which the charter of its creation confers upon it,
either expressly or as incidental to its very existence. These are
such as are supposed best calculated to effect the object for which
it was created. Among the most important is immortality, and, if
the expression may be allowed, individuality; properties by which a
perpetual succession of persons are considered the same, and may
act as a single individual. They enable a corporation to manage its
own affairs, and to hold property without the perplexing intricacies,
the hazardous and endless necessity, of perpetual conveyances for
the purpose of transmitting it from hand to hand. It is chiefly for the
purpose of clothing bodies of men in succession with these qualities
and capacities that corporations were invented, and are in use. By
these means, a perpetual succession of individuals is capable of
acting for the promotion of the particular object, like one immortal
being."35 Hence, one of the distinctive features of a corporation is the
right of succession that is also known as "perpetual succession."
Henn and Alexander, p. 146.
Trustees of Darmouth College v. Woodward, 17 U.S. (4 Wheat) 519 (1819).
35
Supra.
33
34
't!TLE I -
lJJ"
DE
PR
F THE PHI IPPIN •
P rpetual succession is "that continuous existence which
orporation to manage its affairs, and hold property
th necessity of perpetual conveyances, for purposes of
mitting it. By reason of this quality, this ideal and artificial
l' on remains, in its legal entity and personality, the same, though
·u nt changes may be made of its members."36
b.
Another striking description of the concept of perpetual
u,
sion is by Blackstone who said that "all individual members
i,hat have existed from the foundation to the present time, or that
l u l ver hereafter exist, are but one person in law, a person that
n v r dies; in like manner as the River Thames is still the same
riv r, though parts which compose it are changing every instant."37
c.
Thus, a corporation continues to exist even if there is a
•hange in those who compose it. Death of a shareholder or transfer of
hi hares will not affect the continued existence of the corporation.
d.
In SME Bank, Inc., etal. v. De Guzman, etal., 38 the Supreme
ourt explained that a shift in the composition of the shareholders
fa corporation would not affect its existence and continuity. The
juridical entity remains and "the corporation continues to be the
mployer of its people and continues to be liable for the payment of
their just claims."39
e.
Perpetual succession does not always imply corporate
immortality but rather a continuity of existence irrespective of
that of its components.40 Section 11 of the RCCP provides that a
orporation shall have perpetual existence unless its Articles of
Incorporation provides otherwise. 41 The maximum corporate term
of fifty (50) years imposed under Section 11 of the Corporation Code
was deleted in the RCCP. Previously, the term of a corporation is
50 years, subject to further extension. While the limitation on the
·orporate term was removed by the RCCP, the corporation may still
Black's Law Dictionary, 6th Ed. (1990), p. 1141.
1 Blackstone Commentaries 467-468.
38
G.R. Nos. 184517 and 186641, October 8, 2013.
39
SME Bank, Inc., et al. v. De Guzman, et al., ibid.; See Note 5 under Section
40 where the equity transfer is distinguished from asset transfer.
40
William Mead Fletcher, Cyclopedia of the Law of Private Corporations, Vol.
1, p. 8, hereinafter referred to as "1 Fletcher 18."
41
Secs. 11, 13(d) and Sec. 14, RCCP.
36
37
T
·IE A
J RJP
ED
RP RAT
OF THE PHILIPPIN.
o�t for a fixed term. In such a case, the corporation still enjoys the
right of succession during its fixed term.
8.
Doc!rine of Separate Personality. A corporation
has a personality separate and distinct from its members. It has a
personality separate and distinct from the persons composing it as
we�l as from that of any other entity to which it may he related.42
This separate juridical personality is recognized under the New Civil
Cod� because its �ticle 44 specifies corporations as among those
_ _
cons1d�r d as Juridical persons wit� juridical personality, separate,
�
and d1s�mct from that of each shareholder or member. Hence,
orporat10�s have separate properties, rights and obligations. For
�
mstan_ce, rights can be enforced for and against the corporation and
the fih�g of a complaint against the stockholder is not ipso facto a
_
complamt agamst the corporation.43
a.
The New Civil Code provides that the personality of
_ .
. . _
Juridical entities begins as soon as they have been constituted
ac ording to la�.•• Article 45 of the New Civil Code provides that
�
private �orporahons are regulated by laws of general application on
the subJect. On the other hand, Article 46 provides that juridical
persons may acquire and possess property of all kinds as well as
incur obligations and bring civil or criminal actions in conformity
_
with the laws and regulations of their organization.
b.
The RCCP added a new type of corporation the One
Person Corporation. One Person Corporation (OPC) is a c�rporation
with a single stockholder, who may be a natural person, a trust, or
an estate. The separateness of its personality is present even if a
corporation is a One Person Corporation. 45
c.
There is only one juridical personality even if the
corporation maintains different places of business. A branch office
does not have separate legal personality. Consequently, a branch
office has no legal capacity to maintain a separate action in court. 46
Secosa, et al. v. Heirs of Erwin Suarez Francisco, G.R. No. 160039 January
29, 2004, 433 SCRA 273.
43
Philippine Overseas Telecommunications Corp. v. Sandiganbayan' G · R· No ·
174462, February 10, 2016.
44
Article 44(2), New Civil Code.
45
Secs. 116 and 130, RCCP.
46
National Electrification Administration v. Maguindanao Electric Cooperative
Inc., G.R. No. 192595-96, April 11, 2018.
42
Till', I J.i,VI
HJ' RA'l'l
TITLB I-
E
7
parate
Propertie
Because of the separate
lity of th corporation, the properties of the corporation
prop rties of its shareholders, members or officers.
J rti r gistered in the name of the corporation are owned by it
ntity separate and distinct from those who compose it. 47
A stockholder cannot sell, transfer, mortgage or encumber
48
cal
pr perties of the corporation without proper authority. Physi
the
or
sale,
for
ation
L lil the offering of the property of the corpor
rty
ptance of a counter-offer of a prospective buyer of the prope
h
throug
f th corporation can be performed by the corporation only
ate
corpor
fi rs or agents duly authorized for the purpose by
rly, a
Simila
ors.
direct
of
board
the
of
acts
y-laws or by specific
al
person
his
for
pay
to
rty
prope
such
t kholder cannot use any
9
d bts.•
s,
In the same manner, properties of the shareholder
b.
ties of the
m mbers or officers of the corporation are not the proper
50
rporation.
A shareholder has no right to file in his own name an
c.
because
action to quiet title of the properties of the corporation
older and
of the separate nature of the personality of the shareh
51 This is true even if the stockholder lent the
the corporation.
52
For the
corporation money that was used to purchase the property.
cannot
ation
corpor
a
ality
ame reason - separateness of person
or
olders
shareh
its
of
likewise file an action to recover the properties
rties
prope
members. An action filed by a corporation to recover the
failure to
of its shareholders or members should be dismissed for
real party
state a cause of action because the corporation is not the
53
in interest.
, G.R. No.
Stockholders of Guanzon & Sons, Inc. v. Register of Deeds of Manila
1962.
30,
L-18216, October
8, 2006, 490
48
Litonjua, Jr. v. Eternit Corporation, G.R. No. 144805, June
SCRA 204, 220.
47
49
Ibid.
Islands, G.R.
Siochi Fishery Enterprises, Inc., et al. v. Bank of the Philippine
2011.
19,
October
No. 193872,
, May 30,
51
Philippine National Bank v. Aznar, G.R. Nos. 171805 and 172021
2011.
50
52lbid.
53
17, 1976.
Sulo ng Bayan, Inc. v. Araneta, et al., G.R. No. L-31061, August
E
MMENTARIE AND J RI lR
THE REVISED ORP RATION
OF THE PHILIPPINES
'Jt
N
Similarly, the properties of the corporation cannot be
. d.
included in the inventory of the properties of the estate of a deceased
shareholder of the corporation. Real properties should be excluded
fron:i the inventory of the estate of the deceased shareholder if they
�rem the possession of and registered in the name of the corporation
m the absence of any cogency to shred the veil of corporate fiction.
The presumption of conclusiveness of the titles in favor of the
corporation should stand undisturbed.54
The properties of the stockholders are not part of the
e.
properties of a judicially declared insolvent corporation. Hence the
prohibition against an insolvent corporation to transfer prope�ties
does not apply to the corporation's stockholder who wishes to
transfer his (stockholder's) own personal property.
Properties belonging to a corporation cannot be attached
f.
to satisfy the debt of a stockholder. The stockholder only has an
indirect interest in the assets and business of the corporation.
9.01. Nature of Stockholders' Interest in Corporate
Properties. The interest of the shareholder in the properties of
the corporation is indirect, contingent, and inchoate. The interest
of the shareholder on a particular property becomes actual direct
and existing only upon liquidation of the assets of the cor�oratio�
and the same property is assigned to the shareholder concerned
. . As
explained in one case, there is clear distinction between the title of a
corporation and the interest of its members and stockholders in the
property of the corporation. The ownership of corporate properties
is in the corporation itself and not in the holders of its shares of
stock. '.'The interest of each stockholder 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." It was
further explained:
"x x x Properties registered in the name of the corporation are owned
by it as an entity separate and distinct from its members. While shares of
stock constitute personal property, they do not represent property of the
corporation. The corporation has property of its own which consists chiefly
of real estate (Nelson u. Owen, 113 Ala., 372, 21 So. 75; Morrow u. Gould,
145 Iowa, 1, 123 N.W. 743). A share of stock only typifies an aliquot part of
the corporation's property, or the right to share in its proceeds to that extent
when distributed according to law and equity (Hall & Faley u. Alabama
54
Lim v. Court of Appeals, G.R. No. 124716, January 24, 2000, 323 SCRA 102.
'l'H I HEVl"'lllD
RP HA'l'I
'l'I'l'LE 1- E
flnitions
9
Ala., 39 , 56 So. 235), but its holder is not the owner of any
orL f th· apital of th corporation (Bradley u. Bauder, 36 Ohio St., 28).
· or is h · ntitl d to the possession of any definite portion of its property or
ts ( ottfried u. Miller, 104 U.S., 521; Jones u. Davis, 35 Ohio St., 474).
Th t ckholder is not a co-owner or tenant in common of the corporate
prop rty (Harton u. Johnston, 166 Ala., 317, 51 So., 992)."55
'I'< rmina,l, 17
Indeed, the stockholders of a corporation are not co-owners
a.
fit (corporation's) assets. The shareholders do not ownpro-indiviso
hares in the assets and therefore, they cannot mortgage or convey
the same except in their capacity as directors, collectively with the
ther directors, or as duly authorized officers of the corporation.56
The stockholders of a corporation "are not themselves the
b.
real parties in interest to claim and recover compensation for the
damages arising from the wrongful attachment of (the corporation's)
assets. Only the corporation is the real party in interest for that
purpose."67 This is also the case if damages are due to the corporation
because a foreclosure of its assets was wrongful and done in bad
faith. 58 The amounts that will be paid by way of damages are
properties of the corporation over which the stockholders do not
have legal right or title. If the shareholders will be allowed to recover
the damages belonging to the corporation, the stockholders would
be unduly "appropriating and distributing part of the corporation's
assets prior to the dissolution of the corporation and the liquidation
of its debts and liabilities."59
(1) In another case, the damages being claimed were
those that resulted because of mismanagement of the affairs and
assets of the corporation by its principal officer. The Supreme
Court ruled that "the injury complained of is thus primarily
to the corporation, so that the suit for the damages claimed
should be by the corporation rather than by stockholders."60
Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila,
55
supra; cited in Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992); Mobilia
Products, Inc. v. Umezawa, supra; Silverio, Jr. v. Filipino Business Consultants, Inc.,
G.R. No. 143312, August 12, 2005, 466 SCRA 584.
56Juanito Ang v. Spouses Ang, G.R. No. 201675, June 19, 2013.
67
Stronghold Insurance Company, Inc. v. Cuenca, et al., G.R. No. 173297,
March 6, 2013.
58Asset Privatization Trust v. Court of Appeals, G.R. No. 121171, December
29, 1998.
59Stronghold Insurance Company, Inc. v. Cuenca, et al., supra.
60
Evangelista v. Santos, 86 Phil. 387 (1950).
MMENTARIE AND J
THEREVI ED
R
OF THE PHI
6
E
'T' JU) IUWJ
E
v r th prop rti of E Corporation belong to the latter. F
rporation as har holder is not entitled to possession of
th property because its right is only inchoate. (Silverio, Jr. v.
Filipino Business Consultants, Inc., G.R. No. 143312, August 12,
2005, 466 SCRA 584)
The stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and
the distribution among them of part of the corporate assets
before dissolution and liquidation. 61
c.
There are cases, however, that members of a non-stock
corporation may have an interest that is separate and distinct
from ownership. For example, in Alvarado v. Ayala Land, Inc., et
al., 62 the members of a non-stock corporation were considered real
parties-in-interest in a case to annul the tax sale of the property
of the non-stock corporation. The Court explained: "Though having
its own personality, as a golf and country club, Capitol primarily
exists for the utility and benefit of its members. While legal title
in its properties is vested in Capitol, beneficial use redounds to its
membership. Apart from this, proprietary interest in Capitol is
secured through club shares. It was in this capacity as members
that they initiated the Complaint assailing the validity of the tax
delinquency sale. They did this because, by the transfer of ownership
to petitioner, they stood to be deprived of the capacity to use and
enjoy the entire 15,598-square-meter parcel."63
PROBLEMS:
1.
Q:
A:
E Corporation is the registered owner of a parcel of land. F
Corporation was able to obtain possession of the parcel of land.
Later, a case was filed by E Corporation against F Corporation
and a writ of possession was issued against F Corporation
ordering the latter to turn over the parcel of land to E Corporation.
Before the enforcement of the writ of possession, F Corporation
acquired the substantial and controlling shares of stocks of E
Corporation. F Corporation refused to turn over the parcel of
land claiming that its acquisition of the controlling shares is a
supervening event that justifies the non-enforcement of the writ
of possession. Is the position of F Corporation tenable?
No, the position is not tenable. The acquisition by F Corporation
of the controlling shares in E Corporation does not create a
substantial change in the rights or relations of the parties
that would entitle F Corporation to possession of the property
of E Corporation. The rights, including the right of possession,
61Ibid.; Note that there is also a violation of the Trust Fund Doctrine if the
property of the corporation will be given to the shareholder.
62G.R. No. 208426, September 20, 2017.
63Ibid.
1
3.
Q:
RITCHIE Corporation owns a beach resort with several
cottages. Ed, the President of RITCHIE Corporation, occupied
one of the cottages for residential purposes. After Ed's term
expired, RITCHIE wanted to recover possession of the cottag�.
Ed refused to surrender the cottage contending that as a
stockholder and former president, he has a right to possess
and enjoy the properties of the corporation. Is Ed's contention
correct? Explain.
A:
No. Ed's contention is not correct. Ed is not the owner of the
properties of the corporation. As shareholder, his interest over
the properties of RITCHIE Corporation is merely inchoate.
RITCHIE Corporation has a personality separate and distinct
from its shareholders and the properties of the corporation are
not the properties of the shareholders. Hence, as the owner, only
the corporation has the right to enjoy and possess its properties.
(1996 Bar)
Q:
Nine individuals formed a private corporation pursuant to
the provisions of the Corporation Code of the Philippines.
Incorporator S was elected director and president - general
manager. Part of his emolument is a Ford Expedition, which
the corporation owns. After a few years, S lost his corporate
position, but he refused to return the motor vehicle claiming
that as a stockholder with substantial equity share, he owns
that portion of the corporate assets now in his possession. Is the
contention of S valid?
A:
No. The contention of S is not valid. S is not the owner of the
properties of the corporation. As shareholder, his interest
over the properties of the corporation is merely inchoate. The
corporation has a personality separate and distinct from its
shareholders and the properties of the corporation are not the
properties of the shareholders. Hence, as the owner, only the
corporation has the right to enjoy and possess its properties.
(2000 Bar)
10. Separate Obligations. The obligations of the corporation
are not the obligations of its shareholders and members and officers
and vice versa.
a.
The president of the corporation may not be held liable
for the obligation arising from the tort committed by the employee of
MM Wl'Mt
1
J
THEREVI
OF THE PHI
E N
the corporation.64 Indeed, the general rule is that the directors and
officers are not personally liable for the obligations of the corporation.
"The obligations incurred by the corporate officers, or other persons
acting as corporate agents, are the direct accountabilities of the
corporation they represent, and not theirs."65 They may, however, be
liable in the instances mentioned in Section 31 of the Corporation
Code, now Section 30 of the RCCP.66
b. Stockholders or officers are also not liable for the
contractual obligations of the corporation. In contracts, consent
by a corporation through its represe_ ntatives is not consent of the
representatives, personally.67 Even majority shareholders are not
liable for corporate obligations.68 However, there are instances when
the officers or stockholders voluntarily make themselves personally
liable. For instance, they can act as a surety or make themselves
solidarily liable for corporate obligations by signing the appropriate
surety agreement or affixing their joint and solidary signature in
the relevant document/s.
c.
The corporation cannot likewise be made to answer for
the personal obligations of the stockholders, members, directors or
officers. The contractual obligation of the members of a non-stock
corporation cannot be enforced against the corporation itself and
vice versa.
(1) Thus, in one case, 69 the corporation cannot enforce
the milling contract and the arbitration agreement entered
into between the members of the corporation and the sugar
centrals. The Court pointed out that the corporation cannot
initiate an arbitration proceeding because it failed to prove
that it (corporation) has an agreement with the sugar central.
d. A stockholder cannot condone an obligation of a third
person to the corporation. The right pertains to the corporation
alone.
Secosa, et al. v. Heirs of Francisco, G.R. No. 160039, January 29, 2004.
Saverio v. Puyat, G.R. No. 186433, November 27, 2013.
66
See Notes under Section 30 of this work.
67
Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1, 2014.
68Construction & Development Corporation of the Philippines v. Cuenca, G.R.
No. 163981, August 12, 2005, 466 SCRA 714, 727.
69
Ormoc Sugar Planters Association, Inc., et al. v. Court of Appeals, et al., G.R.
No. 156660, August 24, 2009.
64
65
I
I
•1w, :u111vJ ·wD ·oar
TITWJ
D fini
R
6
sifico tions
In n
, 70 a rporate officer was prosecuted for vio­
. at Pamban a Blg. 22 (otherwise known as the ''Anti­
ll un •in'
hecli Law') for issuing two bounced checks for and in
1 1 h lf f th corporation. The corporate officer was subsequently
i :quilt d. The Supreme Court ruled that the corporate officer
l rrn t b held liable for the value of the checks because it was
l 111· that they were issued for the obligations of the corporation.
Tl
rporation remains liable for the checks especially since no
I' .id nc was presented that the debts covered by the checks have
n paid. 11
(1) Even if the corporate officer was convicted, the
corporation can still be made liable for the value of the checks
if they were issued for corporate debts. A separate action can
be maintained against the corporation. 72
11. Limited Liability Rule. One feature that makes
rporations more advantageous to investors compared to
partnerships and single proprietorships is the Limited Liability
Rule. Under this rule, "a stockholder is personally liable for the
financial obligations of the corporation to the extent of his unpaid
subscription."73 While stockholders are generally not liable, the
stockholders may be liable if they have not or have not fully paid the
ubscription price.74
a.
The limited liability rule applies even if the corporation
is the result of a joint venture agreement. "By choosing to adopt a
corporate entity as the medium to pursue the joint venture enterprise,
the parties (stockholders) to the joint venture are bound by corporate
Bautista v. Auto Plus Traders, Inc., G.R. No. 166405, August 6, 2008.
71See Chapter X, Peralta, Jr. and Aquino, Handbook on Summary and Small
Claims Procedure and Bouncing Checks Law, 2009 Ed.
72
Gosiaco v. Ching, et al., G.R. No. 173807, April 16, 2009.
73Donnina C. Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011, citing
Edward A. Keller & Co., Ltd. v. COB Group Marketing, Inc., G.R. No. L-68907,
January 16, 1986, 141 SCRA 86, 93 citing Vda. de Salvatierra v. Hon. Garlitos etc.,
and Refuerzo, 103 Phil. 757, 763 (1958).
74
Donnina C. Halley v. Printwell, Inc., ibid.; Edward A. Keller & Co., Ltd. v.
COB Group Marketing, Inc., G.R. No. L-68907, January 16, 1986, 141 SCRA 86, 93;
Vda. de Salvatierra v. Hon. Garlitos, etc., and Refuerzo, ibid. The Supreme Court
likewise explained in the Donnina C. Halley case that the liability for the unpaid
subscription is also consistent with what is known as the ''Trust Fund Doctrine"
under which the unpaid subscription price is held in trust for corporate creditors.
The "Trust Fund Doctrine"will be discussed in Note 8 of this Work under Section 61.
70
nr
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law principles under which the entity must operate. Among these
principles is the limited liability doctrine. The use of a joint venture
corporation allows the co-venturers to take full advantage of the
limited liability feature of the corporate vehicle which is not present
in a formal partnership arrangement."75
11.01.
Reason for the Limited Liability Rule. For small
and/or closely held companies, limited liability may be the principal
reason for the investor to use the corporation as a vehicle in pursuing
business. However, limited liability has advantages even if the
ownership of shares in a corporation is diffused and spread among
numerous stockholders or even if the management (directors) is
largely separated from ownership of the corporation. Some legal
writers propose that the reasons for the Limited Liability Rule
include: (1) investment in shares is encouraged because the task of
evaluating equity investment is greatly simplified considering that
the low-probability even of insolvency and the financial condition
of other investors can already be ignored; (2) investment in risky
ventures is encouraged; (3) banks and other financial intermediaries
who are considered experts are encouraged to closely monitor
corporate debtors more closely.76
a.
In the large number of cases when there is separation
of investment (stockholders) and management (directors and
officers), the Limited Liability Rule is said to be one of the devices
that is beneficial to investors. Judge Frank Easterbrook and Prof.
Daniel Fischel proposed a modern account of the Limited Liability
Rule by explaining that when there is separation of investment
and management, "the costs generated by agency relations are
outweighed by the gains from separation and specialization of
function."77 They said that the Limited Liability Rule "reduces the
costs of this separation and specialization." 78 For example, the cost
of monitoring managers and other shareholders is reduced.
75
Mabuhay Holdings Corporation v. Sembcorp Logistics Limited., G.R. No.
212734, December 05, 2018.
76
William T. Allen, Reinier Kraakman & Guhan Subramanian, Commentaries
and Cases on the Law of Business Organizations, 2nd Ed., 2007, p. 94, hereinafter
cited as "Allen, Kraakman and Subramanian"; See also William T. Allen, Ambiguity
in Corporation Law, 22 Del. J. Corp., L. 894, 896.
77Frank Easterbrook & Daniel Fischel, Limited Liability and the Corporation,
52 U. Chi. L. Rev. 89, 94-97 (1985), hereinafter cited as "Easterbrook & Fischel."
78
Frank Easterbrook & Daniel Fischel, supra.
1
w 11"t'Hlll 1·1
· f
i - tions
b-c m fungible because the value of shares
pr nt value of the income stream generated
th · rporation' assets; the identity and wealth of the other
h.
h ld r are irrelevant. Investors would not be required to
p nd m r to analyze the market prices of the shares because
1
har s may already considered homogenous commodities. 79
F rth rmore, diversification is encouraged and risky ventures such
a i v lopment of new products can be undertaken without thinking
f :financial risk. 80
11.02.
Remedy. The stockholders who are sought to be
rnad liable for their unpaid subscription should be impleaded. If
th stockholders are not impleaded as defendants, a separate action
hould be filed against them to enforce any judgment obligation.
a.
In one case, a final and executory judgment against a
corporation was sought to be enforced against the stockholders of the
ame corporation on the ground that the stockholders have unpaid
ubscription.81 The stockholders were not original parties and were
not involved in the case until the writ of execution was returned
unsatisfied and the judgment creditor sought the examination of the
corporation's debtors, which allegedly included the stockholders.
The stockholders denied their liability in the course of examination
proceedings but the trial court still ordered the stockholders to
settle "their obligations to the capital stock" of the corporation.82
The Supreme Court ruled that the trial court erred in ordering
the stockholders to pay. The Supreme Court ruled that consistent
with the demands of due process, "the RTC should have directed
respondent Gudgment creditor) to institute a separate action against
petitioners (stockholders) for the purpose of recovering their alleged
indebtedness" to the corporation in accordance with Section 43, Rule
39 of the Rules of Court. 83
11.03.
Limited Liability in OPC. The limited liability
rule applies to a One Person Corporation.84 However, for the limited
liability rule to apply in the case of an OPC, the RCCP imposes
upon the sole shareholder claiming limited liability the "burden
19Ibid.
80Supra.
81
Atilano II, et al. v. Asaali, G.R. No. 174982, September 10, 2012.
Ibid.
83Ibid.
82
84
Sec. 130, RCCP.
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of affirmatively showing that the corporation was adequately
financed."85 Ifthere is noncompliance with this requirement, the sole
shareholder shall be jointly and severally liable for the debts and
other liabilities of the OPC. 86
12. Separate Acts. The acts of the stockholders do not bind
the corporation unless they are properly authorized. Similarly, the
acts of officers and directors in their personal capacity cannot be
imputed to the corporation. Their powers and duties pertain to them
respectively and not to each other. 87
a.
If the stockholders, officers and directors are disqualified
from performing certain acts, the corporation is not necessarily
disqualified and vice versa.
b.
It is well settled that an individual cannot enter into a
contract with himself but a corporation has the same freedom of
contracting with its stockholders that it has of contracting with any
other person. 88
c.
Ordinarily, the corporation is not the agent of the
stockholders and does not act or hold property as agent for them. 89
Thus, a non-stock corporation may file an action in the name of its
members only ifit can prove that the members indeed authorized the
corporation to institute the action for and in behalfofsuch members.
The mere fact that the non-stock corporation was organized for the
purpose of advancing the interests and welfare of its member does
not necessarily mean that the corporation has the authority to
represent its members in legal proceedings, including an arbitration
proceeding. 90
(1) A stockholder is also not an agent of the corporation
and he becomes an agent only ifhe was duly appointed as such.
A stockholder may even be an employee of the corporation.
13. Separate Personality in Court Actions. The
stockholders are not parties to an action by or against the corporation
85Jbid.
86Ibid.
1 Fletcher 103.
Fletcher 107.
89 1 Fletcher 110.
9
0 Ormoc Sugar Planters Association, Inc., et al. v. Court of Appeals, et al., G.R.
No. 156660, August 24, 2009.
87
88 1
1•v1
'JJJD
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r ·
£
n
tions
,u
67
ly,
rporation is not a party to an action just
l holders are. 9' The Court explained in one case:
"Th rul on real party-in-interest ensures, therefore, that the party
wi h th 1 al right to sue brings the action, and this interest ends when a
'ud m nt involving the nominal plaintiff will protect the defendant from a
oubs•qu nt identical action. Such a rule is intended to bring before the court
h · party rightfully interested in the litigation so that only real controversies
will b presented and the judgment, when entered, will be binding and
·on lusive and the defendant will be saved from further harassment and
v ation at the hands of other claimants to the same demand.
In the case at bar, PNAS, as a corporation, is the real party-in-interest
b cause its personality is distinct and separate from the personalities of its
tockholders. A corporation has no power, except those expressly conferred
on it by the Corporation Code and those that are implied or incidental to its
existence. In sum, a corporation exercises said powers through its board of
directors and/or its duly authorized officers and agents. Thus, it has been
observed that the power of a corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate powers. 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 by-laws or by a specific act of the board of directors. It necessarily
follows that 'an individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from the
board of directors."'92
a.
In one case, the Supreme Court ruled that the association
of hospitals that is incorporated under existing laws has no
personality to file a case to question the constitutionality of a
provision of law that imposed certain duties on hospitals. 93 One of
the grounds relied upon by the Court in dismissing the petition is
the absence of one of the requirements for judicial review, that is;
that the person challenging the act must have standing to challenge;
he must have a personal and substantial interest in the case such
that he has sustained, or will sustain, direct injury as a result of
its enforcement. In this case, the case should have been filed by the
hospitals. "While juridical persons, like an association, are endowed
with the capacity to sue or be sued, it must demonstrate substantial
91
1 Fletcher 127.
Philippine Numismatic Ad Antiquarian Society v. Aquino, G.R. No. 206617;
January 30, 2017.
93
Private Hospital Association of the Philippines, Inc. v. Medialdea, G.R. No.
234448, November 6, 2018.
92
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THE R •VI ED
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N
interest that it has sustained or will sustain direct injury" and in
this case, the alleged "injury inures not to the petitioner association
itself but to the member-hospital." 94
b.
The corporation may even sue the stockholders and the
latter may sue the corporation. The corporation may also be a co­
defendant in the same case. Even if the corporation and stockholders
are co-defendants in an action, summons served on the corporation
does not bind the stockholders who must personally be served.
c.
The filing of a case against shareholders is not ipso facto
a complaint against the corporation and failure to implead these
corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of their right to due
process for it would in effect be disregarding their distinct and
separate personality without a hearing.95
14. Doctrine of Piercing the Veil of Corporate Fiction.
Basic in corporate law is the principle that a corporation has a
separate personality distinct from its stockholders and from other
corporations to which it may be connected. It is a fiction created by
law with the intent that it should be treated as true. 96 However, under
the doctrine of piercing the veil of corporate entity, the corporation's
separate juridical personality may be disregarded when there is
an abuse of the corporate form. Whenever the doctrine applies,
the principal and the conduit will be treated as one; the controlled
corporation will be deemed to have, "so to speak, no separate mind,
will or existence of its own, and is but a conduit for its principal."97
If applicable, "the corporation is merely an aggregation of persons
whose liabilities must be treated as one with the corporation."98 The
conduit corporation will then be solidarily liable with the principal. 99
a.
For example, corporate personality may be disregarded
when the corporate identity is used to defeat public convenience,
Private Hospital Association of the Philippines, Inc. v. Medialdea, ibid.
Philippine Overseas Telecommunications Corporation v. Sandiganbayan
(3rd Division), G.R. No. 174462, February 10, 2016.
9
61 Fletcher 77.
97WPM International Trading, Inc. and Warlito Manlapaz v. Labayen, G.R.
No. 182770, September 17, 2014.
98Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1, 2014.
99Heirs of Fely Tan, Uy v. International Exchange Bank, G.R. Nos. 166282 and
166283, February 13, 2013.
94
95
I' 11 W,JVJ
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69
TITLE J-
prot ct fraud, or defend crime. Also, where the
th r stock or non-stock, is a mere alter ego or business
it f a natural person or persons, 100 or where the corporation
r aniz d and controlled and its affairs are so conducted as to
11 11
it m r ly an instrumentality, agency, conduit or adjunct of
th·r orporation, then its distinct personality may be ignored. In
ircumstances, the courts will treat the corporation as a mere
·upation of persons and the liability will directly attach to them..
'l l · l · al fiction of a separate corporate personality in those cited
i n tanc s, for reasons of public policy and in the interest of justice,
will b justifiably set aside. 101
b.
Mere ownership by a single stockholder or by another
·orporation of all or nearly all of the capital stock of a corporation is
'tin itself sufficient ground for disregarding the separate corporate
p r onality. 102 Thus, mere ownership of 70% of the outstanding
apital stock does not justify the disregard of the separate corporate
p rsonality.103
(1) The similarity of business of two corporations does
not warrant the disregard of the corporate veil. 10• The mere fact
that the businesses of the two entities are interrelated is not a
justification for disregarding the separate personalities, absent
1
00 International Academy of Management Economics (I/AME) v. Litton and
Company, Inc., G.R. No. 191525, December 13, 2017.
101
Francisco Motors v. Court of Appeals, G.R. No. 100812, June 25, 1999; See
also Gold Line Tours, Inc. v. Heirs of Maria Concepcion Lacsa, G.R. No. 159108, June
18, 2012 (where the incorporators of two corporations are the same and the vehicles
of one are used by the other in the transportation business).
102Aboitiz Equity Ventures, Inc. v. Chiongbian, G.R. No. 197530, July 9,
2014; Wensha Spa Center, Inc. v. Yung, G.R. No. 185122, August 16, 2010; Shrimp
Specialists, Inc. v. Fuji-Triumph Agri-lndustrial Corporation, G.R. Nos. 168756
and 171476, December 7, 2009; Philippine National Bank v. Mega Prime Realty
and Holdings Corp., G.R. Nos. 173454 and 173456, October 6, 2008; Hi-Cement
Corporation v. Insular Bank of Asia and America, G.R. No. 132403, September 28,
2007, 534 SCRA 269, 285; Construction & Development Corp. of the Philippines v.
Cuenca, G.R. No. 163981, August 12, 2005, 466 SCRA 714, 727; Secosa, et al. v. Heirs
of Francisco, G.R. No. 160039, January 29, 2004; MR Holdings, Ltd. v. Bajar, G.R.
No. 138104, April 11, 2002, 380 SCRA 617 (2002); Sunio v. National Labor Relations
Commission, G.R. No. L-57767, January 31, 1984.
103Union Bank of the Philippines v. Spouses Ong, G.R. No. 152347, June 21,
2006.
104China Banking Corp. v. Dyne-Sem Electronics Corp., G.R. No. 149237, July
11, 2006, 494 SCRA 493, 500.
70
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sufficient showing that the corporate entity was purposely
used as a shield to defraud creditors and third persons of their
rights. 105
(2) Even the overlapping of incorporators and
stockholders of two or more corporations will not necessarily
justify the piercing of the veil of corporate fiction. Much more
has to be proven. 106 In another case, it was explained that
the existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of
corporate fiction. 107 Hence, the mere fact that two corporations
have the same president is not suffici�nt to pierce the veil of
corporate fiction of the two corporations. 108
14.01
Piercing the Veil in OPC. By express, provision of
the RCCP, the doctrine of piercing the veil of corporate fiction applies
with equal force to a One Person Corporation. 109 As noted earlier, the
limited liability rule applies to a One Person Corporation provided
that the sole shareholder claiming limited liability has the ''burden
of affirmatively showing that the corporation was adequately
financed." 110 The sole shareholder shall be jointly and severally
liable for the debts and other liabilities of the OPC if his OPC is
not adequately financed.m If the OPC is not adequately financed,
there is no evident intent to treat the OPC as a separate entity. Such
financial inadequacy is an indication that the OPC is being treated
as just a conduit of the OPC.
14.02
Theory of Enterprise Entity. An influential
alternative account of the Doctrine of Piercing the Veil of Corporate
Fiction is the so-called "Theory of Enterprise Entity." 112 This theory
was offered as a unifying dominant principle to systematize the
doctrines and rules pertaining to corporations including the
05
1 China Banking Corp. v. Dyne-Sem Electronics Corp., ibid., citing Umali v.
Court of Appeals, G.R. No. 89561, September 13, 1990, 189 SCRA 529.
06
1 China Banking Corp. v. Dyne-Sem Electronics Corp., ibid.
7
0
1 Jardine Davies, Inc. v. JRB Realty, Inc., G.R. No. 151438, July 15, 2005, 463
SCRA 555, 565.
08
1 Complex Electronics Employees Association v. NLRC, G.R. Nos. 121315 and
122136, July 19, 1999, 310 SCRA 403, 418.
09
1
Sec. 130, RCCP.
110 Sec. 130, RCCP.
lll Ibid.
A. Berle, Jr., The Theory of Enterprise Entity, 47 Columbia Law
Review, No. 3, April 1947, p. 343, hereinafter cited as "Berle, Jr., p. 343."
112 Adolf
. 'l'l
TITLlJJ !- E
flllitions 11r
DJ
PR
ificati
71
i r ing th V il of Corporate Fiction, m the rules on
rpo:ra.tion n " and even as an alternative justification for
liability for pre-incorporation promoter's contracts.115 The
r
p int is the observation that the enlargement of the scale
i bu · 1
nterprises resulted in the process of subdivision. "More
fL n than not, a single large-scale business is conducted, not by a
al
:r poration, but by a constellation of corporations controlled
l,· n • 1t:ral holding company, the various sectors being separately,
- rpo:rated, either because they were once independent and have
n a quired, or because the central concern, entering new fields,
t d new corporations to develop them or for tax reasons."116 The
i was restated as follows:
"That the entity commonly known as a 'corporate entity' takes its
b 'n , from the reality of the underlying enterprise, formed or in formation;
"That the state's approval of the corporate form sets up a prima facie
•as that assets, liabilities and operations of the corporation are those of
th enterprise;
But where the corporate entity is defective, or otherwise challenged,
it existence, extent and consequences may be determined by the actual
xistence and extent and operations of the underlying enterprise, which
by these very qualities acquires an entity of its own, recognized by law."117
14.03
Classifications. The Supreme Court observed that
the doctrine of piercing the veil of corporate fiction may be applied in
at least three basic areas with which the law covers and isolates the
corporation from any other legal entity to which it may be related.118
These, according to the Supreme Court, are: (1) cases where public
convenience may be defeated, as when the corporate fiction is used
3
11 Berle,
4
11 Berle,
Jr., p. 352.
Jr., at p. 345; There is reference to a "De Facto Corporation" although
the equivalent under our present laws is actually a corporation by estoppel where no
actual corporation is incorporated.
115Berle, Jr., p. 357.
6
11 Berle, Jr., p. 343.
7
11 Berle, Jr., p. 344.
8
11 General Credit Corporation v. Alsons Development and Investment
Corporation, G.R. No. 154975, January 29, 2007, 513 SCRA 225.
72
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as vehicle for the evasion of an existing obligation; (2) Fraud cases
or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or (3) Alter Ego cases, where a 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 corporationY9
a.
Kinds. Piercing Cases can either be Traditional Veil
Piercing cases or Reverse Veil Piercing Cases.
(1) In Traditional veil-piercing action, "a court
disregards the existence of the corporate entity so a claimant
can reach the assets of a corporate insider."120
(2) In Reverse piercing action, the plaintiff seeks to reach
the assets of a corporation to satisfy claims against a corporate
insider. "Reverse-piercing flows in the opposite direction (of
traditional corporate veil-piercing) and makes the corporation
liable for the debt of the shareholders."121
(i) There are two (2) types of Reverse Piercing:
Outsider reverse piercing and Insider reverse piercing.
"Outsider reverse piercing occurs when a party. with a
claim against an individual or corporation attempts to be
repaid with assets of a corporation owned or substantially
controlled by the defendant. In contrast, in insider
reverse piercing, the controlling members will attempt to
ignore the corporate fiction in order to take advantage of
a benefit available to the corporation, such as an interest
in a lawsuit or protection of personal assets." 122
9
Ibid., citing Villanueva, Commercial Law Review, 2004 Ed., p. 576; Guillermo
v. Uson, G.R. No. 198967, March 7, 2016 citing Pantranco Employees Association
(PEA-PTGWO) v. NLRC, 600 Phil. 645 (2009); Ever Electrical Manufacturing, Inc. v.
Samahang Manggagawa ng Ever Electrical, G.R. No. 194795, June 13, 2012; Traders
Royal Bank v. Court of Appeals, G.R. No. 93397, March 3, 1997, 269 SCRA 15; First
Philippine International Bank v. Court of Appeals, 252 SCRA 259; Koppel (Phil.),
Inc. v. Yatco, 77 Phil. 496 (1946), and Umali v. Court of Appeals, G.R. No. 89561,
September 13, 1990, 189 SCRA 529.
120International Academy of Management Economics v. Litton and Company,
December 13, 2017.
i2 1Ibid.
i22Ibid.
11
'"
D finitions an
TB.£ PHILIP IN •
73
· ons
l,.
th r hand, legal writers and Courts likewise cite
tri,mt within th doctrine of piercing the veil of corporation,
1 1111( l :
1) th in trumentality doctrine, (2) the identity doctrine
1 ,1 J
th lter ego doctrine:123
{{
(1) The Instrumentality Rule, or what is referred
by the Supreme Court as the "Three-Pronged Control
t,"' 2' has gained wide acceptance as the primary test in
application the doctrine of piercing the veil of corporate ·
tion. The Instrumentality Rule calls for the application
of the test consisting of the three requisites enumerated
h reunder. The leading case in the United States with respect
t the Instrumentality Rule is Lowendahl v. Baltimore & Ohio
Railroad. 125 The Instrumentality Rule was adopted in this
jurisdiction in Concept Builders, Inc. v. The National Labor
Relations Commission126 and is now often cited in jurisprudence.
In the application of this rule, courts are called upon to apply
the "Three-Pronged Control Test," that is, to determine the
presence of three factors, namely:
(i) Control, not mere majority or complete stock
control, but complete domination, not only of finances
but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or
existence of its own;
(ii) Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiffs
legal right; and
(iii) The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.
123
James D. Cox, Thomas Lee Hazen, & F. Hodge O'Neal, Corporations, §7.8,
hereinafter referred to as "Cox, Hazen & O'Neal."
124Pacific Rehouse Corporation v. Court of Appeals, G.R. Nos. 199687 and
201537, March 24, 2014.
125287
N.Y.S. 62 (App. Div.) cited in Cox, Hazen & O'Neal.
126G.R. No. 108734, May 29, 1996, 257 SCRA 149, 159.
74
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The absence of any of these elements will prevent
the application of the doctrine of "piercing the corporate
veil."121
(1) Examples of cases when the Three-Pronged Control
Test was successfully invoked include the above cited Concept
Builders, Inc. v. National Labor Relations Commission, 128 and
the fairly recent cases of Heirs of Fely Tan Uy v. International
Exchange Bank, 129 and Spouses Bill and Victoria Hing v.
Choachuy, Sr. 130 There are more recent cases that cited the
three factors but the Court rU:led that the party who invoked
the Doctrine of Piercing the Veil of Corporate Fiction was
unsuccessful in proving the presence of the three factors. 1a1
b.
The "Identity Doctrine" referred to earlier was restated
s
follows:
"If the plaintiff can show that there was such a unity of
�
mterest and ownership that the independence of the corporations
127Lowendahl v. Baltimore & Ohio Railroad, 287 N.Y.S. 62 (App. Div.), see
note 104; WPM Int'l Trading Inc. v. Labayen, G.R. No. 182770, September 17, 2014;
Commissio�er of Customs v. Oilink International Corp., G.R. No. 161759, July 2,
2?14; Saveno v. �uyat, G.R. No. 186433, November 27, 2013; Spouses Violago v. BA
Fmance Corporation, et al., G.R. No. 158262, July 21, 2008; Hi-Cement Corporation
v. Insul�r Bank of �sia and America, G.R. Nos. 132403 and 132419, September 28,
2007; N1sce v. Eq�1table PCI Bank, Inc., G.R. No. 167434, February 19, 2007, 516
SCRA 231, 259; Times Transportation Company, Inc. v. Sotelo, G.R. No. 163786,
February 16, 2005, 451 SCRA 587, 602; Martinez v. Court of Appeals, G.R. No.
131673, September 10, 2004, 438 SCRA 130; R & E Transport, Inc. v. Latag, G.R.
No. 155214, February 13, 2004, 422 SCRA 698, 707; Velarde v. Lopez, Inc., G.R. No.
153886, January 14, 2004; Philippine National Bank, et al. v. Andrada Electric and
Engineering Company, G.R. No. 142936, April 17, 2002, 381 SCRA 244, 254; Heirs
of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Lim v. Court of Appeals, G.R. No.
124716, January 24, 2000, 323 SCRA 102; Concept Builders, Inc. v. National Labor
Relations Commission, et al., G.R. No. 108734, May 29, 1996, 257 SCRA 149.
128
/bid.; See also Livesey v. Binswanger Philippines, Inc., G.R. No. 177493,
March 19, 2014 and Guillermo v. Uson, G.R. No. 198967, March 7, 2016 (where new
corporations were also created to avoid the old corporations' obligations).
9
12 G.R. Nos. 166282 and 166283, February 13, 2013.
0
13 G.R. No. 179736, June 26, 2013.
131
WPM Int'! Trading Inc. v. Labayen, G.R. No. 182770, September 17 2014
(involving the President and majority stockholder); Commissioner of Cust�ms v.
Oilink International Corp., G.R. No. 161759, July 2, 2014; Nuccio Saverio v. Puyat,
G.R. No. 186433, November 27, 2013 (petitioner owned 40% of the outstanding
shares); PNB v. Hydro Resources Contractors Corp., March 13, 2013; See also Bureau
of Customs v. The Hon. Agnes VST Devanadera, G.R. No. 193253, September 8, 2015;
_
NFF I�dust�1al Corp. v. G&L Associated Brokerage, G.R. No. 178169, January 12,
2015 (mvolvmg a General Manager) and California Manufacturing Company Inc. v.
Advanced Technology System, Inc., G.R. No. 202454, April 25, 2017.
HP
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7
d or had never begun, and adherence to the
id ntity would serve only to defeat justice and
i n of par
1 I 1. iL b p rmitting the economic entity to escape liability arising
1L f n op ration of one corporation for the benefit of the whole
pri
i
(1) Under the Alter Ego Doctrine cited by legal
writ rs, it must be shown that there is unity of interest and
wnership that the separate personalities of the corporation
and the individual no longer exist and that if the acts are
tr ated as those of the corporation alone, an inequitable result
will follow. 133 In another case, it was explained that where a
'Orporation is a dummy, is unreal or a sham and serves no
business purpose and is intended only as a blind, the corporate
form may be ignored for the law cannot countenance a form
that is bald and a mischievous fiction.134
At any rate, any classification cannot fully differentiate
c.
on group of cases from other groups of cases. The classifications,
h n applied to cases, suffer from conceptual incoherence. The
d marcation lines between the cases are unclear.
(1) Indeed, there is no rigidity or exactitude in the
application of the doctrine of piercing the veil of corporate
fiction. Thus, in many cases decided by the Supreme Court,
it did not recognize pure Alter Ego cases. Even in cases where
the Court ruled that the corporations in question were mere
conduits of another person or entity, the High Court used
fraud and other irregularities to justify the piercing of the veil
of corporate fiction. Even the Instrumentality Rule requires
wrongful act as an element. The first group cited by the
Supreme Court - where public convenience may be defeated
- may even be included or subsumed in either of the two other
groups, Alter Ego Cases and Fraud Cases. 135
(2) In the cases where the Supreme Court cited the
three factors that constitute the Instrumentality Rule, the
132Cox, Hazen & O'Neal, supra.
Riddle v. Leuschner, 51 Cal.2d 574, 580, 335 P.2d 107; Minton v. Cavaney,
66 Cal.2d 676, 16 Cal. Rptr. 641, 364 P.2d 473 (1961).
134Liddle & Co., Inc. v. The Collector of Internal Revenue, G.R. No. L-9687,
June 30, 1961, 2 SCRA 632.
135General Credit Corporation v. Alsons Development and Investment
Corporation, G.R. No. 164975, January 29, 2007, 513 SCRA 225.
133
COMMENTARIE AND J RI PRU EN E
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76
N
High Court referred to the subject corporations as alter ego
corporations. Nevertheless, it is immediately noticeable that
the presence of wrongful acts - including fraud - is still
necessary before the veil of corporate fiction can be pierced.
(3) It has also been suggested that there is another group
of cases where the doctrine of piercing the veil of corporate
fiction can be applied known as Equity Cases. 136 However, even
"Fraud Cases" and "Alter Ego Cases" are oftentimes explained
on the basis of equity and not on the basis of strict application
of the rule on complete separation of legal personality. "Fraud
Cases" and "Alter Ego cases" are oftentimes Equity Cases.
,IPPI
E
77
f\l izin th orporation or entering into the contract is not
1 m nt in the e cases. What is being considered is that
t l h lders or those who compose the corporation did not
l' , t th corporation as such and considered and operated the
um n t as a separate entity but only as part of the property
' u iness of an individual or group of individuals or another
·orp ration.
Fraud. There is fraud if there is deception that
1 1 ad an ordinarily prudent person into error after taking the
•I,, ·um tances into account. 139
d.
What appears from the foregoing is that the cases when
the doctrine of piercing the veil may be applied include both (1) cases
when fraud or other wrongful acts or omission are present, and (2)
cases when there is no intent to commit a wrongful act in organizing
the corporation or operation of the corporation but injustice and
inequity may result if the corporate veil is not pierced. The first
group includes cases covered by the Instrumentality Rule as well as
Alter Ego Cases where the Supreme Court required the presence of
fraud or other wrongful act. The latter group may include pure Alter
a.
In Enriquez Security Services, Inc. v. Cabotaje, 140 the
urt found that a security guard used to work for a dissolved
rporation. After the dissolution, the guard was transferred to a
ll, w corporation. When the guard retired, the time that he worked
£ r the dissolved corporation was not included in the length of
rvice that was used for the purpose of determining his retirement
pay. The Supreme Court ruled that the attempt to make the two
curity agencies as two separate entities, when in reality they were
ne, was a devise to defeat the law. The veil of corporate fiction was
disregarded because the same was used to perpetrate injustice or as
a vehicle to evade obligations.
(1) Thus, there are cases when the corporate identity
is used to defeat public convenience, justify wrong, protect
fraud, or defend crime. 137 This group also includes cases when
there is an attempt to distort or hide the truth or to let in an
unjust defense. 138 There is intent to commit a wrong from the
inception of the corporation or in entering into transactions in
this type of cases. The corporation is the tool that is being used
to accomplish such purpose.
b.
The separate corporate personalities of a mortgagor
corporation and a new corporation were disregarded because it was
established that the same mortgagor ceased operations and is no
longer holding office in its principal office. The mortgagor transferred
all its assets to another (new) corporation, including the mortgaged
properties, thereby succeeding to hide the mortgaged properties and
preventing the sheriff to foreclose the mortgage. It was established
that the incorporators and controlling stockholders of the mortgagor
corporation and the new corporation are the same. 141
Ego Cases.
(2)
What is being referred to in this work as pure
Alter Ego Cases are situations where the corporation 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 person. Fraud or wrongful act in
6
13 Villanueva,
137
505.
Philippine Corporate Law, 2001 Ed.
Koppel (Phil.), Inc. v. Yatco, G.R. No. 47673, October 10, 1946, 77 Phil. 496,
Ibid., p. 506.
138
c.
The president of a family-owned corporation was likewise
made liable for the return of the purchase price of a car even if it
appears that the same is a corporate debt. The president was made
liable because he committed fraud in selling the car to the judgment
139Solidbank Corporation v. Mindanao Ferroalloy Corporation, G.R. No.
153535, July 28, 2005.
140G.R. No. 147993, July 21, 2006, 496 SCRA 169, 175.
141Mendoza v. Banco Real Development Bank, G.R. No. 140923, September 16,
2005, 470 SCRA 86, 9.
78
COMMENTARIE AND JURI PRUDEN E N
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creditors although the president had previously sold the same
vehicle to another person. 142
d.
The doctrine may be applied if the government may be
deprived of taxes. A taxpayer may gain advantage of doing business
through a corporation but the separate corporate entity may be
disregarded where it serves but as a shield for tax evasion and treat
the person who actually take the benefits of the transactions as the
person taxable. 143
(1) The separate personality o( a subsidiary was
disregarded in Koppel (Phil.) v. Yatco 144 because it was
established that its parent (foreign) corporation organized the
subsidiary for the purpose of evading the payment of sales
taxes. The following facts were also established in support of
the application of the doctrine of piercing the veil of corporation:
(1) the parent company holds 995 of the 1,000 shares of the
subsidiary, the remaining five shares being held by the officers
of the parent company in order to permit the incorporation of
the subsidiary and to enable the latter to act as directors; (2)
as regards the transactions, the subsidiary is an agent of the
parent company; (3) the share of the subsidiary in the profits
in the transactions was ultimately left to the sole, unbridled
control of the parent company; (4) the selection of the directors
and the actions of the board of the subsidiary were dominated
by the parent company; (5) in the sale of goods, the subsidiary
as seller charged the parent company no more than the actual
cost without profit whatsoever and no attempt whatsoever was
made to explain why the two corporations departed from the
ordinary course of business; (6) there was commingling and
interlacing of the activities as to render incomprehensible
certain accounting operations between the two corporations;
and (7) the parent company freely credited and debited the
other for certain items of expenses or even merchandise sold or
disposed of.
e.
The doctrine may be invoked if the separate corporate
personality is being used to evade the enforcement of court
11 1111: ! 11] I
1
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HLIPPINE
79
mpl , in Tan Boon Bee & Co., Inc. v. Jarencio, 145
)t ni t1 t
nd 1 vy on a piece of machinery used for printing
fl I i Li n d by th judgment debtor corporation (referred to as
11 I 11 l , n th ground that it belonged to another corporation,
I' I) . Th trial court ruled in favor of the judgment creditor but
! i1t llil)r m ourt set aside the ruling stating that the judge should
11, 11i r d th veil of corporate fiction. The Court observed that
I· 11 1
a n ver engaged in printing business; that the board of
1111· ,, and officers of the two corporations were the same; that
11 I
h ld 50% of the shares in GRAPHIC; and that the subject
in ry had been in the premises of GRAPHIC for a long period
· Im . The Court concluded that the circumstances show that
' laim of ownership over the printing machine was not only
I
1
11; .r, and sham but also unbelievable.
t
I
ltl.05
Alter Ego. Piercing the veil of corporate fiction is
Ll:O d under the Alter Ego Doctrine if there is such unity of interest
11 d wn rship that the separate personalities of the corporation and
l,h individual no longer exist. The interest of equity will be served
l
parate personality of the corporation will be disregarded. 146
, when the corporation is owned by one person whereby the
ration functions only for the benefit of such individual owner,
orporation and the individual should be deemed to be the
1
(1) For example, the Alter Ego doctrine was applied
to make the controlling shareholder, who is also operations
manager, and the corporation itself liable for the obligations of
a sole proprietorship. The sole proprietorship was transformed
into a corporation and the franchise was transferred to
the corporation. The corporation was established after the
sole proprietorship was charged by the union with unfair
labor practice, illegal deductions, illegal dismissal and
violation of labor standard laws. It was established that the
corporation was a mere continuation and successor of the sole
proprietorship. The sole proprietorship was transformed into
G.R. No. L-41337, June 30, 1988, 163 SCRA 205.
Sea-Land Services, Inc. v. Pepper Source, 941 F. 2d 519 (1991); Van Dorn
Co. v. Future Chemical and Oil Corp., 753 F.2d 565 (1985); Minton v. Cavaney, 56
al. 2d 576, 15 Cal. Rptr. 641, 364 P. 2d 473 (1961); Riddle v. Leuscher, 51 Cal. 2d
"'74, 580, 335 P 2d 107, 110.
147
G.C. Arnold v. Willits & Patterson, Ltd., G.R. No. 20214, March 17, 1923,
44 Phil. 634, 645.
145
I46
142Spouses Violago v. BA Finance Corporation, et al., supra.
143
Liddle & Co., Inc. v. The Collector of Internal Revenue, G.R. No. L-9687,
June 30, 1961, 2 SCRA 632, citing Higgins v. Smith, 308 U.S. 406, 84 L. ed.
144
G.R. No. 47673, October 10, 1946, 77 Phil. 496.
UP TI
1'J'J'L8 1 -
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DE
a family corporation in a surreptitious attempt to evade the
charges of the union. 148
(2) In another case, 149 the Alter Ego doctrine was applied
because of the presence of numerous circumstances that
support the conclusion that the corporation was an adjunct of
the subsidiary corporation. Thus, there was commonality of
directors, officers, and stockholders; there was sharing of office;
there were financing and management arrangement between
the two companies allowing a corporate officer of the first
corporation to handle the other; there was virtual domination
if not control wielded by the same officer over the finances, and
business policies and practices of the subsidiary. The Supreme
Court therefore concluded that it behooves the corporation
officer "as a matter of law and equity, to assume the legitimate
financial obligation of a cash strapped subsidiary corporation
which it virtually controlled to such a degree that the latter
became its instrument or agent." 150
(3) In Tomas Lao Construction u. NLRC, 151 the High
Court ruled that where it appears that the businesses of three
corporations are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect
the rights of third persons, disregard the legal fiction that
the three corporations are distinct entities and treat them as
identical. It was established that the three corporations were
in fact substantially owned and controlled by the members of
one family; that the directors also belong to the same family;
the corporations were engaged in the same line of business;
there was only one management; the corporations use the
same manpower services; and the corporations use the same
equipment. 152
a.
As noted earlier, the second requisite under the
Instrumentality Doctrine is that the control must have been used by
the defendant to commit fraud or wrong, to perpetuate the violation
148
Heirs of Pajarillo v. Court of Appeals, G.R. Nos. 155056-57, October 19,
2007, 537 SCRA 96.
149
General Credit Corp. v. Alsons Development, et al., G.R. No. 154975,
January 29, 2007, 513 SCRA 225, 238-242.
1
50Ibid.
151
G.R. No. 116781, September 5, 1997, 278 SCRA 716, 733.
15
2Tomas Lao Construction v. NLRC, ibid.
'I'I'I'LE I
D Gniti
1D
1
ssincations
r th r positiv legal duty, or dishonest and unjust
ntion of plaintiffs legal right. It is believed however
Lh am
ond :requisite need not be present under the Alter
tl trin . In other words, it is not necessary in Alter Ego cases
} corporation was organized or operated to commit fraud
H r n . Under the rubric of Alter Ego doctrine, there is no need
I' 1 ,.n all gation or a finding of specific fraud in the organization
:) ration of the corporation. The "wrong'' consists only of the
'u ti that will result if the veil of corporate fiction is not pierced
id ring the relationship between the corporation and the owner.
i b Ii ved that inequity will result if the Alter Ego Doctrine will
n t b applied. In the cases covered by the Alter Ego Doctrine, the
us i on reality and not form; the focus is on how the corporation
w
p rated and the relationship between those who compose the
' rp ration with such operation. The Alter Ego Doctrine applies even
ntrol may not have been obtained for the purpose of committing
fhm l but the corporation was not treated as such separate entity.
aptly observed in one case, the cases of fraud make up part of the
' ptional cases that allow piercing of the veil of corporate fiction
but they do not exhaust it. 153
(1) Thus, it is submitted that even if there is no finding
of fraud, the veil may be pierced when there is substantial
ownership of all the stocks coupled with other circumstances
like failure to observe corporate formalities, non-payment of
dividends, use of funds of the corporation by the stockholder,
undercapitalization, non-functioning of other directors and
officers, unusually large salary and other circumstances. In
these cases, although there was no fraud in "organizing'' and
"operating" the corporation, the non-application of the doctrine,
may result in injustice to one of the parties. There may have
been no fraud at the time a contract was perfected or during
its enforcement but the injustice and inequity may result if the
doctrine will not be applied.
(2) It is believed that the factual background of Siain
Enterprises, Inc. u. Cupertino Realty Corporation154 justifies a
finding that the Alter Ego rule applies. There is no showing
that there was fraud in organizing the corporations involved
in the case and the operation does not appear to have been
153
154
Anderson v. Abbot, 321 U.S. 349 (1944).
G.R. No. 170782, June 22, 2009.
2
OMMENTARIE AND JURl PRUDEN E
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undertaken for the purpose of committing fraud. However, there
was oneness in the operations of the petitioner corporation, the
two other corporations 155 and their common president; there
was unity in the keeping and maintenance of corporate books
and records; the operation was also in complete control of the
president and even her common law spouse who is not an
officer received funds of the corporation for the account of the
president; and the president had unlimited power, control and
authority without the approval from the board. In other words,
the president did not treat the subject corporations as separate
entities and operated the same as his alter ego. Hence, the
non-application of the doctrine of piercing the veil of corporate
fiction would result in injustice as it may result in evasion of
obligation.
(3) It should also be noted that while there was no
finding of fraud in the organization and operation of the
respondent corporation in Siain Enterprises, Inc. v. Cupertino
Realty Corporation, 156 the doctrine was also applied to
respondent corporation even if it was organized only after the
subject obligations were incurred. The Court observed that the
respondent corporation was merely an alter ego of its president
and the obligations of the respondent corporation are deemed
the president's personal obligation and vice versa.
(4) It is also believed that the circumstances obtaining
in Heirs of Pajarillo v. Court of Appeals, 157 General Credit
Corporation v. Alsons Development 158 and Koppel (Phil.), Inc.
v. Yatco159 likewise justify the application of the Alter Ego
Doctrine. Hence, even if fraudulent intent and acts were not
established in those cases, there would still be sufficient reason
to disregard the separate personality of a corporation.
14.06
Totality of Circumstances Test. Justice Cardozo
said that "metaphors in law are to be narrowly watched, for starting
as devices to liberate thought, they end often by enslaving us." 160
155
The two other corporations referred to in the case are Yuyek Manufacturing
Corporation and Siain Transport, Inc.
156Supra.
157
G.R. Nos. 155056-57, October 19, 2007, 537 SCRA 96.
1 58
G.R. No. 154975, January 29, 2007, 513 SCRA 225, 238-242.
169G.R. No. 47673, October 10, 1946, 77 Phil. 496.
160
Berkey v. Third Avenue, Ry., 155 N.E. 61.
J PINE
i al o applicable to classifications in law and
, it l rud nc . In this connection, an alternative approach is to
/' •u
a t of circumstances or factors that serve as indicia of the
nppJi. bility of the doctrine of piercing the veil of corporate fiction.
I h pr livity to classify is thus eschewed and the effort is instead
r ' t d to the identification of background facts that support the
·lu ion that the corporate entity can be disregarded in the
r- t of justice and equity. What is important is the totality of
ircumstances and each case must be decided on its own set of •
r t . 161 However, even under the Three-Pronged Control Test, these
i:r umstances are material in establishing the presence of the three
f tors.
a.
The following circumstances indicate the applicability of
th- doctrine although it is not required that all of the circumstances
mu t concur: 162
"(1) commingling of funds and other assets of the
corporation with those of individual shareholders;
(2) diversion of the corporation's funds or assets
to non-corporate (to the personal uses of the corporation's
shareholders);
(3) failure to maintain the corporate formalities
necessary for the issuance of or subscription to the corporation's
stock, such as formal approval of the stock issue by the board of
directors;
(4) an individual shareholder representing to persons
outside the corporation that he or she is personally liable for
the debts or other obligations of the corporation;
(5) failure to maintain corporate minutes or adequate
corporate records;
(6)
identical equitable ownership in two entities;
(7) identity of the directors and officers of two entities
who are responsible for supervision and management (a
partnership or sole proprietorship and a corporation owned
and managed by the same parties);
Kinney Shoe Corporation v. Polan, 4th Circuit, 939 F.2d 209 (1991).
D. Cox, Thomas Lee Hazen, & F. Hodge O'Neal, Corporations, §7.8,
hereinafter referred to as "Cox, Hazen & O'Neal."
161
162James
MMENTAfUE AN
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4
(8) failure to adequately capitalize a corporation for the
reasonable risks of corporate undertaking;
(9)
absence of separately held corporate assets;
(10) use of a corporation as a mere shell or conduit to
operate a single venture or some particular aspect of the
business of an individual or another corporation;
(11) sole ownership of all the stock by one individual or
members of a single family;
(12) use of the same office or business location by the
corporation and its individual shareholder(s);
(13) employment of the same employees or attorney by
the corporation and its shareholder(s);
(14) concealment or misrepresentation of the identity
of the ownership, management or financial interests in the
corporation, and concealment of personal business activities
of the shareholders (sole shareholders do not reveal the
association with a corporation, which makes loans to them
without adequate security);
(15) disregard of legal formalities and failure to maintain
proper arm's length relationship among activities;
(16) use of a corporate entity as a conduit to procure
labor, services or merchandise for another person or entity;
(17) diversion of corporate assets from the corporation by
or to a stockholder or other person or entity to the detriment of
creditors, or the manipulation of assets and liabilities between
entities to concentrate the assets in one and the liabilities in
another;
(18) contracting by the corporation with another person
with the intent to avoid the risk of nonperformance by use of
the corporate entity; or the use of a corporation as a subterfuge
to illegal transactions;
(19) the formation and use of the corporation to assume
the existing liabilities of another person or entity." 163
163
Cox, Hazen & O'Neal, supra.
'f'HE R 1 V l
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Probative Factors. At any rate, probative factors
11 u t b
stablished in Fraud cases and Alter Ego cases. Proof of
I' •Ls nd circumstances must be presented to establish the elements
· Fraud cases and Alter Ego cases. 164 For example, under the
Thr, -Pronged Control Test, the one who invokes the doctrine must
tabli h, among others, sufficient circumstances that indicate that
l r i complete domination of the corporation. As explained in
n · pt Builders, Inc. v. NLRC, 165 the conditions under which the
'u ·idical entity may be disregarded vary according to the peculia�
f ·t and circumstances of each case. No hard and fast rule can
ccurately laid down, but certainly, there are some probative
tors that will justify the application of the doctrine of piercing
corporate veil, to wit: (1) Stock ownership by one or common
wnership of both corporations; (2) Identity of directors and officers;
·) The manner of keeping corporate books and records; and (4)
M thods of conducting the business.
14.08
Subsidiary. One of the instances when the
Alter Ego doctrine is invoked is when there is a parent companyubsidiary company relationship. A subsidiary "means a corporation
more than 50% of the voting stock of which is owned or controlled
directly or indirectly through one or more intermediaries by another
·orporation, which thereby become a parent company."166
a.
There are instances when piercing the veil of corporate
fiction is justified to make the parent company liable for the
obligations of the subsidiary. For instance, using the Three-Pronged
ontrol Test, it may be established that the parent company
ompletely dominates the subsidiary. However, the general rule is
till to the effect that if used for legitimate functions, a subsidiary's
eparate existence shall be respected, and the liability of the parent
orporation as well as the subsidiary will be confined to those arising
in their respective business. In this connection, the Supreme Court
utlined the circumstances which are useful in the determination of
Saverio v. Puyat, G.R. No. 186433, November 27, 2013.
G.R. No. 108734, May 29, 1996, 257 SCRA 149; See Note 98 above; cited in
Heirs of Fely Tan Uy v. International Exchange Bank, G.R. Nos. 166282 and 166283;
February 13, 2013; Olongapo City v. Subic Water and Sewerage Co., Inc., G.R. No.
171626, August 6, 2014.
166
Section 1, Rule 2, Rules of Procedure on Corporate Rehabilitation (2008).
164
165
MMENTARlE AND J nI PR DE
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.u; N
whether a subsidiary is but a mere instrumentality or alter ego of
the parent-corporation, to wit: 167
(1) The parent corporation owns all or most of the
capital stock of the subsidiary;
(2) The parent and subsidiary corporations have
common directors or officers;
(3)
The parent corporation finances the subsidiary;
(4) The parent corporation subscribes to all the capital
stock of the subsidiary or otherwise causes its incorporation;
(5)
TI ERE
DE
The subsidiary has grossly inadequate capital;
(6) The parent corporation pays the salaries and other
expenses or losses of the subsidiary;
(7) The subsidiary has substantially no business except
with the parent corporation or no assets except those conveyed
to or by the parent corporation;
(8) In the papers of the parent corporation or in the
statements of its officers, the subsidiary is described as
a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent
corporation's own;
(9) The parent corporation uses the property of the
subsidiary as its own;
(10) The directors or executives of the subsidiary do not
act independently in the interest of the subsidiary, but take
their orders from the parent corporation; and
(11) The formal legal requirements of the subsidiary are
not observed.
14.09
Traditional Case: The Corporation is
Obligor. In traditional piercing cases, courts will disregard
the separate personality to make corporate insiders liable for
corporate obligations. 168 In Francisco Motors Corporation v. Court
167
MR Holdings, Inc. v. Bajar, G.R. No. 138104, April 11, 2002, 380 SCRA 617
(2002); Philippine National Bank v. Mega Prime Realty and Holdings Corp., G.R.
Nos. 173454 and 173456, October 6, 2008.
168
International Academy of Management Economics (I/AME) v. Litton and
Company Inc., G.R. No. 191525, December 13, 2017.
7
f pp a,l , wo p titioner corporation sued the private respondent
_ 1 th balanc of the price of the jeepney units that he purchased.
H w y of counterclaim, the private respondent (a lawyer) claimed
hat th amounts, which are allegedly due, should be offset with the
mp nsation which was allegedly due him for the legal services
hat he rendered in favor of the shareholders of the company in an
tat proceeding. The Supreme Court rejected the counterclaim
r- tating the basic rule that the obligations of the stockholders are
n t the obligations of the corporation. The Supreme Court likewise·
rul d that there was no reason to pierce the veil of corporate fiction
b cause there was no evidence that the corporation was perpetuating
fraud or promoting injustice.
a.
Interestingly, the Supreme Court observed in Francisco
Motors v. Court of Appeals110 that: "The rationale behind piercing
a corporation's identity in a given case is to remove the barrier
b tween the corporation from the persons comprising it to thwart
the fraudulent and illegal schemes of those who use the corporate
p rsonality as a shield for undertaking certain proscribed activities.
However, in the case at bar, instead of holding certain individuals
or persons responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation that is being
ordered to answer for the personal liability of certain individual
directors, officers and incorporators concerned. Hence, it appears to
us that the doctrine has been turned upside down because of its
rroneous invocation."
b.
Reverse Piercing. It is respectfully submitted, that the
invocation of the doctrine was erroneous only because of the factual
milieu in the Francisco Motors case. Jurisprudence does not limit
the application of the doctrine to cases where the claims (against
the corporation) are sought to be enforced against its stockholders
or members. For example, the stockholders may have incorporated
the subject corporation precisely to evade a legal obligation of the
stockholders. In such case, the corporation can be made liable for
the obligations of the stockholders or corporate insider. This is an
example of the cases involving what is known as "Outsider Reverse
Piercing" where piercing is at the instance of a third person. This
should be distinguished from Insider Reverse Piercing where a
169
110
G.R. No. 100812, June 25, 1999.
Supra.
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person who is part of the corporation, like a stockholder, will be the
one to ask for the court to pierce the corporate veil. 171
c.
In the same manner, the doctrine can also be invoked
even if another corporation is involved, that is, in proper cases
one corporation can be made liable for the obligations of another
corporation. Thus, under the doctrine, a new corporation may be
ruled to be a mere continuation of an old corporation that has
stopped operation. Piercing may result even if one corporation is not
the stockholder of another. This may be true in cases where there
is a common "principal" - the one· who controls the two alter ego
corporations - although it may appear on paper that they do not
have an identical set of stockholders.
14.10
Corporation as Plaintiff Obligee. In Siain
Enterprises, Inc. v. Cupertino Realty Corporation, 172 the doctrine of
piercing the veil of corporate fiction was even allowed in favor of a
claimant corporation that sought to enforce a mortgage obligation.
The mortgage was sustained even if the obligations secured by
such mortgage were incurred before the mortgagee corporation was
organized. Although the obligations were the transactions with and
in favor of the president, the right of the mortgagee was sustained
because the mortgagee corporation was deemed the alter ego of the
president.
a. The authors disagree with the rule expressed in Siain
Enterprises, Inc. v. Cupertino Realty Corporation that allows a
mortgagee-creditor to use the doctrine of piercing the veil of corporate
fiction. The cases covered by the doctrine are cases when there is
abuse of the corporate privilege. The Doctrine of Piercing the Veil
of Corporate Fiction seeks to prevent inequity and injustice. Hence,
the plaintiff or claimant corporation that is seeking affirmative
relief should not be allowed to disregard its own or another
corporation's corporate fiction in order to pursue a case or claim a
right that properly pertains to other entities. Hence, if a mortgage
debt pertains to an individual, a corporation cannot enforce such
debt using the doctrine.
171 lnternational Academy of Management Economics (I/AME) v. Litton and
Company, Inc., G.R. No. 191525, December 13, 2017.
172 G.R. No. 170782, June 22, 2009.
'I'll'<' RE I
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4.11
Judicial Function. Only the courts (or
n m"ni trative tribunals like the National Labor Relations
; mmission) can pierce the veil of corporate fiction. To pierce the veil
f · rporate fiction is a power belonging only to the courts. Hence, a
sl: riff who has a ministerial duty to enforce a final and executory
d i.sion cannot "pierce the veil of corporate fiction" by enforcing the
d- ision against stockholders who are not parties to the action. 173
a.
In the exercise of this judicial function to determine if.
th corporate fiction will be disregarded, courts should be concerned
with reality and not form, with how the corporation was operated
and the individual components' relationship to that operation. The
question involved is one of fact.174
14.12
Jurisdiction Over the Alter Ego. The Supreme
ourt ruled in International Academy of Management Economics
(IIAME) v. Litton and Company, Inc. 175 that even if a co� poratio_n
is not impleaded in the main case and yet was so named m a wnt
of execution to satisfy a court judgment against its directors or
officers, it is vulnerable to the piercing of its corporate veil. The
Court explained:
"The 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. Coroll�ry �her�to,
it cannot be subjected to a writ of execution meant for another m 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.
The resistance of the Court to offend the right to due process of a
corporation that is a nonparty in a main case, may disin!egrate not only
when its director, officer, shareholder, trustee or member 1s a party to the
main case, but when it finds facts which show that piercing of the corporate
veil is merited.
173Cruz v. Dalisay, A.M. No. R-181-P, July 31, 1987.
174Concept Builders, Inc. v. NLRC, G.R. No. 108734, May 29, 1996.
175Supra.
90
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Thus, as the Court has already ruled, a party whose corporation is
vulnerable to piercing of its corporate veil cannot argue violation of due
process." 176
a.
In Kukan International Corp. u. Hon. Amor Reyes, 177 the
Supreme Court explained that "the principle of piercing the veil
of corporate fiction, and the resulting treatment of two related
corporations as one and the same juridical person with respect to a
given transaction, is basically 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
a case. Elsewise put, a corporation not impleaded in a suit cannot
be subject to the court's process of piercing the veil of its corporate
fiction. In that situation, the court has not acquired jurisdiction
over the corporation and, hence, any proceedings taken against
that corporation and its property would infringe on its right to due
process." 178 The Court requires that the corporation or person that
is sought to be made liable must be impleaded stating that the
implication is two-fold: (1) the court must first acquire jurisdiction
over the corporation or corporations involved before its or their
separate personalities are disregarded; and (2) the doctrine of
piercing the veil of corporate entity can only be raised during a full­
blown trial over a cause of action duly commenced involving parties
duly brought under the authority of the court by way of service of
summons or what passes as such service." 179
b.
It is believed that the ruling in International Academy
of Management Economics (I IAME) u. Litton and Company, Inc. 180
is the correct rule. While the authors agree that impleading the
"conduit" or "alter ego" is the best way to enforce the doctrine of
piercing the veil of corporate fiction, it is submitted however that
the requirements of due process are not violated if the person who
176Concept Builders v. NLRC, supra; Arcilla v. Court of Appeals, G.R. No.
89804, 215 SCRA 120, 23 October 1992; Violago v. BA Finance Corporation, 581
Phil. 62 (2008); Republic of the Philippines v. Mega Pacific eSolutions, Inc., et al., G.R.
No. 184666, June 27, 2016.
177 G.R. No. 182729, September 29, 2010.
l7BJbid.
179
Kukan International Corp. v. Hon. Amor Reyes, ibid.; See also Pacific
Rehouse Corporation v. Court of Appeals, G.R. Nos. 199687 and 201537, March 24,
2014.
180Supra.
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91
ht to b mad liable was not expressly impleaded or was not
f
th original parties in the complaint. In the first place, the
1 1
urt may order the inclusion of another corporation or person as
ary party in order to avoid multiplicity of suits and thereby
v th parties unnecessary expenses and delay. 181
1
(1) Secondly, in effect, if the Doctrine of Piercing the
V il of Corporate Fiction is successfully invoked, the conduit
r the "principal" or alter ego who is not an original party can
be deemed to have participated in the proceedings because
of the complete dominance of the corporation. The separate
personalities are disregarded and what should be ordinarily
considered separate personalities are treated as one. Hence,
it is believed that there is no need to file another case just
to invoke the doctrine. Due process is accorded because the
only remaining issue - whether or not the separateness of
the personality of the corporation and the stockholder or
directors or officers should be disregarded - can be threshed
out in the same case during the hearing on a proper motion. If
the personalities of the persons and entities are merged into
one, then both already participated in the trial on the merits
although only one was impleaded.
c.
The rule in Labor cases is consistent with the view
xpressed herein. The rule is well settled that persons who are
not originally impleaded may be held solidarily liable with the
corporation in the application of the doctrine of piercing the veil
of corporate fiction. The Supreme Court explained in Guillermo u.
Uson182 that:
"The common thread running among the aforementioned cases,
however, is that the veil of corporate fiction can be pierced, and responsible
corporate directors and officers or even a separate but related corporation,
may be impleaded and held answerable solidarily in a labor case, even
after final judgment and on execution, so long as it is established that such
persons have deliberately used the corporate vehicle to unjustly evade
the judgment obligation, or have resorted to fraud, bad faith or malice in
doing so. When the shield of a separate corporate identity is used to commit
wrongdoing and opprobriously elude responsibility, the courts and the legal
authorities in a labor case have not hesitated to step in and shatter the said
Sec. 2, Rule 6, Rules of Court as amended.
G.R. No. 198967, March 7, 2016 citing Claparols v. CIR, 160 Phil. 624 (1975);
A.C. Ransom Labor Union-CCLU v. NLRC, 226 Phil. 199 (1986); Reynoso v. Court of
Appeals, 399 Phil. 38 (2000).
181
182
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�hield and deny the usual protections to the offending party, even after final
Judgment. The key element is the presence of fraud, malice or bad faith ..."
d.
For example, two corporations were involved in Concept
Builders, Inc. v. NLRC, 183 (referred to herein as, CCI and HHPI).
Only CCI was originally impleaded as the employer of the private
respondents in an illegal dismissal case. Judgment was rendered
against CCI and the decision, in due course, became final and
executory. HHPI came into the picture only when the writ of execution
was not satisfied against the assets of CCI. Despite the objection of
HHPI and even if it was not impleaded, the judgment was allowed to
be satisfied against the properties of HHPI because of the finding that
HHPI was "obviously a business conduit of petitioner corporation
(CCI) and its emergence was skillfully orchestrated to avoid the
financial liability that already attached to petitioner corporation."
There was no need to implead HHPI because the personalities of the
two corporations were merged into one. Note that proof of facts and
circumstances showing the applicability of the Doctrine of Piercing
the Veil of Corporate Fiction were presented at the time the Motion
for the Issuance of Break Open Order was heard.
e.
Similarly, in The Heirs of the Late Panfilo V Pajarillo v.
Court ofAppeals, 184 the Supreme Court used the Doctrine of Piercing
the Veil of Corporate Fiction to allow the enforcement of a Decision
against P.V. Pajarillo Liner, Inc., although it was not impleaded as
a party and was incorporated almost two years after the complaint
was filed.
f.
It should be noted in this connection that if a corporation is
a party to a contract that provides for arbitration, corporate officers
and directors may be included in the arbitration proceedings under
Republic Act No. 9285 for the purpose of determining if there is
basis to pierce the veil of corporate fiction. Although the agreement
containing the arbitration clause is generally binding only on the
corporation, its officers may be impleaded if the purpose is to make
them solidarily liable because allegedly, the cause of action between
the corporation and its officers or directors is the same; they allegedly
acted not as separate entities. 185
I
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Personality Not Abrogated. When the veil of
fi tion i pierced in proper cases, the corporate character
arily abrogated. It continues for legitimate objectives. 186
In applying the doctrine of piercing the veil of corporate
th court will not disregard the corporate personality for
1 ur o
other than the granting of the relief prayed for in the
mplaint. It cannot be disregarded for purposes of other cases and
� r th r purposes. The court's power is confined to the transaction$
l v lv d in the case for the purpose of adjudging the rights and
1i - bilities of the parties in the case. They have no jurisdiction to
d more. 187 As explained in one case: "the courts do not say that the
rp ration, in all instances and for all purposes, is the same as
it directors, stockholders, officers, and agents. It does not result
'n an absolute confusion of personalities of the corporation and the
p r ons composing or representing it. Courts merely discount the
distinction and treat them as one, in relation to a specific act, in
rder to extend the terms of the contract and the liabilities for all
damages to the alter ego or to the principal as the case may be." 188
14.14
Doctrine of Piercing the Veil of Corporate
Fiction and Limited Liability Rule. 189 In Donnina C. Halley v.
Printwell, Inc., 190 the Supreme Court observed that: "stockholders
of a corporation are liable for the debts of the corporation up to the
extent of their unpaid subscriptions. They cannot invoke the veil
of corporate identity as a shield from liability, because the veil
may be lifted to avoid defrauding corporate creditors." This writer
respectfully disagrees with the last phrase of the Supreme Court
pronouncement. There is a difference between the Limited Liability
Rule and the Doctrine of Piercing the Veil of Corporate Fiction.
The Limited Liability Rule and the Doctrine of Piercing the Veil of
Corporate Fiction do not go hand in hand. The legal personality of
the corporation is not pierced if the Limited Liability Rule is applied.
If the Doctrine of Piercing the Veil of Corporate Fiction is applied
then the entire obligation of the corporation may be enforced against
a stockholder thereof even beyond the extent of the latter's unpaid
subscription to the corporation, while under the Limited Liability
Reynoso IV v. Court of Appeals, G.R. Nos. 116124-25, November 22, 2000.
Koppel (Phil.), Inc. v. Yatco, G.R. No. 47673, October 10, 1946, 77 Phil. 496•
186
187
(1946).
G.R. No. 108734, May 29, 1996.
184
G.R. Nos. 155056-57, October 19, 2007.
185
Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1, 2014.
183
3
Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1, 2014.
189Ibid.
190
G.R. No. 157549, May 20, 2011.
188
MMENTARIE AND JURl PR DEN E
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94
Rule only the unpaid subscription price is due from the stockholder
for application to the corporation's debts/obligations.
a.
For example, Mr. C is the creditor of Corporation X in the
amount of P200,000.00 and Corporation Xdoes not have any asset to
pay for the obligation to Mr. C. Mr. A has 200 shares with par value
of Pl00.00 per share registered in his own name in Corporation X
and has paid only half of the subscription price (at par value) or
Pl0,000.00 leaving a balance of Pl0,000.00. In the application of
the doctrine of piercing the veil of corporate fiction on the ground
that Mr. A is fraudulently using Corporation Xas a conduit, Mr. C
who invokes the same doctrine must show circumstances that prove
that there is fraud and that Corporation Xis just a conduit of Mr.
A. If Mr. C satisfies the burden of proof, then he can recover the
entire amount of P200,000.00 from Mr. A because the personality
of Corporation Xis pierced and Mr. A will be considered the person
who committed fraud through a conduit. In cases where the Doctrine
of Piercing the Veil of Corporation Fiction is applied the conduit
corporation and the principal (whether the principal is another
corporation or a natural person) are jointly and severally liable for
the entire obligation. 191
b. On the other hand, if the Limited Liability Rule is to be
applied in the same example, Mr. C need not show circums.tances
or probative factors that show fraud or illegality. If Corporation X
cannot pay and Mr. C wants to recover, all that is needed is for Mr.
C to prove that there is an unpaid portion of the subscription price.
In such a case, Mr. A is liable only up to the extent of his investment,
meaning for the unpaid subscription price of Pl0,000.00. In Donnina
C. Halley v. Printwell, Inc., 192 the Supreme Court stated that "in view
of the petitioner's unpaid subscription being worth P262,500.00, she
was liable up to that amount." When the petitioner was made to
pay P262,500.00 for her unpaid subscription, the veil of corporate
fiction was not pierced because she was just made to pay up to the
extent of her investment. There was even no need to prove that
there were prevailing circumstances (probative factors) that justify
the application of the Doctrine of Piercing the Veil of Corporate
Fiction. The Supreme Court even observed in Donnina C. Halley
v. Printwell, Inc.: 193 "The creditor is allowed to maintain an action
Heirs of Fe Tan Uy v. International Exchange Bank, G.R. Nos. 166282 and
166283, February 13, 2013.
192
G.R. No. 157549, May 20, 2011.
193
Supra, citing Velasco v. Poizat, 37 Phil. 802, 806 (1918) and Tierney v.
Ledden, 121 NW 10.
191
ftP 11A'f'l
N
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E
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ILC
9
ifications
lJOfl n unpaid uh criptions and thereby steps into the shoes of
· rp r tion for the satisfaction of its debt. To make out a prima
, i , ·a in a uit against stockholders of an insolvent corporation
•omp 1 th m to contribute to the payment of its debts by making
, d unpaid balances upon their subscriptions, it is only necessary
stablish that the stockholders have not in good faith paid the par
tu of the stocks of the corporation."
15. Group of Companies. The term "group of companies"
r £ r to corporations that are financially related to one another
194
A "group of
tL parent corporations, subsidiaries, and affiliates.
each of
from
ompanies" has no personality separate and distinct
195
th component corporations. Thus, under the doctrine of separate
p r onality, the filing of a petition for insolvency of a member of the
roup and a Stay Order issued therein should not benefit the other
m mbers.
a.
However, under Republic Act No. 10142 otherwise known
as The Financial Rehabilitation and Insolvency Act of 2010 as well
a the new Rules of Procedure on Corporate Rehabilitation, a Group
f Companies may jointly file a petition for rehabilitation when one
or more of its constituent corporations foresee the impossibility of
meeting debts when they respectively fall due, and the financial
distress would likely adversely affect the financial condition and/or
operations of the other member companies of the group and/or the
participation of the other member companies of the group is essential
under the terms and conditions of the proposed rehabilitation plan.196
b.
In effect, the separate nature of the personalities of
the constituent corporations will be disregarded for purposes of
the rehabilitation case. Even if only one is in distress, the other
constituents will be affected. If one constituent corporation has no
liquidity problem, the filing of a rehabilitation proceeding for the
group of companies of which it is a member will adversely affect its
creditors.
c.
Interestingly, there is no similar right if it is the creditor
who will initiate the rehabilitation proceedings. Neither is there a
Section 1, Rule 2, Rules of Procedure on Corporate Rehabilitation (2008).
Litonjua Group of Companies v. Vigan, G.R. No. 143723, June 28, 2001.
196
Section 1, Rule 4, A.M. No. 00-8-10-SC, effective June 16, 2009; This appears
to be consistent with the Theory of Enterprise Entity proposed by Prof. Adolf A. Berle,
Jr.
194
195
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'l'IIEltEVJ'ED
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right to include other constituent corporations if only one distressed
corporation will file the petition. The present rules therefore allow
corporations who are members of the group of companies the
unilateral right to disregard their separate personalities on the
sole consideration that the financial distress would likely adversely
affect the financial condition and/or operations of the other member
companies of the group and/or the participation of the other member
companies of the group. It is submitted that the rule is hardly fair
to creditors whose financial conditions and operations will also be
affected by the suspension of the claim against the members of
the group with separate personalities who may not be in financial
distress.
d. It is believed that fairness will be achieved if creditors are
also allowed to initiate a petition against a "group of companies."In
addition, members must be required to give notice to the SEC the
moment they become such member of a "group of companies."From
the time such notice is given or should have been given, creditors
should be allowed to file an action and pierce the veil of corporate
fiction against all members of the group although only one of them
is liable. The filing of actions against all members of the group of
companies should be allowed even if the obligation was incurred by
only one of the constituents if they are so related that the financial
condition of one will affect the other.
e.
Without proper regulation, however, the action against
the parent company or any other member of the group of companies
may still be maintained, in proper cases, under the rubric of the
doctrine of piercing the veil of corporate fiction. As noted earlier,
circumstances may be presented to justify the disregard of corporate
fiction to make the parent company liable for the obligations of the
subsidiary.
15.01.
Associated Enterprises or Related Parties.
Consistent with this author's concern that the concept of group
of companies may be used to foster unfairness and avoidance of
obligation are recent developments in the sphere of administrative
regulation. There is an effort to prevent corporations from using
the separate personality of a member of the group to avoid legal
obligations. For example, the rules on transfer pricing that was
issued by the Bureau of Internal Revenue, using the methodologies
of the Organization for Economic Cooperation and Development
TI
JILHPl
'
97
k t pr v nt harmful tax practices using the vehicle of
nt rpri "that have resulted in tremendous losses of
for gov rnments.
.
Under the BIR Regulation, the term "associated
nt 1-prises" means that: "two or more enterprises are associated if
) participates directly or indirectly in the management, control,
)t'
pital of the other; or if the same persons participate direct�y or
_
i 11 dir tly in the management, control, or capital of the enterprises.
'rh
are also referred as related parties."198 "Control" refers to any
1 i d of control, direct or indirect, whether or not legally enforceable,
d however exercisable or exercised. Moreover, control shall be
med present if income or deductions have been arbitrarily s�ifted
_
w en two or more enterprises."199 The harmful tax practice 1s
a --omplished when one associated enterprise, entitled to income tax
x mptions, is being used to allocate income away from a company
subject to regular income taxes."200
15.02.
Single Economic Unit Rule under Philippine
ompetition Act. Republic Act No. 10667, otherwise known as the
Philippine Competition Act"provides that entities that control, are
ntrolled by, or are under common control with another ei:itity or
ntities have common economic interests, and are not otherwise able
to decide or act independently of each other, shall not be considered
ompetitors. 201 Control refers to the ability to substantially influence
or direct the actions or decisions of an entity, whether by contract,
agency or otherwise. 202
"Ultimate parent entity'' is the jurid�cal
ntity that, directly or indirectly, controls a party to the transact10n,
and is not controlled by any other entity.203
a.
Control is presumed to exist under the Philippine
Competition Act when the parent owns directly or indirectly,
through subsidiaries, more than one half (1/2) of the voting power
of an entity, unless in exceptional circumstances, it can clearly
be demonstrated that such ownership does not constitute control.
2013.
2013.
197Section 2, BIR Revenue Regulations No. 2-2013 dated January 23,
198
Section 4, ibid.
t99Jbid.
23,
200Background in BIR Revenue Regulations No. 2-2013 dated January
Section 14, Republic Act No. 10667.
Section 14, Republic Act No. 10667.
2oa1bid.
201
202
9
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9
D ftnition and
. Control also exists even when an entity owns one half (1/2) or less of
the voting power of another entity when:
p cifically with respect to One-Person Corporation, the
attributes of the are also present but the rules on the doctrine of
piercing the veil of corporation fiction also applies. (1970)
(1) There is power over more than one half (1/2) of the
voting rights by virtue of an agreement with investors;
Q:
Marulas Creative Technology, Inc., an e-business enterprise
engaged in the manufacture of computer multi-media accessories,
rents an office and store space at a commercial building owned
by X. Being a start-up company, Marulas enjoyed some leniency
in its rent payment; but after three years, lessor X put a stop to
it and asked Marulas' president and general manager, Y, who is.
a stockholder, to pay back rentals amounting to Pl 00, 000. 00 or
to vacate the premises at the end of the month. Marulas neither
paid its debt nor vacated the premises. X sued Marulas and Y
for collection of the unpaid rentals, plus interests and cost of
litigation. Will the suit prosper against Marulas? Against Y?
A:
Yes, with respect to Marulas but no, with respect to Y. The
suit against Marulas will prosper because it is the party to
the contract. Marulas is an artificial being with a corporate
personality separate and distinct from its officers and
stockholders. As such artificial being, it is the lessee of the office
and store space and X is the lessor. Hence, if Marulas did not
perform its obligations as a lessee, it is liable to the lessor X.
The obligation to pay the rentals for the office and store space is
the obligation of Marulas, as part of its corporate liabilities and
expenses.
(2) There is power to direct or govern the financial and
operating policies of the entity under a statute or agreement;
(3) There is power to appoint or remove the majority of
the members of the board of directors or equivalent governing
body;
(4) There is power to cast the majority votes at meetings
of the board of directors or equivalent governing body;
(5) There exists ownership over or the right to use all or
a significant part of the assets of the entity; or
(6) There exists rights or contracts which confer decisive
influence on the decisions of the entity.204
PROBLEMS:
1.
Q:
What is a one-man corporation? Do such corporations enjoy the
attributes of corporations? What should be done to assure this?
A:
A one-man corporation is a corporation where all the outstanding
shares belong to one person. Although there may be other
incorporators or directors, the same persons hold shares only
as nominee of the person who actually owns the shares. Thus,
a corporation functions for the benefit of one individual, who
controls the corporation. It is commonly called a one-man
corporation.
Under the RCCP, a one-man corporation may in the form of a
One-Person Corporation.
The suit against Y will not prosper because Marulas has
a personality separate and distinct from its officers and
stockholders. Y, as president, general manager and stockholder
of Marulas is therefore not liable for the obligations of the
corporation if he merely acted for and in behalf thereof.
Generally, corporate officers are not obliged to shoulder the
liability of the corporation. (2000 Bar)
3.
Q:
Ronald Sham doing business under the name of SHAMRON
Machineries (SHAMRON) sold to Turtle Mercantile (TURTLE) a
diesel tractor. In payment, Turtle's President and Manager Dick
Seldon issued a check for P50,000. 00 in favor of SHAMRON.
A week after, TURTLE sold the tractor to Briccio Industries
(BRICCIO) for P60,000. 00. BRICCIO discovered that the engine
of the tractor was reconditioned so he refused to pay TURTLE.
As a result, Dick Seldon ordered "stop payment" of the check
issued to SHAMRON. SHAMRON sued TURTLE and Dick
Seldon. SHAMRON obtained a favorable judgment holding
co-defendants TURTLE and Dick Seldon jointly and severally
liable. Comment on the decision of the trial court. Discuss fully."
A:
The decision of the trial court holding Dick Seldon liable is
erroneous. The President and General Manager of TURTLE
A one-man corporation enjoys the attributes of corporations.
However, it is a precondition that a certificate of incorporation
is issued by the SEC. However, in order to avoid the operation
of the doctrine of piercing the veil of corporate fiction, the
corporate business and properties of the corporation should be
kept separate from the properties and business of the person
who owns the shares. The corporation should not be treated as
a mere conduit; otherwise, the attribute that the personality of
the corporation is separate may be disregarded.
204Ibid.
lassifications
MM •NTARIE AN JURI PR DEN E N
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100
THEREVJ
cannot as a rule be held jointly and severally liable with Turtle
Mercantile. Seldon was merely acting in his capacity as corporate
officer when he issued the check to SHAMRON and when he
stopped payment thereof. The corporation has a personality
separate and distinct from its officers, hence, the obligations
of the corporation are not the obligations of the officer even if
the same officer represented the corporation in the transaction.
(1995 Bar)
4.
5.
Q:
C Steel and Nail Co., Inc., owned by X, had financial obligations
to its employees. C ceased_ operation, and was immediately
succeeded on the next day by, and all its assets were turned
over to, the E Steel Corporation, 90% of the subscribed shares
of which were also owned by X. May the E Steel Corporation be
held liable for the financial obligation of the C Steel and Nail
Co., Inc. to its employees? Decide and give reasons.
A:
Yes. It is submitted that E Steel Corporation may be held liable
under the doctrine of piercing the veil of corporate fiction. It
appears that E Corporation is a continuation of C Steel and
Nail Co., Inc. The given circumstances indicate that E Steel
Corporation is being used only as a protective shield of a
corporation to evade the financial obligation of its predecessor­
corporation to its employees. While generally transfer of the
assets of the corporation will not make the transferee liable, the
other circumstances in the present case (such as ownership by
X of the shares of C and E) justify the piercing of the corporate
veil. (Claparols u. CIR, 65 SCRA 613) (1978 Bar)
Q:
Tantalus Corporation, of which 97% of the issued outstanding
shares of stock were owned by Roger Mano, had financial
obligations to its employees by way of unpaid wages and
allowances. Tantalus Corporation was dissolved by shortening
its corporate life and all its assets turned over to Suceso
Corporation, of which 95% of the subscribed shares were held
by Roger Mano and his wife. Then, Tantalus Corporation ceased
to operate. May the employees of Tantalus Corporation proceed
against the Suceso Corporation to recover their unpaid claims?
Discuss.
A:
Yes. The employees of Tantalus may proceed against Suceso
who may be held liable under the doctrine of piercing the veil of
corporate fiction. It appears that Suceso is a mere continuation
of Tantalus. The given circumstances indicate that Suceso is
being used only as a protective shield to evade the financial
obligation of its predecessor-corporation to its employees. While
generally transfer of the assets of the corporation will not make
the transferee liable, the other circumstances in the present
Tl N
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101
ju tify the piercing of the corporate veil. (Claparols u. CIR,
RA 613) (1985 Bar)
7.
Q:
Mr. Pablo, a rich merchant in his early forties, was a defendant
in a lawsuit, which could subject him to substantial damages.
A year before the court rendered judgment, Mr. Pablo sought
his lawyer's advice on how to plan his estate to avoid taxes. His
lawyer suggested that he should form a corporation, with himself,
his wife and his children (all students and still unemployed) as
stockholders, and then, transfer all his assets and liabilities to
this corporation. Mr. Pablo followed the recommendation of his
lawyer. One year later, the court rendered judgment against
Mr. Pablo and the plaintiff sought to enforce this judgment. The
sheriff, however, could not locate any property in the name of Mr.
Pablo and therefore returned the writ of execution unsatisfied.
What remedy, if any, is available to the plaintiff?
A:
The plaintiff can ask the court to pierce the veil of corporate
fiction and make the corporation liable for the judgment
obligation. It is true that a family corporation may be organized
to pursue an estate tax planning. (Delpher Trades Corporation
u. IAC, 157 SCRA 349) However, the factual setting indicates
the existence of a lawsuit that could subject Mr. Pablo to a
substantial amount of damages. It would thus be difficult for
Mr. Pablo to convincingly assert that the incorporation of the
family corporation was intended merely as a case of "estate tax
planning". (See Tan Boon Bee u. Jarencio, C.R. No. 41337, June
30, 1988) (1991 Bar)
Q:
Eva owns 90% of the shares of the capital stock of CK Corporation.
On one occasion, CK Corporation, represented by Eva as the
President and General Manager, executed a contract to sell a
subdivision lot in favor of Ed. For failure of CK Corporation to
develop the subdivision, Ed filed an action for rescission and
damages against CK Corporation and Eva.
Will the action prosper? Explain.
8.
A:
Yes, the action may prosper against CK Corporation but not
against Eva. The liabilities of CK Corporation are not the
liabilities of its officers because the corporation has a legal
personality separate and distinct from that of its officers and
shareholders. The fact that Eva owns 90% of the capital stock of
CK Corporation is not of itself sufficient justification to invoke
the doctrine of piercing the veil of corporation fiction. There
must be a showing of fraud, malice or bad faith. (1996 Bar)
Q:
Plaintiffs filed a collection action against "X" Corporation.
Upon execution of the court's decision, "X" Corporation was
found to be without assets. Thereafter, plaintiffs filed an action
MME 'l'ARIE
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against its present and past stockholder ''Y'' Corporation, which
owned substantially all of the stocks of "X" Corporation. The
two corporations have the same board of directors and ''Y''
Corporation financed the operations of "X" Corporation. May
''Y'' Corporation be held liable for the debts of "X" Corporation?
Why?
A:
9.
Q:
A:
10.
Q:
Yes. ''Y'' Corporation may be held liable for the debts of "X"
Corporation. It is submitted that the doctrine of piercing the veil
of corporate fiction can be applied in the present case. Although
mere interlocking directorship is not by itself sufficient to justify
the application of the doctrine, there are circumstances in the
present case that support such application. Thus, the following
facts are present: (1) X Corporation is without assets; (2) The
stockholders are the same; (3) the directors are identical; and
(4) Y financed the activities ofX Corporation. It is believed that
the mentioned circumstances are enough to allow the piercing of
the corporate veil. (Commissioner of Internal Revenue v. Norton
& Harrison Company, 11 SCRA 714 [19641) (2001 Bar)
R Realty Corporation, lessor, obtained a favorable judgment
in a suit against GEE, lessee, for the latter's failure to pay
rentals. The judgment however was not executed because of
the trial court's finding that P2 million was paid by GEE to
R Realty Corporation tantamount to full satisfaction of the
judgment debt. It turned out however that Pl million was
the consideration in the pacto de retro sale drawn in favor of
R Realty's officers/stockholders, JR and MR. Furthermore, the
otherPl million paid turned out as payment for a loan extended
by JR and MR in favor of GEE. Can the payments to R Realty's
officers/stockholders be considered payment to the corporation?
No. A corporation has a personality distinct and separate from
its individual stockholders or members. The obligations of the
corporation are not the obligations of the officers and vice versa.
It follows that payments made to the shareholders for obligations
in their favor are not payments to the corporation. Shareowners
are not the owners of the receivables of the corporation and
vice versa. (Good Earth Emporium, Inc. v. CA, C.R. No. 82797,
February 27, 1991)
In one case, the trial court rendered judgment ordering the
defendant Mr. X to pay the plaintiff Mr. Y actual damages in
the amount of Pl,000,000.00. The sheriff who is enforcing the
writ of execution to enforce said judgment was not able to locate
the properties of Mr.X so he decided to levy upon the properties
of ABC Corporation on the ground that ABC is a mere conduit
of Mr. X. Is the action of the sheriff in levying the properties of
ABC Corporation valid?
A:
REVI ED
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ILJPPINE
I 3
not have the authority to 1 vy up n
h riff do
No. Th
prop rtie of a corporation that is not a party to th ca . H
cannot do so under the pretext that the doctrin of pi rcing
the veil of corporate fiction is applicable. "Piercing the veil" of
corporate fiction is a judicial prerogative. Only the court can
apply this doctrine. (Cruz v. Dalisay, A.M. No. R-181-P, July 31,
1987)
16. Artificial Being. Although it is treated as a separate
p on, the fact is that a corporation does not have physical existence
- its existence is artificial. Consequently, the rights ofcorporations
·annot be exactly the same as the rights of natural persons. There
are facets of law where the juridical entity's existence cannot be
likened to a natural person precisely because a corporation exists
only by fiction oflaw.
For example, in Manacop v. Equitable PCI Bank, 205
a.
the judgment in favor of a corporation was sought to be executed
pending appeal. It was explained that the plaintiff corporation's
financial distress is sufficient reason to order execution pending
appeal. The plaintiff cited the rule that execution pending appeal
may be granted if the plaintiff is already of advanced age and in
danger of extinction. The Supreme Court rejected such argument.
The juridical existence of a corporation cannot be compared to a
natural person. The precarious financial condition of a corporation
does not warrant the non-application of the long-standing policy of
enforcing only final and executory judgments.
The artificial nature ofthe personality ofthe corporation
b.
likewise affects its entitlement to certain rights. The nature of
the personality of the corporation touches the issue of nationality,
domicile, criminal liability, tort liability, and availability of
constitutional rights. These matters will be discussed hereunder.
17. Primary Rules of Attribution. "The law vests in
corporations rights, powers, and attributes as if they were natural
persons with physical existence and capabilities to act on their
own."206 However, the reality is that a corporation, as an artificial
being, cannot by itself act and acquire knowledge. Due to the
artificial nature of the existence of corporations, corporations can
perform physical acts or commit omissions only through natural
205G.R. No. 162814, August 25, 2005, 468 SCRA 256, 277.
206Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1, 2014.
persons. 207 "Because a corporation's existence is only by fiction of
law, it can only exercise its rights and powers through its directors,
officers and agents, who are natural persons."208 As a consequence,
Corporate Law and jurisprudence provide for rules of attribution.
There are rules that may be applied in determining if an action or
omission of a natural person or knowledge acquired by one person
can be attributed to the corporation.
a.
In what is known in Common Law as Primary Rules of
Attribution, the action of the Board of Directors will be treated as
action of the corporation. 209 This is consistent, with Philippine Law
because Section 23 of the then Corporation Code, and now Section
22 of the RCCP, provides that the Board shall exercise the corporate
powers of the corporation.210
b.
Acts of officers and employees may, in proper cases, be
attributed to the corporation.211 How the authority of corporate
officers and employees is acquired is discussed in the notes to Section
24 (previously Section 25 of the Corporation Code).
18. Attribution of Knowledge. Consistent with Primary
Rules of Attribution, notice to the Board of Directors should also
be deemed notice to the corporation. In one case,212 the Supreme
Court observed that it is part of the duty of care of a direc_tor to
the corporation to inform the said corporation through the ·Board
of the existence of a certain proceeding affecting its property. It
was further observed that a corporation, an artificial being acting
through its duly authorized representative must be deemed to
have been informed or must have constructive knowledge of the
proceeding. 213
a.
The Supreme Court stated the basic rule regarding
attribution of knowledge in Francisco v. Government Service
Republic of the Philippines v. Coalbrine International Philippines, Inc., G.R.
No. 161838, April 7, 2010.
208
Lanuza, Jr. v. BF Corporation, supra.
209
Davies, p. 41.
210
Republic of the Philippines v. Coalbrine International Philippines, Inc.,
207
supra.
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212
IV v. Court of Appeals, G.R. No. 145578, November 18, 2005.
Sta. Monica Industrial and Development Corporation v. The Department of
Agrarian Reform Regional Director for Region III, et al., G.R. No. 164846, June 18,
2008.
2l3Jbid.
E
10
m w wh r it was explained that "knowledge of facts
d by an officer or agent of the corporation in
of his employment, and in relation to matters within
p of his authority, is notice to the corporation, whether he
r unicates such knowledge or not since a corporation cannot see,
n w, anything except through its officers."
r
b.
Law or rules may identify the officer or employee to whom
should be given. For example, summons in civil cases may
rved on a domestic corporation only through the president;
n ral manager, corporate secretary, treasurer or in-house counsel
r their absence or unavailability, their secretaries.215 Service of
ummons on the corporation is restricted, limited and exclusive on
· h e persons consistent with the rule expressio unios est exclusio
a,lterius. 216
c.
In the field of contracts, the parties may encounter
difficulties in determining if notice was properly sent to an authorized
officer or employee. There are situations when a party to a contract
is legally required to give notice or a written demand to the other
party that is a corporation; both parties may want to avoid a dispute
to determine if notice was duly served. The dispute may be avoided
by stipulating in the contract not only the place where and mode
how notice will be sent but also the particular person or persons to
whom notice must be served. It can be agreed upon that notice to
any other officer or employee, other than the person specified in the
contract, would not bind the corporation.
d.
It is important to note, however, that even if knowledge of
an act is properly attributed to the corporation, it does not follow that
all the stockholders are deemed to have knowledge of the same fact
or act. For instance, it was argued in one case that the respondents
who were stockholders of the corporation were already barred from
214
G.R. Nos. L-18287 and 18155, March 30, 1963, 7 SCRA 577, 584-585
citing Ballentine, Law on Corporations, Section 112, cited in Carrascoso, Jr. v.
The Honorable Court of Appeals, et al., G.R. No. 123672, December 14, 2005, 477
SCRA 666, 702; See also Umali v. Court of Appeals, G.R. No. 89561, September 13,
1990 (Where knowledge of the true relations between parties was attributed to the
corporation because of the notice to or knowledge of the Executive Vice President).
216Section 11, Rule 14, 1997 Rules of Civil Procedure as amended by A.M. No.
19-10-20-SC dated October 15, 2019; Ellice Agro-Industrial Corp. v. Young, G.R. No.
174077, November 21, 2012.
216
Dole Philippines, Inc. v. Hon. Reinato G. Quilala, G.R. No. 168723, July
9, 2008; Paramount Insurance Corp. v. A.C. Ordonez Corporation, et al., G.R. No.
175109, August 6, 2008; Gentle Supreme Philippines, Inc. v. Consulta, G.R. No.
183182, September 1, 2010.
1.06
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the questi�ning of the Mortgage Trust Indenture that was already
presented m a stockholders' meeting. The Supreme Court ruled that
absent any proof that the individual respondents were notified of
the holding of a stockholders' meeting or that they were present
.
_
durmg the meetmg,
the respondents could not have been informed
of the transaction.217
19. Nationality and Citizenship. The general rule is
that a corporation cannot be considered a citizen as the term
'.'citizen" is ur.id�rstood in political law. "In political l�w, citizenship
1s m�mbersh1p m a body politic, which carries with it the duty of
a!legiance to the State and the exercise of political rights, like the
right of s��rage and right to hold public office, as well as the duty to
_
render m1htary service when required to by the State. In this sense
the term citizenship is limited to natural persons because by th�
very essence of the duty of allegiance to the state and the exercise of
political rights, only natural persons are capable of performing said
acts."21s
a. Nevertheless, there are instances when it is important to
�etermine the nationality of a corporation for certain purposes. Thus,
it has �e�n o?served that two principal tests have been applied for
determmmg 1f a c�rporation is foreign or domestic, namely: (1) The
Aggref!ate Test which requires looking into the nationality, domicile
or res1d�nce of the individuals who control the corporation; and (2)
_ looks to the nation where the corporation was
!'he Entity Test which
2
mcorporated. 19 The Aggregate Test is also known as The Control Test
while The Entity Test is also referred to as the Place of Incorporation
Test or Incorporation Test.
19.01.
Place of Incorporation Test. The norm that is
expr�ssed in the RCCP is the Entity or Place of Incorporation Test.
Section 140 of the RCCP (previously Section 123 of the Corporation
Code) p�ovides that "a foreign corporation is one formed, organized,
_
or ex1stmg
under laws other than those of the Philippines' and
hose
laws
allow
Filipino citizens and corporations to do business in
�
its ow� country or St�te." As explained in one case, the sovereignty
by which a corporation was created, under whose laws it was
organized, determines its national character, and the fact that some
217Metropolitan Bank and Trust Company v. Centro Development Corporation
et al., G.R. No. 180974, June 13, 2012.
218Carmelino �- Alvendia, The Law of Private Corporations in the Philippines,
1967 Ed., p. 10, heremafter called "Alvendia, p. 10."
219Henn and Alexander, p. 171.
'rH
1rnv1 •
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g
I
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• TU IJ: J 1 1IT IJ PINE
I
I 7
r id nt and citiz ns of a for ign country
_220
l . 2.
Wartime Control Test. The place of incorporation
b di regarded in times of war. Courts will look into the
nality of the controlling stockholders in wartime. If the
ntrolling stockholders are citizens of the enemy state then the
ration will also be deemed a public enemy corporation.221
19.03.
Investment Test: Voting Control Test and.
D neficial Ownership Test. The incorporation test is also not the
only test in relation to nationalization laws where the law limits
� r ign ownership to a certain percentage of the outstanding capital
in c rtain activities or businesses. For investment purposes, there
a cases when the Constitution and laws limit the percentage of
quity participation of foreigners.222
a.
For example, in public utilities, the Constitution limits
for ign equity to 40%, "the legal and beneficial ownership of
60% of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate."223 The
t rm "capital" refers only to shares of stock entitled to vote in the
lection of directors.224 However, the requirement is in conjunction
with the Incorporation Test because the Constitution requires that
the corporation be organized in the Philippines.225 In other cases,
involving foreign investment, there is no requirement that the
corporation is organized in the Philippines.
b.
In this connection, the Supreme Court ruled that "both
the Voting Control Test and the Beneficial Ownership Test must
be applied to determine whether the corporation is a 'Philippine
National'."226 In other words, "full beneficial ownership of the stocks,
220Philippine Sugar Estates v. United States, 39 U.S. Ct of Claims 225.
221 Filipinas Compania De Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil.
54 (1951).
222A summary of these cases is provided in the Foreign Investment Negative
List promulgated under Republic Act No. 7042 as amended by Republic Act No. 8179.
223Gamboa v. Teves, G.R. No. 176579, June 28, 2011.
224Roy III v. Chairperson Herbosa, G.R. No. 207246, November 22, 2016.
225Section 11, Article XII, Constitution.
226Gamboa v. Teves, G.R. No. 176579, October 9, 2012 (Resolution on Motion
for Reconsideration); See SEC Memorandum Circular No. 8, Series of 2013 dated May
20, 2013 for the implementation by the SEC of the ruling in this case.
MMEN'fARI I
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coupled with voting rights is essential."221 There is a pairmg of
concepts of "beneficial ownership" and the "situs of control."228
c.
In public utilities, ownership of at least 60% of the shares
with voting rights must pertain to Filipinos. If the requirement will
not be imposed, the corporation will not be "effectively controlled"
by Filipinos in accordance with the mandate of Section 11, Article
XII of the Constitution. The Supreme Court gave the following
explanation:
"We shall illustrate the glaring ai:iomaly in giving a broad definition to
the term 'capital.' Let us assume that a corporation has 100 common shares
owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of shares having a par value of one peso (Pl.00)
per share. Under the broad definition of the term 'capital,' such corporation
would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more
than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.
In the example given, only the foreigners holding the common shares
have voting rights in the election of directors, even if they hold only 100
shares. The foreigners, with a minuscule equity of less than 0.001 percent,
exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election
of directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the
clear language of the Constitution, to place the control of public utilities
in the hands of Filipinos. It also renders illusory the State policy of an
independent national economy effectively controlled by Filipinos."229
Since the Constitutional requirement of at least 60%
d.
Filipino ownership applies not "only to voting control of the
corporation but also to the beneficial ownership of the corporation, it
is therefore imperative that such requirement apply uniformly and
across the board to all classes of shares, regardless of nomenclature
and category, comprising the capital of the corporation."230 The
requirement of at least 60% Filipino ownership "must apply
separately to voting shares and to the total outstanding shares of
Gamboa v. Teves, ibid.; See Express Investment II Private Ltd. v. Bayantel
Communications, Inc., G.R. Nos. 175418-20, December 5, 2012.
228
Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines, G.R. No. 195580, January 28, 2015.
22ssupra.
2a0Ibid.
' It
p int d out that even non-voting shares are still
t v t n ight sp cific corporate matters.232 Hence, across
ard application "regardless of differences in voting rights,
and restrictions, guarantees effective Filipino control of
utilities, as mandated by the Constitution."
.
The Supreme Court doctrine is implemented in SEC
m , ndum Circular No. 8, Series of 2013. This Circular, which
upheld in Roy III u. Chairperson Teresita Herbosa, et al., 233_
id in part:
ction 1. This Circular shall apply to all corporations ("covered
ut1)0rations") engaged in identified areas of activities or enterprises
-i:fically reserved, wholly or partly, to Philippine Nationals by the
1
n titution, the FIA and other existing laws, amendments thereto and
IRRs of said laws except as may be provided therein.
ection 2. All covered corporations shall, at all time, observe the
n, titutional or statutory ownership requirement. For purposes of
d t rmining compliance therewith, the required percentage of Filipino
own rship shall be applied to BOTH (a) the total number of outstanding
ha ·es of stock entitled to vote i n the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the
l ction of directors."
f.
With respect to the requirement of beneficial ownership,
it was noted in the previous edition of this work that it is not
ufficient to simply say that a corporation is Filipino owned if it is
60% owned by another corporation which in turn is 60% Filipino
wned. It is imperative that beneficial ownership must ultimately
be in the hands of Filipinos. Any attempt to defeat the limitation on
foreign ownership is subject to sanctions under applicable laws and
rules.234 There must be no attempt to circumvent nationalization
laws by making it appear that 60% of the outstanding capital in
a corporation belongs to Filipinos although the real owners are
foreigners.
(1) The SEC opined that in cases where a corporation
invests in the formation of a new corporation as a stockholder,
when there is doubt as to the actual extent of Filipino equity in
227
Roy III v. Herbosa, G.R. No. 207946, November 22, 2016.
Gamboa v. Teves, supra; SEC Memorandum Circular No. 8, Series of 2013.
233
Supra.
234
SEC OGC Opinion No. 07-20 dated November 28, 2007.
231
232
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the investee corporation, the SEC is not precluded from using
the Grandfather Rule. 235
rnndfath-r Rul is a supplem nt to the Control Test so that the
lo Hthutional r quirement can be given effect. 239
g.
Special laws may expressly limit the computation to
a certain type of shares. Hence, Section 2 of SEC Memorandum
Circular No. 8, Series of 2013 dated May 20, 2013 provides that
"corporations covered by special laws which provide specific
citizenship requirements shall comply with provisions of said law."
The SEC gave as examples Republic Act No. 9474, otherwise known
as the Lending Company Regulation Act of 2007, Republic Act No.
8556 otherwise known as the Financing Company Act of 1998, and
Presidential Decree No. 129 also known as the Investment Houses
Law.
b.
Th Control Test contemplated by the SEC is said to
h1
b --n adopted under Section 3 of Republic Act No. 7042, as
un n 1 d by Republic Act No. 8179, otherwise known as the Foreign
tments Act of 1991 which provides that a corporation shall be
id- · d a "Philippine National" ifit is: (1) a corporation organized
d r Philippine laws of which 60% of the capital stock outstanding
nd ntitled to vote is owned and held by Filipino Citizens; or (2)
a •o poration organized abroad and registered as doing business
i th Philippines under the Corporation Code of which 100% of
'Lh apital stock entitled to vote belongs to Filipinos. Section l(b)
f th Amendments to the Implementing Rules and Regulations of
l public Act No. 7042 expressly provides that the control test shall
b applied.
19.04.
Control Test and Grandfather Rule. By way of
background, the SEC had previously adopted the Control Test and
explained that: "Shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality."236 This test can
be applied when a law makes an activity partly nationalized. The
question involved is the nationality of the entity that owns shares in
the nationalized activity.
a. Even with the clarification in Gamboa v. Teves, 237 it·is still
relevant to distinguish the Control Test from the strict application
of the Grandfather rule because of cases involving different layers.
For instance, the Supreme Court explained in Narra Nickel Mining
and Development Corp. v. Redmont Consolidated Mines Corp., 238
that "the 'control test' is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the
ambit of Section 2, Article II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and circumstances of
the case, in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the 'Grandfather Rule." The Court ruled that the
235
courts.
(1) Where a corporation and its non-Filipino stockholders
own stocks in an SEC registered enterprise, at least 60% of
the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the
Philippines and at least 60% of the members of the Board of
Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation shall be considered a
Philippine national.240
(2) For example, X Corporation owns 70% of the
outstanding shares entitled to vote in A Corporation. The 70%
of the outstanding shares entitled to vote in X Corporation
are owned by Mr. A, a Filipino and four of its five directors
are also Filipinos. A Corporation is a Philippine National in
this example. However, A Corporation is not a Philippine
National if 70% of the shares outstanding entitled to vote in
X Corporation (which owns 70% of A Corporation) belong to
Japanese nationals. Corporation A is also not a Philippine
National even if only 40% of the shares outstanding and
entitled to vote in X Corporation belong to aliens but more than
60% of its directors are aliens (e.g., 4 of 5 directors are aliens).
SEC OGC Opinion No. 10-20 dated May 27, 2010; This rule now applies to
236
SEC Opinions dated April 14, 1993 and December 7, 1993; DOJ Opinion
dated January 19, 1989.
237
Gamboa v. Teves, G.R. No. 176579, June 28, 2011 and October 9, 2012.
238
G.R. No. 195580, April 21, 2014.
239
Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines, G.R. No. 195580, January 28, 2015 (Resolution on the MR).
240Section 3(a), Republic Act No. 7042, as amended by Republic Act No. 8179,
therwise known as the Foreign Investments Act of 1991 (FIA for short).
MMENT
THE REV
P
OF THE PHILIPPINES
11
N
(3) Note that for a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee
is a Philippine national, the requirement is that at least 60% of
the fund will accrue to the benefit of Philippine nationals.241
c.
As noted in Narra Nickel Mining and Development Corp.
v. Redmont Consolidated Mines, 242 generally, the test that should be
applied is the Control Test and not the "Grandfather Rule."243 The SEC
en bane voted and decided to do away with the strict computation of
the so-called Investment Test otherwise known as the "Grandfather
Rule" in determining the nationality of cqrporations with foreign
equity in accordance with the Opinion of the Department of Justice
(DOJ) No. 18, Series of 1989 dated January 19, 1989. 244
(1) It should be noted in this connection that the
Grandfather Rule is a method of determining the nationality of
a corporation, which in turn is owned by another corporation by
breaking down the equity structure of the shareholders of the
corporation that owns the other. 245 The percentage of Filipino
equity in the corporation is computed by attributing the
nationality of the second or even subsequent tier of ownership
to determine the nationality of the corporate shareholder.246
The percentage of shares held by the second corporation
in the first is multiplied by the latter's own Filipino equity,
and the product of these percentages is determined to be the
ultimate Filipino ownership of the subsidiary corporation. 247
Section 3(a), FIA.
G.R. No. 195580, April 21, 2014.
243
Note, however, the -caveat that the term "Grandfather Rule" is sometimes
used to refer to a concept that is different from the SEC and DOJ Opinions cited
here where no computation of the proportion is involved but the ''grandfather" meaning the shareholders of corporate shareholders - are just subjected to the 60:40
requirement. Hence, any reference to the Grandfather Rule in this work is limited
to its meaning under DOJ Opinion: No. 18, Series of 1989 dated January 19, 1989.
244
This Opinion was reiterated in SEC OGC Opinion No. 10-08, February 8,
2010, SEC OGC Opinion No. 09-09, April 28, 2009, SEC in OGC Opinion No. 0803, January 15, 2008, SEC OGC Opinion No. 07-17, September 27, 2007, SEC OGC
Opinion No. 07-18 dated November 28, 2007, OGC Opinion No. 07-19 dated November
28, 2007, OGC Opinion No. 07-20 dated November 28, 2007, SEC OGC Opinion No.
07-21, November 28, 2007 and SEC OGC Opinion No. 07-22, December 7, 2007.
245
SEC OGC Opinion No. 07-19 dated November 28, 2007.
246
SEC OGC Opinion No. 07-22, December 7, 2007; Section 2.6, SEC Memo­
randum Circular No. 15, Series of 2019 dated July 26, 2019.
247Supra.
241
242
E
.
'i'
N,
I· ILIPPI
E
1 3
r ndf th r Rul "h w with the rule that 'beneficial
hip' f corporations engaged in nationalized activities
t r id in the hands of Filipino citizens."248
(2) Under the Control Test, no such computation is
·ary and the total shareholdings in the subsidiary may,
in proper cases, be considered as totally Filipino owned even
if some of the shareholders in the shareholder-corporation are
not Filipinos. Under the Control Test, a corporation shall be
onsidered a Filipino corporation if the Filipino ownership of
its capital is at least 60% and where the 60-40 Filipino-alien
hareholding is not in doubt. 249
d.
However, the Grandfather Rule is a corollary rule - even
60-40 Filipino to foreign equity ratio is apparently met by the
ct or investee corporation, a resort to the Grandfather Rule is
ary if doubt exists as to the locus of the beneficial ownership
d control. 250 These include "layering" cases contemplated in the
·
rra Nickel Mining and Development Corp. case. Doubt exists, for
in tance, if the following indicators are present: (1) that the foreign
inv stors provide practically all the funds for the investment jointly
undertaken with Filipinos; (2) that the foreign investors undertake
t provide practically all the technological support for the venture;
nd (3) that the foreign investors, while being minority stockholders,
manage the company and prepare all economic viability studies. 251
e.
In addition, previous issuances of the DOJ and the SEC
likewise apply the "Grandfather Rule" in some cases because of
the qualification in the opinion to the effect that if the percentage
of Filipino ownership in the corporation or partnership (that is a
tockholder of another corporation that is partly nationalized) is
less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine Nationality.252
248
Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines, G.R. No. 195580, January 28, 2015.
249
SEC OGC Opinion No. 16-19, August 11, 2016; SEC OGC Opinion No. 07-22,
December 7, 2007.
250
Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines, supra.
251/bid., citing DOJ Opinion No. 165, Series of 1984; Note that in another case
cited by the Supreme Court, the SEC found it suspicious that the shares of foreigners
have a greater par value but only have similar rights to those held by Philippine
Nationals.
252See Narra Nickel Mining and Development Corp. v. Redmont Consolidated
Mines Corp., supra.
114
MME TARIE . ND J RI PR
THE I EVI ED RP RAT!
OF THE PHILIPPINE
N
(1) For example, assume that Corporation "A," a
corporation organized in the Philippines, wants to pursue an
activity that is reserved under a statute to corporations where
the equity participation of foreigners does not exceed 40% of
the outstanding capital stock. "A" Corporation's outstanding
capital stock is equivalent to Pl0,000,000.00 divided into
1,000,000 shares. 600,000 shares in Corporation "A" are
owned by Corporation "B" while the rest belong to Mr. X, an
American. Sixty percent (60%) of the outstanding capital stock
in Corporation "B" belongs to Philippine nationals while 40%
belongs to Japanese nationals :_ Filipinos own 600,000 shares
out of the outstanding capital stock of 1,000,000 shares and
Japanese nationals own 400,000. Under the Control Test, the
60% of the outstanding capital in Corporation "A:' owned by
Corporation "B'' shall be considered as belonging to Philippine
Nationals. In other words, all the shares of Corporation "B" in
Corporation "A" or 600,000 shall be deemed owned by Filipinos.
(2) The Grandfather Rule is not the prevailing rule. If
the Grandfather Rule will be strictly applied in the preceding
example, the 600,000 shares owned by Corporation "B" cannot
be said to be entirely Filipino owned. The percentage which
can be said to be Filipino-owned can be determined using the
formula "Number of Shares multiplied by 60/100" or in this
case 600,000 x 60/100 = 360,000. Thus, 360,000 shares are
deemed owned by Filipinos and the balance of 240,000 shares
are deemed owned by Japanese Nationals. If the 240,000 will
be added to the shares of Mr. X (400,000), then the total number
of shares owned by foreigners in Corporation "A" is 640,000 or
64%. On the other hand, 360,000 shares belong to Filipinos
or only 36% of the outstanding capital stock in Corporation
"A." Therefore, under the "Grandfather Rule," Corporation
"A" cannot pursue activities that require 60% Filipino equity
because the maximum equity participation of foreigners (40%)
has been exceeded. However, as noted earlier, generally, the
Grandfather Rule cannot be applied in the given situation. It
is the Control Test that applies.
(3) By way of exception, the Grandfather Rule applies
if the share of Filipinos in a shareholder corporation is less
than 60%. As noted earlier, the qualification in the DOJ and
SEC opinion is to the effect that if the percentage of Filipino
ownership in the shareholder-corporation or partnership is less
than 60%, only the number of shares corresponding to such
tP
I
1n'
F
I
ti
HILIP'PTNE
11
p
nta
hall b counted as of Philippine Nationality. For
in t nc , 55% of the shares or 550,000 shares in Corporation "B''
b 1 ng to Japanese nationals and 45% or 450,000 shares belong
t Filipinos. The shares of Corporation "B" in Corporation "A"
hall be considered owned by Philippine nationals only up to
the extent of 45/100 or 45%. In other words, 270,000 shares
(600,000 x 45/100) of Corporation "B" in Corporation "A:'
hall be considered as belonging to Philippine nationals while
330,000 shares shall be considered foreign owned. The total
number of shares belonging to foreigners is 730,000 shares or
73% of the outstanding capital.
(4) Similarly, if 50% of the outstanding capital stock in
Corporation B belongs to Japanese Nationals while 50% belongs
to Filipinos, the shares of Corporation "B'' in Corporation "A"
shall be deemed owned by Philippine Nationals up to 50% or
300,000 shares in our example (600,000 x 50/100). If these
300,000 shares are added to the shares of Mr. X of 400,000, the
total shares of foreigners in Corporation "A" is 700,000 shares
or 70% of the outstanding capital.
f.
It should also be noted that under SEC Memorandum
ircular No. 15, Series of 2019 dated July 26, 2019, beneficial
wnership information is now required to be included in the General
Information Sheet. The circular was issued by the SEC to assist
in the implementation of the Anti-Money Laundering Act and the
Terrorist Financing Prevention and Suppression Act. Under the
said circular, the methodology applied in the Grandfather Rule is
being applied in the determining the natural person who ultimately
owns the corporation through indirect ownership.
19.05. No Nationality for Corporation Sole. One exceptional
situation where the Supreme Court ruled that a corporation has no
nationality is the case of a Corporation Sole. The case involved the
Roman Catholic Church but the ruling can also be applied to other
corporations sole. The Supreme Court categorically declared that
"the Roman Catholic Apostolic Church in the Philippines has no
nationality and that the framers of the Constitution" did not have
in mind the religious corporations sole when they provided the 60%
requirement."253
253Roman Catholic Apostolic Administration of Davao, Inc. v. Land Registration
Commission, G.R. No. L-8451, December 20, 1957.
116
MMENTARI • AND J Rl R
THE REV! ED
RP RATI N
OF THE PHILIPPINES
'rl N
ENE.
PROBLEMS:
1.
2.
Q:
Petitioner is a corporation sole organized and ex1stmg in
accordance with Philippine laws, with Msgr. Trudeau, a Canadian
citizen, as actual incumbent. It presented for registration a deed
of sale to the Register of Deeds of Cebu who denied it for lack of
proof that at least 60% of the capital property or assets of the
corporation sole is owned or controlled by Filipino citizens. Was
the action of the Register of Deeds correct? Give reasons for your
answers.
A:
No. The action of the Register of Deeds was not correct. The
requirement of at least 60% Filipino ownership of the capital
was never intended to apply to a corporation sole, because the
same corporation is only the administrator of the properties
of the corporation sole and it is well settled that it has no
nationality. (1978 Bar)
Q:
Global KL Malaysia (GLOBAL), a 100% Malaysian-owned
corporation, desires to build a hotel beach resort in the Samal
Island, Davao City, to take advantage of the increased traffic of
tourists and boost the tourism industry of the Philippines.
a.
Assuming that GLOBAL has US$100 Million to invest in a hotel
beach resort in the Philippines, may it be allowed to acquire the
land on which to build the resort? If so, under what terms and
conditions may GLOBAL acquire the land? Discuss fully.
b.
May GLOBAL be allowed to manage the hotel beach resort?
Explain.
c.
May GLOBAL be allowed to operate restaurants within the
hotel beach resort? Explain.
A:
No, GLOBAL may not be allowed to acquire the land on which
to build the resort. The Constitution limits land ownership to
Filipinos and corporations with Filipino ownership of not less
than 60% of the outstanding capital. The equity participation of
foreigners in a corporation that will own land is therefore limited
to 40%. In this case, GLOBAL is 100% Malaysian-owned.
a.
However, GLOBAL can lease a parcel of land. The 40% limit
on foreign equity applies only to ownership of land and not to
temporary use thereof like a contract of lease.
b.
Yes, GLOBAL can manage the hotel beach resort. Management
of a resort is not a nationalized activity; hence the law does not
prohibit a foreign corporation from managing a resort in the
country.
c.
Yes, GLOBAL may be allowed to operate restaurants within
the beach resort. While operation of a restaurant business is
'T'HE ' P fJTLl-P NE
117
nsid r d r tail trad , a corporation will not be considered
ngag d in r tail busin ss if the restaurant is a mere adjunct of
th operation of the resort which is an activity that is not wholly
or partly nationalized. (1995 Bar)
Q:
What is the nationality of a corporation organized and
incorporated under the laws of a foreign country but owned
100% by Filipinos?
A:
The corporation is a Philippine National under Section 3 of
Republic Act No. 7042 for purposes of applying our investment
laws provided that at least 60% of the directors are Filipinos.
In addition, applying the control test of corporate nationality,
a corporation organized and incorporated under foreign laws
but entirely owned by Filipinos is a Philippine national. Note,
however, that the corporation is not a domestic corporation
under the Incorporation Test embodied in the Corporation Code
(now the RCCP) because the corporation is one organized in
another country. (1998 Bar)
20. Residence. A corporation may be considered a resident
fa particular country or place for different purposes. For instance,
a foreign corporation can be considered a resident of the Philippines
£ r tax purposes. On the other hand, domestic corporations may be
a resident of a particular region, city or municipality for purposes
of applying the procedural rules on venue or in the application of
ertain doctrines like the doctrine of forum non conveniens.
a.
A corporation has no residence in the same sense in which
the term is applied to a natural person. 254 This is precisely the reason
why it was ruled that for practical purposes, a corporation is in a
metaphysical sense a resident of the place where its principal office
is located as stated in the Articles of Incorporation. 255
b.
The High Court has definitively ruled that for purposes of
venue of cases, the term "residence"is synonymous with "domicile."256
Article 51 of the New Civil Code provides that when the law creating
254
Hyatt Elevators and Escalators Corporation v. Goldstar Elevators, Phils.,
Inc., G.R. No. 161026, October 24, 2005, 473 SCRA 705, 712.
255
[bid., citing Young Auto Supply Company v. Court of Appeals, 223 SCRA
670, June 25, 1993; Davao Light & Power Co., Inc. v. Court of Appeals, 363 SCRA
396, August 20, 2001; Clavecilla Radio System v. Antillon, 19 SCRA 379, February
18, 1967.
256
Hyatt Elevators and Escalators Corporation v. Goldstar Elevators, Phils.,
Inc., supra, citing Evangelista v. Santos, 86 Phil. 387, May 19, 1950; Corre v. Corre,
100 Phil. 321, November 13, 1956.
11
MM • NTARJE AND JURI PRU
THE REVI ED
RPORATION
OF THE PHILIPPINES
Ttm
119
DE
or recognizing them, or any other provision does not fix the domicile
of juridical persons, the same shall be understood to be the principal
place where their legal representation is established or where they
exercise their principal function. With respect to corporations, the
law creating it, which is the Corporation Code, now the RCCP, fixes
the residence or domicile. 257 The place where the principal office of the
corporation is located is one of the required contents of the Articles
oflncorporation under Section 13(c) of the RCCP (previously Section
14[3] of the Corporation Code).
c.
However, in relation to foreign corporations, corporations
may have a residence (i.e., the place where they operate and transact
business) separate from their domicile (i.e., the State of their
formation or organization) "and (that) they may be considered by
other states as residents only for limited and exclusive purposes."258
21. Tort Liability. A corporation is civilly liable in the
same manner as a natural person for torts, because generally
speaking, the rules governing the liability of a principal or master
for a tort committed by an agent or servant are the same whether
the principal or master be a natural person or a corporation, and
whether the servant or agent be a natural or artificial person. All
of the authorities agree that a principal or master is liable for every
tort that he/she/it expressly directs or authorizes, and this is just as
true of a corporation as of a natural person. A corporation is liable,
therefore, whenever a tortious act is committed by an officer or
agent under express direction or authority from the stockholders
or members acting as a body, or generally, from the directors as the
governing body.259
a.
The liability of corporations may either be vicarious or
direct personal obligation and may arise out of different sources
of obligation. Thus, the liability of a corporation may be based on
contract. Under the primary rule of attribution, the corporation
is liable based on contract if the board of directors sanctioned the
breach. On the other hand, the direct corporate responsibility may
be imposed under Article 2176 of the New Civil Code.
Vi ariou liability may b ba ed on quasi-delict under
1 0 f th New Civil Code, delict under Article 102 of the
I' i
nal Cod , and under Article 104 of the Revised Penal
•
£ r innkeepers or hotelkeepers. A single act or omission may
} 1
to different sources of obligations and may warrant the
f damages. Tort obligation may even concur with contractual
tion. This is of course subject to the proscription against double
ry. 250
Doctrine of Corporate Responsibility. fo
l r fi s ional Services, Inc. v. Court of Appeals, 261 the Supreme Court
u tain d the liability of hospitals based on the Doctrine of Corporate
R s nsibility. 262 The duty of providing quality medical service is
Ft 1 nger the sole prerogative and responsibility of the physician.
Thi is because the modern hospital now tends to organize a highly
pr £ ssional medical staff whose competence and performance need
1 to be monitored by the hospital commensurate with its inherent
r ponsibility to provide quality medical care. Such responsibility
in ludes the proper supervision of the members of its medical staff.
cordingly, the hospital has the duty to make a reasonable effort to
1 onitor and oversee the treatment prescribed and administered by
th physicians practicing in its premises.
(1) The Corporate Negligence Doctrine imposes
several duties on a hospital: (i) to use reasonable care in the
maintenance of safe and adequate facilities and equipment; (ii)
to select and retain only competent physicians; (iii) to oversee
as to patient care all persons who practice medicine within
its walls; and (iv) to formulate, adopt, and enforce adequate
rules and policies to ensure quality care for its patients. These
special tort duties arise from the special relationship existing
between a hospital or nursing home and its patients, which
are based on the vulnerability of the physically or mentally ill
persons and their inability to provide care for themselves.263
See Timoteo B. Aquino, Torts and Damages, 2019 Ed., Chapters 2 and 11.
261G.R. No. 126297, February 11, 2008 citing Purcell v. Zimbelman, 18 Ariz.
App. 75, 500 P2d 335 (1972).
262Professional Services, Inc. v. Court of Appeals, supra, citing 40 A Am Jur 2d
28 citing Funkhouser v. Wilson, 89 Wash. App. 644, 950 P 2d 501 (Div.1 1998), revie.;;_,
granted, 135 Wash. 2d 1001, 959 P 2d 126 (1998).
263Professional Services, Inc. v. Court of Appeals, ibid., citing Purcell v.
Zimbelman, 18 Ariz. App. 75, 500 P2d 335 (1972).
260
257
Hyatt Elevators and Escalators Corporation v. Goldstar Elevators, Phils.,
Inc., ibid.
258
State Investment House, Inc. v. Citibank, N.A., G.R. Nos. 79926-27, October
17, 1991, 203 SCRA 9.
259
Philippine National Bank v. Court of Appeals, G.R. No. L-27155, May 18,
1978, 83 SCRA 237, 247.
1 111, 1t1� T
MMEN'I'AR!E
RP RATI N
'ff! 1 R •VI ED
OF THE PHILIPPINES
1
1 1
c.
Liability may be imposed on other corporations that have
special relationship with or owe affirmative duties to the injured
party. It is important to distinguish a direct corporate liability
under Article 2176 of the New Civil Code and vicarious liability
as employer under Article 2180 of the New Civil Code because the
defense of diligence in the selection and supervision of the employee
is available under Article 2180. Such defense - diligence in the
Aquino, Torts and Damages, 2019 Ed., Chapter 16.
G.R. No. 150920, November 25, 2005.
264
265
6
2 6Jbid.
'l'I
E
DE
p·
D flnitions ·
'
ssi
HlLIPPI '
121
t'
n 1 up rvi ion of th mployee - is not available if the
d n dir ct corporate responsibility.
a.
What this means is that the liability of the hospital as a
corporate entity is direct and primary and not merely vicarious. In
this jurisdiction, the direct corporate responsibility may be imposed
under Article 2176 of the New Civil Code. The negligence will no
longer be imputed but is considered the negligence of the corporate
entity itself with which the injured party has a special relationship.
b.
The Doctrine of Corporate Responsibility is not limited
to hospitals. Thus, direct and primary liability may also be imposed
on schools as separate entities not only based on contract but also
under Article 2176 of the New Civil Code. In a separate work, this
author expressed the opinion that the school, which has a special
parental authority over its minor students, has "the corresponding
responsibility to take care of a minor student with the diligence of a
good father of a family. Included in the exercise of due diligence is
the duty of the school to provide the students with adequate security
and safe facilities. If due care is not exercised, damages may be
imposed under Articles 19, 20, 21, and 2176 of the Civil Code."264
The ruling of the Supreme Court in Child Learning Center, Inc. v.
Tagario265 is consistent with this view. In Child Learning Center,
Inc. v. Tagario, 266 a pre-schooler was trapped inside a small toilet in
the third floor of a school building. The child panicked and banged
and kicked the door several times while shouting for help. When no
help came, the child opened the window to call for help. Tragically,
in the process of opening the window, the child went right through
the window and fell down three stories. The child suffered multiple
serious injuries. The school was made directly and primarily liable
under Article 2176 of the New Civil Code. The liability is not
vicarious because the obligation to provide safe facilities is imposed
directly on the corporation (school).
O
TI
t
I
1
Right to Moral Damages. The award of moral damages
b
ranted in favor of a corporation because, being an
1 I r on and having existence only in legal contemplation,
n, f lings, no emotions and no senses. It cannot, therefore,
physical suffering and mental anguish, which can be
d only by one having a nervous system. 267 The Supremy
it rated the rule in a recent case:
rporation is not a natural person. It is a creation of legal fiction
I 'l s no feelings[,] no emotions, no senses[.]" A corporation is incapable
,[ l t, anxiety, shock, humiliation, and physical or mental suffering.
• .· tul uffering can be experienced only by one having a nervous system
rn l it flows from real ills, sorrows, and griefs of life[.]' A corporation, not
h. n a nervous system or a human body, does not experience physical
ff ring, mental anguish, embarrassment, or wounded feelings. Thus, a
•1 •poration cannot be awarded moral damages.
1 ,1
X
X
X
There is no standing doctrine that corporations are, as a matter of
ri ht entitled to moral damages. The existing rule is that moral damages
lr �ot awarded to a corporation since it is incapable of feelings or mental
nnguish. Exceptions, if any, only apply pro hac vice."268
a.
Previous decisions cite People v. Manero269 and Mambulao
Lumber Co. v. Philippine National Bank210 in support of the view that
a corporation can recover damages if it has a good reputation that
is debased, resulting in social humiliation. However, the Supreme
Court ruled in ABS-CBN Broadcasting Corporation v. Court of
Appeals271 that the observation in the said two cases regarding the
right of a corporation to moral damages is an obiter dictum.
b.
Nevertheless, the Supreme Court ruled in Filipinas
Broadcasting Networks, Inc. v. Ago Medical and Educational
No.
ABS-CBN Broadcasting Corporation v. Hon. Court of Appeals, G.R.
ty of the
Universi
also
See
602-603;
572,
SCRA
301
1999,
21,
January
128690,
Philippines, et al. v. Dizon, G.R. No. 171182, August 23, 2012.
No.
268
Noelle Whessoe, Inc. v. Independent Testing Consultants, Inc., G.R.
199851, November 07, 2018.
269
218 SCRA 85 (1993).
270
130 SCRA 366 (1968).
271ABS-CBN Broadcasting Corporation v. Hon. Court of Appeals, supra.
267
122
MMENTARIE AND J RI PR EN E N
THE REVISED ORPORATION ODE
OF THE PHILIPPINES
Center-Bicol, et al., 272 that a corporation can be an offended party in
a defamation case and it can recover moral damages under Article
2219(7) of the Civil Code. Although the High Court reiterated that
the observation in Mambulao Lumber Co. v. Philippine National
Bank213 was a mere obiter, it went on to sustain the award of moral
damages by way of exception in defamation cases because of the
specific provision that expressly provides for such an award. The
High Court ratiocinated that Article 2219(7) does not qualify
whether the plaintiff is a natural or juridical person.
c.
Unfortunately, it appears that the issue is far from settled
regarding besmirched reputation because there are subsequent
decisions that maintain that corporations may exceptionally
claim moral damages. Thus, in Manila Electric Co. v. T.E.A.M
Corporation, 274 the Supreme Court observed that "as a rule, a
corporation is not entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or sentiments
like wounded feelings, serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the corporation has
a reputation that is debased, resulting in its humiliation in the
business realm." More recently, in Crystal v. Bank of Philippine
Islands, 275 the Supreme Court reiterated that the ruling in Manero
and Mambulao were mere obiter dicta. However, the Supreme Court
did not eliminate the possibility that moral damages may be awarded
to corporations observing that "(i)ndeed, while the Court may allow
the grant of moral damages to corporations, it is not automatically
granted; there must still be proof of the existence of the factual
basis of the damage and its causal relation to the defendant's acts.
This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate
the claimant for actual injury suffered and not to impose a penalty
on the wrongdoer."
d.
It is believed that the better rule is to disallow award
of moral damages to juridical entities like corporations even for
272
G.R. No. 141994, January 17, 2005, 448 SCRA 413.
213Supra.
274
G.R. No. 131723, December 13, 2007, 540 SCRA 62, 81 citing Coastal Pacific
Trading, Inc. v. Southern Rolling Mills, Co., Inc., G.R. No. 118692, July 28, 2006, 497
SCRA 11, 41; ABS-CBN Broadcasting Corp. v. Court of Appeals, 361 Phil. 499, 516
(1999).
275G.R. No. 172428, November 28, 2008 cited in University of the Philippines,
et al. v. Dizon, supra; See also Flight Attendants and Stewards Association of the
Philippines v. Philippine Airlines, Inc., 559 SCRA 252 (2008).
'!'HE Hl.Nl
T
DB
F 'TH • PI ILIPPINE
123
ENERAL PR VISION
D finitions and Classifications
b mirched reputation and defamation. This rule is consistent with
th v ry nature of moral damages. The award of moral damages is
£ r th restoration within the limits possible of the spiritual status
quo ante. It is predicated on the presence of injury that is incapable
f pecuniary estimation like physical suffering, mental anguish, and
other similar injury. 276 The award of moral damages is justified only
if there is moral suffering and physical suffering.
(1) A member of the Code Commission, Justicl;!
Capistrano, explained in one case that all the cases when moral
damages may be awarded under Article 2219 of the New Civil
Code "immediately suggest physical or moral suffering."277
Hence, award of moral damages predicated on besmirched
reputation or defamation is justified only if there is moral
suffering on the part of the plaintiff. This is possible only in
the case of natural persons. Consequently, an artificial being
like a corporation cannot be awarded moral damages because
it does not have a spiritual status quo; it cannot be subject to
physical or moral sufferings.
(2) On the other hand, Judge Sanco explained that
''besmirched reputation cannot cause mental anguish to
a corporation unlike in the case of a natural person, for a
corporation has no reputation in the sense that an individual
has, and besides, it is inherently impossible for a corporation to
suffer moral anguish."218
e.
This is not to say that the commercial reputation of a
corporation cannot be besmirched or defamed. The question is not
whether or not there is injury but whether the type of damage
sought (moral damages) by the corporation is appropriate for such
injury. Courts may still find that the reputation of a corporation was
besmirched but they may not award moral damages in favor of the
corporation.
(1) Courts may still award damages in favor of a
corporation if they find that the reputation of the corporation
was besmirched. However, these damages cannot include
276
Report of the Code Commission, reproduced in Civil Law Reader, 2005 Ed.,
Carmelo Sison, pp. 623-624.
277
Macondray & Co., Inc. v. Villarosa, et al., 1 CAR 2s 402, 415 (1961); See also
Aquino, Torts and Damages, 2013 Ed., pp. 997-1001.
278
J. Cezar Sanco, Philippine Law on Torts and Damages, 1994 Ed., p. 1000.
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moral damages but must be limited to actual damages,
nominal damages, temperate damages, exemplary damages,
and attorney's fees.
PROBLEMS:
1.
Q:
In the complaint filed by XYZ Corporation, its President alleged
that he suffered mental anguish, fright, social humiliation and
serious anxiety as a result of tortious acts of ABC Corpor�tion.
In its counterclaim, ABC Corporation claimed to have suffered
moral damages due to bes_mirched reputation or goodwill.
May XYZ Corporation recover moral damages based on the
allegations in the complaint?
A:
No. As a rule, corporations are not entitled to recover moral
da_Il1;ages. The _only exception is with respect to moral damages
ansmg from hbel. In addition, even assuming for the sake of
argument that a corporation can recover moral damages, it
cannot also recover damages in the present case because the
President and not the corporation suffered the damages. A
corporation is separate and distinct from the officers who
compose it. (1978 Bar)
. Note: There is still an opposing view that corporations are
entitled to moral damages. This opposing view is based largely
on the obiter in the Mambulao Lumber case.
2.
Q:
!n a co�plaint for damages, Zebra Corporation alleged that
its President, Anton Molina suffered mental anguish, social
humiliation and serious anxiety as a result of the tortious acts
of Omeg� Corporation. In its answer with counterclaim, Omega
Corporation alleged that it suffered besmirched reputation
because of the unfounded suit of Zebra Corporation and
accordingly claimed for the award of moral damages. May either
corporation recover moral damages based on its allegations in
the complaint? Discuss. (1978 Bar)
A:
No. As a rule, corporations are not entitled to recover moral
da_Il1;ages. The _only exception is with respect to moral damages
ansmg from hbel. In addition, even assuming for the sake of
argument that a corporation can recover moral damages, it
cannot also recover damages in the present case because the
President and not the corporation suffered the damages. A
corporation is separate and distinct from the officers who
compose it. (1985 Bar)
23. Constitutional Rights. A corporation is a person, in
proper cases, within the due process and equal protection clauses
of the Constitution. Just like a natural person it cannot be deprived
E
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lassification
li£ and prop rty without due process of law. 279 A corporation
p r on under the equal protection clause. Its properties
nn t also be taken for public use without just compensation.
n r
cannot likewise pass a law that impairs the obligations
ntracts entered into by a corporation. The observation in
rnith Bell & Company (Ltd.) v. Natividad, 280 is to the effect that
'private corporations, likewise, are 'persons' within the scope of
th uaranties in so far as their property is concerned." The United
tates Supreme Court explained in one case that a purely personal
:right like the right against self-incrimination cannot be utilized by
r on behalf of the corporation. 281 Similarly, a corporation cannot
laim liberty of abode and travel.
a.
The rights of the corporation are clearly limited because
it is an artificial being and a mere creature of law. As such a
orporation cannot exercise Constitutional rights that are not
onsistent with its nature as a mere artificial being or rights that
are not available because the corporation's life is just a concession of
the State. Thus, a corporation cannot claim that it is entitled to the
ame level protection of the due process clause for the protection of
"liberty" that is being enjoyed by natural persons. Even the right
to exist that is included in the term "liberty" is not the same as the
right enjoyed by natural persons because the life of a corporation is
a mere concession of the State.
b.
A corporation is entitled to the right against unreasonable
searches and seizure. A corporation is, after all, but an association
of individuals under an assumed name and with a distinct legal
personality. In organizing itself as a collective body, it waives no
constitutional immunities appropriate to such body. 282 The right
pertains to the corporation as a separate entity, hence, only the
corporation, and not its officers in their personal capacity, is the
real party in interest to question an alleged unreasonable search
and seizure. Where the properties of the corporation are unlawfully
seized, the right that is invaded is the right of the corporation and not
279
1912.
Smith Bell & Company (Ltd.) v. Natividad, G.R. No. 15574, September 17,
280
G.R. No. 15574, September 17, 1912 citing Santa Clara County v. Southern
Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining Co. v. Pennsylvania [1888], 125
U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford [1896], 164 U. S., 578.)
281
United States v. White, 322 U.S. 694 (1944), https://supreme.justia.com7
cases/federal/us/322/694 last accessed October 16, 2019.
282
Bache & Co. (Phil.), Inc. v. Ruiz, G.R. No. L-32409, February 27, 1971, 37
SCRA 823,837.
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the right of its officers or stockholders. Hence, only the corporation
can question such unlawful invasion. 283
c.
However, corporations do not enjoy the same level of
privacy as natural persons. Hence, even if the corporation is entitled
to the right against unreasonable searches and seizure, the same
result that is sought to be achieved by public authorities may be
carried out in a lawful way. Thus, an officer of a corporation cannot
refuse to produce the books and papers of such corporation if lawfully
required by the appropriate government agency. 284 For example, the
Securities and Exchange Commission may require a corporation to
present its books in the exercise of its (SEC) regulatory function.
d. Consistently, it is elementary that the right against selfincrimination has no application to juridical persons. While an
individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises, may refuse
to show its hand when charged with an abuse of such privileges.
There is a reserved right on the part of the legislature to inquire if
the corporation has abused its privileges. In making such inquiry,
proper government agencies may require the corporation to produce
its books. 286 Besides, as already noted, purely personal rights cannot
be invoked by the corporation; there can be no physical or moral
compulsion that can be committed against the corporation itself.
e.
In Bataan Shipyard & Engineering Co. (BASECO), Inc.
v. Presidential Commission on Good Government (PCGG), 286 PCGG
issued an order requiring BASECO to produce corporate records in
the exercise of its powers under Executive Order No. 2 to require
all persons in the Philippines holding alleged ill gotten wealth of
President Ferdinand Marcos and his alleged cronies to make full
disclosure of the same. BASECO questioned the order alleging
that there was violation of its right against unreasonable searches
and seizure and self-incrimination. The Supreme Court rejected
Stonehill, et al. v. Hon. Diokno, et al., G.R. No. L-19550, June 19, 1957.
284Bache & Co. (Phil.), Inc. v. Ruiz, supra., citing Hale v. Henkel, 201 U.S. 43,
50 L.ed. 652 and Silverthorne Lumber Company, et al. v. United States, 251 U.S. 385,
64 L.ed. 319.
285Bataan Shipyard & Engineering Co., Inc. v. Presidential Commission on
Good Government, G.R. No. L-75885, May 27, 1987, 150 SCRA 181, 234-235.
286Jbid.
127
ar um nt b cause there was in fact no search and seizure in
and BA ECO as a corporation is not entitled to the right
If-incrimination.
f.
Although some of the cases did not rule on whether
r-p rations have constitutional rights, there are cases decided
by the Supreme Court where the High Court sustained the
n titutional rights of corporations. For example, in American Bible
ciety v. City of Manila, 287 the Court ruled that the defendant city is
p werless to license or tax the business of the plaintiff corporation
( ociety) because "it would impair plaintiffs right to free exercise
nd enjoyment of its religious profession and worship, as well as
its right rights of dissemination of religious beliefs." Other cases
involved the constitutionally protected freedom of speech and of the
press of corporation like newspaper companies. 288
24. Criminal Liability. Corporations are now criminally
liable under the RCCP. The RCCP now provides that 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,
stockholders, members, officers, or employees responsible for the
violation of the provisions of the RCCP or indispensable to its
commission. 289 The fact that it is the court that will impose the penalty
means that the penalty contemplated is not a mere administrative
sanction.
a.
In 1914, the Supreme Court raised the possibility of
making a corporation criminally liable in West Coast Life Insurance
Co. v. Geo N. Hurd. 290 However, the Supreme Court clarified that
it is necessary that the statute, by express words or by necessary
intendment, include the corporations within the persons who could
offend against the criminal laws and the legislature at the same
time must establish a procedure applicable to corporations. This is
consistent with the so-called modern rule that pronounces that a
corporation may be criminally liable for acts or omissions made by
its officers or agents in its behalf. According to this view, while a
corporation cannot be imprisoned, it may be fined, its charter may
283
G.R. No. L-9637, April 30, 1957.
for example Ayers v. Capulong, 160 SCRA 861 (1988); Policarpio v:
Manila Times Publishing, Co., G.R. No. L-16027, May 30, 1962.
289
Section 171, RCCP
290G.R. No. 8527, March 30, 1914.
287
288See
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be revoked by the State or other sanctions may be imposed by law. 291
In effect, the real reason why corporations were not previously
subject to criminal liability or penalties was that there was still no
law expressly making corporations criminally liable.
b.
The deliberations in the defunct Batasang Pambansa
reflected the opinion of the author of the Corporation Code that
"as a general proposition, offenses mala in se where intent is
indispensable cannot be committed by a corporation because the
existence or presence of criminal intent assumes the existence of a
will which only a natural person may- have. However, offenses, mala
prohibita, which may be committed simply by committing the act
prohibited, may be committed by a corporation."292 Nevertheless, it
was also explained that if the law on corporations imposes criminal
liability, the Supreme Court should promulgate appropriate criminal
procedure for the prosecution of corporations. 293
c.
In Ching v. Secretary of Justice, 294 the Supreme
Court explained the modern view regarding criminal liability of
corporations:
"If the crime is committed by a corporation or other juridical entity,
the directors, officers, employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime, precisely because of
the nature of the crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment. However, a corporation 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.
A crime is the doing of that which the penal code forbids to be done, or
omitting to do what it commands. A necessary part of the definition of every
crime is the designation of the author of the crime upon whom the penalty
is to be inflicted. When a criminal statute designates an act of a corporation
as a crime and prescribes punishment therefor, it creates a criminal
offense which, otherwise, would not exist and such can be committed only
by the corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be
punished. On the other hand, if the State, by statute, defines a crime that
291
Gosiaco v. Ching, et al., supra, citing Cox, James, Corporations, 2nd Ed.,
2003, p. 130.
292
III BP Records, p. 1735, December 12, 1979.
29
3V BP Records, pp. 2371-2372, March 12, 1980.
294
G.R. No. 164317, February 6, 2006, 481 SCRA 626-637, citing Ong v. Court
of Appeals, 401 SCRA 648 (2003); W.H. Small & Co. v. Commonwealth, 120 S.W. 361
(1909); Paragon Paper Co. v. State, 49 N.E. 600 (1898).
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mmitt d by a corporation but prescribes the penalty therefor to
uff r d by th officers, directors, or employees of such corporation or
th r p r ·ons responsible for the offense, only such individuals will suffer
u. hp nalty. Corporate officers or employees, through whose act, default
r mi sion the corporation commits a crime, are themselves individually
uilty of the crime."295
d.
The intent of the legislators who enacted the RCCP is clear
with respect to criminal responsibility. They want to instill corporate
and civic responsibility, which include imposition of "corporate
criminal liability and penalties for graft and corruption."296 Senator
Franklin Drilon explained that: "criminals hide behind the separate
personality given to corporations. Shareholders have little incentive
to be vigilant because the corporation itself is not subject to criminal
liability."297 "In compliance therefore with our obligations under the
United Nations Convention Against Corruption, or the UNCAC, to
prevent the use of the corporation as a vehicle for committing crimes,
we hereby seek to impose corporate criminal liability and penalties
for graft and corruption. Aside from having to pay hefty fines, the
corporation may also suffer revocation of its registration."298 The same
intent was expressed in the sponsorship speech of Representative
Ferjenel Biron in the House of Representatives:
"The third reform is on the imposition of more stringent corporate
and civic responsibility, which specifically proposes to impose corporate
criminal liability and penalties for graft and corruption. This is consistent
with the country's obligation under the United Nations Convention Against
Corruption which seeks, among others, to prevent the use of the corporation
as a vehicle for committing crimes. This is in recognition of the fact that
corporations are effective vehicles for the accumulation of capital, production
of goods, and delivery of services, but are also social institutions in which
the public has an interest. House Bill No. 8374 will likewise strengthen
corporate responsibility, especially in cases of corporations vested with
public interest, which may now be required to have independent directors
and compliance officers."299
Accordingly, the penalty of payment of fine can be
e.
imposed on the corporation itself under Section 171 of the RCCP.
295
Ching v. Secretary of Justice, supra.
Sponsorship Speech of Senator Franklin Drilon, Journal of the Senate,
December 13, 2016, p. 725.
296
297Jbid.
29BJbid.
299
Congressional Records, October 8, 2018, p. 17.
130
The criminal liability of the corporation is likewise expressed in the
following provisions of the RCCP:
(1) Failure to comply with the (i) cease and desist
order of the SEC on the use of a corporate name that is not
distinguishable, already protected by law, or contrary to law,
rules and regulations and (ii) SEC order to remove all signages,
marks, advertisements, labels, prints and other effects bearing
such corporate name;300
(2) The unjustified failure or refusal by the corporation,
or by those responsible for keeping and maintaining corporate
records, to comply with Sections 45, 73, 92, 128, 177 and other
pertinent rules and provisions of the RCCP on inspection and
reproduction of records; 301
(3) A corporation that conducts its business through
fraud shall be punished with a fine; 302
(4) A corporation used for fraud, or for committing
or concealing graft and corrupt practices as defined under
pertinent statutes, shall be liable for a fine; 303 and
(5) A corporation that appoints an intermediary who
engages in graft and corrupt practices for the corporation's
benefit or interest shall be punished with a fine.304
f.
However, corporations are still not criminally liable under
the Revised Penal Code. Corporations cannot be made criminally
liable for a felony (crimes punishable under the Revised Penal
Code) because intent is required in felonies. For violation of special
laws, in the absence of an express provision making the corporation
criminally liable, corporations cannot also be held criminally liable
because the present criminal law system requires the performance
of overt acts. This is consistent with the traditional view in Spanish
law. Spanish laws, from which the criminal law rules and principles
in the Philippines were largely derived, do not allow a corporation
to be proceeded against.305 The special law must expressly provide
that a corporation is criminally liable and impose a penalty that is
appropriate to its nature. One such law is the RCCP.
300 Section
17,RCCP.
161, RCCP.
302Section 165, RCCP.
303Section 166, RCCP.
304Section 167, RCCP.
305Time, Inc. v. Reyes,G.R. No. L-28882,May 31,1971, 39 SCRA 303, 313.
30 1 Section
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181
tions
, th officers of the corporation may still
ttled that an officer of a corporation can be
ril i · lly liable for acts or omissions done in behalf of the
ti n only where the law directly requires the corporation to
a tin a given manner and the same law makes the person who
1 1 J t p rform the act in the prescribed manner expressly liable
1
:ii a lly. Although the performance of an act is an obligation
lir Uy imposed on a corporation, the responsible officer who
tu Uy performed the act must of necessity be the one to assume .
1 i 1 al liability; otherwise, this liability as created by the law
w uld be illusory, and the deterrent effect of the law, negated.306 As
t d arlier, Section 171 of the RCCP provides that "if the offender
l a orporation, the penalty may, at the discretion of the court, be
i
ed upon such corporation and/or upon its directors, trustees,
t -1 holders, members, officers, or employees responsible for the
' lation or indispensable to its commission." In addition, Section
7 of the RCCP provides that "anyone who shall aid, abet, counsel,
ommand, induce, or cause any violation of the [RCCP] or any rule,
, Yulation, or order of the [SEC] shall be punished with a fine not
ceeding that imposed on the principal offenders, at the discretion
f the court, after taking into account their participation in the
offense."
li bl . It i
(1) In the case of Sia u. People of the Philippines, 307
the crime involved was estafa under the Revised Penal Code
for the alleged failure to return the goods covered by a trust
receipt or to account for the proceeds of the sale of the same
goods. The Supreme Court acquitted the president who signed
the trust receipt in question explaining that "in the absence of
an express provision of law making the petitioner liable for the
criminal offense committed by the corporation of which he is a
president as in fact there is no such provision in the Revised
Penal Code under which the petitioner is being prosecuted, the
existence of criminal liability on his part may not be said to be
beyond any doubt."
(2) The principle making corporate officers and
employees criminally liable "applies whether or not the crime
requires the consciousness of wrongdoing. It applies to those
corporate agents who themselves commit the crime and to
306West
Coast Life Insurance Co. v. Hurd, G.R. No. 8527, March 30, 1914.
Sia v. People of the Philippines, G.R. No. L-30896,April 28, 1983,121 SCRA
655,662.
307
182
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those, who, by virtue of their managerial positions or other
similar relation to the corporation, could be deemed responsible
for its commission, if by virtue of their relationship to the
corporation, they had the power to prevent the act. Moreover,
all parties active in promoting a crime, whether agents or
not, are principals. Whether such officers or employees are
benefited by their delictual acts is not a touchstone of their
criminal liability. Benefit is not an operative fact." 308 In the
words of Chief Justice Earl Warren, a corporate officer cannot
protect himself behind a corporation where he is the actual,
present and efficient actor. 3o9·
h.
The same rule applies to stockholders. Before a stockholder
may be held criminally liable for acts committed by the corporation,
it must be shown that he/she had knowledge of the criminal act
committed in the name of the corporation and that he/she took part
in the same or gave his/her consent to its commission, whether by
action or inaction. 310
i.
The criminal statute itself may expressly provide or may
identify the persons who are criminally liable. For example, after
the ruling in Sia v. People of the Philippines311 was promulgated,
Presidential Decree No. 115, otherwise known as the Trust Receipts
Law, was passed expressly providing in Section 13 thereof. that "if
the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in
(the) Decree shall be imposed upon the directors, officers, employees,
or other officials or persons therein responsible for the offense."
Similarly, the third paragraph of Section 1 of Batas Pambansa Blg.
22 or Anti-Bouncing Checks Law states: "Where the check is drawn
by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawer shall be liable
under this Act."312 The same rule applies for violation of Republic
Act No. 10667 or the Philippine Competition Act, which provides
308Ching v. Secretary of Justice, G.R. No. 164317, February 6, 2006, citing U.S.
v. Park, 421 U.S. 658, 94 S. Ct. 1903 (1975).
309
Ching v. Secretary of Justice, ibid. at p. 637 citing U.S. v. Wise, 370 U.S.
405, 82 S.Ct., 1354 (1962).
310
Espiritu, Jr. v. Petron Corporation, G.R. No. 170891, November 24, 2009.
(The case involved trademark infringement under Republic Act No. 8293.)
3 11 Supra.
Navarra v. People of the Philippines, G.R. No. 203750, June 6, 2016; Gosiaco
v. Ching, et al., G.R. No. 173807, April 16, 2009.
312
.l 3
0 th r of that "wh n the ntltl involv d ar juridic 1
n , th p nalty of imprisonment hall be impo ed on it
r , dir ctors, or employees holding managerial positions, who
l n wingly and willfully responsible for such violation."
When the corporate officer is made criminally liable for
j.
acts,
he is also civilly liable in accordance with Article
'P r
f the Revised Penal Code that provides that persons criminally
bl are also civilly liable. However, the corporation is not fre�
r m liability if the criminal liability of its directors or officers arose
ut of a corporate act or the performance (and within the limits)
of th ir functions. This is true even if the civil action is deemed
tituted with the criminal action and the rules do not allow the
filing of a separate civil action against the accused corporate officer
l'k in Anti-Bouncing Checks Law cases.313 The civil case against
·h corporation can be pursued separately. 314 The Supreme Court's
ruling is consistent with the intent of the legislators that passed
th Corporation Code. As observed by one of the authors of the
rporation Code: "x x x where liability may result in the payment
of damages of a very substantial amount, it may well be that the
fficer of the corporation responsible would not have the financial
apability to meet the judgment. But the corporation as such may
have the resources. It may, then, be unfair to excuse the corporation
from paying the obligation arising from the act committed which is
in violation of law." 315 The same reasoning applies under the RCCP.
24.01.
Contempt Cases. Corporations may be punished for
contempt.316 "A corporation and those who are officially responsible
for the conduct of its affairs may be punished for contempt when
they disobey judgments, decrees, or orders of a court made in a
case within its jurisdiction." 317 The liability is present even if the
contempt case involved is in the nature of a criminal case.
a.
Section 17 of the RCCP provides that the SEC may
hold a corporation and its responsible directors and officers in
contempt if the corporation fails to comply with the SEC's order: (i)
Section 1, Rule 111, Rules of Criminal Procedure.
Gosiaco v. Ching, et al., G.R. No. 173807, April 16, 2009.
316III BP Records, p. 1736, December 12, 1979.
31
6The Heirs of Trinidad De Leon Vda. de Roxas v. Court of Appeals, G.R. No.
138660, February 5, 2004.
317
Ibid., citing 17 C.J.S. Contempt§ 34 (1963).
313
314
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to immediately cease and desist from using a particular corporate
name and to register a new name; and (ii) to remove all visible
signages, marks, advertisements, labels, prints and other effects
bearing the disallowed name.
25. Theory of Special or Limited Capacities. The
fourth attribute of the corporation, that is, that it has the powers,
attributes and properties expressly authorized by law or incident
to its existence, refers to what is known as the Theory of Special
Capacities. It is the law that gives the powers of the corporation
and the corporation cannot exercise powers that are not so given. In
fine, the powers of the corporation are only those that are expressly
provided for by law, implied powers, and incidental powers.
a.
The Theory of Special Capacities should be distinguished
from the Theory of General Capacities under which a corporation
may exercise any and all powers that may be exercised by natural
persons.
SEC. 3. Classes of Corporations. - Corporations
formed or organized under this Code may be stock or
nonstock corporations. Stock corporations are those
which have capital stock divided into shares and are
authorized to distribute to the holders of such shares,
dividends, or allotments of the surplus profits on the
basis of the shares held. All other corporations are
nonstock corporations.
SEC. 4. Corporations Created by Special Laws or
Charters. - Corporations created by special laws or
charters shall be governed primarily by the provisions
of the special law or charter creating them or applicable
to them, supplemented by the provisions of this Code,
insofar as they are applicable.
NOTES
1.
Revised Corporation Code Classification. The RCCP
recognizes different classifications of corporations. Under Section 3,
a corporation can be a stock or non-stock corporation. Section 4, on
the other hand, expressly recognizes corporations that are created
by special laws as distinguished from corporations created under a
general law like the Corporation Code or the RCCP. Elsewhere in the
' '.HE llE I E
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d m stic and foreign corporations318 are provided for together
sp cial types of corporation like religious corporations, 319
ti nal corporations320 and close corporations. 321 A new type of
ration, the One Person Corporation (OPC), is also provided in
1J
, 11Lpt r III, Title XIII (Sections 115-132) of the RCCP. There are
ti o provisions of the RCCP dealing specifically with corporations
t d with public interest.
aJ.
r1 l
Classifications in Other Statutes and Jurisprudence.
different types of corporations under the RCCP and existing
i prudence as well as those enumerated by eminent authorities
as follows:
a.
As to the number of components:
(1) Aggregate corporation - a corporation consisting
of more than one member. It has been defined as an artificial
body of men, composed of diverse individuals, the ligaments
of which body, the franchises and liberties bestowed upon it,
bind and unite all into one, and consists the whole frame and
essence of the corporation. 322
(2) Corporation sole - a corporation consisting of only
one person or member. Under Section 108 of the RCCP, a
corporation sole is one formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of a religious
denomination, sect or church for the purpose of administering
and managing, as trustee, the affairs, property, and
temporalities of such religious denomination, sect, or church.
(3) One Person Corporation - a corporation with a
single stockholder. 323
b.
As to functions:
(1) Public Corporation - a corporation organized
for the government of a portion of a State (like cities and
municipalities) for the purpose of serving general good and
welfare. 324
318
Sections 140-153, RCCP.
319Sections 107-114, RCCP.
320Sections
105-106, RCCP.
95-104, RCCP.
322
1 Fletcher 180.
323 Section 116, RCCP.
324
Section 3, Act No. 1459, otherwise known as the Corporation Law.
321Sections
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OF THE PHILIPPINES
(2) Private Corporation - a corporation formed for
some private purpose, benefit, aim or end. They may be stock
or non-stock corporations. 325
c.
As to the manner of creation:
(1) Corporation created by special law - a corporation
directly created by Congress through a special law. Such
corporation must be a government-owned or controlled
corporation. 326
(2) Corporation created under ,a general law - a
corporation created under the RCCP, the Corporation Code of
the Philippines or the old Corporation Law.
(3) Corporations by prescription - a corporation
that was not formally organized as such but has been duly
recognized by immemorial usage as a corporation, with rights
and duties enforceable under the law.
d.
As to legal status:
(1) De jure corporation - a corporation organized in
accordance with requirements of law.
(2) De facto corporation - a corporation that is formed
where there exists a flaw in its incorporation but there is
colorable compliance with the requirements of law.
(3) Corporation by estoppel - a group of persons which
holds itself out as a corporation and enters into a contract with
a third person on the strength of such appearance. It cannot
be permitted to deny its existence in an action under said
contract. 327 However, a corporation by estoppel does not have
juridical personality.
e.
As to existence of stocks:
(1) Stock corporation - a corporation with capital stock
that is divided into shares and is authorized to distribute to
holders of such shares, dividends or allotments of the surplus
profits on the basis of the shares held. 328
s25Jbid.
Section 16, Article XII, 1987 Constitution.
327
Section 20, RCCP.
328
Section 3, RCCP.
326
R• I
T'
1 7
iti
sifications
Non-stock corporation - a corporation that has no
pital t l , do s not issue stocks, and does not distribute
d t its members.
f.
As laws of incorporation:
(1) Domestic corporation - a corporation formed,
:r anized or existing under Philippine laws. 329
(2) Foreign corporation - a corporation formed,
r anized or existing under laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or State. 330
g.
Special Types of Corporations under the RCCP:
(1) Close Corporation - a corporation whose articles
of incorporation provides that: (a) all the corporation's issued
tock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons,
not exceeding 20; (b) all the issued stock of all classes shall
be subject to one or more specified restrictions on transfer
permitted by Title XII of the RCCP; and (c) the corporation
shall not list in any stock exchange or make any public offering
of its stock of any class. 331
(2) Special Corporations - those provided in Title XIII
of the RCCP that include educational corporations and religious
corporations. Religious corporations include corporation sole
and religious societies.
h.
Ecclesiastical and Lay Corporations:332
(1) Ecclesiastical
Corporations
corporations
composing entirely of spiritual persons like bishops, deacons
and the like and are established for the furtherance of religion
and for perpetuating the rights of a church. 333
(2) Lay Corporations - all corporations other than
ecclesiastical are lay corporations.
329
Section 140, RCCP. The definition is the same under Section 22(C) (need to
check no. under TRAIN) of the NIRC.
330
Section 140, RCCP.
331
Section 95, RCCP.
332
This Classification is recognized in English Law.
333
1 Fletcher 188, citing Blackstone.
13
MMENTARIE AND JURI PR DEN E N
THE REVI ED ORPORATI N ODE
OF THE PHILIPPINES
i.
Eleemosynary and Civil Corporation:
(1) Eleemosynary or Charitable Corporation - a
corporation created not for private gain or profit but for
charitable purposes for the administration of charitable trust.
This corporation is not an ecclesiastical corporation but a lay
corporation.334
(2) Civil Corporation - a corporation not for the
purpose of charity but for the benefit, pecuniary or otherwise,
of its members.335
j.
As to relationship:
(1) Subsidiary - "a corporation more than 50% of the
voting stock of which is owned or controlled directly or indirectly
through one or more intermediaries by another corporation,
which thereby become a parent company." 336
(2) Affiliate - a corporation that directly or indirectly,
through one or more intermediaries, is controlled by, or is under
the control of another corporation, which thereby becomes its
parent company. 337
(3) Parent corporation - a corporation that has__ control
over another corporation directly or indirectly through one or
more intermediaries. 338 It is the corporation that owns all or
substantially all or the controlling shares in the subsidiary.
3. Going Public and Going Private. There are cases
when corporations are referred to as "corporations going public" or
"corporations going private." 339 A corporation is deemed to be "going­
public" when it decides to list its shares in the stock exchange.
These include corporations that will make initial public offering of
its shares. A corporation is said to be "going private" when it would
restrict the shareholders to a certain group. In a sense, this also
includes close or closely held corporations.
'i'll L� Rt.i:Vl
1 Fletcher 189.
335
1 Fletcher 189.
336Section 1, Rule 2, Rules of Procedure on Corporate Rehabilitation (2008).
331/bid.
33BSupra.
339
1986 Bar Examination.
DE F THE PHLLLPP.L
PR VI
8
1
Wh n th hares of a corporation are listed in the stock
th
rporation will already be considered a "public
• ,mp rn 'und r th rules that implement the Securities Regulation
; cl ( R ). However, public companies are not limited to listed
• )11tP lI i . Rule 3(1)(m) of the Amended Implementing Rules
1 d
ulations of the SRC defines a "public company" as "any
H r tion with a class of equity securities listed on an Exchange
with assets in excess of P50,000,000.00 and having 200 or more
h Id r , at least 200 of which are holding at least 100 shares of a·
las of its equity securities." Note, however, that public companies
:1 uld not be confused with public corporations, which is an entirely
dlf£ r nt type of corporation.340
4.
Corporation by Prescription. The Roman Catholic
1 u · h is a corporation by prescription. In Rev. Barlin v. Ramirez,
t l.,a,i the Supreme Court rejected the argument that the Roman
atholic Church has no legal personality in the Philippines
plaining that it is an institution "which antedates by almost a
1ousand years any other personality in Europe, and which existed
h n Grecian eloquence still flourished in Antioch, and when idols
r still worshiped in the temple of Mecca." It was pointed out that
' ince the latter half of the third century, and more particularly since
Lh year 313, when Constantine, by the edict of Milan, inaugurated
an era of protection for the church, the latter gradually entered
upon the exercise of such rights as were required for the acquisition,
pr servation, and transmission of property the same as any other
juridical entity under the laws of the Empire."342
5. Stock and Non-Stock Corporations. For a stock
orporation to exist, two requisites must be complied with, to wit:
(1) a capital stock divided into shares; and (2) an authority to
distribute to the holders of such shares, dividends or allotments of
urplus profits on the basis of the shares held.343 "If only one requisite
i present, it cannot be properly classified as a stock corporation."344
340
334
RP RATI
TITLE 1 - E
See Note 6.
G.R. No. 2832, November 24, 1906.
342
Rev. Barlin v. Ramirez, ibid., citing Montero Rios, Dictionary of Spanish
Administration, Alcubilla, p. 211 and Royal Order of the 4th of December 1890, 3
Alcubilla 189.
343
Republic of the· Philippines v. City of Paraiiaque, G.R. No. 191109, July 18,
2012.
344/bid.
341
140
OMMENTARIE AND J RI RUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
a.
Even if there is a statement of capital stock, the
corporation is still not a stock corporation if dividends are not
supposed to be declared, that is, there is no distribution of retained
earnings. 345 Similarly, the issuance of "share certificates" is not, by
itself, proof that the corporation is a stock corporation. The so-called
"share certificates" may be nothing more than proof of membership
in a non-stock corporation.
b.
In the case of non-stock corporations, there must be
members and the corporations must not distribute any part of their
income to members. 346
c.
For instance, as further explained below, a governmentowned or controlled corporation must be a stock or a non-stock
corporation. An agency like the Philippine Reclamation Authority
(PRA) cannot be considered a government-owned or controlled
corporation because it is neither a stock nor a non-stock corporation.
PRA cannot be considered a stock corporation although it has
a capital stock divided into no par value shares because it is not
authorized to distribute dividends, surplus allotments or profits to
stockholders. PRA cannot also be considered anon-stock corporation
because it does not have members and it was not organized for any
of the purposes mentioned in Section 87 of the RCCP (pr�viously
Section 88 of the Corporation Code). 347
6.
Public and Private Corporations. The first problem
regarding public corporations and private corporations is analytical
involving the concept and meaning of the terms. A public corporation
is limited to corporation for the government of the State or municipal
corporations under Section 3 of the old Corporation Law. Thus, even
Government Service Insurance System (GSIS) and Development
Bank of the Philippines (DBP) are private corporations in corporate
law. 348 Similarly, the National Power Corporation and those operating
public utilities are more in the character of private corporations.349
Collector of Internal Revenue v. Club Filipino de Cebu, G.R. No. L-12719,
May 31, 1962, 5 SCRA 321.
346
Republic of the Philippines v. City of Parafiaque, supra, citing Philippine
Fisheries Development Authority v. Court of Appeals, G.R. No. 169836, July 31, 2007.
347
Republic of the Philippines v. City of Parafiaque, ibid.
348
111 BP Records, p. 1635, November 12, 1979.
349Jbid. at p. 1642, December 5, 1979.
345
'l'TI • REVI
tP MTI N
E F
I- EN•RALPR
Definition and Classifications
H LIPPI E
141
a.
How v r, it was acknowledged by the Sponsor of the
:tp ·ation Code that the classification of corporations into
bli and private in corporate law may be entirely different in
Lh r ·ontext. 36° For example, corporations may be considered
'public corporations" according to the purpose for which they were
r • niz d. 351
b.
Consistently, the Supreme Court in a majority decision
,,ul d that there are "public corporations," like the Boy Scouts of.
· h Philippines, that are created by special law to serve a public
urpose. 352 The Court ruled that these "public corporations"
ar recognized under paragraph 2 or Article 44 of the New Civil
de. 363 In The Veterans Federation of the Philippines v. Reyes, 354
th Supreme Court ruled that the petitioner corporation is a public
· rporation within the contemplation of Section 16, Article XII of
th 1987 Constitution. The High Court stated that the functions
of the petitioner under Section 4 of Republic Act No. 2640 fall
within the category of sovereign functions. Hence, supervision and/
r control over the petitioner can be granted to the Secretary of
National Defense. It is clear that the subject corporation is not a
public corporation as the term is defined under the old Corporation
law and as contemplated by the legislators who enacted the
orporation Code. The Veterans Federation of the Philippines is
not a public corporation in corporate law because it is not meant
for the governance of a portion of the State. The purpose of the
corporation - sovereign functions - is not the concern of corporate
law. However, under the framework of the ruling in Boy Scouts of
the Philippines case, it could be classified as a public corporation
that falls under paragraph 2 or Article 44 of the New Civil Code.
c.
The concept of public corporations is more expansive
in other jurisdictions. Thus, a public corporation has been
defined as such as are created for the purpose of government and
management of public affairs founded by the State and managed by
it for governmental purposes.355 Thus, even banks and hospitals are
included in this definition in other jurisdictions.
350Jbid. at pp. 1641-1642, December 5, 1979.
351
111 BP Records, ibid.
352
Boy Scouts of the Philippines v. Commission on Audit, G.R. No. 177131,
June 7, 2011.
asalbid.
354
G.R. No. 155027, February 28, 2006, 483 SCRA 526, 551.
355
Clarks on Corporations, p. 28.
E
MMEN'l'AfUE AN JURI PR" J U:N E N
142
THE REVI ED
RP RA.TI N
OF THE PHILIPPINES
DE
d.
In other jurisdictions, the matter regarding the meaning
of the terms public corporations and private corporations is involved
in problems relating to immunity from suit. In this jurisdiction,
what should be considered in the application of the Doctrine of
State Immunity is whether or not the agency is engaged in a private
or proprietary function or governmental or sovereign function. In
Philippine National Railway v. Intermediate Appellate Court, 356
the Supreme Court explained that suits against State agencies in
relation to matters in which they have assumed to act in a private
or non-governmental capacity are not regard�d as suits against the
State. By engaging in business operations through a corporation,
the State divests itself of its sovereign character, and by implication
consents to suits against the corporation.
7.
Quasi-Public Corporations. There are also corpora­
tions that are referred to as Quasi-Public Corporations; these are
corporations like railroad and canal corporations that are engaged
in private business affected with public interest. 357
8.
Government-Owned or Controlled Corporations.
Government-Owned or Controlled Corporations (GOCCs) may
either be (1) with original charter or created by special law, or (2)
incorporated under a general law (the Corporation Code, riow the
RCCP). 358 GOCCs are now partly governed by Republic Act No.
10149 otherwise known as the "GOCC Governance Act of 2011."
a.
Paragraph 13, Section 2 of the Administrative Code of
1987 defines government-owned or controlled corporation as "any
agency organized as a stock or non-stock corporation vested with
functions relating to public needs whether governmental or propriety
in nature, and owned by the Government directly or through its
instrumentalities either wholly or where applicable as in the case of
stock corporations to the extent of at least 51% of its capital stock."
RP R.ATI N
DE I!' TH • HILIPPINE
Tl'l'LE I - ENERAL PR VI I N
flniti ns nd Clas ifications
143
Th £ 11 wing r quisites must therefore be present: 359
(1) There must be an agency organized as a stock or
non- tock corporation;
(2) The corporation must be vested with functions
relating to public needs whether governmental or proprietary
in nature; and
(3) The corporation must be owned directly by the
government or through its instrumentalities either wholly, or
where applicable as in the case of stock corporations, to the
extent of at least 51% of it's capital stock.
b.
Despite common misconceptions, government-owned or
controlled corporations are regarded as private corporations. 360 The
deliberations in the Batasang Pambansa was quoted by the Supreme
Court in one case: "There are corporations which are organized
under the Corporation Code, the shareholding of which are owned
by the government, and sometimes these corporations are referred
to also as public corporations simply because the shares of stock
of those corporations are owned or controlled by the government.
However, as one[s] organized under the Corporation Law, those
corporations are regarded as private corporations in the context of
the Corporation Code."361
c.
GOCCs may be created under special laws in which case
they are included in what is known as Chartered GOCC that refers to
a GOCC, including Government Financial Institutions, created and
vested with functions by a special law. 362 The SEC has no jurisdiction
over government-owned or controlled corporations created by
special law because their charters primarily govern them. However,
the Corporation Code (now RCCP) may apply suppletorily either by
operation of law or through express provisions in the charter.363
d. GOCCs may also be created or established through the
Corporation Code (now the RCCP) in which case they are'included in
what is known as non-chartered GOCCs. 364 With respect to GOCCs
356217
SCRA 637 (1992); National Development Company v. Tobias, 119 Phil.
703, 705 and cases cited therein; National Development Company v. NDC Employees
and Worker's Union, G.R. No. L-32387, August 19, 1975, 66 SCRA 181, 184.
357
Philippine National Railways v. Intermediate Appellate Court, supra.
358
Philippine National Construction Corporation v. Pabion, G.R. No. 131715,
December 8, 1999, 320 SCRA 188, 204; See also GSIS Family Bank Employees Union
v. Villanueva, G.R. No. 210773. January 23, 2019; GSIS Family Bank Employees
Union v. Villanueva, G.R. No. 210773, January 23, 2019; Tetangco, Jr. v. Commission
on Audit, G.R. No. 244806, September 17, 2019;
2000.
359Leyson,
Jr. v. Office of the Ombudsman, et al., G.R. No. 134990, April 27,
36
0Philippine National Construction Corp. v. Pabion, et al., supra.
361Jbid.
362
Section 3(f), �epublic Act No. 10149.
363
Philippine National Construction Corp. v. Pabion, et al., supra, pp. 204-205.
364
Section 3(q), Republic Act No. 10149.
144
145
MMEN'rARm AN J
R
THEREVI ED
OF THE PHILIPPINES
organized under the general law on corporations (the Corporation
Code then or the RCCP now), it was also pointed out that the SEC
is authorized to implement the provisions of the Corporation Code
under Section 143 thereof (now provided in Section 179 of the
RCCP) specifically for the purpose of regulating the entities created
pursuant to its provisions. These entities include corporations in
which the controlling shares are owned by the government or its
agencies.365
e.
The Supreme Court ruled that "not all corporations,
which are not government-owned or controlled, are ipso facto to
be considered private corporations as there' exists another distinct
class of corporations or chartered institutions which are otherwise
known as 'public corporations'. These corporations are treated by
law as agencies or instrumentalities of the government which are
not subject to the tests of ownership or control and economic viability
but to a different criteria relating to their public purposes/interests
or constitutional policies and objectives and their administrative
relationship to the government or any of its Departments or
Officers."366
f.
In one case, a foreign corporation claimed that it is a
government-owned corporation. The Court ruled that the said
corporation is presumed to be a government-owned and -co.ntrolled
corporation without original charter.367
g.
A corporation organized under the Corporation Code
that is originally a GOCC may cease to be such after incorporation.
Thus, in one case, the Bases Conversion and Development Authority
(BCDA) was an original majority shareholder of a corporation.
However, additional shares were later subscribed by a private entity
ma�ing the BCDA a minority shareholder. With the BCDA as the
minority shareholder, the corporation can no longer be considered a
government-owned or controlled corporation.368
8.01. Creation Through Special Law. Section 16, Article
XII of the 1987 Constitution explicitly prohibits the creation or
establishment of private corporations through special laws except
Philippine National Construction Corp. v. Pabion, et al., supra, p. 205.
Boy Scouts of the Philippines v. Commission on Audit, supra.
367
China National Machinery & Equipment Corp. (Group) v. Santamaria, G.R.
No. 185572, February 7, 2012. (The nature of the corporation was material because
the doctrine of State immunity from suit was invoked.)
368
People v. Morales, G.R. No. 166355, May 30, 2011.
365
366
nt- wn d or controlled corporations. 369 "The purpose of
n titutional provision is to ban private corporations created
p ial charters, which historically gave certain individuals,
f m"li or groups certain privileges denied to other citizens."370
a.
The requirements for the exception -private corporations
n be created through special law - are as follows: (1) The
pr' at corporation must be government-owned or controlled; (2)
'1 1 h r ation of the corporation through special law must be in the .
t r t of common good; and (3) The creation must meet the test of
n mic viability. 371
b.
The test of economic viability applies only to GOCCs that
_p rform economic or commercial activities, and need to compete in
th market place.372
c.
The above-enumerated requirements pertain to private
rporations; the requirements do not apply to public corporations.
Th Supreme Court explained that the Constitutional provision
ction 16 of Article XII) should not be construed so as to prohibit
th creation through special law of"public corporations" like the Boy
outs of the Philippines or other corporate agency or instrumentality
f the government intended to serve a public interest or purpose.373
These "public corporations" can be created through special law
without violating Section 16, Article XII of the Constitution.
d.
The employees of GOCCs created by special law or
harter are subject to civil service laws. The Labor Code covers the
mployees of GOCCs that are created under the Corporation Code
(or now, the RCCP). 374
36
9Veterans Federation of the Philippines v. Reyes, supra; League of Cities
of the Philippines, et al. v. Commission on Elections, et al., G.R. Nos. 176951 and
177499, November 18, 2008; Feliciano v. Commission on Audit, G.R. No. 147402,
January 14, 2004, 419 SCRA 363; Feliciano v. Aranez, G.R. No. 165641, August 25,
2010.
37
°Feliciano v. Commission on Audit, 464 Phil. 439 (2004) cited in Boy Scouts of
the Philippines v. Commission on Audit, G.R. No. 177131, June 7, 2014.
3
71 Boy Scouts of the Philippines v. Commission on Audit, ibid.
372
Manila International Airport Authority v. Court of Appeals, G.R. No.
155650, July 20, 2006; Republic of the Philippines v. City of Parafiaque, G.R. No.
191109, July 18, 2012.
373
Boy Scouts of the Philippines v. Commission on Audit, supra.
374
Salenga v. Court of Appeals, G.R. No. 174941, February 1, 2012.
MMENTARI I AN J RI PR DE" E
DE
THE REVISED ORPORATION
OF THE PHILIPPINES
146
N
8.02. GOCC Distinguished from Government Instru­
mentalities. The Supreme Court observed in Manila International
Airport Authority v. Court of Appeals375 that government-owned
or controlled corporations must be organized either as a stock
corporation or a non-stock corporation. The High Court ruled that
government-owned or controlled corporatiqns should therefore be
distinguished from "government instrumentalities" which may
also be vested with corporate powers to perform efficiently their
governmental functions. 376 When the law vests the government
instrumentality with corporate powers, the instrumentality does
not become a corporation. 377 Examples of instrumentalities are the
Manila International Airport Authority, the Mactan International
Airport Authority, the Philippine Ports Authority, the University
of the Philippines378 and the Bangko Sentral ng Pilipinas. 379
Instrumentalities fall under the more general term "Government
Agency. "380
a. Government Instrumentalities may have corporate powers.
"Government Instrumentalities with Corporate Powers (GICP)/
Government Corporate Entities (GCE) refer to instrumentalities
or agencies of the government, which are neither corporations nor
agencies integrated within the departmental framework, but vested
by law with special functions or jurisdiction, endowed with.some if
not all corporate powers, administering special funds, and enjoying
operational autonomy usually through a charter including, but not
limited to, the following: the Manila International Airport Authority
(MIAA), the Philippine Ports Authority (PPA), the Philippine Deposit
Insurance Corporation (PDIC), the Metropolitan Waterworks
and Sewerage System (MWSS), the Laguna Lake Development
Authority (LLDA), the Philippine Fisheries Development Authority
(PFDA), the Bases Conversion and Development Authority (BCDA),
the Cebu Port Authority (CPA), the Cagayan de Oro Port Authority,
the San Fernando Port Authority, the Local Water Utilities
Administration (LWUA) and the Asian Productivity Organization
375
G.R. No. 155650, July 20, 2006, 495 SCRA 591, 615. Note the dissenting
opinion in this Decision.
376
Manila International Airport Authority v. Court of Appeals, et al., supra.
3
77Ibid.
378
2012.
University of the Philippines, et al. v. Dizon, G.R. No. 171182, August 23,
379Manila International Airport
380 Section 3(k),
Authority v. Court of Appeals, et al., supra.
Republic Act No. 10149.
I
E F
R V
HI IPPI
147
sifications
."aAi Int r tingly, v n GICPs are considered GOCCs under
w tatut .3 2
. 3. Government Financial Institutions. GOCCs may be
nm nt Financial Institutions (GFis) that refer to financial
11 't lti ns or corporations in which the government directly or
udir tly owns majority of the capital stock and which are either:
1 t · tered with or directly supervised by the Bangko Sentral ng
l 1ili ina,s; or (2) collecting or transacting funds or contributions from
ublic and places them in financial instruments or assets such
d posits, loans, bonds and equity including, but not limited to,
- overnment Service Insurance System and the Social Security
t-m_ss3
.04. Affiliates. Affiliate refers to a corporation 50% or less
f the outstanding capital stock of which is owned or controlled,
d'r ctly or indirectly, by the GOCC. 384
8.05. PNRC as Sui Generis. One of the cases, where the
upreme Court's original Decision was not only split but was also
later reversed in a Resolution (that also was not unanimous),
involved the nature of the Philippine National Red Cross (PNRC)
a a corporation. 385 The PNRC was created through special law
and there is no dispute that it is a corporation. However, it was
leclared that it is not a subdivision, agency or instrumentality of
vernment nor a government-owned or controlled corporation or
a subsidiary thereof. However, the High Court ruled that it does
not follow that it is a private corporation. 386 The Court ruled that
ince PNRC is not a private corporation, its charter (special law
reating it) is not unconstitutional under Section 16 of Article XII of
the Constitution. 387 The Court ruled that "the structure of the PNRC
Section 3(n), Republic Act No. 10149.
Section 3(o), ibid.
383
Section 3(m) and (o), ibid.
384
Section 3(a), ibid.
385
Dante Liban, et al. v. Richard J. Gordon, G.R. No. 175352, January 18, 2011
(Resolution on the Motion for Clarification and/or Reconsideration) and Dante Liban,
et al. v. Richard J. Gordon, G.R. No. 175352, July 15, 2009, 593 SCRA 68 (Original
Decision); Torres v. De Leon, G.R. No. 199440, January 18, 2016.
381
382
3B6Jbid.
387
Supra; Note that in its original Decision on July 15, 2009, the Supreme·
Court declared void the PNRC Charter insofar at it creates the PNRC as a private
corporation and ruled that the PNRC should incorporate under the Corporation Code
and register with the SEC.
MM <NTAR
14
J
J4
THER •VI
OF THE PHI
is sui generis, being neither strictly private nor public in nature";
it is supposed to be a private institution and at the same time a
public service organization that is an auxiliary of the government in
the humanitarian field in accordance with its commitments under
international law.388 The Court, however, ruled that the sui generis
character of PNRC requires it to approach controversies involving
the PNRC on a case-to-case basis. Thus, the Supreme Court did not
reverse its previous ruling involving enforcement of labor laws and
penal statutes.389 In fact, in a subsequent case, the Supreme Court
ruled that the Civil Service Commission has jurisdiction over the
PNRC in the enforcement of labor laws and penal statutes because,
for such purposes, it is deemed a GOCC with original charter.390
8.06. Corporation Vested with Public Interest.
The
RCCP contains a number of rules dealing with "corporations vested
with public interest."391 The RCCP does not contain any definition
of the term "corporation vested with public interest." However,
Section 176 of the law provides for the different factors that will
affect the determination of the meaning of such term. Section 176
provides that in recommending to the Congress which corporations,
businesses, and industries will be declared i;ts vested with public
interest, "the NEDA [National Economic and Development
Authority] shall consider the type and nature of the industry, size
of the enterprise, economies of scale, geographic location, extent of
Filipino ownership, labor intensity of the activity, export potential,
as well as other factors which are germane to the realization and
promotion of business and industry." In addition, Section 22 of the
RCCP enumerates the following as corporations vested with public
interest: (1) Corporations covered by Section 17.2 of Republic Act
No. 8799, otherwise known as "The Securities Regulation Code,"
namely those whose securities are registered with the SEC,
corporations listed with an exchange or with assets of at least Fifty
million pesos (P50,000,000.00) and having two hundred (200) or
more shareholders, each holding at least one hundred (100) shares
of a class of its equity shares; (2) Banks and quasi-banks, nonstock
savings and loan associations, pawnshops, corporations engaged in
money service business, preneed, trust and insurance companies, and
388
Supra.
See Concurring opinion of Justice Abad in Dante Liban, et al. v. Richard J.
Gordon, ibid.
390
Torres v. De Leon, G.R. No. 199440, January 18, 2016.
391
See Sections 22, 23, 24, 29, 31, 91, 95, 176, and 177, RCCP.
389
n i 1 int rm di.ari ; and (3) Other corporations engaged
s v st d with ·public interest similar to the above, as the
d t rmin , taking into account relevant factors which are
11 111 to the objective and purpose of requiring the election of
n jnd p ndent director, such as the extent of minority ownership,
rp f financial products or securities issued or offered to investors,
I ubli · interest involved in the nature of business operations, and
1 Ll r nalogous factors.
SEC.
5.
Corporators
and
lncorporators,
Stockholders and Members. - Corporators are those
who compose a corporation, whether as stockholders
or shareholders in a stock corporation or as members
in a nonstock corporation. lncorporators are those
stockholders or members mentioned in the articles of
incorporation as originally forming and composing the
corporation and who are signatories thereof.
NOTES
1.
Components. The components of the corporation
in lude: 1) shareholders or members, 2) directors or trustees, and
3) officers. Stockholders or members are referred to in Section 5 of
Lhe RCCP as the Corporators. "Corporators in a stock corporation
· called stockholders or shareholders. Corporators in a non-stock
orporation are called members."392
2.
lncorporators. Section 5 provides that Incorporators are
those stockholders or members mentioned in the Articles of Incor­
poration as originally forming and composing the corporation and
who are signatories thereof. There is only one set of incorporators.
The incorporators appearing as such in the Articles of Incorporation
will remain to be incorporators up to the termination of the life of
the corporation. The Articles of Incorporation cannot be amended
to change the names of the incorporators because the fact that the
I ersons named therein are incorporators is an accomplished fact or
deed that can no longer be undone.
3.
Shareholders. The shareholders are the holders of
shares in a corporation with interest over the management (control),
income (dividends) and assets (share upon liquidation) of the
corporation.
392
Section 5, Corporation Code. The last two statements quoted do not appear
in Section 5 of the RCCP but they remain relevant.
OMM.I!) 'I'AfUI£
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151
a.
The shareholders participate in controlling the affairs
of the corporation by exercising their right to vote. They can elect
the directors who will actually govern the corporation and they can
also vote in important matters that are still reserved to them by the
RCCP. It was observed that the right to participate in the control
and management is exercised through the election of members of the
board of directors because "it is the board of directors that controls
or manages the corporation."393
( ) To nter into management contract (the 2/3 vote of
total outstanding stock or of the members applies to the
a ed corporation) (Sec. 43, RCCP) if:
b. Two-Thirds Requirement. In addition, shareholders
vote on or approve fundamental structural changes in the corporation
and certain major decisions that are specific�lly provided for under
the RCCP. Concurrence of the stockholders representing 2/3 of the
outstanding capital (or 2/3 of the members whenever applicable) is
necessary in the exercise of the following powers: 394
(ii) a majority of the members of the board or directors
of the managing corporation also constitute a majority of
the members of the board of the managed corporation;
(1)
To extend or shorten corporate term (Sec. 36, RCCP);
(2)
To increase/decrease capital stock (Sec. 37, RCCP);
(3) To incur, create or increase bonded indebtedness
(Sec. 37, RCCP);
(4) To deny pre-emptive right after incorporation since the denial is required to be in the Articles of IncorP.oration
or any amendment thereto, and approval of amendments to the
Articles of Incorporation requires the vote or written assent of
stockholders representing 2/3 of the outstanding capital stock
or 2/3 of the members (Sec. 15 and Sec. 38, RCCP);
(5) To sell, lease, exchange, mortgage, pledge, or
otherwise dispose of all or substantially all of corporate assets
(Sec. 39, RCCP);
(6) To invest in another corporation, business, or for
any purpose other than the primary purpose for which it was
organized, like the secondary purpose (Sec. 41, RCCP) (1977,
1983 and 1996 Bar);
(7)
To declare stock dividends (Sec. 42, RCCP);
393Heirs of Wilson
P. Gamboa v. Teves, G.R. No. 176579, June 28, 2011.
394Approval of the Board is also expressly required in the exercise of the powers
specified in numbers (1) to (10) but not in number (11), although majority of the
Board is required to sign the petition for dissolution under Section 35 of the RCCP.
(i) a stockholder or stockholders representing the
same interest of both the managing and the managed
corporations own or control more than 1/3 of the total
outstanding capital entitled to vote of the managing
corporation; or
(9)
RCCP);
To amend the Articles of Incorporation (Sec. 15,
(10) To merge or consolidate with another corporation or
other corporations (Sec. 76, RCCP);
(11) To voluntarily dissolve the corporation where
creditors are affected (Sec. 135, RCCP).
c.
Majority. Approval at a meeting duly called for the
purpose by the stockholders representing majority of the outstanding
apital, or majority of the members, is necessary, together with
Board approval, in the exercise of the following powers:
(1) To enter into a management contract under
circumstances not covered by either of the two instances stated
above (see No. 8[i] and [ii] above). The majority vote of the
outstanding capital or of the members is required for both the
managed and managing corporation (Sec. 43, RCCP);
(2) To adopt, amend or repeal the By-laws (Sec. 46 and
Sec. 48, RCCP);
(3) Voluntary dissolution where no creditor is affected
(Sec. 134, RCCP).
d. Without Prior Board Approval. Without Board
resolution, the stockholders/members may by the vote of:
(1) 2/3 of the outstanding capital stock or of the members
- Delegate to the Board the power to amend the By-laws (Sec.
47, RCCP).
(2) Majority of the outstanding capital stock or of the
members� Revoke the power of the Board to amend the By­
Laws, which was previously delegated (Sec. 47, RCCP).
152
COMMENTARIE ND JURI PRUDENCE N
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(3) 2/3 of the outstanding capital stock or of the members
- Remove any director or trustee subject to the requirements
under Section 27 of the RCCP.
(c) Sale, lease, exchange, mortgage, pledge,
or other disposition of all or substantially all of the
corporate property;
(4) Majority of outstanding capital stock or of the
members - Grant directors or trustees with compensation
and approve the amount thereof at a regular or special meeting
(Sec. 29, RCCP).
(d) Incurring, creating, or increasing bonded
indebtedness;
e.
Other provisions of the RCCP on the vote required for
specific matters requiring stockholder action are as follows:
(1) 2/3 of outstanding capital stock or of the members
- Ratification of contracts entered into by directors/trustees
(involving self-dealing/disloyalty) under Sections 31 and 33 of
the RCCP;
(2) Majority of outstanding capital stock - Fixing the
issued price of no-par value shares if not so fixed in the Articles
of Incorporation or by the Board pursuant to the authority
under the Articles (Sec. 61, RCCP).
SEC. 6. Classification of Shares. - The
classification of shares, their corresponding rights,
privileges, or restrictions, and their stated par value, 'if
any, must be indicated in the articles of incorporation.
Each share shall be equal in all respects to every other
share, except as otherwise provided in the articles of
incorporation and in the certificate of stock.
The shares in stock corporations may be divided
into classes or series of shares, or both. No share may
be deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code: Provided, That there
shall always be a class or series of shares with complete
voting rights.
Holders of nonvoting shares shall nevertheless be
entitled to vote on the following matters:
(a)
Amendment of the articles of incorporation;
(b)
Adoption and amendment of bylaws;
(e)
stock;
Increase or decrease of authorized capital
(f) Merger or consolidation of the corporation
with another corporation or other corporations;
(g) Investment of corporate funds in another
corporation or business in accordance with this Code;
and
(h)
Dissolution of the corporation.
Except as provided in the immediately preceding
paragraph, the vote required under this Code to approve
a particular corporate act shall be deemed to refer only
to stocks with voting rights.
The shares or series of shares may or may not
have a par value: Provided, That banks, trust, insurance,
and preneed companies, public utilities, building and
loan associations, and other corporations authorized to
obtain or access funds from the public, whether publicly
listed or not; shall not be permitted to issue no-par value
shares of stock.
Preferred shares of stock issued by a corporation
may be given preference in the dis�ribution of dividends
and in the distribution of corporate assets in case
of liquidation, or such other preferences: Provided,
That preferred shares of stock may be issued only
with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any
series thereof: Provided, further, That such terms and
conditions shall be effective upon filing of a certificate
15
154
COMMENTARIE AND JURI PRUDENCE ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
thereof with the Securities and Exchange Commission,
hereinafter referred to as the "Commission".
Shares of capital stock issued without par value
shall be deemed fully paid and nonassessable and
the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto:
Provided, That no-par value shares must be issued
for a consideration of at least Five pesos (PS.00) per
share: Provided, further, That -the entire consideration
received by the corporation for its no-par value shares
shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may further classify its shares for
the purpose of ensuring compliance with constitutional
or legal requirements.
NOTES
1.
Concept of Shares. A share of corporate stock has
been defined as the unit into which the proprietary interests in
a corporation are divided. 395 It is the "intangible interest or -right
which an owner has in the management, profit and assets of the
corporation."396
a. The shares comprise what is known as the capital stock.
"Capital stock consists of all classes of shares issued to stockholders,
that is, common shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated in the articles
of incorporation."397 A "specific class of shares may have rights or
privileges or restrictions different from the rest of the shares in the
corporation." 398
2. Reason for Classification. Classification of shares is
allowed under the Corporation Code/RCCP so "that entrepreneurs
who decide to go into business would have a wide latitude of flexibility
"L'l I JlEVI
Black's Law Dictionary, 6th Ed. (1990), p. 1375.
396
Federico B. Moreno, Philippine Law Dictionary, 1973 Ed. (1975 Supplement),
p. 52 citing Shurdut Investment Corporation v. Bataan Pulp and Paper Mills, Inc.,
4475-R, March 13, 1975.
397
Heirs of Wilson P. Gamboa v. Teves, G.R. No. 176579, October 9, 2012.
assIbid.
RF UATI N
E F THE HIILIPPINE
'l'l'rLE I - , NERAL PR VISION
D finitions and Classifications
155
rd r to as ure that they will be able to raise capital and
m tim run the corporation in the manner which will be
11 Lh
m1u'tabl to all investors."399 The intent of the legislature is therefore
f'
d in making the business organization attractive by making
i L fl ibl "in providing for the financial arrangements within the
rp rat entity itself."100
a. The classes and number of shares, which a corporation
hall i sue are first determined by the incorporators in the Articles·
fin orpo;ation filed with the SEC. After the corporation comes into
i t nee, the Board of Directors and the stockholders may alter
· h m by amending the Articles of Incorporation.401
3. Doctrine of Equality of Shares. Under this doctrine,
all stocks issued by the corporation are presumed to be equal with
th same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.402 This doctrine is now
xpressly provided for in the first paragraph of Section 6 of �he �C�P.
_
In addition, Section 6 of the RCCP requires that the d1stmgmshmg
f atures of the shares must be stated in the Certificate of Stock. The
first paragraph of Section 6 of the RCCP provides:
" ... The classification of shares, their corresponding
rights, privileges, or restrictions, and their stated
par value, if any, must be indicated in the articles of
incorporation. Each share shall be equal in all respects
to every other share, except as otherwise provided in the
articles of incorporation and in the certificate of stock."
a. If the Articles of Incorporation, therefore, does not provide
for any distinction of the shares of stocks of the corporation, all shares
shall enjoy the same rights and privileges. All the shares are to be
treated equal. 403 The Board of Directors cannot provide preference
or additional rights if nothing is provided for in the Articles of
Incorporation. For example, the Board cannot issue preferred shares
in the absence of provisions in the Articles of Incorporation.404
399
395
rm
III BP Records, p. 1702, December 10, 1979.
III BP Records, ibid.
401
SEC SGC Opinion No. 10-18, April 12, 2010.
402
Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576, ·
January 20, 1999; SEC OGC Opinion No. 10-20 dated May 27, 2010.
403
SEC Opinion dated March 9, 1994.
404
SEC Opinion dated March 9, 1994; SEC OGC Opinion No. 10-20 dated May
27, 2010.
400
156
OMMENTARIE AND JURI PRUDEN E ON
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Similarly, any special agreement between a particular
b.
subscriber and a corporation or its promoters by which he is allowed
to subscribe for shares upon different terms from other subscribers
and is guaranteed against loss at their expense is fraudulent and
invalid.405
4. Kinds of Shares. Shares of stocks in a corporation
represent the interest of the shareholder in a stock corporation.
Shares may be classified into: (1) common or preferred shares, (2)
voting or non-voting shares, (3) par value or no par value shares,
(4) treasury shares, (5) redeemable.shares, and (6) founder's shares.
Preferred shares may be: (1) cumulative or non-cumulative, (2)
participating or non-participating, and (3) preferred as to dividends
and/or preferred as to assets upon distribution. Preferred shares
may also be convertible shares.
The most basic classification of shares is: common shares
a.
and preferred shares. It was explained in one case that common
shares and preferred shares are part of the corporation's capital
stock and that both stockholders are no different from ordinary
investors who take on the same investment risks. Preferred and
common shareholders participate in the same venture, willing to
share in the profits and losses of the enterprise.406
Common Shares. Common shares or stocks represent
5.
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.407
Preferred Shares. Preferred stocks are those that
6.
entitle the shareholder to some priority on dividends and/or
asset distribution. Preferred shareholders are not creditors of the
corporation by virtue of the preferred shares. The holder obtains
neither the enforceable claim to interest and repayment of principal
that is provided by debt nor the rights of residual owner that is
provided by common shares. 408
405SEC Opinion dated April 18, 1985, citing Ballentine on Corporations,
Revised Edition, p. 459.
406 Commissioner of Internal Revenue
v. Court of Appeals, G.R. No. 108576,
January 20, 1999, 301 SCRA 152, 187.
401Ibid.
408Robert W. Hamilton, Corporation Finance, 2nd Ed., p. 299, hereinafter
called "Hamilton."
'f'Tl, T IWI
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ENER
E
F THE PHILIPPINE
157
R V
In a n , th issue of a preferred share is itself an attempt
il two forms of property rights that are fundamentally not
, •1111 il bl : 109 On cannot be a creditor and an owner by virtue of
u :1 in trument. "A person as principal cannot create a contract
n himself as owner and himself as creditor. Yet all preferred
· ntracts are, fundamentally attempts to endow certain
with rights analogous to creditor rights" and statutes and
t' ur d i ions on this matter "have been concerned, primarily, with.
1,1 1 n th to which the preferred stock contract can go in extending
i'• dit r rights to stockholders."410 The reason why there is an
fC rt to extend such right is to make preferred shares attractive to
st rs. The investors can remain as such and at the same time
ertain advantages that are available to creditors.
b.
Corporations issue preferred stock for the following
ns: (1) to avoid the use of bonds that have fixed interest charges
t must be paid regardless of the amount of net income; (2) to
id issuing so many additional common shares that earnings per
hare will be less in the current year than in prior years; (3) to avoid
diluting the common shareholders' control of the corporation since
1 r ferred shares usually have no voting rights. 411
"Preferred shareholders are often excluded from any
c.
· ntrol, that is, deprived of the right to vote in the election of
dir ctors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in
th same manner as shareholders."412 Considering that preferred
shares are usually non-voting, inequity may result if the board will
not declare dividends for a long period of time. One way inequity
may be erased is b:v, providing in the Articles of Incorporation and
the certificates that the right to vote shall resume if no dividends are
declared after a certain number of years (for example five years).
d. There is no guaranty, however, that the holder of preferred
hares will receive dividends every fiscal year. Under the old
Corporation Law, it was provided that "no corporation shall make or
declare any dividend except from the surplus profits arising from its
business, or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment of
409A. Dewing, The Financial Policy of Corporations, 2nd Ed., pp. 128-130.
410A. Dewing, ibid.
4
11 Hermanson and Edwards, p. 616.
412Heirs of Wilson P. Gamboa v. Teves, G.R. No. 176579, June 28, 2011.
158
'J'Trn lt'lilVI
COMMENTARIES AND JURISPRUDENCE ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
its debts and the termination of its existence by limitation or lawful
dissolution." The Corporation Code and now the RCCP provide that
the board of directors of a stock corporation may declare dividends
out of the unrestricted retained earnings. The Corporation Code and
the RCCP, in Section 43 and Section 42, respectively, adopting the
change made in accounting terminology, use the phrase "unrestricted
retained earnings," which may be a more precise term than "surplus
profits arising from its business" in the old Corporation Law. Thus,
the declaration of dividends is dependent upon the availability of
surplus profits or unrestricted retained earnings, as the case may
be. Preferences granted to preferred stockholders, moreover, do not
give them a lien upon the property of the corporation or make them
creditors of the corporation, the right of the former being always
subordinate to the latter. Dividends are, thus, payable only when
there are profits earned by the corporation and as a general rule,
even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared.
Shareholders, both common and preferred, are considered risk
takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid.413
e.
Hence, preferred shares that are referred to as "interest
bearing," on which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders, is legal only
when construed as requiring payment of interest as dividends from
net earnings or surplus only.414
f.
Preferred shares are considered in the computation of the
equity of foreigners and Filipinos in a corporation for purposes of
determining compliance with nationalization laws. Both common
shares and preferred shares are part of the outstanding capital
stock.415
6.01. Fixing Terms and Conditions of Preferred Shares.
The rights, privileges, or restrictions of preferred shares must be
indicated in the articles of incorporation and in the certificate of
stock.416
413
Republic Planters Bank v. Agana, Sr., et al., G.R. No. 51765, March 3, 1997,
269 SCRA 1.
414/bid., at p. 13.
415
SEC Opinion dated July 16, 1996.
416Section 6, RCCP.
11P RAT
TI'I'LE I- E
1
F THE PlllLIPPI E
I N
1 9
By way of exception, the board of directors may fix the
11 ,n
nd conditions of preferred shares of stock or any series
1,J,1 r, f ubj ct to the following requirements as provided in Section
,I' Lh R CP:
(1) The articles of incorporation must provide for a class
f hares that are preferred shares;
(2) The board of directors must be authorized in the
articles of incorporation to fix the terms and conditions of the·
pr ferred share; and
(3) A certificate of the terms and conditions fixed by the
Board shall be filed with the SEC. The terms and conditions
hall be effective upon filing of the said certificate with the
EC.
6.02. Kinds of Preferred Shares. A preferred share of stock
n that entitles the holder thereof to certain preferences over the
h lders of common stock. The preferences are designed to induce
r ons to subscribe for shares of a corporation. Preferred shares
k a multiplicity of forms.417
a.
The most common forms may be classified into two:
1) preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case
of liquidation; the latter is a share the holder of which is entitled
to receive dividends on said share to the extent agreed upon before
ny dividends at all are paid to the holders of common stock.418 If the
preference is as to dividends, the amount that will be received by the
hareholder may be a fixed amount (for example "P20.00 preferred")
or it may be a fixed percentage of the par value of the share (for
xample, "5% preferred").
(1) Preferred shares may be subject to an express
stipulation in the Articles of Incorporation that they are
excluded from dividend rates. Exclusion from dividend rates
is not violative of any provision of the Corporation Code.
The directors may be authorized to vary the dividend rate of
preferred shares so long as such power is provided for in the
Articles of Incorporation.419
Republic Planters Bank v. Agana, Sr., et al., supra.
41BJbid.
419SEC OGC Opinion No. 06-35 dated September 7, 2006.
417
160
MMENTARIE
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.
b.
Preferred shares as to dividends may be (1) cumulative
or (2) no:1- cu�ulative and they may also be (3) participating or (4)
.
non-partic1patmg.
c.
In case the preferred shares are cumulative "if a dividend
is om�t�ed in any year, it must be made up in a lat�r year before
any d1v1dend may be paid on the common in the later year."420 The
declaration of dividends is still generally subject to the discretion of
the board but once dividends are declared, the cumulative preferred
shareholders are entitled to receive the dividends for the years when
no declaration was made. When dividends are declared cumulative
dividends must be paid regardless of the y�ar in which they are
earned.421
If the preferred shares are non-cumulative, there is no
d.
need to make up for undeclared dividends. No right survives as
to the undeclared dividends and the directors do not even have
discretion to declare those past dividends subsequently.422 The non­
_
cumulative nature of the preference given to the share serves to
rest�ict th� dividend source to earning of the particular year.423 As
Justice Ohver Wendell Holmes declared in one case, dividends that
were passed are forever gone insofar as non-cumulative preferred
stocks are concerned.424
Participating preferred shares are entitled to participate
e.
.
with �he common shares in excess distribution. "Typically, a
.
_
partic1patmg preferred is entitled to a fixed cumulative dividend·
the common is then entitled to receive a fixed amount· and exces�
distribution ov�r those two amounts in any year is shared by common
and prefe�red m some predetermined ratio."425 Nevertheless, it may
be also stipulated that the preferred shares shall receive a fixed
dividend and common and preferred shareholders shall share the
balance.
6.03. Convertible Shares. Preferred shares may be stipulated
as convertible into common shares. This feature of the preferred
share must be stipulated in the Articles of Incorporation.42 6
420Hamilton, supra, p. 301.
421Dohme v. Pacific Coast Co., 5 N.J. Super. 477 (1949).
422
Guttman v. Illinois Central Railroads, Co., 198 F 2d. 927 (1951).
423 Dohme v. Pacific Coast Co., supra.
Wabash Railway Co. v. Barclay, 280 U.S. 197 (1930).
425Hamilton, supra, p. 301.
426SEC Opinion dated May 19, 1992.
424
'11 11 UJ t i!:V J E
ftp RATI N
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'I'fi'LE I - ENERAL PR VI I N
D finitions and Classifications
N
1
161
1,
If th Articles of Incorporation do not reflect the
r ibilit £ature, it is necessary that the Articles of Incorporation
h , rp r tion be amended before the conversion is formalized.427
n ndment must not result in the watering of stock or the
of tock in excess of the authorized capital stock of the
b.
onversion is also subject to the appraisal right of
di nting tockholders because conversion varies the rights of the.
to l holders. '29
Conversion may be mandated by law. For example,
.
Rural
. . tion 8 of Republic Act No. 7353, otherwise known as the
ment
govern
of
stocks
red
Bank Act of 1992 provides that if prefer
may
same
the
olders
shareh
e
financial institutions are sold to privat
b
nverted into common stocks.
Par Value and No Par Value Shares. Shares may be
7.
value shares or no-par value shares. Par value shares are those
with fixed value stated in the Articles of Incorporation and the share
rtificate. Par value is an arbitrary amount assigned to the share
. nd is expressed in the certificate covering the share. No-par value
hares refer to shares without such arbitrary amount.
par
a.
The use of par value may sometimes result in confusion
on the part of the investors who might be misled because the par
value does not reflect the market value. Thus, no-par value shares
may be issued to avoid such confusion. Consistently, the records of
the legislature that enacted the Corporation Code reflect an intent
to provide for no-par value shares which provides "flexibility on the
part of the corporation to issue shares at different times presumably
under varying circumstances with values which realistically equate
with the situation under which they are issued."430
The view of the legislature that a provision in the Articles
b.
oflncorporation on no-par value shares provides flexibility on the part
of the corporation is consistent with the view in other jurisdictions.431
In other jurisdictions, no-par value shares are resorted to in order
to maintain flexibility on the price that may be hampered at times
2002.
427SEC OGC Opinion No. 10-18, April, 12, 2010; SEC Opinion dated May 10,
428SEC OGC Opinion No. 10-18, April, 12, 2010.
429SEC Opinion dated December 16, 1986; See Section 81, Corporation Code.
430III Records, p. 1699, December 10, 1979.
43'Jbid.
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MMEN'I'ARIE AND J Rl PR DE
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Definition and Classifications
N
because of the rule on watered stocks. Par value prevents issuance
of shares at a discount that may be desirable for business purposes
in some cases.432
c.
The issued value or stated value of the shares may be
higher than the par value. The Board of Directors is authorized
to fix the amount for which the shares shall be subscribed. This is
subject to the condition that the value fixed cannot be below par.
With respect to no-par value shares, the stated or issued value
cannot be less than five pesos (P5.00).
d.
The issued price or value of no-par value shares may be
fixed in the Articles of Incorporation, or by the board of directors
pursuant to the authority conferred upon it by the Articles of
Incorporation or the By-laws, or in the absence thereof, by the
stockholders representing at least a majority of the outstanding
capital at a meeting duly called for the purpose.433
e.
Other values that are commonly associated with shares of
stock are as follows: 434
(1) Market value - the price at which shares of capital
stock is bought and sold by investors in the market. It is directly
affected by all the factors that influence general economic
conditions, investor's expectations concerning the corporation,
and the corporation's earnings.
(2) Book value - the amount per share that each
shareholder would receive if the corporation were liquidated
without incurring any further expenses and if assets were sold
and liabilities liquidated at their recorded amounts.
m nt
f to •k, the corporation's properties, plant435and equip �
hnr
mg
result
The
.
value
aised
t/appr
curren
tat d at their
11 1 L b
.
the
of
tation
compu
the
in
ed
includ
be
will
1 luation increment
ht l valu .
Shares without par value may be converted to pa� value
.
n. In
s and vice-versa, by amending the Articles of Incorporatio
the
s,
share
value
par
to
s
share
e of conversion of no-par value
r
no-pa
the
of
value
book
latest
the
rsion value will be based on
436
hares.
s. The
7.01. Conditions for Issuance of No-Par Valu_e Share_ _
1ons:
cond1t
mg
follow
i suance of no-par value shares is subject to the
ed
deem
be
shall
1) hares of capital stock issued without par value
not
shall
s
share
such
o
folly paid and non-assessable and_ the hol�er �
_
ct th�reto, _(2)
b liable to the corporation or to its creditors m respe
cons1deration
_
The shares without par value may not be issued for a
(3) The entire
and
;
share
per
0)
l s than the value of five pesos (P5.0
value shares
onsideration received by the corporation for its no-par
distribution
for
ble
availa
be
not
hall be treated as capital and shall
437
as dividends.
e . While
7.02.Shares That Cannot be No-Par Value Shar �
S
s,
�ction 6 of
corporations are allowed to issue no-par value share
w1
be
t
�hout par
the RCCP provides that the following shares canno
or nonpubhc
are
value whether the corporations that issue them
public:
(1) Preferred shares;
(2) Shares in banks;
(3) Liquidation value - the amount a stockholder would
receive upon the dissolution and liquidation of the corporation.
(3) Shares in trust companies;
(4) Shares in insurance companies;
(4) Redemption value - the price per share at which
the corporation may redeem its share.
(5) Shares in preneed companies;
(6) Shares in public utilities;
(5) Issued (Stated) Value - the selling price of the
shares fixed by the Board or in the Articles of Incorporation.
f.
In connection with the book value of the shares, the SEC
opined that in order to determine the true value of the company's
432 Hermanson
and Edwards, p. 615.
Section 61, RCCP (previously Section 62, Corporation Code).
434
Hermanson and Edwards, pp. 614-615.
433
163
(7) Shares in building and loan associations; and
(8) Shares in other corporations authorized to obtain or
access funds from the public.
SEC Opinion dated February 15, 2001.
SEC Opinion dated March 18, 1992.
437
Section 6, RCCP.
435
436
164
COMMENTARIE AND JURl PRUDEN ,
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
N
Except for public utilities, the common characteristic of
a.
these corporations is the presence of trust relationship.438 Public
utilities were not included in the original bill (that later was approved
as the Corporation Code); however, the legislators later included
the same. It was observed that "an aspect to be considered really is
whether it is desirable considering the nature of the business of the
corporate entity that the amount of capital be more or less easily
identifiable."439
b. The list of shares that cannot be issued without par
value under the Corporation Code did not include shares in preneed
companies and the catchall provision on shares in other corporations
authorized to obtain or access funds from the public.
Voting and Non-Voting Shares. Shares may be
8.
voting or non-voting. In the absence of a provision in the Articles
of Incorporation, and consistent with the Doctrine of Equality of
Shares, the shares in a stock corporation are considered voting
shares. Under the present law, all shareholders regardless of the
classification, other than holders of preferred or redeemable shares
are entitled to vote. 440
The legislature justified the provisions allowing non­
a.
voting shares by observing that: " ... as a matter of policy, it �ould
_
be desirable that all persons who invest in corporations be allowed
to participate in the decisions of the corporation. And the most
meaningful way of participating is through the ballot. However, it
has been the experience that for various reasons among which is to
attract investors or to provide for a more, shall we say, realistic and
flexible management of a corporation under certain circumstances
certain shares must be denied voting rights." 441
b.
Section 6 of the RCCP (and also of the Corporation Code),
_
however, contams protective provisions for the benefit of non-voting
shar�s. For instance, non-voting shares are not totally deprived of
the �1ght to vote. The shareholders who hold non-voting shares still
retam some measure of effective control. 442 Thus, holders of non­
voting shares may still vote on the following matters:••3
111 BP Records, p. 1294, November 12, 1979.
439Jbid.
44°Castillo v. Balinghasay, et al., G.R. No. 150976, October 18, 2004.
441 111 BP Record, p. 1623, December 4, 1979.
442
See Heirs of Wilson P. Gamboa v. Teves, G.R. No. 176579, October 9, 2012.
443 Philippine Coconut Producers Federation, Inc. (COCOFED), et al. v.
Republic of the Philippines, G.R. Nos. 177857-58, September 17, 2009.
438
165
DE F THE PHILIPPINES
RP RATI N
'£HE REVl E
TITLE I - 1 NERAL PROVISIONS
D finitions and Classifications
(1)
Amendment of the articles of incorporation;
(2)
Adoption and amendment of by-laws;
(3) Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate property;
(4) Incurring,
indebtedness;
(5)
creating
or
increasing
bonded
Increase or decrease of authorized capital stock;
(6) Merger or consolidation of the corporation with
another corporation or other corporations;
(7) Investment of corporate funds in another corporation
or business in accordance with this Code; and
(8)
Dissolution of the corporation.
The immediately preceding enumeration involves
c.
fundamental changes not only in the corporate structure but also in
the rights of the shareholders that are therefore the concern of all
shareholders, including holders of non-voting shares. Hence, the law
deems it wise to allow holders of non-voting shares to vote on the
above-enumerated matters.
The issuance of non-voting shares is subject to the following
d.
conditions under Section 6 of the RCCP (and the Corporation Code):
(1) Only preferred or redeemable shares may be deprived of voting
rights; (2) There must always be shares with full voting rights; and
(3) The non-voting shares may still vote in the matters enumerated
above. Even if the .Articles oflncorporation provides for classification
of shares, there must always remain a certain class/es of shares
that are entitled to vote and be voted for as directors or officers if
they are not classified as preferred or redeemable shares. 444 Thus,
"common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid." 445
A mandatory feature in the Articles of Incorporation that
e.
the voting rights of a class of common shares shall be assigned to a
trustee who shall exercise all rights for all corporate actions may be
v. Balinghasay, et al., G.R. No. 150976, October 18, 2004.
Heirs of Wilson P. Gamboa v. Teves, G.R. No. 176579, June 28, 2011.
444Castillo
445
166
COMMENTARIE AND JURI PRUDEN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
nm R 'VI
N
construed as a virtual denial of voting rights. Hence, the mandatory
feature is in violation of Section 6 of the Corporation Code (now
RCCP) to the effect that no shares may be deprived of voting rights
except those classified and issued as preferred or redeemable
shares.446
9.
Nationalization Requirements. The shares may be
classified to facilitate the requirements of nationalization laws. For
instance, in a realty company where foreign equity is only up to
40%, the Articles of Incorporation may classify 60% of the shares
as Class A shares that can be acquired only hy Filipinos and 40%
of the shares as Class B shares that can be acquired by Foreigners
and Filipinos. In such case, there will be an assurance that excess
foreign participation will be prevented.
a.
However, the classification of shares into Class A and
Class B shares is not required under the Constitution or statute.
"Such arrangement is only a device internally adopted by Philippine
companies to facilitate monitoring of foreign equity in the company.
This practice is recognized, but not mandated, by the Corporation
Code which allows a corporation to classify its shares for the purpose
of insuring compliance with constitutional or legal requirements."447
10. Escrow Shares. Just like treasury shares, escrow shares
are not reflected in the Articles of Incorporation. Escrow shares
result by virtue of a transaction to place shares in escrow until the
happening of an event or fulfillment of a specified condition like
payment of the subscription price to the corporation or purchase
price to a shareholder. When the shares are held in escrow, they are
deemed to be subjected to an agreement by virtue of which the share
is deposited by the grantor or his agent with a third person to be
held by the latter until the performance of a certain condition or the
happening of an event. 448 Shares that are in escrow may be common
shares or preferred shares.
a.
An escrow deposit makes the depository a trustee under
an express trust. Title does not pass under such an agreement until
the performance of a certain condition and does not relate back to
the time the shares are deposited. 449
ED
RP RATI N
DE F 'l'HE PHILIPPINE
TI'I'LE I - · ENERAL PR VI ION
Definitions and Classifications
167
11. Reclassification. Shares that are originally common
may be reclassified into preferred shares. Reclassification
hares is a legitimate exercise of corporate powers under the
rp ration Code. 450
a.
A holder of shares that are reclassified can exercise the
ppraisal right under Section 81 of the Corporation Code (now
ction 80 of the RCCP). In other words, the shareholders retain
th ir right to dissent and demand payment of the fair value of their
hares. 451
b.
The Supreme Court distinguished reclassification from
· xchange of shares in Commissioner of Internal Revenue v. Court
of Appeals: 452 "Reclassification of shares does not always bring any
ubstantial alteration in the subscriber's proportional interest. But
the exchange of shares is different - there would be shifting of
the balance of stock features like priority in dividend declarations
or absence of voting rights. Yet, neither the reclassification nor
exchange of shares per se, yields realized income for tax purposes."
In the said case, certain shares were exchanged for preferred
shares but no change in the proportional interest of the shareholder
resulted. The Court went on to continue that: "There was no cash
flow. Both stocks had the same par value. Under the facts herein,
any difference in their market value would be immaterial at the
time of exchange because no income is yet realized - it was a mere
corporate paper transaction. It would be different, if the exchange
transaction resulted into a cash flow of wealth, in which case income
tax may be imposed."453
PROBLEMS:
1.
Q:
The proposed Articles oflncorporation ofX Corporation contains
the following provision: "The preferred shares shall be entitled
to dividends in such a rate as may be determined by the Board of
Directors whenever there are unrestricted retained earnings."
Is the provision valid?
Philippine Coconut Producers Federation, Inc. (COCOFED), et al. v.
Republic of the Philippines, G.R. Nos. 177857-58, September 17, 2009.
450
SEC Opinion dated January 15, 1997.
SEC SGC Opinion No. 09-10, May 19, 2009.
448
SEC Opinions dated January 25, 1995 and August 10, 1972.
449
SEC Opinion dated January 25, 1999 citing Fletcher, Section 5567.
446
447
4s1Ibid.
452
Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,
January 20, 1999.
453
Commissioner of Internal Revenue v. Court of Appeals, ibid.
168
2.
OMMENTAflIE AN J RI I RU EN E
THE REVISED ORPORATION CODE
OF THE PHILIPPINES
N
A:
The proVIs10n is not valid. A provision in the Articles of
Incorporation that gives the Board of Directors blanket authority
to fix the terms and conditions of preferred shares might result in
an abuse of such authority that might adversely affect the rights
of shares already issued. Thus, in order to protect the interest
of shareholders, the Securities and Exchange Commission does
not allow a provision giving such blanket authority. There must
be certain features, guidelines or standards to be followed in the
issuance of preferred shares that are spelled out in the Articles
of Incorporation. (SEC Opinions, May 24, 1994, January 17,
1983, August 9, 1982 and January 11, J 982)
Q:
The proposed Articles oflncorporation ofX Corporation contains
the following paragraph: "The preferred shares shall be non­
voting except in those cases where the law expressly allows
them to vote; that the said shares shall be redeemable within
one to ten years from date of issue as the Board may fix; that
they shall earn cumulative dividend of 6% to 16% per annum, as
the Board may determine." Is the paragraph vaiid?
A:
The pr_ovision is valid. A provision in the Articles oflncorporation
that gives the Board of Directors a blanket authority to fix the
terms and conditions of preferred shares might result in an
abuse of such authority that might adversely affect the rights
of shares already issued. In this case, there is no such blanket
authority. Instead, there are certain features, guidelines or
standards to be followed in the issuance of preferred shares that
are spelled out in the Articles of Incorporation. (SEC Opinions,
May 24, 1994, January 11, 1982 and January 17, 1983)
SEC. 7. Founders' Shares. - Founders' shares
may be given certain rights and privileges not enjoyed
by the owners of other stocks. Where the exclusive right
to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five
(5) years from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its exercise
will violate Commonwealth Act No. 108, otherwise
known as the "Anti-Dummy Law"; Republic Act No.
7042, otherwise known as the "Foreign Investments Act
of 1991; and other pertinent laws.
TrT.U: RI.NI
P RATI N
I- E E
I
IlLJPPlNE '
16
"founders." However, the special rights given to the
"(' u
r " may also be by reason of some business concerns. The
1
s ns of the lawmakers when this provision was deliberated upon
b th· Batasang Pambansa are clear from the following comments
1 fl
t d in the records of its proceedings: "... whether those persons
wh m the prerogative or right is reserved have, shall we say,
tributed substantially in the organization of the corporation or
h · th r also the business of the corporation is of a character that
l l'l. c ssary for a period of time that its control must be to a certain,
r up of individuals. Otherwise, it may not be able to obtain certain
n ssions, certain loans or certain business because these founder's
hares may not only serve to remunerate possibly promoters ... the
i tence of a certain group of individuals who have perhaps special
qualifications to manage a corporation by reason of which it is in
th ir competence only that certain other groups with which the
rporation may be dealing with and willing or agreeable to enter
into transactions with the corporation but only if the management
f the corporation is reserved to that certain group."454
2.
Approval of SEC. The special rights granted to founders'
hares are subject to the approval of the SEC. The approval of the
EC was inserted by the lawmakers to prevent abuse.455
3.
Nature of Five-Year Limit. The five-year limitation
imposed by Section 7 refers only to the exclusive right to vote and
be voted for in the election of directors, a right normally enjoyed by
holders of common shares, the class of shares which are supposed
to have complete voting rights. After the expiration of the five-year
period, founders' shares shall have equal rights with the holders of
common shares. 456
SEC. 8. Redeemable Shares. - Redeemable
shares may be issued by the corporation when
expressly provided in the articles of incorporation. They
are shares which may be purchased by the corporation
from the holders of such shares upon the expiration of a
fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and
upon such other terms and conditions stated in the
articles of incorporation and the certificate of stock
NOTES
1.
Rationale. Founders' shares are shares that are given
to those who helped organize the corporation. This may be a form
F
III BP Records, November 12, 1979.
III BP Records, ibid.
456
SEC Opinion, August 10, 1995.
454
455
J I PRU
THE REVI ED RP RATION
OF THE PHILIPPINES
MMENTi\RIE A
170
N
representing the shares, subject to rules and regulations
issued by the Commission
NOTES
1. Redeemable Shares. Redeemable shares are shares of
stocks issued by a corporation which said corporation can purchase
or take up from their hol ders as expressly pro vided for in the articles
of incorporation and certificates of stock representing said shares.457
Redeemable shares are usually preferred shares.458
a.
Section 8 of the RCCP provides formal requirements for
shar es. The obligation to redeem must be indicated in
the Articles of Incorporation and the Certificates of Stock.
red eemable
b. The issuance of redeemable shares may be likened to
temporary borrowings that enable a corporation to adjust its capital
structure to meet varying cond itions.459
2. Rationale. Altho ugh the investment of a shareholder is
usually locked-in and cannot be returned to the shareholder until
liquidation, the redemption feature of shares was envisaged to
effectively eliminate the market volatility risks on the side of the
share owners. There are clear advantages and benefits that inure to
the redeemable preferred share owners who, on one hand, prefer a
stable d ividend yield on their investments and, on the other hand,
want security from the uncertainty of market forces over which they
do not have control.4 60 The deliberations in the law-making body that
enacted the Corporation Code likewise state that the presence of
redeemable shares will also facilitate the raising of badly needed
capital by the corporation but at the same time would not deceive
creditors.461 Anyone dealing with a corporation is placed on notice
that he is dealing with a corporation, part of whose funds are
committed for the payment of shares with a redeemable character.462
457Section 2, SEC Rules Governing Redeemable and Treasury Shares (1982).
458Republic Planters Bank v. Agana, G.R. No. 51765, March 3, 1997, 269 SCRA 1.
459SEC SGC Opinion No. 07-03, March 7, 2007.
460Philippine Coconut Producers Federation, Inc. (COCOFED), et al. v.
Republic of the Philippines, G.R. Nos. 177857-58, September 17, 2009.
461III BP Record, pp. 1624-1625, December 4, 1979.
462Jbid.
171
D
RP t .'l'l
Tl1'L J - ,· ERAL l R
D finition and la sift ations
Required.
Unre tricted Retained Earnings Not
need of
the
out
with
e
mad
be
can
1�ption of redeemable shares
63
may come from
tricted retained earnings.4 In effect, payment
apital.
the amount of
a. Unrestricted retained earnings means
th
ut of � normal and
a . umulated profits and gains realized o
de uctmg therefrom
ontinuous operations of the company after � stock r other
capital
�
di tributions of stockholders and transfers to
oard of Director s
B
its
by
iated
r
p
o
appr
not
(1)
is:
h
a ounts, and whic
; (2) not covered by a
for corporate expansion projects or programs
oan agreement; a�d (�)
.
r striction for dividend declaration under a l
mstance� obtammg m
not requir ed to be retained under special circu
for a special reserve for
the corporatio•n such. as when there is a need
44
probable contmgencies. 6
d reg�rdless of
b. While redeemable shares may be redee��
, this is su?Ject to the
the existence of unrestricted retained earnings
r edempti�n, assets
such
r
afte
_
ondition that the corporation has,
sive of capit al �toe�.
�n its books to cover debts and liabilities inclu
here the cor�ora�i?n is
Redemption, therefore, may not be made :"
olvency or mabihty of
ms
e
caus
insolvent or if such redemption will
re.•ss
the corporation to meet its debts as they matu
ds of the Batasang
4. Mandatory Redemption. The recor
datory or com�ul�ory
Pambansa show the intent to allow man
t be made wi�hm a
redemption. This means that redemption mus
mable share is o�e
certain period. Compulsory or obli_gatory redee
em or repurchase its
that requires the issuing corporat10n to rede
on of th� �older there��
preferred shares at a fixed date or at the opti
n of their mvestment.
giving the shareholder the right to the retur
nst ublic policy.
a. Mandatory redemption is not agai
� ore rned
d atory r edeemable shar es is �
man
:,::
es
r
i
acqu
o
wh
y
od
b
Any
r chased out of capital.
pu
be
may
es
r
sha
able
eem
d
e
r
the
that
edeemable shares
b. All corporations, which have issued :
to set up and
red
reqm
with mandatory redemption features, are
I
463Sect·10n 5(5), SEC Rules Governing Redeemable and. Treasury Shares (1982).
464S t' 2 SEC Memorandum Circular No. 11, Series of 2008, G�·1dermes on
Dividend Declaration.
the Deter��:::01� of Retained Earnings Available for
.
465Republic Planters Bank v. Agana, Sr., supra
466SGC SEC Opinion No. 07-03, March 7, 2007.
467UI BP Record, pp. 1624-1625, December 4, 1979.
MMENTARIE
THEREVI
OF THE PHI
172
maintain a "Sinking Fund." The fund shall be deposited with
a trustee bank and is not supposed to be invested in risky or
speculative ventures. 468 The rules define a "Sinking Fund" as a fund
set up by the corporation where cash is gradually set aside in order
to accumulate the amount necessary to meet the redemption price of
redeemable shares at specified dates in the future. 469
5.
Effect of Redemption. Redemption is repurchase or
reacquisition of stock by a corporation which issued the stock in
exchange for property, whether or not the acquired share is cancelled,
retired or held in the treasury. Esse:r;itially, the corporation gets back
some of its stock, distributes cash or property to the shareholder in
payment of the stock and continues in business as before. 470
a.
When the redeemable shares are reacquired, the same
shall be considered retired and no longer issuable unless otherwise
provided for in the Articles of Incorporation.471 The redeemed shares
shall be considered deduction to equity if there is no provision in
the Articles of Incorporation that provides that the sa:tne shares are
not retired. In a sense, redemption is a repurchase of the shares for
cancellation.472
RP RATI
,
E l<' '1'11.u; IIILlJ ?
R VII N
17
475
ll � r th on tructive distribution of cash dividends. In those
treated as
be
will
Lh am unt received by the shareholder
a case
such
in
tion
11 r divid nd because the proceeds of redemp
but
capital
of
1 . additional wealth; they are not merely returns
th reon."76
r
,,1
(
,
7.
Other Limitations. Redeemable shares are also usually
I r £ rr d shares, which by their terms are redeemable at a fixed date,
at th option of either issuing corporation, or the stockholder, or
b th at a certain redemption price. Redemption by the corporation·
of ·t stock is, in a sense, a repurchase of it for cancellation. Both the
p and the Corporation Code allow redemption of shares even
if there are no unrestricted retained earnings on the books of the
rporation. This provision in effect qualifies the general rule that
th corporation cannot purchase its own shares except out of current
r tained earnings.477
PROBLEM:
Q: On September 15, 2013, XYZ Corporation issued to Paterno 800
preferred shares with the following terms:
b.
On the other hand, the redeemed shares will not be
considered retired and will become treasury shares if the Articles
of Incorporation expressly provides that once redeemed, the
redeemable shares shall be classified as treasury shares. 473
"The Preferred Shares shall have the following rights,
preferences, qualifications, and limitations, to wit:
c.
If the redeemable shares are considered retired, the
authorized capital stock of the corporation is in effect reduced by
the corresponding number of shares because the redeemed shares
can no longer be re-issued. The Articles of Incorporation must be
amended accordingly. 474
2.
These shares may be redeemed, by drawing of lots, at
any time after two (2) years from date of issue, at the option of the
Corporation; x x x."
6.
Tax Consequence. For tax purposes, there are cases
when redemption of shares (which were previously issued as stock
dividends) is considered a scheme to circumvent the tax consequence
of cash dividends. There are cases when redemption is used as a
SEC Rules Governing Redeemable and Treasury Shares (1992), supra.
SEC Rules Governing Redeemable and Treasury Shares (1992), supra; SGC
SEC Opinion No. 09-21, August 13, 2009.
47
°Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,
January 20, 1999.
471 Section 3(2), SEC Rules Governing Redeemable and Treasury Shares (1982).
472SEC SGC Opinion No. 06-35, September 7, 2006.
473SEC SGC Opinion No. 09-21, August 13, 2009.
474
SEC Opinion dated June 21, 1989.
468
469
'l.
The right to receive a quarterly dividend of One Per
Centum (1%), cumulative and participating;
Today, Paterno sues XYZ Corporation for specific performance,
for the payment of dividends on, and to compel the redemption of,
the preferred shares, under the terms and conditions provided in the
stock certificates. Will the suit proper? Explain.
A:
No. The suit will not prosper. The fact that Paterno holds preferred
shares does not give him the right to compel XYZ Corporation to
pay dividends. It is still within the business judgment of the Board
of Directors to declare dividends and the judgment of the Board is
always subject to the requirement that there must be unrestricted
Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576,
January 20, 1999.
476
Commissioner of Internal Revenue v. Court of Appeals, ibid.
477
Republic Planters Bank, Inc. v. Agana, G.R. No. 51765, March 3, 1997, 269
SCRA 1.
475
RP R.Nrr N
NE
MMENTAR
THEREVI
•P :
OF THE PHILIPPINES
retained earnings. Holders of preferred shares are not creditors and
dividends are not interest that is due.
Paterno cannot likewise compel the corporation to redeem the
shares because the express terms of the stipulation is to the effect that
the shares "may be redeemed" after two (2) years thereby indicating
that the redemption is not mandatory. Even if Paterno is holding
mandatory redeemable shares, it is subject to the requirement that
enough assets are left to cover debts and liabilities. In other words,
there should be no effect on creditors (2009 Bar).
SEC. 9. Treasury Shares. - Treasury shares are
shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing
corporation through purchase, redemption, donation,
or some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of
directors.
NOTES
1
(2) Treasury shares cannot participate in dividends
because dividends cannot be declared by the corporation to
itself. 484
(3) Treasury shares cannot be represented during
stockholder's meetings for otherwise equal distribution of
voting powers among stockholders will be effectively lost and
the directors will be able to perpetuate their control of the
corporation.486
(4) The amount of unrestricted retained earnings
equivalent to the cost of treasury shares being held shall be
restricted from being declared and issued as dividends.486 The
dividend restriction on retained earnings on account of treasury
shares being held shall be lifted only after the treasury shares
causing the restriction are reissued. 487
b.
Treasury shares are previously issued shares and they do
not revert to unissued shares once they become part of the properties
of the corporation. "This is so because the amount paid for the
acquisition of treasury shares does not represent a return of capital
to the stockholders but an investment out of retained earnings on
salable property known as treasury shares."481
482
483
1975, 66 SCRA 14, 24.
479
Supra.
48
0SEC-OGC Opinion No. 16-16 dated June 27, 2016.
48 1
SEC-OGC Opinion No. 16-16 dated June 27, 2016.
17
(1) They may be sold again as long as the corporation
holds them as treasury shares. 483
a.
Treasury shares are currently owned by the corporation
and not its shareholders. As an owner of the treasury shares, the
corporation may opt to retire, sell or distribute the treasury shares
as property dividends. 480
oflnternal Revenue v. Manning, G.R. No. L-28398, August 6,
HlL PI r E
tage · in the Life of Treasury Shares. The Revised
. p rati n ode deals with three stages in the life of treasury
hur . Th fir t stage is how treasury shares are created. It is
· id nt from Section 9 of the RCCP that treasury shares can be
nL d n t only through redemption but also through other modes
£ qui ition like purchase, donation and the like. In the second
t
, th rights enjoyed by the corporation as the holder of treasury
har are restricted. For instance, there is no voting right and right
· divid nds with respect to treasury shares. Finally, Section 9 of.
·h R CP governs the disposition of treasury shares. It is the first
Lim that the law provides in Section 9 that the discretion of the
Board of Directors to fix reasonable terms and conditions through
whi ·h treasury shares may cease to exist as such treasury shares. In
oth r words, the Board of Directors may provide for the reasonable
p:r:i for the transfer of treasury shares.
3.
Limitations. Treasury shares, not having been retired
by the corporation reacquiring it, are subject to the following rules: 482
1.
Treasury Shares. Under Section 9 of the Corporation
Code (now the RCCP), treasury shares are shares of stock that
have been issued and fully paid for, but subsequently reacquired
by the issuing corporation by purchase, redemption, and donation
or through some other lawful means. Treasury shares are issued
shares but being in the treasury, they do not have the status of
outstanding shares. 478 However, they still represent paid-for-interest
in the property of the corporation. 479
478Commissioner
D,
P·
Code.
Commissioner of Internal Revenue v. Manning, supra.
Commissioner of Internal Revenue v. Manning, ibid.; Section 9, Corporation
484
Commissioner oflnternal Revenue v. Manning, supra.
oflnternal Revenue v. Manning, ibid.; San Miguel Corporation v. Sandiganbayan, G.R. Nos. 104637-38 and 109797, September 14, 2000.
486
Section 4(1), SEC Rules Governing Redeemable and Treasury Shares (1982).
487 Section 4(2), ibid.
486Commissioner
176
MM • N'I'ARlE AN J
THE REVI ED ' R
OF THE PHILIPPINES
4.
Nature and Effects. A treasury share may be common
or preferred share. Treasury shares 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. 488 It may be held
indefinitely, resold or retired. While held in the company's treasury,
the stock earns no dividends and cannot vote in stockholders'
meetings. 489
a.
Treasury shares are different from the authorized but
unissued share. Treasury shares do not reduce the number of issued
shares or the amount of stated capital and their "sale" does not
increase the number of issued shares or amount of stated capital. 490
b.
The corporation has the option to retire the treasury
shares. Retirement of treasury shares shall be effected by decreasing
the capital stock of the corporation in accordance with Section 38 of
the Corporation Code (now Section 37 of the RCCP) for the purpose
of eliminating the treasury shares. 491
c.
Treasury shares may be declared as property dividend to
be issued out of the retained earnings previously used to support
their acquisition provided that the amount of the retained earnings
has not been subsequently impaired by losses. Any declaration and
issuance of treasury shares as property dividend shall be disclosed
and properly designated as property dividend in the books ·of the
corporation and its financial statements.492
d.
Inasmuch as treasury shares are not considered as
outstanding capital stock, the corporation is not entitled to any right
or privilege of a shareholder. The reason is that when a corporation
re-acquires its own shares, it does not become a subscriber thereof. 493
e.
The Board of Directors is empowered to re-issue the
treasury shares. The approval of the stockholders for the re-issuance
of treasury shares is not necessary but the same is subject to the
pre-emptive rights of shareholders. 494
4
88Philippine Coconut Producers Federation, Inc. (COCOFED), et al. v.
Republic of the Philippines, G.R. Nos. 177857-58, September 17, 2009.
4B9Jbid.
490
SEC Opinion dated June 22, 1995 citing 11 Fletcher, Chapter 58, Section
5088; See Annotations in Sections 14 and 15.
491
Section 4(2), SEC Rules Governing Redeemable and Treasury Shares (1982).
492
Section 5(3), ibid.
493SEC Opinion dated October 1, 1999.
494
SEC Opinion dated June 22, 1995; See annotations in Section 39.
TITLE II
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATIONS
1.
Incorporation. Incorporation means the performance
f conditions, acts, deeds, and writings by incorporators, and the
fficial acts, certification or records, which give the corporation its
xistence. 1 Incorporation is a mere grant of privilege from the State
and, in order to be entitled to such privilege, the requirements and
procedures for the grant thereof must be complied with. 2
a.
In the broader sense, "the creation of a corporation could
be taken to include all of the acts and doings from the enactment
of the general corporation law by the legislature, through the
promotion, underwriting, preparation and execution and filing of
the incorporation papers and obtaining the certificate or charter,
to the organization and the first meeting and election which set the
corporation in motion full-fledged."3
b.
Corporations are creatures of law, and can only come
into existence in the manner prescribed by law. General laws
authorizing the formation of corporations are general offers to any
persons who may bring themselves within their provisions; and if
conditions precedent are prescribed in the statute, or if certain acts
are required to be done, they are terms of the offer, and must be
complied with substantially before legal corporate existence can be
acquired.•
2.
Effect if not Incorporated. It is only through
incorporation and registration with Securities and Exchange
11 Fletcher 445.
2Care
Best International, Inc. v. Securities and Exchange Commission, G.R.
No. 215510, March 16, 2015 (Resolution).
31 Fletcher 445.
4Cagayan Fishing Development Co., Inc. v. Sandiko, G.R. No. 43350, December
23, 1937, 65 Phil. 223, 227.
177
17
MMENTARI I A
J RI PR DEN I
THE REVISED
RP RATION
DE
OF THE PHILIPPINES
N
R
Commission (SEC) that private corporations can acquire juridical
personality under the RCCP. Under Section 18 of the RCCP, the
life of the corporation will not commence if the SEC will not issue
a Certificate of Incorporation, even if the supposed incorporators
already signed and filed the Articles of Incorporation with the SEC.
a.
When there is no legal incorporation and organization
of a corporation, the association of a group of men for business or
other endeavors does not absorb the personality of the group and
merge it into the personality of another separate and independent
entity that is not given corporate life by the, mere formation of the
group. Such conglomeration of persons is incompetent to act as a
corporation, cannot create agents, or exercise by itself authority in
its behalf. 5
b.
However, as noted in the introduction of this work,
incorporation is not necessary for an association to function as a
group. In addition, incorporation is not necessary for liability to
attach under the rule on corporation by estoppel. 6
3.
Electronic Filing. Section 13 of the RCCP now expressly
provides that the Articles of Incorporation and applications for
amendments thereto may be filed with the SEC in the form of
electronic document in accordance with the rules and reglilations
to be promulgated by the SEC on electronic filing. Presently, the
SEC is already partly implementing a system of electronic filing
consistent with the provisions of the E-Commerce Law. Consistently,
Section 180 of the RCCP also provides that the SEC shall develop
and implement an electronic filing and monitoring system. The
SEC is also mandated under the same Section to promulgate rules
to facilitate and expedite, among other matters, corporate name
reservation and registration, incorporation, submission of reports,
notices, and documents required under the RCCP, and sharing of
pertinent information with other government agencies."
4.
Documentary Requirements for Incorporation.
The application together with supporting documents shall be filed
by the incorporators with the SEC. It is only upon the approval
and issuance of a certificate of incorporation by the SEC that the
5Recreation and Amusement Association of the Philippines v. The City of
Manila, et al., G.R. No. L-7922, February 22, 1957, citing Fay v. Noble, 7 Cushing
(Mass.) 188.
6See Section 20, RCCP.
N
179
·ation becom s a juridical person. The life of the
nized under the RCCP starts from the issuance of
· Incorporation by the SEC. The supporting papers
SEC for stock and non-stock corporations are as
a.
For Stock Corporation.
(1)
Name Verification Slip;
(2)
Articles oflncorporation and By-Laws;
(3)
Additional Requirements:
(i) Endorsements/clearances from other govern­
ment agencies, if applicable;
(ii) For corporations with foreign equity: Proof of
remittance by non-resident aliens and foreign corporate
subscribers, and of registration of their investment with
the Bangko Sentral ng Pilipinas (BSP) or an affidavit that
they will not register their investment with the BSP;
(iii) For corporations with more than 40% foreign
equity: application form required by the Foreign
Investments Act of 1991 (Republic Act No. 7042, as
amended);
(iv) For corporations with applications with the
Philippine Economic Zone Authority (PEZA), Subic Bay
Metropolitan Authority (SBMA), Clark Development
Corporation (CDC), Cagayan Economic Zone Authority
(CEZA) .or other economic zones: Certificate of Authority
or endorsement from said government agencies;
(v) Cash or such other additional requirements if
paid up capital is not cash. 8
1
See Http://www.sec.gov.ph/gsr/primary/primaryreg.html (Accessed on June 4,
014 - Ed.); the list presented by this author already takes into consideration the new
provisions of the RCCP.
8SEC Memorandum Circular No. 11, Series of 2016, August 5, 2016; Certificates
of bank deposits were previously required by the SEC. However, SEC Resolution
No. 331, Series of 2012 provides: "RESOLVED, To DISPENSE with the requirement
of submission of a Bank Certificate in the registration of stock corporations whose
ubscription is paid in cash." See Memorandum dated July 20, 2012 signed by the
ommission Secretary, C.A. Gerard M. Lukban.
OMMENTARI • A
JURI R E E N
THE REVISED ORPORATION CODE
OF THE PHILIPPINES
1 0
b.
For Non-Stock Corporations.9
(1)
Name verification slip;
(2)
Articles oflncorporation and By-Laws;
(3) List of members certified by the Corporate Secretary
unless the members are named in the Articles of Incorporation;
(4) List of names of contributors or donors and the
amounts contributed or donated, as certified by the treasurer.
There shall be no fixed amount-of contribution required but only
such reasonable amount as the incorporators and trustees may
deem sufficient to enable the corporation to start operation,
except in the case of foundations which must have a minimum
contribution of at least One Million Peso (Pl,000,000.00).10
(5)
Registration Data Sheet; and
(6)
Additional requirements:
(i) For Foundations: Notarized certificate of bank
deposit of the contribution of not less than Pl,000,000.00:
and statement of willingness to allow the SEC to conduct
an audit;
(ii) For religious corporations: Refer to Sections
109, 110, and 114 of the RCCP, and an affidavit of
affirmation or verification by the chief priest, rabbi,
minister or presiding elder;
(iii) For federations, certified list of member­
associations by Corporate Secretary/President;
(iv) For condominium corporation/association,
Master Deed with primary entry of the Register of Deeds
and certification that there is no other existing similar
condominium association within the condominium
project.
By-Laws. Section 18 of the RCCP states that the
c.
Articles of Incorporation and the By-laws shall be submitted upon
application for incorporation. However, it is also clear under Section
45 of the RCCP that By-Laws can also be filed with the SEC after
incorporation. The one-month period from receipt of notice of
R
1 1
rtificat of Incorporation within which to adopt
, 'I it nL B -Law pr viously provided for in Section 46 of the
Li n od no longer appears in the RCCP.
rganized Under Existing Laws. "Incorporation" is
used interchangeably with the term "organization."
t I n , d m stic corporations are often referred to as corporations
11 Ul • z-d and existing under Philippine laws. A corporation should
full and complete organization or incorporation and existence .
hll
ntity before it can enter into any kind of a contract or transact
bu iness. A corporation, until incorporated, has no being,
i s or faculties. Nor do those engaged in bringing it into
Ill
h ve any power to bind it by contract, unless so authorized
i
't 1- charter. Until organized or incorporated as authorized by
,h -harter there is no corporation, nor does it possess franchises
1 fa ulties for it or others to exercise, until it acquires a complete
j, 't nce. 11 However, "organization" in the sense that it is being
1
d under Section 21 of the RCCP is different from incorporation.
anization under Section 21 of the RCCP presupposes that the
! tJ p ration is already incorporated.
6.
Agreement to Incorporate. Natural persons and/
orporations may validly enter into an agreement to create
11 ·orporation. Such agreement, which may be a joint venture
Ii ' ment, may be reciprocal in nature where each party is not
ibligated to comply if the other is also not in a position to comply
i h his side of the obligation.12
SEC.
10. Number and Qualifications of
lncorporators. - Any person, partnership, association
or corporation, singly or jointly with others but not more
than fifteen (15) in number, may organize a corporation
for any lawful purpose or purposes: Provided, That
natural persons who are licensed to practice a
profession, and partnerships or associations organized
for the purpose of practicing a profession, shall not be
allowed to organize as a corporation unless otherwise
provided under special laws. lncorporators who are
natural persons must be of legal age.
1 Fletcher 445 citing Gent v. Manufacturers and Merchant's Mutual
Lnsurance Company, 107 Ill. 652.
12Fong v. Duenas, G.R. No. 185592, June 15, 2015; See also Aurbach v. Sanitary
Wares Manufacturing Corp., G.R. Nos. 75875, 75951 and 75975-5, December 15,
19 9.
11
9
Items 3, 4, and 5 need not be submitted if they are already provided in the
Articles of Incorporation.
10SEC Memorandum Circular No. 8, Series of 2006 dated June 22, 2006.
N
OMMENTARI • AND JURI PRUDEN E
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
182
Each incorporator of a stock corporation must own
or be a subscriber to at least one (1) share of the capital
stock.
A corporation with a single stockholder is
considered a One Person Corporation as described in
Title XIII, Chapter Ill of this Code.
NOTES
1.
Incorporators. Incorporators are' those stockholders or
members mentioned in the Articles of Incorporation as originally
forming and composing the corporation and who are signatories
thereof. 13 The basic qualifications of incorporators under Section 10
may be enumerated as follows:
(1)
entity;
(2)
The incorporator must be a natural or juridical
There must not be more than 15 incorporators;
(3) If the incorporator is a natural person, he or she
must be of legal age; and
(4) Each incorporator of a stock corporation must own
or be a subscriber to at least one share of the capital stock.
a.
It is now allowed for a corporation to have only on�
incorporator if the corporation is a One Person Corporation (OPC).14
Section 10 of the RCCP provides that any person, partnership,
association or corporation can be an incorporator "singly" or "jointly
with others." Hence, there can be one incorporator only for an OPC
but at least two incorporators but not more than fifteen (15) are
required for a corporation that is not an OPC. 15
2.
Persons who can be Incorporators. lncorporators
may either be natural persons or corporations, partnerships and
associations. 16 Section 10 of the RCCP eliminated the rule under
the Corporation Code that incorporators must be natural persons.
13Section 5, RCCP.
14SEC Memorandum Circular No. 16, Series of 2019.
/bid.
IT
1z ·rr
N
1
N
R a on for the New Rule. The old rule that set five (5) as
um numb r ofincorporators and limited the incorporators
11 1Lural p rsons was deemed to be a "stumbling block for many
t incorporate." "This has made declarations of trust and
L
hareholders indispensable to doing business in the country.
name individuals as incorporators, with no real interest in
o p ration, just to comply with the legal requirement. For local
,. ._.,.,.....,..,_, owners, naming the entire household as incorporators­
k to driver-is not unusual because of the requirement that.
, - hould have five incorporators." 17 It was further explained that
n all other jurisdictions, anyone who wants to avail of the benefits
f
rporate entity to be able to do business even if he has no
tl h r incorporators, can go ahead and incorporate just like a single
:rietorship but with the protection" of the general corporation
(the RCCP, in our case). 18
rh·
1
b.
Meaning of Associations. Noticeably, the juridical
tities specified in Section 10 of the RCCP include associations
h h seem to convey the idea that they are entities that ar�
dif£ rent from corporations. The sponsor of the bill clarified that
1
1 sociations" refer to non-profit organizations being organized.
11 wever, it follows that these associations/organizations already
l quired legal personality. Non-profit organizations can be non1L ck corporations incorporated under the RCCP. In addition,
duly registered homeowners , associations likewise have juridical
p rsonality.
c.
Practice of Profession. Section 10 of the RCCP
pressly provides that natural persons who are licensed to practice
profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to organize
a a corporation unless otherwise provided under special laws.
d.
Rural Banks. It should be noted that an exception to the
old rule under the Corporation Code is Section 4 of Republic Act
No. 7353 (as amended Republic Act No. 10574), otherwise known as
the Rural Banks Act of 1992, which provides that upon consultation
with the rural banks in the area, duly established cooperatives and
orporations primarily organized to hold equities in rural banks may
organize a rural bank. Under the RCCP, corporations can now be
incorporators not only of rural banks but also of other types of banks,
like commercial banks and universal banks, provided that they are
Journal of the Senate, December 13, 2016, p. 724.
Journal of the Senate, July 30, 2018, p. 156.
15
17
16Section 10, RCCP.
18
1 4
allowed to do so by the Monetary Board of the Bangko Sentral ng
Pilipinas. There is no prohibition in the New Central Bank Act and
the General Banking Law for corporations to be incorporators.
e.
Local Government Units. It should also be recalled that
under the Corporation Code, local government units may organize
corporations but subject to the limitations imposed under the Local
Government Code of 199119 and the Code of Conduct and Ethical
Standards for Public Officials and Employees. 20 Hence, it is believed
that municipal corporations fall under the term "corporation" under
Section 10 of the RCCP. It is believed that corporations include both
private and public corporations.
f.
Nominees. Under the previous rule that disallowed
juridical persons to be incorporators, corporations resorted to
nominees in order to comply with the requirement that there
should be a minimum of five (5) incorporators and five (5) original
directors of a corporation. 21 With the use of nominees, the problem
of dealing with a corporation was obviated because the personality
of the corporation was transposed to that (single) individuaVs (the
nominee/s) who represent/s the interest of the corporation. 22 Hence,
corporations who wished to incorporate another entity were legally
allowed to designate nominees who are natural persons j;o hold
share/s for them (the trustor-corporations) to qualify the natural
persons as directors or incorporators. This arrangement involves
both a trust agreement for the shares and agency. Under Section 10
of the RCCP, it is no longer necessary for a corporation to resort to
designating nominees to incorporate another corporation. However,
there is nothing in the RCCP that prohibits the appointment of
nominees especially if the corporation wants the Board of Directors
to be a group of professionals who will manage the corporation.
To lessen the number of persons who may be involved in the
incorporation process, these persons who are the original directors
may also be the incorporators together with the corporation.
2004.
l 5
MMENTARl• AN J RI PR D •N E N
DE
THE REV! ED
RP RATI N
OF THE PHILIPPINES
19
Republic Act No. 7160.
20Republic Act No. 6713; SEC Opinion No. 1, Series of 2004 dated January 7,
21Ibid.; SEC Opinions dated July 11, 1989 and January 18, 1993; It its most
common signification, the term "nominee" refers to one who is designated to act
for another usually in a limited way (Philippine Coconut Producers Federation v.
Republic, 663 SCRA 514).
22III BP Records, p. 1715, December 11, 1979.
IJ.
Approval to Act as lncorporator. If an_incorporator
rp ration, this constitutes investment by th� _mc�rpora�or­
l 1 •p r tion in another corporation. Hence, the dec1s10n 1s subJect
tion 41 of the RCCP, which requires the approval of both th_e
11 rd of Directors or Trustees and the stockholders or members if
!.h inv tment is for any purpose other than the primary purpose. 23
Ir th investment is consistent with the primary purpose of the
: p r tion, the approval by the Board of Directors or Trustees
i all that is required. However, it is noted that Section 5 of SEC·
M-morandum Circular No. 16, Series of 2019 (dated 30 July 209)
,, quires stockholders/member's approval for corp�rate _investments
s incorporators in new corporations without quahficat10n.
3.
Number of Incorporators and Shares. The
r quirement is that the incorporators must not be more than 15. In
I\ tock corporation, the incorporators must own at least one share.
a.
It is not correct to assume that the incorporators are
always the only original subscribers. They may be so but not in all
a es. While there can be only one incorporator under the new law,
th RCCP does not limit the number of original subscribers. Hence,
Lh oretically, there can be one incorporator but the rest of the shares
may be subscribed originally by other persons.
b.
The intention of the legislature when the requirement of
wnership of at least one share by incorporators was imposed u�der
_
the Corporation Code (and adopted under the RCCP) was to md1ca�e
who really represents the corporation at its inception. T�e pubhc
used to be misled under the old law (prior to the Corporation Code)
as to who had authority to act because there were incorporators who
were not stockholders. 24 It was observed:
"... The reason for this is that under the present law or under present
practices some kind of confusion always arises when you have an incorporator
who is not even a shareholder and then after that you have another set of
directors because the directors on the one hand must be shareholders. So,
sometimes you have one set of incorporators, another set of directors, and
people who deal with the corporation at that early stage are confuse� as to
what the real situation is, who are the persons who are really authorized to
act in behalf of the corporation ... "25
23Ratification by stockholders representing 2/3 of the outstanding capital
RCCP.
stock or at least 2/3 of the members is required under Section 41 of the
24III BP Records, at p. 1643, December 15, 1979.
25Supra.
186
OMMENTARIE AND JURI PRUDEN ,
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
N
·
4_.
Capa_city. An incorporator must have capacity to act.
26
ity
t
apa
�
�
� act i� �he power to do acts with legal effect. Minority,
i�s:i�ity or �m?ecihty, the state of being a deaf-mute, prodigality, and
27
�iVIl m�erdict10n are restrictions on capacity to act. Accordingly,
mcapacitated persons cannot be incorporators.
a.
Section 10 of the RCCP is specific that incorporators who
are natural persons must be of legal age. Hence, minors - those
below 18 years28 - cannot be incorporators.
5.
Gender. Married
women can be incorporators. A special
_
aw
expressly
provides
that
women have e'qual rights to act as
!
mcorporator.29 !�is is in line with the rule that "women of legal age,
�egardless of civil status, shall have the capacity to act and enter
mto contracts which shall in every respect be equal to that of men
under similar circumstances."30
Philippine Residence Not Required. Non-residents
6.
ay
be
incorporators.
There is no residency requirement for
�
mcorporators under the RCCP. Unlike the Corporation Code the
RC�P no longer requires that the majority of the incorporato;s be
res�dents of the Philippines. It should be noted that a person is a
reside�t. u�der t�e Corporation Code if he is physically present in
the Phihppmes with an intention to remain present therein.3 1
No Citizenship Requirement. There is no requi��ment
7.
that the majority of the incorporators must be citizens of the
Phil�ppines. �he rule
_ . however is subject to the requirements of
pertment nat10nahzat10n laws. For, instance, if the law requires
�11 stockholders to be Filipino citizens, then it follows that all
mcorporators must also be citizens.
8. Accomplished Fact. An incorporator remains to be
an incorporator even if he will later on cease to be a corporator or
�hareholder. Thus, one will still be an incorporator even if he/she/
�t already transferred all his/her/its shares to another. Being an
mcorporator is an accomplished fact.32
26Article 37, New Civil Code.
2 7Articles
38 and 39, New Civil Code.
28Article 234, Family Code (Executive Order No. 209 as amended by Republic
Act No. 6809).
29
5(3), Republic Act No. 7192, Women in Development and Nation­
. . Section
Bmldrng
Act.
30/bid
31 EC Opinion, J nuary 17, 1985. Note that the SEC now requires the
�
. �
subm1ss10n of proof of residency such as the Alien Certificate of Registration.
32SEC Opinion, June 4, 1987.
'l'l'I'W ll - l
IZATI
RP Tl . '1'1 N - D
F PRIVATE
RP RAT!
SEC. 11. Corporate Term. - A corporation
hall have perpetual existence unless its articles of
ncorporation provides otherwise.
Corporations with certificates of incorporation
Issued prior to the effectivity of this Code, and which
continue to exist, shall have perpetual existence,
unless the corporation, upon a vote of its stockholders
representing a majority of its outstanding capital stock,
notifies the Commission that it elects to retain its specific
corporate term pursuant to its articles of incorporation:
Provided, That any change in the corporate term under
this section is without prejudice to the appraisal right
of dissenting stockholders in accordance with the
provisions of this Code.
A corporate term for a specific period may be
extended or shortened by amending the articles of
incorporation: Provided, That no extension may be
made earlier than three (3) years prior to the original or
subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined
by the Commission: Provided, further, That such
extension of the corporate term shall take effect only
on the day following the original or subsequent expiry
date(s).
A corporation whose term has expired may apply
for a revival of its corporate existence, together with
all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and
liabilities existing prior to its revival. Upon approval
by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence
shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.
No application for revival of certificate of
incorporation of banks, banking and quasi-banking
institutions, preneed, insurance and trust companies,
non-stock savings and loan associations (NSSLAs),
pawnshops, corporations engaged in money service
1 7
MMENTAR •
J RI PRU EN • N
THE REV! ED RP RA'rI N DE
OF THE PHILIPPINES
1
business, and other financial intermediaries shall be
approved by the commission unless accompanied
by a favorable recommendation of the appropriate
government agency.
NOTES
1.
Basic Rules. Section 11 makes it clear that: (a) As a
general rule, the corporate term is perpetual; (b) The Articles of
Incorporation of new corporations can specify a fixed term - the
incorporators can choose not to have a perpetual term and specify
a fixed term in the Articles of Incorporation; (c) Corporations
duly incorporated prior to the effective date of the RCCP and still
existing shall also automatically have perpetual term; (d) If existing
corporations do not want a perpetual term, they must notify the SEC
that they want to maintain their fixed term; (e) A corporation with a
fixed term may be dissolved by shortening its term; (t) Corporations
with fixed terms may extend their term; and (g) No extension can be
made earlier than three (3) years prior to the original or subsequent
expiry date. 33
a.
Section 18 of the RCCP provides that a private corporation
organized under the RCCP commences its corporate existence and
juridical personality from the date the SEC issues the certificate of
incorporation under its official seal and thereupon the incorporators,
stockholders/members and their successors shall constitute a body
corporate under the name stated in the Articles of Incorporation for
the period of time mentioned therein, unless said period is extended
or the corporation is sooner dissolved in accordance with law. It
was further clarified that the first day of the term is the date of
incorporation, stated in the Certificate of Incorporation, since it
is the day the existence of a corporation commences pursuant to
Section 19 of the Corporation Code (now Section 18 of the RCCP)
and Section 31, Chapter VIII, Book 1 of the Administrative Code
of 1987."34 If the corporation has a fixed term, the last day of the
corporate term is the day before the corresponding numbered day of
the same month of incorporation in the last year of the existence of
the corporation. 35
33
The previous rule under the Corporation Code is that no extension of the
term can be made earlier than five years prior to the expiration of the term.
34 SEC Memorandum Circular No. 21, Series of 2014, dated November 28, 2014.
35
Ibid., citing Commissioner of Internal Revenue v. Primetown Property
Group, Inc., G.R. No. 162155, August 28, 2007.
'J'Il' E tr- l
l
IZ TI N F PRIVATE
1
Rati o nale for Perpetual Term.
It was explained
:: n
th t the Philippines "is one of the few countries that
lim"t to th corporate term. Those who actually go through
h
•duous task of incorporating, run the risk of having their
,, 1 p r- tions dissolved simply by forgetting to renew their corporate
r .' ao Limited term "leads to loss of income and livelihood for
mili
and loss of legacy and dreams for entrepreneurs and
( pl y ' s."37 The perpetual corporate term as the defaul� opt�?n
) to address this problem. 38 It also allows corporat10ns to
d v lop long-term plans and to look into more sustainable and far­
a hing strategies for more economic growth."39
a.
However, corporations may opt to specify a term limit
their Articles of Incorporation to give their stockholders an
pportunity to assess the future of the corporat�on to determine at
hat point to wind up the affairs of the corporation or to extend the
lif of the corporation. 40
b.
It is evident from the change in the rule that the State,
through Congress, is free to provide a term limit or :o provide a
p rpetual term for corporations through Congress as it ma� �eem
n. cessary. The State is naturally interested that �he privilege
.
f juridical persons be enjoyed only under the cond1tions and not
_
b yond the period that it sees fit to grant. The �tate 1s concerned
that the grant is not abused through fraud and 1t should not be to
the detriment of other parties. For this reason, it has been ruled
that the previous limitation of corporate existence to 3: defin�te term
under the Corporation Code was an exercise of control m the mterest
of the public.41 It was explained that:
"The State and its officers also have an obvious interest in the term of
life of associations since the conferment of a juridical capacity upon them
during such period is a privilege that is derived �rorr: �tatu_te. It is obvious
that no agreement between associates can result m givmg rise to a new and
distinct personality, possessing independent rights and obligatio� s, unless
the law itself shall decree such result. And the State is naturally mterested
that this privilege be enjoyed only under the conditions and not beyond
36Journal of the Senate, December 13, 2016, p. 724.
37
Explanatory Note to S.B. 992.
38
Journal of the Senate, December 13, 2016, p. 724.
Ibid.
39
46 III
Record, p. 1717, December 11, 1979.
41Benguet Consolidated Mining Co. v. Mariano Pineda, G.R. No. �-7231,
_
March 28, 1956, 98 Phil. 711, 719, citing Smith v. Eastwood Wire Manufacturmg Co.,
43 Atl. 568.
MMEN'I'ARH; AND JURI PR
THE REVl ED
RP RAT! N
OF THE PHILIPPINES
190
_ �he period that it sees fit to grant; and, particularly, that it be not abused
m fraud and to the detriment of other parties; and for this reason, it has
been ruled that 'limitation (of corporate existence) to a definite period is an
exercise of control in the interest of the public' (Smith vs. Eastwood Wire
Manufacturing Co., 43 Atl. 568)."42
3.
Perpetual Term of Existing Corporation. Corpora­
tions with certificates of incorporation issued prior to the effectivity
of the RCCP, and which continue to exist, shall have perpetual exis­
tence.43
a.
If an existing corporation opts ,to have a fixed term,
stockholders representing a majority of its outstanding capital stock
must vote to retain its specific term and must notify the SEC that
it elects to retain its specific corporate term pursuant to its Articles
of Incorporation. 44 In this event, the dissenting stockholders are
entitled to appraisal right. On the other hand, existing corporations
need not do anything if they want to have perpetual term because
they will automatically be considered to have a perpetual term
by virtue of the express wordings of Section 11 of the RCCP,
notwithstanding the fixed term indicated in their existing Articles of
Incorporation. This is consistent with the intent of Congress to have
perpetual corporate term as the default option for corporations.
4.
Option to have a Fixed Term. Even under the RCCP'
new corporations may opt to have a fixed term by indicating such term
in their Articles of Incorporation. The choice to have a fixed term
is now therefore given to the corporation. When a new corporation
indicates a fixed corporate term in its Articles of Incorporation, or
when an existing corporation opts to retain its existing fixed term
with notice to the SEC, the specific period may still be extended or
shortened by amending the Articles of Incorporation.45
4.01. Arbitrary Limit if the Term is Fixed. If a specified
term is fixed in the Articles of Incorporation, the term so fixed serves
as an arbitrary limit to the corporate life. Unless its existence is
renewed or extended by proper proceedings, it dies forever. At the
day set, the corporation falls dead automatically by the wayside, its
affairs must be wound up and a new corporation would then have to
be created if those concerned wish to continue the business.46
Benguet Consolidated Mining Co. v. Mariano Pineda, supra.
42
43Sec. 11, RCCP.
44
Sec. 11, RCCP.
45Sec. 11, RCCP.
46
Ballentine, cited in Salonga, p. 93.
U'l'LE II - 1
RP RA'rI
R ANIZ TI N ; PRIVA'TE
191
11.
Th
upr me Court explained in one case47 that the
11 111· n a ·orporation's right to exist ceases, its corporate powers
'" 11 !'mi.nat d just as powers of a natural person to take part in
I t 111undan affairs cease to exist upon his death. There is nothing
1 1 IL h 1L t conduct, as it were, the settlement of the estate of the
I '( H d juridical person. If the corporate life as stated in the
, Ii •l
f Incorporation expired, without a valid extension having
n ff ted, the corporation is deemed dissolved by such expiration.
h ut need of further action on the part of the corporation or the
I, lL
I.(
Extension of Term. If the corporation has a fixed term,
nsion of term must be made within the time and in the
1n 1 n r prescribed by the RCCP. Otherwise, the term will expire
ind th corporation's personality will cease. "Since the privilege
t nsion is purely statutory, all of the statutory conditions
iJ ·, dent must be complied with in order that the extension may be
( t'C tuated."49 The pertinent provision on extension and shortening
1r Lh corporate term is Section 36 of the RCCP.
a.
For instance, extension cannot be sought after the
piration of the term. There is no more term to extend in such a case.
'l'h conditions must be complied with, and the steps necessary to
f£ t the extension must be taken, during the life of the corporation,
nnd before the expiration of the term of existence as originally fixed
I its charter or the general law, since, as a rule, the corporation
es ipso facto. 50
<
b.
No extension of the corporate term for a specific period
may be made earlier than three (3) years prior to the original or
ubsequent expiry date(s) unless there are justifiable reasons for
an earlier extension as may be determined by the SEC. 51 Thus, if
47Alhambra Cigar and Cigarette Mfg. Co., Inc. v. Securities and Exchange
ommission, G.R. No. L- 23606, July 29, 1968, 24 SCRA 269, 273 .
48
Majority Stockholders of Ruby Industrial Corporation v. Lim, G.R. Nos.
165887 and 165929, June 6, 2011; See SEC-OGC Opinion No. 16- 27 dated November
23, 2016.
49
Alhambra Cigar and Cigarette Manufacturing Company, Inc. v. SEC, supra
ut p. 274.
50Ibid.
51
Sec. 11, RCCP; The previous rule under the Corporation Code provided that
extension of corporate term shall not be made earlier than five (5) years before the
xpiration of the original term.
192
MM • NTARI ◄ AN JURI PRUDE
E
DE
THE REVISED ORP RAU N
OF THE PHILIPPINES
the term of a corporation is 50 years, an application for extension
of the term cannot be filed on the 40th year of the life of the said
corporation.
c.
However, whether a corporation has a perpetual or a
fixed term, it cannot be required by the SEC to file an application for
the annual renewal of the certificate of registration of a corporation.
Renewal of the certificate of registration is not consistent with
Section 11 of the RCCP that provides for a perpetual term; it is
also not consistent with the fixed term stated in the Articles of
Incorporation.52
5.01. Doctrine of Relations. The filing and recording of a
certificate of extension after the expiration of the fixed corporate
term cannot relate back to the date of the passage of the resolution
of the stockholders to extend the life of the corporation. However, the
doctrine of relation or relating back doctrine applies if the failure to
file the application for extension within the term of the corporation
is due to the neglect of the (SEC) officer with whom the certificate is
required to be filed or to a wrongful refusal on his part to receive it. 53
a.
The doctrine of relation or relating back doctrine was
applied when the corporation's failure to file the application for
extension was due to the "EDSA Revolution" that resulted in the
closure of the Securities and Exchange Commission."54 The SEC
clarified, however, that the doctrine does not apply if there was fault
or negligence on the part of the corporation.
6.
Revival of Corporate Existence. A remedy is now
provided for under the RCCP for corporations whose terms already
expired. The RCCP provides for the remedy of application of revival
of corporate existence. A corporation whose term has expired may
apply for a revival of its corporate existence, together with all the
rights and privileges under· its certificate of incorporation and
subject to all of its duties, debts and liabilities existing prior to its
revival. Upon approval by the SEC, the corporation shall be deem�d
revived and a certificate of revival of corporate existence shall be
SEC Opinion dated July 29, 1994.
Alhambra Cigar and Cigarette Mfg. Co., Inc. v. Securities and Exchange
Commission, supra; See also SEC Opinion dated May 11, 2000.
54
SEC Opinion dated May 14, 1987 and July 7, 1987.
62
53
193
N
p rp tual
th rwise. 65
xistence, unless its application for
Th implementing regulation issued by the SEC is SEC
TT\ r dum Circular No. 23, Series of 2019 dated November 21,
ntitl d "Guidelines on the Revival of Expired Corporations."
b.
However, no application for revival of certificate of
rp ration of banks, banking and quasi-banking institutions,
d, insurance and trust companies, nonstock savings and loan•
o iations, pawnshops, corporations engaged in money service
and other financial intermediaries shall be approved by
'unless accompanied by a favorable recommendation of the
·opriate government agency. 66
P.R BLEM:
A corporation was organized for a term of 50 years, expiring in
December 2006. Outline the steps to be taken in order that it may
extend its corporate life.
The following steps should be taken for the extension of the corporate
term:
The articles of incorporation shall be amended stating the term
a.
vote of
tension and the amendment must be approved by: (1) the majority
at
nting
represe
olders
stockh
the
(2)
and
s
th board of directors or trustee
rs,
membe
the
of
2/3
least
at
by
or
stock
capital
ding
1 ast 2/3 of the outstan
now
in case of a non-stock corporation. (See Section 16, Corporation Code,
ction 15, RCCP.)
b.
The approved amendment of the articles of incorporation shall
b submitted to the Securities and Exchange Commission for approval
not earlier than five (5) years (under Section 11, Corporation Code) and
now three (3) years under Section 11 of the RCCP) prior to the original or
subsequent expiry date.
c.
The amendment is deemed approved upon the inaction of the
EC for 6 months after submission due not the fault of the corporation
r upon its approval. (See Section 16, Corporation Code, now Section 15,
RCCP.) The effectivity of the amendment relates back to the date of its
filing with the SEC. (1968 Bar) 57
Sec. 11, RCCP.
Sec. 11, RCCP.
67Note, however, that under the RCCP, the term of existing corporations would
the corporation.
be considered perpetual without need of action on the part of
65
56
194
OMMEN'fARIE AND JURI PRUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
'l'rl' E Il - J
llP RAT! NA
Il. ANIZA'I'l
F PRIVATE
RP RATI N
rporat action from surplus to stated capital. 62 E�en
hares are considered part of the Stated �apital
definition because Stated Capital includes all issued
SEC. 12. Minimum Capital Stock Not Required of
Stock Corporations. - Stock corporations shall not be
required to have a minimum capital stock, except as
otherwise specifically provided by special law.
NOTES
1. Minimum Authorized Capital. Section 12 provides
that there is no minimum authorized capital under the RCCP.
a.
Important terms relating to this topic as well as their
definitions, are as follows:
Authorized Capital Stock is the amount fixed in
the articles of incorporation to be subscribed and paid by the
stockholders of the corporation.
(1)
(2) Subscribed Capital is that portion of the authorized
capital stock that is covered by subscription agreements
whether fully paid or not.
(3) Paid Up Capital is the portion of the authorized
capital that is subscribed and paid; 58
(4) Paid-In Capital is the amount of outstanding capital
stock and additional paid-in capital (APIC) or premium paid
over the par value of the shares.59 APIC is any additional
contribution by shareholders over the par value of shares. 60
(4) Outstanding Capital Stock refers to the total shares
of stock issued to subscribers or stockholders, whether or not
fully or partially paid except treasury shares so long as there is
a binding subscription agreement. 61
(5) Capital includes properties and assets of the
corporation that are used for its business or operation.
(6) Stated Capital is the sum of the par value of all
issued par value shares, the entire amount received for no-p�r
value shares and any amount transferred by a stock dividend
58
MSCI-Nacusip Local Cha ter v. National Wages and
Productivity
Commission, G.R. No. 125198, Marchp 3, 1997.
59
Section 2, SEC Memorandum Circular No. 11, Series of 2008.
60SEC OGC O inion No. 19-40
p
dated September 16, 2019.
61Section 2, SEC
Memorandum Circular No. 11, Series of 2008.
9
Paid-up Capital. Special laws �ay also impose
n' i 1 apitalization requirements. The Securitie� and Ex�hange
J nlmi ion prescribes the following minimum paid-up capital for
d if£ r. nt businesses based on existing special laws:63
JJroak Bulk Agent
fl9 250,000.00
Cntgo Consolidator
,- 400,000.00
!<'inancing Company
Metro Manila and other 1st class cities
fl9 10,000,000.00
Other classes of cities
fl9 5,000,000.00
Municipalities
fl9 2,500,000.00
Freight Forwarders
Domestic
International
Health Maintenance Organization
fl9 250,000.00
fl9 2,000,000.00
fl9 10,000,000.00
Insurance
Insurance Broker
fl9 20,000,000.00
Reinsurance Broker
fl9 20,000,000.00
Insurance Broker and Reinsurance Broker
fl9 50,000,000.00
Life Insurance Company
,- 1,ooo,ooo,000.00
Non-Life Insurance Company
,- 1,ooo,ooo,000.00
Reinsurance Company
,- 2,ooo,ooo,000.00
Investment Adviser/Manager
19 10,000,000.00
Investment Company
19 50,000,000.00
Investment House
19 300,000,000.00
62Black's Law Dictionary, 6th Ed., p. 1408.
.
63h tt ://www.sec.gov. ph/wp-con ten t/u loads/2015/0 I/Minimum-Paid-U
p
p
p­
Capital_Final1.pdf (Last accessed on December 27, 2019).
196
'l'l'l'LE Il
IZ TI N
MMENTARIE AN J RI PRUDEN E N
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
Lending Investor
P 1,000,000.00
Local Manpower Contracting and
Subcontracting
P 3,000,000.00
Mining
P 2,500,000.00
*Required Authorized Capital Stock
(P10,000,000.00)
Non-Vessel Operating Common Carrier
Pawnshop
P 4,000,000.00
P 100,000.00
Pre-Need Plan Issuer
P 100,000,000.00
Pre-Need Plan Agent
P 5,000,000.00
Real Estate Investment Trust (REIT)
Recruitment - Domestic - Corporation
- Partnership
Recruitment for Overseas Employment
Retail Trade with Foreign Equity
P 300,000,000.00
P 500,000.00
P 200,000.00
P 2,000,000.00
US$ 2,500,000.00
School (for stock corporations)
Pre-elementary/Elementary Education
P 1,000,000.00
Elementary and Secondary Education
P 2,500,000.00
Elementary, Secondary, Tertiary
P 5,000,000.00
Post/Graduate Education
Security Agency
Securities Broker/Dealer
P 500,000.00
P 100,000,000.00
(New/SRO-Member)
Securities Broker/Dealer
P 30,000,000.00
3.
Special Purpose Vehicle
Special Purpose Corporation
Secondary Mortgage Institution (SMI)
Transfer Agent
P 5,000,000.00
P 31,250,000.00
197
Iuitial Subscribed and Paid-Up Capital. The RCCP
that portion of the authorized capital is subscribed in a
rporation. This is evident from the requirement that the
of Incorporation must contain a list of subscribers. Besides,
inv tment of the subscribers is the primary source of the capital
t th corporation will use for its operations. Hence, it follows
t at least a portion of the subscription must also be paid. Stocks
• r rations must necessarily issue shares of stock that are fully or
rtially paid for by considerations that are acceptable under the
P.
a.
However, there is no required minimum subscribed
·apital and paid-up capital under the RCCP. 64 The exceptions are
rporations governed by special laws that require a minimum
ub cribed and/or paid-up capital.
b.
Implicit from the new provision is the rule that subscribers
rnay pay in full or in part the subscription price. 65 If the subscription
ontracts require full payment of the subscription price, the contract
must be followed. 66
c.
The amount of paid-up may be established by various
documents such as the Audited Financial Statement, the Articles
f Incorporation, treasurer's affidavit (for corporations organized
under the Corporation Code) and Certificate of Filing of increase of
authorized capital. 67
SEC. 13. Contents of the Articles of Incorporation.
- All corporations shall file with the Commission
articles of incorporation in any of the official languages,
duly signed and acknowledged or authenticated, in such
form and manner as may be allowed by the Commission,
containing substantially the following matters, except
as otherwise prescribed by this Code or by special law:
(Existing/SRO-Member)
Securities Broker/Dealer in Proprietary Shares
(Non-SRO-Member)
RP
IVAT
(a) The name of the corporation;
(b) The specific purpose or purposes for which
the corporation is being formed. Where a corporation
P 5,000,000.00
flt 2,000,000,000.00
P 1,000,000.00
64
Section 13 of the Corporation Code previously required a Minimum Subscribed
Capital equal to 25% of Authorized Capital and Minimum Paid-up Capital of 25% 0£
Subscribed Capital but must not be less than P5, 000 .00.
65
III BP Record, p. 1714, December 11, 1979.
66Ibid.
67
SEC Memorandum Circular No. 13, Series of 2016, dated August 18, 20 16.
198
MMENTARl E AN JLJRI PRUDEN E N
THE REVI ED ORPORATION CODE
OF THE PHILIPPINES
has more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and
the secondary purpose or purposes: Provided, That a
nonstock corporation may not include a purpose which
would change or contradict its nature as such;
(c) The place where the principal office of the
corporation is to be located, which must be within the
Philippines;
(d) The term for which the corporation is to exist,
if the corporation has not elected perpetual existence;
(e) The names, nationalities,
addresses of the incorporators;
and residence
'l'l'l'LE 11 - I
RP RAT! N AND
H. ANIZA'rI N F PRIVATE
RP RATI N
An arbitration agreement may be provided in the
articles of incorporation pursuant to Section 181 of this
Code.
The articles of incorporation and applications for
amendments thereto may be filed with the Commission
In the form of an electronic document, in accordance
with the Commission's rules and regulations on
electronic filing.
SEC. 14. Form of Articles of Incorporation. Unless otherwise prescribed by special law, the articles
of incorporation of all domestic corporations shall
comply substantially with the following form:
(f) The number of directors, which shall not be
more than fifteen (15) or the number of trustees which
may be more than fifteen (15);
ARTICLES OF INCORPORATION
of
(g) The names, nationalities, and residence
addresses of persons who shall act as directors �r
trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its
authorized capital stock, number of shares into which it
is divided, the par value of each, names, nationalities, and
residence addresses of the original subscribers, amount
subscribed and paid by each on the subscription, and a
statement that some or all of the shares are without par
value, if applicable;
(i) If it be a nonstock corporation, the amount of
its capital, the names, nationalities, and residence
addresses of the contributors, and amount contributed
by each; and
(j) Such other matters consistent with law and
which the incorporators may deem necessary and
convenient.
(Name of Corporation)
The undersigned incorporators, all of legal age,
have voluntarily agreed to form a (stock) (nonstock)
corporation under the laws of the Republic of the
Philippines and certify the following:
First: That the name of said corporation shall be
Inc., Corporation, or OPC";
---------�
"
Second: That the purpose or purposes for which
such corporation is incorporated are: (If there is more
than one purpose, indicate primary and secondary
purposes);
Third:
That the principal office of the
corporation is located in the City/Municipality of
Province
of
____________, Philippines;
199
200
MM•
J aI
P
THEREVI
OF THE PHILIPP
N
Fourth: That the corporation shall have perpetual
existence or a term of ____ years from the date of
issuance of the certificate of incorporation;
Fifth: That the names, nationalities, and residence
addresses of the incorporators of the corporation are
as follows:
Name
Nationality
Residence
TlT
I1 - I
R ANIZATI N
RP RA'rI
2 1
AND
, PRIVATE OR ORATION
stock of the corporation is __________
shares without par value.
(In case some shares have par value and some
are without par value): That the capital stock of said
corporation consists of ________ shares,
of which _______ shares have a par value of
) each, and of which
------ PESOS (P
shares are without par value.
Eighth: That the number of shares of the authorized
capital stock above-stated has been subscribed as
follows:
Name of
Subscriber
Sixth: That the number of directors or trustees
of the corporation shall be ___; and the names,
nationalities, and residence addresses of the first
directors or trustees of the corporation are as follows:
Name
Nationality
Residence
Seventh: That the authorized capital stock of the
corporation is _______ PESOS (P____,
divided into ___ shares with the par value of
______ PESOS (P
) per share. (In case
all the shares are without par value): That the capital
Nationality
No. of Shares
Subscribed
Amount
Subscribed
Amount
Paid
(Modify No. 8 if shares are with no-par value. In case
the corporation is nonstock, Nos. 7 and 8 of the above
articles may be modified accordingly, and it is sufficient
if the articles state the amount of capital or money
contributed or donated by specified persons, stating
the names, nationalities, and residence addresses of
the contributors or donors and the respective amount
given by each.)
Ninth: That _________ has been
elected by the subscribers as Treasurer of the
Corporation to act as such until after the successor is
duly elected and qualified in accordance with the bylaws,
that as Treasurer, authority has been given to receive
in the name and for the benefit of the corporation, all
subscriptions, contributions or donations paid or
given by the subscribers or members, who certifies the
information set forth in the seventh and eighth clauses
above, and that the paid-up portion of the subs�ription
in cash and/or property for the benefit and credit of the
corporation has been duly received.
20
MM TARTE
J BI PR DEN E
THE REV! ED
RP RATI N
DE
OF THE PHILIPPINES
N
Tenth: That the incorporators undertake to change
the_name of the corporation immediately upon receipt of
notice fro the C ommission that another corporation,
�
partnership or person has acquired a prior right to the
use of such name, that the name has been declared
not distinguishable from a name already registered or
reserved for the use of another corporation, or that it is
contrary to law, public morals, good customs or public
policy.
Eleventh: (� rporations which will, engage in any
?
_
business
or act1v1ty reserved for Filipino citizens shall
provide the following):
"No transfer of stock or interest which shall
reduce the ownership of Filipino citizens to less than
the required percentage of capital stock as provided
by existing laws shall be allowed or permitted to be
recorded in the proper books of the corporation and
!his restriction shall be indicated in all stock certifi�ates
issued by the corporation."
IN WITNE�S WHEREOF, we have hereunto•
_
signed
these Articles of Incorporation, this
20
in _t_h_e_C_ iday_ �f
ty/
_
Mumc1pahty
of ________, Province of
_________, Republic of the Philippines.
(Names and signatures of the incorporators)
(Name and signature of Treasurer)
TJTLE JT - I
RP JtA
R ANIZATI N F PRIVATE
2 3
NOTES
and Con tract.
Articles of Incorporation as Charter
l.
ribed as a document that
The Articles of Incorporation has been desc
ng its name, purpose or
stati
defines the charter of the corporation
description of its governing
purposes, its capital stock, as well as the
13 and 14 of the RCCP.
board and other stipulations under Sections
contractual relationships
The Articles of Incorporation defines the
the stockholders and the
between the State and the corporation,
68
its stockholders.
State, and between the corporation and
of the Articles
There is no gainsaying that the contents
a.
ion, but also
orat
corp
the
on
of Incorporation are binding, not only
indicates
ation
rpor
Inco
of
on its shareholders. Thus, if the Articles
bona fide
were
s
ator
rpor
that at the time of incorporation, the inco
es, the
shar
on
comm
76
stockholders of 700 founders' shares and
book
sfer:
tran
and.
the stock
same cannot be questioned just because
that
s
state
ion
oflncorporat
states a different number. If the Articles
ing
bind
is
e
es, the sam
there are 776 issued and outstanding shar
sfer
tran
in the stock and
on all stockholders even if less is specified
69
book.
the State. The
The Articles of Incorporation also binds
b.
out any valid
with
les
Artic
State cannot disregard the provisions of the
rporation.
Inco
of
Articles
reason. It cannot whimsically revoke the
the constitution
The Articles of Incorporation constitutes
c.
oration, he does
corp
a
join
to
of a corporation. When anyone decides
If he joins, then
.
joins
he
h
so conscious of the conditions under whic
e conditions,
thos
to
e
agre
he agrees to those conditions. If he cannot
70
he is not compelled to join.
is evidence of
An entry in the Articles of Incorporation
d.
nce, the recitals in the
the factual stipulations therein. For insta
unpaid subscriptions are
Articles of Incorporation that there are
eholder alleges that he or
shar
proof against the stockholders. If the
must substantiate the
she
she has fully paid the subscription, he or
the recitals found in
ter
averment of full payment, as well as coun
No. 131394, March 28, 2005;
Lanuza, et al. v. Court of Appeals, et al., G.R.
Company and Jose Paez,
oad
Railr
la
Government of Philippine Islands v. The Mani
1929.
G.R. No. 30646, January 30,
69
Lanuza, et al. v. Court of Appeals, et al., ibid.
70
III BP Record, p. 1702, December 10, 1979.
68
204
MM NTARIE AN JURI PRU EN
N
THE REV! ED ORP RATION ODE
OF THE PHILIPPINES
I
'rITLJiJ
IZATI
I
th� Articles of Incorporation that the subscription were only partly
paid. 71
2.
Sub�tantial Compliance. The Articles of Incorporation
must comply with the form prescribed by Articles 13 and 14 of the
R�CP. However, substantial compliance may not affect the de Jure
existence of the corporation. Section 13 provides that the Articles
of Incorporation must contain "substantially" the matters indicated
_
therem.
a.
The RCCP recognizes that special laws and the Code
.
itself may require strict compliance with certain provisions. Thus, a
corp�ra�e name and a purpose clause in the Articles of Incorporation
are ��dispensable. Special laws may likewise impose additional
provis10ns for strict compliance such as minimum capitalization
requirements.
3.
Name.72 Just like the names of natural persons the
name of the corporation is necessary for identification purposes'. The
Sup�eme Co�rt explained that the very law of their creation and
contmued e�stence requires each to adopt and certify a distinctive
name . The mcorporators constitute a body politic and corporate
under the name stated in the certificate. A corporation has the power
?f succession under its corporate name. The name of the corporation
1s th�refore esse ntial to its existence. 73 In fact, the Supreme Court
explamed:
"As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115
(1927), the Cou�t declared that a corporation's right to use its corporate
and trade �ame is a prop�rty right, a right in rem, which it may assert and
protect agamst the world m th � same manner as it may protect its tangible
proper�y, real or personal, agamst trespass or conversion. It is regarded, to
a certam extent, as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another corporation in the same
_
field (Red Line Transportation Co. vs. Rural Transit Co. ' September 8' 1934'
20 Phil. 549).
A name is pec�liarly important as necessary to the very existence of
_
a corporat10n (American Steel Foundries vs. Robertson, 269 US 372, 70 L
ed �17, 46 S Ct 160; L uman vs. Lebanon Valley R. Co., 30 Pa 42; First
a_
National Bank vs. Huntington
Distilling Co. 40 W Va 530, 23 SE 792). Its
;;oonnina C. Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011.
See annotations in Section 17, RCCP.
73
Red Line Transportation Company Co. v. Rural Transit Co. G.R.
No. 41570'
'
September 6, 1934, 60 Phil. 549.
205
n fit ttribut s, an element of its existence, and essential to its
6 Fl t her [Perm Ed], pp. 3-4). The general rule as to corporations
h rporation must have a name by which it is to sue and be sued
11d d 111 gal acts. The name of a corporation in this respect designates
rp ration in the same manner as the name of an individual designates
· n (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538;
wp rt Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use
lL rp rate name is as much a part of the corporate franchise as any other
1 ri 'l
granted. (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375,
76 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 '
11165, 26 A 36)
A corporation acquires its name by choice and need not select a name
id ntical with or similar to one already appropriated by a senior corporation
whil an individual's name is thrust upon him (See Standard Oil Co. of
w Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
··poration can no more use a corporate name in violation of the rights of
th rs than an individual can use his name legally acquired so as to mislead
h public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308)."74
a.
The right to use its name is, just like other privileges, part
of the franchise granted to the corporation. 75 The corporate name
i necessarily included in the enjoyment of the franchise. Hence, a
,orporate name cannot be levied upon because it is inseparable from
the primary franchise . 76
b.
Before the Articles of Incorporation of the prospective
orporation is drafted, it is advisable to verify with the SEC if the
proposed name of the corporation is still available for registration.
If available, reservation can be made for a limited period after
payment of the required fees. However, the reservation and notice
of availability of the corporate name shall not constitute an approval
of the use of such name. 77
The name of the corporation need not reflect the purpose
c.
of the corporation. The purpose of the name is for identification and
not to give an indication of its purpose. 78
74Philips Export B.V., et al. v. Court of Appeals, G.R. No. 96161, February 21,
1992, 206 SCRA 457.
75Ibid.
J.R.S. Business Corporation, et al. v. Imperial Insurance, Inc., G.R. No.
L-19891, July 31, 1964.
77Paragraph 16(a), SEC Memorandum Circular No. 21, Series of 2013.
78SEC O inion dated November 14, 1991.
p
6
7
206
MMENTARIE AND JURI 'IRUD , N ,
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
Tt'l'LEU
Tl N
N
·
4.
Purpose Clause. The purpose clause is important in
order to assure that persons who invest in corporate entities would
be aware of the business the corporation is designed to engage in. 19
The purpose or purposes for which the corporation is to
a.
be for�ed must be grouped into Primary and Secondary Purposes.
The Primary Purpose must be only one, but the Secondary Purposes
m�y be several.so Other purposes not allied or incidental to the
Primary Purpose should be classified as Se_condary Purposes. It is
_
necessary to specify the two kinds of purposes in order to determine
which investment of corporate funds would ,require the authority
of both the Board and stockholders under Section 41 of the RCCP
(previously Section 42, Corporation Code).81
As a general rule, the primary purpose determines the
b.
classification of a corporation. However, where the corporation
actu�lly e�gages in one of its secondary purposes, it may also be
classified m accordance with the secondary purpose/s. Thus a
corporati�n is a ?1ining corporation if mining is its primary purp�se.
_
Where mmmg is the secondary purpose, it may be considered a
mini?g corporation only when it undertakes its mining purpose
and is a�tually engaged in it.82 If the purpose of a corporation is
to est��hsh, operate manage, hold, own or invest in corpor:ations
:
or entities engaged m mining activities, the corporation is in the
nature of a holding company and thus cannot engage in the business
of mining by itself.83
c.
�here should be a specification of the corporate purpose
.
wit� sufficient clearness to define with certainty the scope of the
busmess or undertaking prescribed and to enable one to see that
the purpose specified is one provided for by the statute. A statement
that the object of the corporation is to carry on any business that it
may deem profitable or in other vague terms is not sufficient. If the
manner of conducting the proposed business is to be stated, vague
and general terms are to be avoided also.84
l1I BP Record, p. 1691, December 10, 1979.
�EC Guidelines in the Formation and Organization of a Private Stock
Corporation, paragraph (2), hereinafter referred to as "Guidelines."
81
SEC Opinion dated June 6, 1995.
82
SEC Opinions dated June 6, 1995, November 8 ' 1972 and August 29' 1972·
83SEC-OGC Opinion No. 11-46 dated November 11, 2011.
84
1 Fletcher 365.
PM
ATE
207
1,
N t 11 th pow r n ed to be described in the Articles of
In • rt rati n. Other powers are either implied or incidental.
Furthermore, the purposes of a corporation as set forth
n h Ax-tides of Incorporation are not to be limited by the words
or
in le clause, but are to be ascertained by the reading of the
( 11c'
d claration. All the clauses shall be considered together and
s iation with one another in determining what the corporation
· d although that part expressing the object of the corporation.
n:· t referred to. 85
4.01.
Rationale of Purpose Clause. The purpose clause
included in the Articles of Incorporation in order that: 86
(1) The person who intends to invest his money in the
business will know where and in what kind of business or
activity his money will be invested;
(2) The directors and officers will be informed regarding
the scope of business they are authorized to act; and
(3) A third person will be aware if the transaction he has
with the corporation is within the authority of the corporation.
General Limitations. The purposes of a corporation
4.02.
must not be unlawful. Although the Articles of Incorporation may
mply with the formal requirements of law, the SEC may reject
Lhe Articles of Incorporation because the purpose is not legally
acceptable. 87 The general limitations imposed on the purpose clause
re:
(1) It cannot be created or formed for a purpose or
function of which a corporate body is incapable. For example,
generally, a corporation cannot be incorporated for the purpose
of practicing a profession. Corporations cannot possess human
personal qualifications for the practice of profession.88
(2) It cannot be created for a purpose that is contrary
to law, morals, or public policy. For example, the corporation
cannot be organized for the purpose of creating a municipal
79
80
85 1
Fletcher 361.
Alvendia, p. 80.
87Asuncion v. De Yriarte, G.R. No. 9321, September 24, 1914, 28 Phil. 67.
88See 11th Foreign Investment Negative List.
86
MMEN'I'ARIE AND J U PR EN E N
THE REVI ED ORP RATION DE
OF THE PHILIPPINES
2
corporation. 89 Obviously, a corporation cannot also be created
for the purpose of engaging in prostitution business.
(3) It cannot be organized for two or more incompatible
purposes.00 There may be non-allied purposes but they must
not be incompatible. For example, the General Banking Law
expressly prohibits banks from being engaged in insurance
business.
(4) The corporation may not be organized for a purpose
that is contrary to its nature. For example, a non-stock non­
profit corporation cannot have as its f:iecondary purpose the
manufacturing of goods to be sold on wholesale or retail.
a. Section 13 of the RCCP (previously Section 14 of the
Corporation Code) provides that a non-stock corporation may
not include a purpose that would change or contradict its nature
as such. In this connection, Section 87 of the RCCP (Section 88
of the Corporation Code) provides that a non-stock corporation
"may be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry, agricultural and
like chambers, or any combination thereof, subject to the special
provisions of this Title [Title XI] governing particular classes of non­
stock corporations.
4.03. Questions Regarding the Purpose. The best proof of
the purpose of a corporation is its Articles of Incorporation. If the
purpose stated therein is lawful, then the Securities and Exchange
Commission has no authority to inquire whether the corporation has
purposes other than those stated and mandamus will lie to compel
the SEC to issue the certificate of incorporation.91
a. It is also a well-established rule that collateral attack on
the legality of the purpose of the corporation is not allowed in this
jurisdiction. Thus, a party in a case for damages cannot impugn the
legality of the purpose of the corporation. A case should be filed to
directly attack the purpose of the corporation. 92
5.
Principal Office. The Articles of Incorporation must
state the principal office where the corporation shall hold office,
89Ibid.
1 Fletcher 357.
Gala, et al. v. Ellice Agro-Industrial Corporation, et al., G.R. No. 156819,
December 11, 2003, 418 SCRA 431.
00
91
92lbid.
Tl TL• II - I
RP RA'rI A
R ANIZA'rl N F PRIV TE RP RATI N
209
h ih mu t b within th Philippines. 93 However, SEC rules require
Ii I , ti r of th principal office to be specifically identified. Circular
N . :1, ri s of 2006 provides that, in accordance with the disclosure
,., l 'r m nts under existing laws, all corporations applying for
, ( i ·ration must state in their Articles oflncorporation the specifics
I l ir principal office which shall include, iffeasible, street number,
T'
t name, barangay, city or municipality and the specific address
l' l incorporator, director, or trustee. If practicable, the name
r l building should also be designated. ''Metro Manila" shall no
I n · be allowed as principal office.94 Filing that does not comply
witl this requirement is deemed non-compliant and is considered as
rt fil d. The SEC justified the specific requirement by explaining
h-t:
"Show cause letters and the like issued by the Commission have to be
11 ldr sed to the specific place where the principal office of the corporation is
Lu b found so that these can be suitably received by the parties. Furthermore,
I' ilitation of the addressee's receipt of any and all communications, as well
1 s the proper service of court and other processes, are sought. In addition,
iLh r government agencies, as well as the public, rely on the Commission
L provide accurate and up-to-date information regarding corporations
1 gi tered with it. It is in this light that the Memorandum was issued by
Lh Commission."95
All existing corporations and partnerships whose existing
a.
ddress in their Articles of Incorporation or articles of partnership,
indicate only a general address as their principal office address such
Lhat the articles merely indicate the city, town or municipality or
M tro Manila are required to amend their articles of incorporation
o:r articles of partnership to reflect specific addresses.96 Otherwise, a
one-time penalty can be imposed.97
Section 13(c) and Third Paragraph/Clause, Section 14, RCCP.
Section 1, SEC Memorandum Circular No. 6, Series of 2016 dated June
9, 2016; SEC Circular No. 3, Series of 2006, published in a newspaper of general
irculation on February 28, 2006.
95
SEC-OGC Opinion No. 14-23 dated August 26, 2014; SEC-OGC Opinion No.
16-02 dated July 2, 2015.
96
See SEC Memorandum Circular No. 6, Series of 2016 dated June 9, 2016,
ection 2, SEC Memorandum Circular No. 6, Series of 2014; SEC Memorandum
Circular No. 9, Series of 2015. (Corporations that do not comply shall be penalized
under SEC Office Order No. 298, Series of 2010 in relation to Sections 144 and 16 of
the Corporation Code.)
97
Section 5, SEC Memorandum Circular No. 6, Series of 2016 dated June 9,
2016
93
94
210
MMENTARIE AN J. RI PR
E
THE REVI ED
RP RATI N
OF THE PHILIPPINES
b.
However, if the corporation's principal address is already
complete and specific but the corporation has moved to another
location within the same city or municipality, the corporation is
not required to file an amended Articles of Incorporation. Instead,
it must declare its new or current specific address in the General
Information Sheet (GIS) within 15 days from the transfer to its
new location.98 However, the corporation must submit an amended
Articles of Incorporation if the new address is in another city or
municipality.99
c.
It should be noted that Section 50 of the RCCP provides
that for purposes of stockholders' or members' meetings, Metro
Manila, Metro Cebu, Metro Davao and other Metropolitan areas
shall, for purposes of determining the proper place of meeting, be
considered a City or Municipality. Section 51 of the Corporation
Code previously mentioned only Metro Manila. Section 51 of
the Corporation Code previously served as the basis of the then
prevailing view that Metro Manila may be indicated in the Articles
oflncorporation as the principal place of business of the corporation.
However, as already noted earlier, a specific address is now required
and Metro Manila is therefore unacceptable.
d.
The practice before the issuance of SEC Circular No. 3,
Series of 2006 was to indicate the town or city where the principal
place of business is located. The practical benefit of this is that there
is no more need to amend the Articles of Incorporation before the
corporation can transfer its specific principal office so long as the new
office is in the same town or city. Under present rules, amendment is
not necessary only if the corporation will transfer to a new address
within the same municipality or city. 100
e.
The problem, however, that may be encountered at the
time of incorporation is that the incorporators (or promoters) are now
constrained to agree with the owner of the specific place indicated in
98
SEC Memorandum Circular No. 6, Series of 2016 dated June 9, 2016;
paragraph 1, SEC Memorandum Circular No. 16, Series of 2014 dated August 13, 2014.
(Note however that the corporation has the option of submitting amended articles of
incorporation under paragraph 2 of the same rule. In the case of partnership, the only
recourse is the filing of amended articles of partnership because it does not file a GIS).
99
Section 8(a), SEC Memorandum Circular No. 6, Series of 2016 dated June 9,
2016; paragraph 4, SEC Memorandum Circular No. 16, Series of 2014 dated August
13, 2014. This rule supersedes SEC Opinion No. 12-12 dated 9 August 2012.
100
SEC Circular No. 6, Series of 2016, published June 18, 2016.
TITLE I - I
RP RATI N AND
R ANIZATI N F PRIVATE
RP RATIONS
211
rt' 1 of Incorporation that the same specific place will be the
i,
i al office of the corporation. It might not be advisable to state
, p ifi place if the owner or possessor thereof has not yet given
b nt thereto. The agreement that will bind the proposed
ration (lease or sale) will then have to be entered into even
the corporation acquires juridical personality. The new rule
£ re invites a conceptual anomaly; there is no corporation to
· into the contract but the incorporators are forced to designate
p- ·ific place where it will locate the corporation's principal office.
Wl il in actual practice, the stockholders/incorporators enter into
n A ntract with prospective lessors to reserve the principal office,
·h agreement exposes the stockholders/incorporators to potential
bility or forfeiture of deposit or advance rentals.
f.
The issue regarding the principal office was discussed in the
nate. There was an original proposal to amend the provision on the
principal place of business from the requirement in the Corporation
ode for inclusion in the Articles of Incorporation of a statement
n "the place where the principal office of the corporation is to be
I ated, which must be within the Philippines" 101 to a provision that
r quires a statement of "the specific address of the principal office of
th corporation, which must be within the Philippines."102 One of the
uthors admitted it was one of the proposed amendments that they
w re reviewing "and which may be deleted at the appropriate time
cause requiring a specific address for purposes of determining the
v nue of the actions and jurisdiction over the corporation for tax and
ther purposes, may not be consistent with ease of doing business
b cause it will not allow the corporation to move to other premises
within the same city or municipality." 103 The legislators eventually
pted to retain the wordings of the Corporation Code under Section
13(c) of the RCCP.
.;1
5.01. Importance of Principal Office. The principal office
f the corporation is considered its place of residence. There may be
rules of law that are focused on the residence of corporations. For
xample, residence may be important for tax purposes, to determine
the venue in cases or even in determining if proper notice was
served.
101
Section 14(c), Corporation Code.
Journal of the Senate, January 31, 2017, p. 885.
2
10
10
3
/bid.
212
COMMENTAI IE AND JURI PRUD ,
•
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
N
a.
The principal place of business may determine the venue
of court cases involving corporations. It may also determine if service
of summons and notices was properly made. 104 The principal place of
business is likewise the place where chattel mortgage over shares of
stocks in the corporation should be registered. 105 Additionally, unless
otherwise provided for, the meetings of stockholders or members
shall be conducted in the city or municipality where the principal
place of business is located, and if practicable in the principal office
of the corporation.106
b.
It is not necessary that all the businesses of the corporation
be conducted in the principal place of business. For instance, the
principal place of business of a corporation manufacturing goods
may be different from the place of the factory.
6.
Corporate Term. The term of existence of a corporation
is now perpetual under the RCCP. As earlier explained, however,
a corporation may also choose to have a fixed term. It has been
explained that where the term of a corporation expires but instead
of liquidating its affairs it continues the business in good faith,
not knowing that the term has expired, some courts hold that it
may be deemed a corporation de facto. It may also be regarded as a
corporation by estoppel under certain circumstances. 107
7. lncorporators.
The Articles
of
Incorporation
contains the names, nationalities, and residence addresses of the
incorporators. All incorporators must sign and acknowledge the
Articles of Incorporation together with the treasurer. The Articles of
Incorporation is defective if not all incorporators acknowledged the
same before the notary public.
a. Necessarily, the names of incorporators specified in
Article 13(e) of the RCCP must refer to their legal names, not
fictitious names or aliases, which they have no authority to use. 108
8.
Directors. Section 13 requires a statement of the number
of directors, which shall not be more than fifteen (15). The number of
4
10 Sy v. Tyson Enterprises, Inc., G.R. No. L-56763, December 15, 1982, 119
SCRA367.
105
Gonzalo Chua Guan v. Samahang Magsasaka, Inc., et al., G.R. No. L-42091,
November 2, 1935.
106
Section 50, RCCP.
107
Guevarra, p. 75.
8
10 Care Best International, Inc. v. Securities and Exchange Commission, G.R.
No. 215510, March 16, 2015 (Resolution).
TIT Ell-I
IZATI N
11! .l
RP RA'I'I
, PRIVATE
AN
ORP RATION
21
nn t xc d 15 even after the incorporation. For a nonrp ration, the number of trustees, which may be more than
n 1 ) hould be indicated in the Articles of Incorporation.
The Articles of Incorporation states the names,
alities, and residences of persons who shall act as directors
u t es until the first regular directors or trustees are duly
t d and qualified in accordance with the RCCP. This means
h the original directors originally appearing in the Articles of
1 H o ·poration need not necessarily be the regular directors elected
1ft r the issuance of the certificate of incorporation.109
·i
9.
Capital Stock. It is mandatory to state the authorized
pital stock, the number of shares into which it is divided and
par value of the shares, in lawful money of the Philippines if
hares have par value. If the shares have no par value, only
number of shares need be stated. Both the RCCP and the
) rporation Code do not impose a minimum capital stock.
a.
Unlike the Corporation Code, the RCCP does not provide
C r a minimum subscribed capital and paid up capital. It is worth
m ntioning though that the Corporation Code required a minimum
ub cribed capital and paid-up capital for the following reasons: (1)
Lo erve as an assurance that there will be successful prosecution
( the business of the corporation; and (2) to assure the creditors
Lh t they have means of obtaining satisfaction of their claims to the
, tent of the subscription. 110
b.
With respect to the shares comprising the capital stock,
Lh same may be divided into classes or series of shares or both and
ny of such classes or series of shares may have rights, privileges or
r trictions, as may be provided for in the Articles of Incorporation.
This is subject to the limitation that no share may be deprived of
voting rights except preferred or redeemable shares and that there
hall always be a class or series of shares which have complete
voting rights. Any or all of the shares may have a par value or have
no par value, as provided in the Articles of Incorporation. Shares of
tock without par value may not be issued for a consideration less
than P5.00 per share. m
109
SEC Opinion dated May 15, 1992.
nosEC Opinion dated May 4, 1977.
mGuidelines, par. 7; Section 6, RCCP.
214
OMMENTARIE AND JURI PRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
c.
The names, nationalities, and residence addresses of the
original subscribers, and the respective amounts subscribed and paid
by each of them must also be stated in the Articles of Incorporation.
The total amount on account of subscriptions shall be stated except
where the capital stock consists of no par value shares, in which case
the subscriptions must be fully paid.112
10. Paid-up Capital. Paid-up capital is that portion of the
authorized capital stock that has been subscribed and paid.113 To
illustrate, the authorized capital stock of a porporation is worth Pl
Million and the total subscription amounts to P250,000.00 while the
total amount paid for the subscription is P200,000.00. The latter
amount, P200,000.00 is the paid-up capital or what should accurately
be termed as ''paid-up capital stock. ''1 14 Thus, not all funds or assets
received by the corporation can be considered paid-up capital. Such
must form part of the authorized capital stock of the corporation,
subscribed and then actually paid up.115
a.
The paid-up capital may be subject to different minimum
requirements under special laws. It is necessary that there is a
treasurer elected by the subscribers authorized to receive for and in
the name of and for the benefit of the corporation all subscriptions
paid or given by the subscribers.116 It should be noted that although
the submission of a certificate of deposit is not presently required,
it is still necessary that there is actual paid-up capital. Hence if the
payment is in cash, it is still good practice to deposit the sum with
a bank in the name of the proposed corporation, or in the name of
the treasurer-in-trust for the corporation who will after all issue the
Treasurer's certification incorporated in the Articles oflncorporation
as its Ninth clause.117
b.
If the paid-up capital consists of property, verification
of its ownership, physical existence, and reasonableness of the
valuation at which it is being transferred to the corporation is made
by the SEC. Documents to· support ownership such as Original/
Transfer Certificate of Title, and Tax Declaration with respect to
112 Guidelines,
par. 8.
3
11 MSCI-NACUSIP
Local Chapter v. National Wages and Productivity
Commission, et al., G.R. No. 125198, March 3, 1997, 269 SCRA 173.
114Jbid.
115Guidelines,
par. 8.
116Jbid. at par. 9.
117Section
14, RCCP.
Tl'l'L H-I
F'
IZATI
AN
11P 111\.TI
RIVATE RP RA'I'I N
21
ttifi at of r gistration with respect to motor vehicles and
1 , and other documents to support the ownership of the
1 1 JJH Li ar required to be submitted. If any of the properties used
, p1 id-up capital is mortgaged or otherwise encumbered, written
n: nt of the mortgagee is necessary. If the transfer value of the
1, up ty is higher than the cost or assessed value, an appraisal
r pr pared by a licensed appraiser is required.118
(1) The Guidelines Covering the Use of Properties
that Require Ownership Registration as Paid-Up Capital of
orporation119 provides that where the payment made is in the
form of land, the applicant corporation shall submit to the SEC
proof of the transfer of the certificate of ownership thereon, in
the name of the transferee corporation within 120 days from
the date of approval of the application, extendible for justifiable
reasons.120
(2) The same Guidelines provides that where the
payment consists of a property other than land, the applicant
corporation shall submit to the SEC proof of the transfer of the
registration thereon in the name of the transferee corporation
within 90 days from the date of approval of the application
extendible for justifiable reasons. 121
(3) The non-submission of the certificate of ownership or
proof of registration within the given period shall be sufficient
ground for the revocation of the application approved by the
SEc.122
c.
Ifa going concern like a single proprietorship or partnership
being converted into a corporation, financial statements duly
rtified by an independent Certified Public Accountant (CPA), as
8
11 MSCI-NACUSIP Local Chapter v. National Wages and Productivity
ommission, et al., supra.
9
11 SEC Memorandum Circular No. 14, Series of 2013 dated August 2013; See
also SEC OGC Opinion No. 09-26 dated September 14, 2009.
120sEC Memorandum Circular No. 14, Series of 2013, ibid., amending
paragraph 1.a of the Guidelines Covering the Use of Properties that Require
Ownership Registration as Paid-Up Capital of Corporation dated November 15, 1994.
121SEC Memorandum Circular No. 14, Series of 2013, ibid., amending
paragraph 1.b of the Guidelines Covering the Use of Properties that Require
Ownership Registration as Paid-Up Capital of Corporation dated November 15, 1994.
122SEC Memorandum Circular No. 14, Series of 2013, ibid., amending
paragraph 1.b of the Guidelines Covering the Use of Properties that Require
Ownership Registration as Paid-Up Capital of Corporation dated November 15, 1994.
216
2 7
MMENTARIE AND JURI PRU EN n; N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
· well as the long form audit report of the certifying CPA is required.
Likewise, written consent of creditors must be submitted. 123
(1) A Deed of Assignment executed by the owner,
proprietor, or partners in case of partnership, transferring the
properties, as well as other assets and liabilities in favor of the
corporation is required. The Deed of Assignment covering real
estate properties must be presented for primary entry to the
Register of Deeds where the property is located. 124
d.
The SEC prescribed the documentary requirements for
the different modes of satisfying the paid-up capital requirement.
Payment of subscription may be in the form of enumerated under
Section 61 of the RCCP. These may include: (1) Cash; (2) Land,
Building or Condominium Unit; (3) Untitled land; (4) Inventories,
Furniture, and Personal Properties; (5) Heavy Equipment and
Machinery; (6) Shares of Stock; (7) Motor Vehicles; (8) Sea Vessel
and Aircraft; (9) Intangibles (like intellectual property rights or
mining rights); and (10) Net Assets by way of Conversion of single
proprietorship/partnership into corporation or by way of Spin-Off. All
these different forms of payment have corresponding documentary
requirements.
11. Treasurer's Certification. The Ninth clause of the
Articles of Incorporation must state the name of the Treasurer who
has been elected by the subscribers to act as such until after the
successor is duly elected and qualified in accordance with the By­
laws and that as Treasurer, he or she has been given the authority
to receive in the name and for the benefit of the corporation, all
subscriptions, contributions or donations paid or given by the
subscribers or members, who certifies the information set forth in the
Seventh and Eighth clauses of the Articles of Incorporation, and that
the paid-up portion of the subscription in cash and/or property for
the benefit and credit of the corporation has been duly received. The
Treasurer is responsible for the certification because the Treasurer
also signs the Articles of Incorporation. Thus, the Treasurer may
be made liable if the information stated in the Seventh and Eighth
clauses are false.
12. Effect if Sole Proprietorship is Organized. A single
proprietorship may be organized as a corporation. In such case, it
t23Jbid.
124
SEC Memorandum Circular No. 14, Series of 2013, supra.
l that th r i a D d of Assignm nt that must specify
I' bi 't i
f th sole propri torship that are being assumed by
w rporation.1 26 The corporation would not be liable if there
fl umption of obligation. In the same manner, in order for a
r ti n to be able to file suit and claim the receivables of its
or business like a single proprietorship, it must show proof
1
,
) l , th corporation had acquired the assets and liabilities of the
n l pr prietorship. 126
a.
The Supreme Court relied on Corpus Juris Secundum
h r it was explained that:" ... where an individual or sole trader
ir nizes a corporation to take over his business and all his assets,
d it becomes in effect merely an alter ego of the incorporator, the
p ration, either on the grounds of implied assumption of the
· t, or on the grounds that the business is the same and is merely
b I conducted under a new guise, is liable for the incorporator's
11' • xisting debts and liabilities. Clearly, where the corporation
. umes or accepts the debt of its predecessor in business it is liable
11d if the transfer of assets is in fraud of creditors it will be liable
t the extent of the assets transferred. The corporation is not liable
nan implied assumption of debts from the receipt of assets where
· h incorporator retains sufficient assets to pay the indebtedness, or
wl re none of his assets are transferred to the corporation, or where,
nlthough all the assets of the incorporator have been transferred,
th re is a change in the persons carrying on the business and the
rporation is not merely an alter ego of the person to whose business
it ucceeded." 127
13. Foreign Equity. For corporations that will engage in
ny business that is fully or partly reserved for Filipino citizens, the
following provision shall be included:
"No transfer of interest which will reduce
the ownership of Filipino citizens to less than the
required percentage of the capital shall be allowed
or permitted to be recorded in the proper books.
This restriction shall be printed in all the stock
certificates of the corporation."
125Excellent
Quality Apparel, Inc. v. Win Multi Rich Builders, Inc., G.R. No.·
175048, February 10, 2009.
i2slbid.
127Supra.
21
'l'L'l'LW ll - lN 1 1tl
JZA'l'I N FPRl
MMENTARI I AND J RI PRUDEN E N
THE REVISED ORPORATION ODE
OF THE PHILIPPINES
a.
There are nationalization laws that are in force in the
Philippines. There are businesses that are fully nationalized and
businesses that are only partly nationalized. The percentage of
equity participation of foreigners is reflected in the Eleventh
Fore�gn Negative List (Executive Order No. 65, Series of 2018,
hereinafter referred to Negative List) promulgated by the President.
The Negative List was issued pursuant to Section 8 of Republic Act
No. 7042 also known as the Foreign Investments Act of 1991, as
amended by Republic Act No. 8179, which requires the formulation
of a Regular Foreign Investment Negative List covering investment
areas/activities which may be opened to foreign investors and/or
reserved to Filipino nationals.
b.
Section 8 of Republic Act No. 7042 provides that the
Negative List shall have two component lists: (1) List A which shall
enumerate the areas of activities reserved to Philippine nationals
by m�ndate of the Constitution and specific laws; (2) List B which
contams the areas of activities and enterprises regulated pursuant
to law. 128 The amendments to List B after the promulgation of the
First Regular Negative List shall not be made more often than every
two years. 129
c.
Included in List A for instance are activities where
the fore�gn equity is limited to 40 % by the Constitution like (1)
explor�tion, development and utilization of natural resources,130 (2)
operation of public utilities, 131 and (3) educational institutions 132
and (4) facility operators of a BOT Project requiring a public utility
franchise. 133
13. 01.
Domestic Market Enterprise. Under Republic Act
No. 7042, foreigners are limited to 40 % equity in a Domestic Market
Enterprise if the paid-in equity capital is less than US$200, 000. 00. 134
Domestic Market Enterprise means an enterprise that produces
Section 8(b), Republic Act No. 7042 as amended.
Section 8, ibid.; List B, No. 7, Negative List.
130
Article XII, Section 2, Constitution.
131
Article XII, Section 11, Constitution. See SEC-OGC Opinion No. 15-14
d�ted November 3, 2015 where the SEC opined that the ground handling services in
airport, port facility operators and airports are considered public utilities.
132
Article XIV, Section 4, Constitution. See SEC-OGC Opinion No. 14-32 dated
November 10, 2014.
133
Article XII, Section 11, Constitution.
134
As amended by Republic Act No. 8179. Note the definition of "Export
Enterprise" under Section 3(e) of the Foreign Investment Act. See also SEC-OGC
Opinion No. 14-26 dated September 30, 2014 involving tour operators.
128
129
!9
f al , r •nd r
rvic or otherwis engages in any business
Philippin . 130 The threshold paid-in capital is US$100, 000. 00
I m tic Market Enterprise involves advance technology. 136
Holding companies are included within the term Domestic
L P L , nt rprise. ' 37 A holding company which will own shares of
I 1 •l f £ r ign-registered corporations only can still be considered
1
i m tic market enterprise if the act of a holding company of
iri , p rating and/or managing its foreign subsidies or affiliates
11
d ne in the Philippines. 138
1
1 .02.
Retail Business. Retail business is limited to
1 ipino depending on the capitalization. Section 3(1) of Republic
L No. 8762, otherwise known as the Retail Trade Liberalization
t of 2000, provides that Retail Trade shall mean any act,
•upation or calling of habitually selling direct to the general public
111 r ·handise, commodities or goods for consumption. The restriction
n id r Republic Act No. 8762 shall not apply to the following sales:
11
/\
\
1,
(1) Sales by manufacturer, processor, laborer, or worker,
to the general public of products manufactured, processed or
produced by him if his capital does not exceed One hundred
thousand pesos (Pl 00, 000. 00);
(2) Sales by a farmer or agriculturist selling the products
of his farm, regardless of capital;
(3) Sales in restaurant operations by a hotel owner or
innkeeper regardless of the amount of capital: provided, that
the restaurant is incidental to the hotel business;
( 4) Sales though a single outlet owned by a manufacturer
of products manufactured, processed or assembled in the
Philippines,. irrespective of capitalization;
(5) Sales to industrial and commercial users who use
the products bought (a) to render service to the general public
or (b) to manufacture goods sold by them; and
SEC Opinion
Jmplementing Rules and Regulations of Republic Act No. 7042;
1997.
25,
dated March
136
See Appendices "B" and "C."
15-15 dated
137
SEC Opinion dated March 25, 1997; SEC-SGC Opinion No.
November 3, 2015.
138SEC OGC Opinion No. 09-30 dated November 23, 2009.
135
MMl'NT UE
J
THEREVI
OF THE PHI
20
(6) Sales to the government or its agencies and
government-owned and controlled corporations. 139
To constitute a retail business, the following requisites
a.
must be present: (1) The person or entity must be selling
merchandise, commodities or goods; (2) The sale must be direct to
the general public; and (3) The merchandise, commodities or goods
are for consumption.140
Sale of goods is not retail if it is a mere incident to the
b.
primary purpose of the corporation as in the case of sale of food
in a restaurant and sale of goods in a gift shop inside a hotel.141
Consistently, if the primary purpose of a corporation is the
operation of a gym, sale of drinks, sundry apparel, and hygiene
articles is incidental to the primary purpose and is not pursued as
an independent business. Gym operation involves transacting with
gym members or guests that need to be attired properly, require
hydration and rehydration, and make use of the shower facilities of
the gym.142 Opening a pharmacy inside a hospital is also not engaging
in retail under the same principle.143 Similarly, sale of spare parts
as an incident to the operation of regular maintenance and repair
services to vehicles is not retail.144 Similarly, the sale of prescription
glasses and frames by optometrist may be considered incidental to
the rendering of optometry services.145
The items must be sold to the final and end users of
c.
the product. 146 This element of retail business necessarily involves
the subject of the retailer's activities or what he is selling, i.e.,
139Section
3, Republic Act No. 8762; Section 2, Rules and Regulations
Implementing Republic Act No. 8762.
140
Marsman & Company, Inc. v. First Coconut Central Company, Inc., G.R. No.
L-39841, June 20, 1988; SEC-OGC Opinion No. 13-07, July 30, 2013; SEC Opinion
dated August 31, 1994 citing DOJ Opinion No. 178, Series of 1983; SEC Opinion
dated July 11, 1995.
141
SEC-OGC Opinion No. 16-06 dated April 1, 2016.
142SEC-OGC
Opinion No. 11-34 dated August 3, 2011.
143
SEC Opinion dated November 12, 1999 reiterated in SEC-OGC Opinion No.
16-06 dated April 1, 2016.
144SEC Opinion No. 16-03 dated February 15, 2016; SEC-OGC Opinion No.
14-08 dated May 19, 2014.
145
SEC-OGC Opinion No. 19-46 dated October 7, 2019.
146
Balmaceda v. Union Carbide Philippines, Inc., G.R. No. L-30442, September
30, 1983.
N
.
l
d or con um r goods. Con umer goo s may be
that ar us d or bought for use primarily for personal,
hold purposes.w Such goods are not intended for
r f rtl r use in the production of other products. In other
n um r goods are goods, which by their very nature: (a)
for consumption 148 by the final end users of a product; (b)
atisf'y human wants and desires; and (c) are needed for
Ii rn a d daily life. 149 Thus, sale of vouchers or gift certificates that
int nded for the purchase of goods is not considered retail. 150
1,
(1) On the other hand, producer goods have been
d fined as goods (as tools and raw material) that are factors
in the production of other goods and that satisfy wants only
indirectly and are also called auxiliary goods, instrumental
ods, and intermediate goods.151 They are by their very nature
not sold to the public for consumption. As such, the sale of
producer goods used for industry or business is classified as a
wholesale transaction. Wholesaling has been defined as selling
to retailers or jobbers rather than to consumers or a sale in
large quantity to one who intends to resell.
(2) For example, sale of industrial machinery - a
diesel-generating unit - to be used in a coconut central, may
be classified as sale of "production or producer goods" since
the diesel-generating unit is not a consumer item. 152 Similarly,
sale of industrial cranes and cutting tools to firms engaged in
construction, mining and similar activities does not constitute
retail. 163 Sale of motorbikes to industrial users or fleet users
is also not considered retail. 154 It is also not retail if the
business is sale of equipment and instruments to hospitals and
laboratories. 155
(3) Products to be used by real estate developers such as
door control, automatic and revolving door, glass fittings and
l41Jbid.
& Company, Inc. v. First Coconut Central Company, Inc., supra.
SEC-OGC Opinion No. 13-07 dated July 30, 2013.
150SEC-OGC Opinion No. 15-10 dated September 2, 2015.
151Marsman & Company, Inc. v. First Coconut Central Company, Inc., supra.
162
Jbid.; See also Balmaceda v. Union Carbide Philippines, Inc., et al., supra.
153SEC-OGC Opinion No. 14-34 dated November 18, 2014.
154
SEC-OGC Opinion No. 16-03 dated February 15, 2016.
165 SEC-OGC Opinion No. 14-12 dated June 2, 2014; SEC-OGC Opinion No.
16-25 dated October 14, 2016.
8
14 Marsman
149
222
MMEN'l'Af'UE
TI • REVI
U 'P
RAT!
N
22
R
OF THE PHILIPPIN
systems, room dividing systems and other similar goods are
considered producer goods. Hence, their sale is not considered
retail.156
(4) The sale of telecommunications and service
processing equipment to banking institutions and service
contractors can likewise be considered sale of production goods.
Hence, it does not fall within the ambit of the Retail Trade
Nationalization Law.157
Mass Media. The Philippine Constitution reserves
,it i hip
ma
media corporations to Filipinos. For this
I I'll n , mas media means gathering, transmission of news,
1 I' r inati n, messages, signals and forms of written, oral, and all
u 11 mmunications and shall embrace the print medium, radio,
I i i i n, film, movies, wire and radio communication services,
11,1 \ dv rtising in all its phases.163 Presidential Decree No. 1018
1 , 1 irl
1
(5) The sale of mobile phone parts and accessories and
other related materials, as replacement does not constitute
retail trade for corporations engaged in' the business of repair,
assembling, maintenance, support and other services relating
to mobile phones and other telecommunications equipment.
The sale of replacement parts and accessories is an integral
part of the repair business.158
d. Auction of jewelry does not come within the purview of
retail business as defined under Republic Act No. 8762 since the
goods are not sold directly or readily available to the general public
but only to those who are invited to participate in competitive
bidding process. The target clients need not be final end users.159 On
the other hand, sale to qualified employees of the producer is also
not sale to the general public, hence, the same is not retail.1�
e.
Where a prosthetics business is not retail if it involves
entails tailor fitting of artificial limbs based on unique customized
design, fabrication and assembly, which in turn depends upon the
unique body measurements of the customer. The contract involved
is contract for a piece of work and not sale.161
f.
Catering business is also considered retail. The end-users
for events are those celebrating birthdays, anniversaries, weddings,
and the like. Thus, selling to group of customers involves selling to
the public. Catering cannot be treated as incidental to the function
of events organizer because catering constitutes the biggest expense
in events. 162
156SEC-OGC Opinion No. 13-07 dated July 30, 2013.
157SEC Opinion dated July 11, 1995.
158SEC Opinion No. 05-08 dated June 23, 2005.
159SEC OGC Opinion No. 10-13 dated March 30, 2010.
160SEC-OGC Opinion No. 16-03 dated February 15, 2016.
161SEC-OGC Opinion No. 19-41 dated September 19, 2019.
162SEC-OGC Opinion No. 19-44 dated October 4, 2019.
N
Section 1. The term "mass media" refers to the
print medium of communication, which includes
all newspapers, periodicals, magazines, journals,
and publications and all advertising therein, and
billboards, neon signs and the like, and the broadcast
medium of communication, which includes radio and
television broadcasting in all their aspects and all other
cinematographic or radio promotions and advertising.
a.
The dissemination of information need not be to the general
public but also to any portion thereof. The Depa� tment of J sti�e
':1o in d that "the distinctive feature of mass media undertakm� 1s
Lh dissemination of information and ideas to the public or a port10n
Lh reof." 164 For instance, a corporation is a mass media corporation
v n if it is engaged solely in a specialized publication particular�y in
Lh publication and distribution of education books and mag�zm� s
• nfined to primary and secondary students. 165 A corporat10n 1s
tl o a mass media corporation if it is engaged in the business of
1-mbleasing advertising space or structure to others because it
provides a medium to disseminate or convey advertising message to
Lhe public.166
13.04.
Real Estate Companies. Only corporations
at least 60% of the outstanding capital stock of which belongs to
163SEC Opinion dated July 15, 1991; See Liwayway Publishing, Inc. v. PCGG,
et al., G.R. No. 77422, April 15, 1988.
164DOJ Opinion No. 24, Series of 1986 cited in SEC Opinion dated October
l4, 1999; See also SEC Opinion No. 12-16 dated September 13, 2012, SEC-OGC
Opinion No. 14-15 dated July 7, 2014, SEC-OGC Opinion No. 14-11 dated Ju�e. 2,
2014 (involving live productions and film/motion pict1;1r_es) and _SE�-OGC Opm10n
No. 14-06 dated May 8, 2014 (involving marketing of digital publication through the
internet).
165SEC Opinion dated October 14, 1999.
166SEC Opinion No. 16-21, August 31, 2016; SEC Opinion No. 16-17, July 11,
2016.
224
MMEN1'ARIE AND J RI PR E'
THE REVI ED ORPORATI N
OF THE PHILIPPINES
N
Filipinos can own land. This limitation is expressly provided for in
the Constitution. 167 Thus, corporation cannot own land if more than
40% of the outstanding capital stock belongs to foreigners. It follows
therefore that the foreign shareholders of a real estate company that
is engaged in the business of owning land so that it can sell or lease
the same cannot hold more than 40% of the capital stock.
However, the prohibition in the Constitution is limited to
a.
private land and land of the public domain. Land is not the only real
property under Article 415 of the New Civil Code. Corporations can
still own real properties like house_s or buildings unless specifically
prohibited by law even if more than 40% of its outstanding capital
belongs to foreigners.168 One exception is with respect to condominium
units because foreign interest in the condominium corporation
should not exceed 40%. 169
With respect to a non-stock corporation, its nationality
b.
in relation to the provision on land acquisition is computed on the
basis of nationality of its members and not based on the capital
contribution of the members. However, the voting rights of the
members should likewise be considered. 110
Anti-Dummy Law. It is well to point out in this
13.05.
connection that violation of the requirements of the pertinent
nationalization law is subject to the criminal liability_ under
Commonwealth Act No. 108, as amended, entitled "An Act to Punish
Acts of Evasion of the Laws on the Nationalization of Certain Rights,
Franchises or Privileges" otherwise known as The Anti-Dummy
Law. Hence, the Articles of Incorporation that is submitted to the
SEC may be rejected if there is patent non-compliance with the
Anti-Dummy Law and the different nationalization requirements.
14. Other Provisions. Other provisions may be inserted in
the Articles of Incorporation as long as they are not contrary to law,
morals, good customs, public order, and public policy. For example,
a provision giving the right of first refusal to the shareholders may
be inserted in the Articles of Incorporation.
The SEC likewise allows certain prohibitions on
a.
stockholders to be stated in the Articles of Incorporation. Thus,
Section 7 in relation to Section 2, Article XII, 1987 Constitution.
SEC OGC Opinion No. 12-11 dated August 8, 2012.
169
Republic Act No. 4726 otherwise known as the Condominium Act of the
Philippines.
170
SEC-OGC Opinion No. 16-15, June 1, 2016.
225
R
all w d a provision that disallows any shareholder from
in a ompeting business. 171
ummary of New Rules. To summarize, the new
m nts under the RCCP with respect to the contents of the
of Incorporation are as follows:
Provision of
'th Articles of
Incorporation
New Requirements under the Revised
Corporation Code
The term OPC should be included in the corporate
name if the corporation is a One Person Corporation.
a. Incorporators can be a natural person, partnership,
In 1porators
corporation or association;
b. One incorporator is sufficient; and
c. There is no residency requirement for incorporators.
The term can be perpetual or a fixed term. The default
T, rm
rule is that the term is perpetual.
A separate treasurer's affidavit is no !anger
Treasurer's
required but the certification of the treasurer 1s now
ertification
_
incorporated in the Ninth clause of the Articles of
Incorporation.
It is no longer required to submit a separate
Undertaking to
Change Corporate undertaking but the contents of the undertak�ng are
now included in the Tenth clause of the Articles of
Name
Incorporation.
incorporators and the treasurer sign the Articles
The
Signatories
of Incorporation.
a. There is no more minimum number of directors and
Directors and
trustees. The exceptions are educational corporations
Trustees
and religious societies which still require a minimum
of five trustees
b. There is no more residency requirement for
directors.
a. Subscribed and paid-up capital are now both in the
Subscribed and
Eighth clause of the new form under Section 14 of the
Paid- Up Capital
RCCP.
b. There is no longer any required minimum
subscribed and paid-up capital unless special laws
provide otherwise.
orporate Name
167
168
171
SEC Opinion dated August 12, 1998.
226
MMENTARIE AND JURI PR
22
EN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
rporation could. b is ued, H, who claims to be the owner of
·h aid r al estate prop rty, filed an action against XYZ, Inc.
f r th r covery of possession of the same. Will H's suit prosper?
Why?
PROBLEMS:
1.
Q:
A:
The articles of incorporation to be registered in the Securities
and Exchange Commission contained the following provisions:
"First Article. The name of the corporation shall be Toho
Marketing Company." "Third Article. The principal office of the
corporation shall be located in Region III, in such municipality
therein as its Board of Directors may designate." "Seventh
Article. The capital stock of the corporation is One Million Pesos
(Pl,000,000.00), Philippine Currency." What are your comments
and suggested changes to the proposed articles?
The name of the corporation should be' amended to include any
of the following words, "Inc.," "Incorporated" "Corporation" or
"Corp." Section 1 of SEC Memorandum Circular No. 14, Series of
2000 requires any one of those words to be included in the name
of the Corporation. The form of the Articles of Incorporation
under Section 14 of the RCCP also calls for the use of the words
"Inc.," "Corporation," or "OPC" (for One Person Corporations).
The Third Article does not comply with the requirements of the
law and SEC rules on the address of the corporation. The RCCP
provides that the Articles of Incorporation must state the place
where the principal office of the corporation is to be established
or located, which place must be within the Philippines. The
RCCP also requires inclusion in the Articles of Incorporation
of the City/Municipality and Province where the principal office
of the corporation is located. SEC Memorandum Circular No.
6, Series of 2016 dated June 9, 2016 further requires a specific
address. For purposes of complying with the RCCP and SEC
requirements, it is not enough to state the Region where the
principal office is located.
The Seventh Article 1s incomplete. Section 14(8) of the
Corporation Code (Section 13[h], RCCP) provides that if the
corporation is a stock corporation, the Articles of Incorporation
must contain the amount of its authorized capital stock, the
number of shares into which it is divided, and in case the shares
are par value shares, the par value of each, and if some or all
of the shares are without par value, such fact must also be
stated. The names, nationalities, and residence addresses of the
original subscribers and amount subscribed and paid by each
must also be stated in the Articles. (1990 Bar)
2.
Q:
While the incorporation papers ofXYZ, Inc. were pending before
the Securities and Exchange Commission (SEC) for approval, A,
the designated Treasurer in the Articles of Incorporation held
real estate property worth P20,000.00 which E turned over for
shares he (E) purchased in XYZ, Inc. Before the certificate of
No. H's suit will not prosper. The issuance of the Certificate of
Incorporation is an indispensable requisite for the existence of
a corporation. In the given problem, the incorporation papers
of XYZ, Inc. were still pending before the Securities and
Exchange Commission for approval. Hence,XYZ, Inc. is not yet
a corporation and has no juridical personality in order to have
the power to sue or be sued in any court. (1978 Bar)
'I.
4.
Q:
May a corporation composed entirely of aliens be organized and
incorporated in the Philippines? Explain. (1970 Bar)
A:
Yes, if nationalization laws do not require ownership by Filipinos.
The RCCP does not provide for a citizenship requirement. There
are businesses that are allowed to be owned by foreigners.
As long as the Constitution and special laws do not impose a
maximum equity participation of foreigners, the directors
and incorporators of a corporation can all be foreigners. For
instance export enterprises may generally be 100% foreign­
owned. However, there are corporations where the Constitution
or special laws require that at least a 60% or a higher percentage
of the outstanding capital stock to be owned by citizens of the
Philippines. For example, Filipinos must own at least 60% of
the outstanding capital in public utilities and corporations that
own land. In these cases, the corporation cannot be composed
entirely of aliens.
Q:
The proposed Articles of Incorporation of X Corporation provides:
"That none of the stockholders shall engage in a similar,
competing or antagonistic business or activity as that to which
the corporation is primarily engaged in. The foregoing restriction
must appear at the back of all certificates of corporation." Is the
provision valid and binding?
A:
Yes, the provision is valid. The provision constitutes a reasonable
exercise of corporate authority since a corporation under the
principle of self-preservation, has the inherent right to preserve
and protect itself by excluding competitors or hostile interest.
The provision seeks to prevent a stockholder from creating an
opportunity to take advantage of the information which he
may have acquired as such to promote his individual interest
to the prejudice of the corporation and other stockholders. The
_
provision is binding on the stockholders because the Articles_
of Incorporation is a contract between the shareholder and
the corporation as well as the State. Any person who intends
22
to acquire a share in the corporation does so with knowledg
that its affairs are governed by the provisions of the Articles
of Incorporation. (SEC Opinion dated August 12, 1998, SEC
Bulletin Vol. XXXIIL No. 1, June 1999)
5.
'r!'l'Llt 1l .;... l
JJ J HI PR
THE REVI E
RP RATI N
OF THE PHILIPPINE
Q:
May the composition of the board of directors of the National
Power Corporation (NPC) be validly reduced to three? Explain
your answer fully.
A:
Yes, the composition of the board of directors of the National
Power Corporation may be validly reduced to three under
the Revised Corporation Code. Section 13(f) of the Revised
Corporation Code provides ·that there, must be not more than
15 directors. There is no minimum number of directors required
under the Revised Corporation Code. The same is true even if
NPC is a government owned or controlled corporation created
by special law because the provisions of the Revised Corporation
Code apply suppletorily to NPC. (2008 Bar)
SEC. 15. Amendment ofArticles of Incorporation. Unless otherwise prescribed by this Code or by special
law, and for legitimate purposes, any provision or matter
stated in the articles of incorporation may be amended
by a majority vote of the board of directors or trustees
and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right
of dissenting stockholders in accordance with the
provisions of this Code. The articles of incorporation of
a nonstock corporation may be amended by the vote or
written assent of majority of the trustees and at least
two-thirds (2/3) of the members.
The original and amended articles together shall
contain all provisions required by law to be set out
in the articles of incorporation. Amendments to the
articles shall be indicated by underscoring the change
or changes made, and a copy thereof duly certified
under oath by the corporate secretary and a majority
of the directors or trustees, with a statement that the
amendments have been duly approved by the required
vote of the stockholders or members, shall be submitted
to the Commission.
lZ 'I'I
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9
The amendments shall take effect upon their
approval by the Commission or from the date of filing
with the said Commission if not acted upon within
six (6) months from the date of filing for a cause not
attributable to the corporation.
1.
NOTES
Amendments. Section 15 of the RCCP pertains to
;1- ndments
in general. 172 For instance, amendments of the Articles
Incorporation to change the corporate name, the place of the
principal office and the purpose of the corporation must comply
with Section 15. There are, however, other sections of the RCCP
} at provide special rules on the amendment of specific provisions
f the Articles of Incorporation. For example, Section 36 specifically
d -al with amendment to extend or shorten the corporate term. On
't l1 other hand, Section 37 deals with amendments to increase or
d crease the authorized capital stock of the corporation.
2.
Requirements. Section 15 of the RCCP imposes certain
quirements for the amendment of the Articles of Incorporation:
(1) The amendment must be for legitimate purposes
and must not be contrary to other provisions of the Revised
Corporation Code and special laws;
(2) The amendment must be approved by a majority
vote of the board of directors or trustees;
(3) There must be a vote or written assent of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of a non-stock corporation,
the vote or written assent of at least two-thirds (2/3) of the
members;
( 4) The original and amended articles together shall
contain ail provisions required by law to be set out in the
Articles of Incorporation. The amendments to the Articles of
Incorporation shall be indicated by underscoring the change or
changes made;
(5) A copy of the Amended Articles shall be duly certified
under oath by the corporate secretary and a majority of the
directors or trustees, stating the fact that the amendment or
amendments have been duly approved by the required vote of
the stockholders or members. The Amended Articles with th�
172SEC OGC Opinion No. 08-12 dated April 29, 2008.
230
MM
TH
OFTHEPHI
certification shall be submitted to the Securities and Exchange
Commission (SEC);
(6)
The amendment must be approved by the SEC.
a. A corporation cannot provide for a different procedure
for the amendment of the Articles of Incorporation other than the
procedure provided in Section 15 of the RCCP. While the Board of
Directors of a corporation can adopt rules and regulations to govern
the affairs of the corporation, the same should be in consonance with
and not repugnant to or in contravention of the RCCP. For example,
while the Board of Directors may· create a committee tasked to
draft amendments to the Articles of Incorporation, the power of the
committee can only be recommendatory. 173
3.
Express and Implied Approval. The amendments
shall take effect upon their approval by the SEC. However, express
approval is not indispensable; the amendments shall take effect
from the date of filing with the said Commission if N.ot acted upon
within six months from the date of filing for a cause not attributable
to the corporation.
4.
Documentary
Requirements.
The registration
requirements for Amended Articles of Incorporation for stock and
non-stock corporations prescribed by the SEC are as follows:
(1)
Amended Articles of Incorporation;
(2) Directors' or Trustees' Certificate - a notarized
document signed by a majority of the directors or trustees and
the corporate secretary, certifying (i) the amendment of the
Articles of Incorporation and indicating the amended provisions,
(ii) the vote of the directors or trustees and stockholders
or members, (iii) the date and place of the stockholders' or
members' meeting, and (iv) the tax identification number of
the signatories which shall be placed below their names;
(3) Monitoring Clearance issued by the Compliance
Monitoring Division (CMD); 174
17 3SEC
174
Opinion dated January 5, 1995.
For financing and lending companies, issuers of proprietary or non-propriety
membership (i.e., golf clubs) and foundations, monitoring clearance shall be issued by
the Investor Protection and Surveillance Department (IPSD). For listed and public
companies, monitoring clearance is issued by the Corporation Finance Department
(CFD). For capital market participants such as brokers, dealers and investment
houses, monitoring is with the Market Regulation Department (MRD).
TITLE II - I
RP RATI
R ANIZATI N F PRIVATE
2 1
(4)
er tary's Certificate - notarized document
d by the corporate secretary certifying that no action or
pl'
ding has been filed or is pending before any Court or
t ibunal involving an intra-corporate dispute or claim by any
p rson or group against the directors, officers or stockholders
of the Corporation.
a.
Indorsement/clearance from other government agencies is
ary in certain cases. For example, amendment of the Articles
t Ii orporation of a bank requires indorsement from the Bangko
"' ntral ng Pilipinas.
5.
Provisions to be Amended. The amendment may
involve a change of the corporate name, increase in the authorized
upital stock, and other similar changes.
a.
Amendments cannot be allowed if they go against the
nature of the corporation. For example, there can be no amendment
f the Articles of Incorporation of a non-stock corporation to convert
it into a stock corporation with the members as shareholders. This
procedure will in effect allow the distribution ofthe assets ofthe non­
tock corporation in favor of the members. Thus, the amendment is
ontrary to the provisions of the RCCP.
5.01. Accomplished Fact Rule. There are provisions of the
Articles of Incorporation that cannot be amended because they are
a complished facts. For example, the names of the incorporators
·annot be changed and their number cannot be increased because the
names and number of the original incorporators are accomplished
facts. Similarly, there can be no change in the names of the original
directors for the same reason.
6.
Effect ofAmendment. Section 184 oftheRCCP provides
that no right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by
the subsequent dissolution of the corporation or by any subsequent
amendment or repeal of the RCCP or ofany part thereof. Section 184
is substantially the same as Section 145 of the Corporation Code.
a.
The implication of this provision is that amendment oftheRCCP and the Corporation Code may have the effect ofamending the
provisions of the Articles of Incorporation of existing corporations.
MMEN'rARI • AN JURI PRU EN E
THE REV! ED ORPORATION
DE
OF THE PHILIPPINES
232
'l'l'l'L II- IN RP RA'I'I
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N
The only reservation is that the amendment of the governing law
must not affect vested rights, remedies or liabilities. For example, a
requirement that the Articles of Incorporation must specify the city
or municipality and province of the principal office may be imposed
on the corporation since no vested right is affected.
Pl
b.
Section 184 is consistent with the rule that Congress
has the plenary power to pass amendatory laws subject to the
Constitutional limitation that no law impairing the obligation of
contracts shall be passed. 175
7. Written Assent of Stockholde�s. Silence or failure
to object cannot be construed as approval by stockholders. 176 The
law requires the express approval of the stockholders through an
affirmative vote or an assent that is in writing.
a.
The law does not require that the approval by the
stockholders be made in a meeting duly called for the purpose.
Written assent solicited by the board even without a meeting is
sufficient. 177 The exceptions are in case of an amendment of the
Articles of Incorporation to extend or shorten the corporate term' 78
and in case of an amendment involving an increase or decrease of the
capital stock. 179 In the two cases mentioned, the applicable provisions
require approval in a meeting of the shareholders. This should also
be distinguished from amendment of theBy-Laws, which requires a
regular or special meeting of shareholders for its approval. 180
8. Who can Question Amendments. Amendments to
the Articles of Incorporation and By-laws can be questioned only
by a real party-in-interest like a shareholder or member. Thus, in
one case, petitioner UCCP was not allowed to question the validity
of amendments to the Articles of Incorporation and By-laws of
respondent BCCI because UCCP was not a member ofBCCl. 181
Section 10, Article III, 1987 Constitution.
SEC Opinion dated July 15, 1999.
177SEC Opinion dated August 16, 1999.
178Section 36, RCCP.
179Section 37, RCCP.
180
Section 47, RCCP.
lBIUnited Church of Christ in the Philippines, Inc. v. Bradford United Church
of Christ, Inc., et al., G.R. No. 171905, June 20, 2012.
2.
23·
BL. M :
Q:
"X" company is a stock corporation composed of the Reyes family
ngaged in the real estate business. Because of the regional crisis,
the stockholders decided to convert their stock corporation into
a charitable non-stock and non-profit association by amending
the Articles of Incorporation.
a.
Could this be legally done? Why?
b.
Would your answer be the same if at the inception, "X" company
is a non-stock corporation? Why?
a.
Yes, the Articles of Incorporation of X Company can be legally
amended to convert it into a non-stock corporation. What this
means fa that the stockholders are deemed to have waived their
right to their respective shares in the profits of the corporation
and that is a gain not a loss to the corporation. However, this
should be without prejudice to the rights of creditors who may
be affected.
b.
No, my answer will not be the same. In a non-stock corporation,
the members do not have the right to the assets and pro­
fits of the corporation. The present and future profits of the
corporation are devoted solely to charitable purposes and cannot
be distributed to the members. If the non-stock corporation is
converted to a stock corporation by a mere amendment of the
Articles oflncorporation, the non-stock corporation is deemed to
have distributed an asset of the corporation among its members.
The only way to form a stock corporation is to dissolve the non­
stock corporation and to re-incorporate as a stock corporation.
(2001 Bar)
Q:
Stockholders representing only 55% of the outstanding capital
stock of A Corporation attended the scheduled meeting. Hence,
the required two-thirds vote of the stockholders to approve
the amendments to the Articles of Incorporation, which was
previously approved by the Board, cannot be obtained. The
directors propose two courses of action, namely: (1) to request
the stockholders present during the meeting to approve the
proposed amendment and then adjourn the meeting and allow
the board to convene another meeting in order to get the required
votes; and (2) to solicit the remaining balance of the required
approval/votes by way of writing the absentee stockholders.
Which of the two alternatives can be validly resorted to by A
Corporation?
A:
Both alternatives may be validly resorted to. The law provides
that the stockholders may assent to the amendment so long as
the assent is in writing and the total written votes/approval
175
176
234
MMENTARIE AND J RI PR DEN E
THE REVI ED CORI ORATION ODE
'I'I'l'LE TI­
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OF THE PHILIPPINES
should not be less than two-thirds of the outstanding capital
stock of the corporation. (SEC Opinion dated August 16, 1999,
SEC Bulletin Vol. XXXIII, No. 2, December 1999) However, if
the amendments involve extending or shortening the corporate
term and/or increasing or decreasing the capital stock, only the
first alternative may validly be resorted to because Sections 36
and 37 of the RCCP require approval of said amendments in a
stockholders' meeting.
SEC. 16. Grounds When Articles of Incorporation
or Amendment May be Disapproved. - The Commission
may disapprove the articles· of incorporation or any
amendment thereto if the same is not compliant with
the requirements of this Code: Provided, That the
Commission shall give the incorporators, directors,
trustees, or officers a reasonable time from receipt of
the disapproval within which to modify the objectionable
portions of the articles or amendment. The follQwing are
grounds for such disapproval:
a) The articles of incorporation or any
amendment thereto is not substantially in accordance
with the form prescribed herein;
b) The purpose or purposes of the corporation
are patently unconstitutional, illegal, immoral or
contrary to government rules and regulations;
c)
The certification concerning the amount of
capital stock subscribed and/or paid is false; and
d) The required
percentage
of
Filipino
ownership of the capital stock under existing laws or
the Constitution has not been complied with.
No articles of incorporation or amendment to
articles of incorporation of banks, banking and quasi­
banking institutions, preneed, insurance and trust
companies, NSSLAs, pawnshops, and other financial
intermediaries shall be approved by the Commission
unless accompanied by a favorable recommendation
of the appropriate government agency to the effect that
such articles or amendment is in accordance with law.
RP
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35
NOTES
l.
Ministerial Duty. The duty of the SEC to approve an
11 I li tion for registration is ministerial provided that all the
, quir ments of law are complied with. The SEC must approve the
U'ti 1 of Incorporation if the applicant has substantially complied
ith th requirements of the RCCP. 182
a.
However, Section 16 recognizes the power of the SEC
r .i ct the Articles of Incorporation or any proposed amendment
Lh r to if the provisions of the RCCP are violated. The SEC should
i the incorporators a reasonable time within which to correct or
m dify the objectionable portions of the articles or amendment.
2.
Rejection Not Based on the Submitted Articles.
-ction 16 enumerates the grounds for rejecting the Articles of
ncorporation or any amendment thereto. Section 16 (a), (b) and
d) can be determined on the basis of the Articles of Incorporation
it elf and the other required documents. Generally, if the Articles of
ncorporation and its supporting papers are in order, the Securities
and Exchange Commission has no recourse but to issue the
rtificate of Incorporation.
a.
Nevertheless, Presidential Decree No. 902-A provides that
the SEC may reject the Articles of Incorporation after consultation
with the Board of Investment, Department of Trade and Industry,
National Economic and Development Authority or any appropriate
agency, if the establishment, organization or operation of the
corporation will not be consistent with the declared national policies.
For this purpose, it may be necessary to go beyond the Articles of
Incorporation and the supporting papers in order to determine if
the establishment, organization or operation of the corporation is
inconsistent with the declared national policies. 183
b.
The Articles of Incorporation or any amendment thereto
may be rejected if it is not substantially in accordance with the form
prescribed in the RCCP. The prescribed form is provided in Section
14 of the RCCP.
3.
Illegal or Immoral Purposes. Rejection of the Articles
of Incorporation or any amendment thereto will result if the purpose
or purposes of the corporation are patently unconstitutional, illegal;
182
1
83
SEC Opinion date May 2, 1995.
Section 6(k), Presidential Decree No. 902-A.
236
COMMENTARIE AND JURISPRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
immoral, or contrary to government rules and regulations. Thus, the
Articles of Incorporation may be rejected if:
(1) The declared purpose of the corporation is to
promote and enhance the incorporation of the Philippines as
an American State; 184
(2) The purpose is to practice certain professions except
in certain cases; 1 85
(3) The corporation is organized to engage in illegal
gambling; 186
(4) The purpose of the corporation is immoral such as to
provide a "mail-order-bride" service;'87
(5) The purpose of the corporation is to establish a local
government unit like a barangay. 188
4.
False Certification. The Articles of Incorporation or any
amendment thereto may be rejected if the certification incorporated
therein concerning the amount of capital stock subscribed and/or
paid is false. This ground is expressly provided for in Section 16(c)
of the RCCP. The irregularity cannot be determined just by looking
at the Articles of Incorporation. The false nature of the entries
therein may be determined only later upon investigation. I� such
a case, there is also a ground to deny the application or revoke the
registration under Section 16(c) of the RCCP. The same is also a
ground to revoke the registration under Section 6(1) of Presidential
Decree No. 902-A because there is fraud in procuring the certificate
of registration.
5.
Time to Correct. The disapproval of the Articles of
Incorporation need not be a final disapproval. Section 16 of the
RCCP provides that the SEC shall give the incorporators, directors,
trustees, or officers a reasonable time from receipt of the disapproval
within which to modify the objectionable portions of the articles or
any amendment thereto.
1990.
184Philippine
Statehood USA, Inc., et al. v. SEC, G.R. No. 82493, January 24,
2 7
R
Nationalization Requirement. The Articles of
ti n or any amendment thereto may also be rejected if the
' nL
of ownership of the capital stock to be owned by citizens
1
ii Lh Philippines has not been complied with as required by existing
lit
r the Constitution. For example, the Articles of Incorporation
1(' a orporation engaged in buying and selling realty may be rejected
I f ' i n rs own more than 40% of the subscribed capital.
7.
Endorsement by Government Agencies. Section 16 of
h R CP provides that no Articles of Incorporation or amendment
'Lo Articles of Incorporation of banks, banking and quasi-banking
titutions, preneed, insurance and trust companies, NSSLAs,
p wnshops, and other financial intermediaries shall be approved
b the SEC unless accompanied by a favorable recommendation of
th· appropriate government agency to the effect that such articles
t' amendment is in accordance with law. Consistently, the SEC
numerates the businesses requiring endorsements from different
v rnment agencies in the formation of corporations, viz.: 189
TYPE OF BUSINESS
-
GOVERNMENT AGENCY
u.
Air Transport
b.
Banks, Pawnshops or other
Financial Intermediaries with
Quasi-Banking Functions.
Bangko Sentral ng Pilipinas
c.
Charitable Institutions and Social
Welfare Organizations
Department of Social Welfare
and Development
d.
Electric Power Plants/Trading of
Petroleum Products
Department of Energy
Civil Aeronautics Authority
Hospitals, Dental, Medical Clinics/ Department of Health
Maintenance Organizations
f.
Insurance/Mutual Benefit
Associations (also Pre-Need
Corporation)
Insurance Commission
g.
Non-chartered GovernmentOwned and Controlled
Corporations
Governance Commission
for Government-Owned or
Controlled Corporations
h.
Professional Associations
Professional Regulation Board
185
List.
SEC Opinion dated August 12, 1987; See 11th Foreign Investment Negative
186SEC Opinion
dated July 12, 1993.
dated October 17, 1989.
1 88Asuncion v. De Yriarte, G.R. No. 9321, September 24, 1914, 28 Phil. 67.
187SEC Opinion
189
Http://www.sec.gov.ph/gsr/primary/primaryreg.htm1. (Accessed on June 6,
2014 Ed.)
238
1.
j.
COMMENTARIE AND JURI PRUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
Radio, TV, Telephone, Internet
Service Providers, Value-added
Services
Recruitment for Overseas
Employment
k.
Security Agency/Anti-Crime Task
Force/Gun Clubs
1.
Tobacco Related Business
m. Volunteer Fire Brigade
n. Water Transport, Ship-building
and Ship Repair
0.
Waterworks corporations
National Telecommunications
Commission
Philippine Overseas
Employment Administration
(POEA)
Philippine National Police
National' Tobacco
Administration
Bureau of Fire Protection
Maritime Industry Authority
Local Waterworks Utilities
Administration/Manila
Waterworks and Sewerage
System and National Water
Resources Board
SEC. 17. Corporate Name. - No corporate
name shall be allowed by the Commission if it is not
distinguishable from that already reserved or registered
for the use of another corporation, or if such name is
already protected by law, or when its use is contrary to
existing law, rules and regulations.
A name is not distinguishable even if it contains
one or more of the following:
a)
The
word
"corporation",
"company",
"incorporated", "limited", "limited liability", or an
abbreviation of one of such words; and
b)
Punctuations,
conjunctions,
articles,
contractions, prepositions, abbreviations, different
tenses, spacing, or number of the same word or phrase.
The Commission, upon determination that the
corporate name is: (1) not distinguishable from a name
already reserved or registered for the use of another
N
239
corporation; (2) already protected by law; or (3) contrary
to law, rules and regulations, may summarily order the
corporation to immediately cease and desist from using
such name and require the corporation to register a
new one. The Commission shall also cause the removal
of all visible signages, marks, advertisements, labels,
prints and other effects bearing such corporate name.
Upon the approval of the new corporate name, the
Commission shall issue a certificate of incorporation
under the amended name.
If the corporation fails to comply with the
Commission's order, the Commission may hold the
corporation and its responsible directors or officers in
contempt and/or hold them administratively, civilly and/
or criminally liable under this Code and other applicable
laws and/or revoke the registration of the corporation.
NOTES
l.
Basic Policy. A corporation cannot use a name that
b longs to another even as a trade name. If any corporation could
ume at pleasure as an unregistered trade name the name of
nother corporation, this practice would result in confusion and open
th door to frauds and evasions and difficulties of administration
and supervision. The policy of the law expressed in our corporate
tatute is clearly against such a practice. 190
2.
What Must be Proved by Oppositor. A corporation
eeking to prevent another corporation from using its name under
ection 17 must prove that:
(1) The corporation has acquired a prior right over the
use of such corporate name; and
(2) It is any of the cases mentioned under Section 17
of the RCCP, that is: (a) the name is not distinguishable from
that already reserved or registered for the use of another
corporation; or (b) the name is already protected by law; or
190
Red Line Transporation Co. v. Rural Transit Co., G.R. No. 41570, September
6, 1934, 60 Phil. 549, citing Scarsdale Pub. Co. Colonial Press v. Carter, 116 New
York Supplement, 731; Svenska Nat. F. i. C. v. Swedish Nat. Assn., 205 Illinois
(Appellate Courts], 428, 434.
)
240
OMMENTARIE AND JURI PRUDEN E
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
JZ.l\'l't
a.
Section 17 now expressly grants the SEC the following
powers if it finds that the name of a corporation is not distinguishable
from a name already reserved or registered for the use of another
corporation or is already protected by law or is contrary to law, rules
and regulations:
(1) reject the Articles of Incorporation;
(2) summarily order the corporation to cease and desist
from using such name;
(3) summarily order the corporation to register a new
name and amend its Articles of Incorporation bearing the new
name;
See Industrial Refractories Corporation of the Philippines v. Court of
Appeals, G.R. No. 122174, October 3, 2002, 390 SCRA 352.
192
Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of
Commerce in the Philippines, Inc., G.R. No. 184008, August 3, 2016 citing Philips
Export B.V. v. Court of Appeals, G.R. No. 96161, February 21, 1992; see also GSIS
Family Bank - Thrift Bank v. BPI Family Bank, G.R. No. 175278, September 23,
2015.
191
193Supra.
I
PUIVATE
•r1 N
D
RP :nATl
241
au
th r moval of all visible signages, marks,
m nts, lab ls, prints and other effects bearing such
(3) the use of the name is contrary to existing law, rules and
regulations.191
3.
Power of SEC. The enforcement of the protection
accorded by Section 17 of the RCCP to corporate names is lodged
exclusively in the SEC. The jurisdiction of the SEC is not merely
confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act, as amended. By express mandate, the SEC has
absolute jurisdiction, supervision and control over all corporations. It
is the SEC's duty to prevent confus_ion 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 not distinguishable from existing corporate name. 192
The SEC, after finding merit in the claims of the real owner of the
corporate name, can compel the other corporation that is invalidly
using the name of another to abide by its commitment "to change its
corporate name in the event that another person, firm or entity has
acquired a prior right to the use of said name or one similar to it."193
TIP l
'l'l'l' Jt; 11 -1
N
tion 17 of the RCCP further provides that if the
fails to comply with the orders of the SEC (2, 3 and 4
EC may:
(1) hold the corporation or its responsible directors and
ffi r in contempt; and/or
(2) hold them (corporation and directors/officers)
dministratively, civilly and/or criminally liable; and/or
(3) revoke the registration/certificate of incorporation of
th corporation.
It should also be recalled, however, that even under
rporation Code, the SEC already had the power to compel
·p ration to change its corporate name in the event that the
,1 1
already belonged to another corporation. The corporation is
• mp lled to change the name especially because of its undertaking
I
nge its corporate name which was attached to the Articles of
rporation. 194
d. Nevertheless, Section 17 of the RCCP strengthens the
iw r of the SEC by providing for express powers and the effects of
i lation of its orders with respect to corporate name. In addition,
m r teeth is given to the deterrence to the illegal appropriation of
Lh names of existing entities because of the penal sanctions under
, ction 159 of the RCCP. Section 159 provides that "the unauthorized
us of a corporate name shall be punished with a fine ranging from
•r n thousand pesos (Pl0,000.00) to Two hundred thousand pesos
00,000.00)."
11
4.
Distinguishability Test. The RCCP adopts the
d · tinguishability test with respect to corporate names. This test was
dopted as part of the reform to enhance the ease of doing business.
It was observed that: "The present name verification system, with
th 'confusingly similar' standard imposed, is indeed confusing.
H nee, a shift to the "distinguishability" test will no doubt allow the
full and seamless automation of name registration. For example,
under the law today, you cannot register 'XYZ Dream Network'
194
GSIS Family Bank - Thrift Bank v. BPI Family Bank, G.R. No. 175278,
ptember 23, 2015)
242
MM • NTARI • AND J
I PRUDEN E
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
N
because of a previously registered "XYZ Dream Hospital". Under
the proposed amendment, you can do so, because one of the key
words is different, that is network and hospital."195 Under Section
18 of the Corporation Code, the corporate name was prohibited if
it was "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, confusingly similar or contrary to existing
laws."
a.
However, it is believed that the basic principle is still the
same. A corporation has an exclusive right ,to use its name, which
may be protected by injunction upon a principle similar to that upon
which persons are protected in the use of trademarks and trade
names. 196 Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name and
carried on its business thereunder, that another would attempt to
use the same name, or the same name with slight variation in such
a way as to induce persons to deal with it in the belief that they are
dealing with the corporation which has given a reputation to the
name. 197
b.
The concern of the legislators is that mere use of the
same word immediately results in the rejection of the applic�tion for
reservation of the corporate name although the business of the new
corporation is not the same as the business of the existing corporation
and although other words are included to distinguish a name from
another. It should be noted that even under our trademark laws, use
of identical marks is not necessarily prohibited. The use of identical
mark does not, by itself, lead to a legal conclusion that there is
trademark infringement if the mark is not used for identical, similar
or related goods. Thus, the following are cited as examples:
"1)
Registration of the trademark "SHELL" for cigarettes was
allowed although there is prior registrant for gasoline and petroleum
products (Shell Company of the Philippines v. CA, C.R. No. L-49145, May
21, 1979);
-I
11 n, t
t\
RP RATI N AND
F PRI ATE
RP RAT! N
Tl trad mark E SO was allowed for cigarettes although the
t gist r d by another for petroleum products (Essa Standard
IC 111l rn, In . u. '.A, 116 SCRA 336 [J 982));
The registration of the trademark CANNON was allowed for
1 d ls d pite the prior registration of the same for paints, chemical
du t , toner and dyestuff (Canon Kabushiki Kaisha v. CA and NSR
b 1· 01poration, 336 SCRA 266 [2000)); and
4)
The mark which contains the word GALLO can be used for
nx· tt s without infringing the rights of the owner of another mark which
JO ·ontains the same word but which was registered for wine. It was
t d that the dominant feature of the GALLO cigarette trademark is the
d v· ·. of a rooster and the name of the manufacturer are clearly stated. The
1 b ls for the GALLO wine are diverse (Mighty Corporation v. E&J Gallo,
upr-a.10s)."199
4.01. Prior Right. The right to the exclusive use of a corporate
· am with freedom from infringement by similarity is determined
b priority of adoption.200 A corporation that is incorporated and
clopts a corporate name earlier acquires a prior right over the use
f the corporate name. 201 On the other hand, with respect to the
cond requisite, the test is whether the name is such as to mislead
u person using ordinary care and discrimination and the Court
mu t look to the record as well as the name themselves. 202 While
distinguishability is the present test, the prior right of a person
should be respected.
a.
Under the Dominancy Test that is incorporated in the
Intellectual Property Code, there will be infringement if the mark
ontains the dominant feature of the mark of a trademark belonging
to another. 203 This rule applies to corporate names. Thus, the name
cannot be used if the name indicated in the Articles oflncorporation
adopts the dominant feature of an existing corporate name or even
198
Mighty Corporation v. E & J Gallo, 434 SCRA 473 (2004).
Sundiang and Aquino, Reviewer on Commercial Law, Part VII, 2019 Ed.
200
Philips Export B.V. v. Court of Appeals, ibid., p. 463; Industrial Refractories
Corporation of the Philippines v. Court of Appeals, supra.
201
Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of
Commerce in the Philippines, Inc., supra, citing Industrial Refractories Corporation
v. Court of Appeals, supra.
202
Industrial Refractories Corporation of the Philippines v. Court of Appeals,
199
195Journal of the Senate, December 13, 2016, p. 724.
96
1 Philips Export B.V. v. Court of Appeals, G.R. No. 96161, February 21, 1992,
p. 466, citing 18 C.J.S 574; See also Indian Chamber of Commerce Phils., Inc. v.
Filipino Indian Chamber of Commerce in the Philippines, Inc., supra; Samahan ng
Manggagawa sa Hanjin Shipyard v. Bureau of Labor Relations, G.R. No. 211145,
October 14, 2015.
197
Philips Export B.V. v. Court of Appeals, ibid., citing 6 Fletcher 39-40.
243
ibid.
203
Section 151.1, Intellectual Property Code.
244
MMENTARIE AND JURI PRUDEN E
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RPORATIONS
245
·a trademark belonging to another.204 The name cannot likewise
be used if it is the essential and distinguishing feature of another
corporation's registered and protected corporate name.205
n t d al with the entity concerned, (2) the evasion of
I •
tion and duties, and (3) the reduction of difficulties of
11dm'ni tration and supervision over corporations.
(1) In Universal Mills Corporation v. Universal Textile
Mills, Inc., 206 the Supreme Court ruled that the corporate
names Universal Mills Corporation and Universal Textile
Mills, Inc., are indisputably so similar that even under the test
As a rule, generic, descriptive and geographical
annot be exclusively appropriated. For example, the
m "international" is a generic or descriptive term.211 Hence, a
1 1' ration cannot appropriate it. Even if the word "international'
u d by one corporation as part of its corporate name, the term can
till b used by other corporations. Similarly, the word "Filipino" in
l name "Filipino Indian Chamber of Commerce in the Philippines,
11 ·," "is merely a description, referring to a Filipino citizen or one
l'viI g in the Philippines, to describe the corporation's members.
the other hand, the words 'in the Philippines' and 'Phils., Inc.'
r imply geographical locations of the corporations which, even if
ppended to both the corporate names, will not make one distinct
('· m the other. Under the facts of this case, these words cannot be
parated from each other such that each word can be considered to
. dd distinction to the corporate names. Taken together, the words
in the phrase 'in the Philippines' and in the phrase 'Phils., Inc.' are
ynonymous - they both mean the location of the corporation.''212
of "reasonable care and observation" confusion may arise. In
another case, the use of the words "Family Bank" by a bank
was disallowed because the same already belonged to an
existing bank.207
(2) Similarly, the name Ang Mga Kaanib sa Iglesia ng
Diyos Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas cannot
be registered because it is strikingly similar to the name of an
existing corporation Iglesia ng Dias kay Cristo Jesus, Haligi at
Suhay ng Katotohanan. 208 Adding the words "Ang Mga Kaanib"
and "Sa Bansang Pilipinas, Inc." will not matter because the
same words are merely descriptive of and referring to the
members or the corporation. The dominant words are Iglesia
ng Diyos Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
(3) Standard Philips Corporation was enjoined to
use the word "Philips" in its corporate name because it was
considered similar to the well-known mark and corporate
names of Philips Electrical Lamps, Inc. and Philips Industrial
Development, Inc.209
b.
In Lyceum of the Philippines, Inc. v. Court of Appeals, 210
the Supreme Court explained that the purposes of the prohibitions
under Section 18 of the Corporation Code (now Section 17 of the
RCCP) are (1) the avoidance of fraud upon the public which would
204
Philips Export B.V. v. Court of Appeals, supra.
Ang Mga Kaanib sa Iglesia ng Diyos Kay Kristo Jesus, H.S.K. sa Bansang
Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay sa Katotohanan,
G.R. No. 137592, December 12, 2001, 372 SCRA 171.
206
78 SCRA 62 (1977).
207
GSIS Family Bank-Thrift Bank v. BPI Family Bank, G.R. No. 175278,
September 23, 2015.
208
Ang Mga Kaanib sa Iglesia ng Diyos Kay Kristo Jesus, H.S.K. sa Bansang
Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay sa Katotohanan,
205
supra.
209
210
Philips Export B.V. v. Court of Appeals, supra.
G.R. No. 101897, March 5, 1993, 219 SCRA 610.
4.02. Doctrine of Secondary Meaning. The Doctrine of
econdary Meaning that originated in trademark law likewise finds
application and has been extended to corporate names. Under said
doctrine, a word or phrase, which is originally incapable of exclusive
appropriation because the word or phrase is geographic or otherwise
descriptive, might nevertheless have been used for so long and so
xclusively by one producer with reference to an article and the
purchasing public has considered the word or phrase as associated
to his product.213 Thus, if a corporate name, though descriptive, has
been used for so long and exclusively by one corporation and has
become associated with that corporation alone in the mind of the
public, another corporation cannot register said name as a corporate
name.
5.
Priority of Adoption Rule. It cannot be overemphasized
that a corporation chooses its name at its own peril; and the use of
211
SEC Opinion dated August 19, 1982.
Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of
Commerce in the Philippines, Inc., G.R. No. 184008, August 3, 2016.
213
Lyceum of the Philippines, Inc. v. Court of Appeals, G.R. No. 101897, March
5, 1993.
212
246
247
COMMENTARIES ANDJURI PRUDEN EON
THE REVISE D CORPORATION CODE
OF THE PHILIPPI NE S
· a name similar to one adopted by another corporation, whether a
business or a non-profit organization, if misleading or likely to injure
in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for
injunction to prevent its use. Under the Priority of Adoption Rule,
the corporation that first adopts a corporation name has the right
thereto and a subsequent corporation cannot use the same name. 214
A corporation may likewise be directed to change its corporate name
in accordance with the undertaking that it submitted to the SEC
together with its Articles of Incorporation.215.
a.
The corporate name is a property right that cannot be
impaired or defeated if another corporation will appropriate the
same. 216 It is in the nature of a right in rem that can be asserted
against the whole world. 211 A corporation may have a better right to
use its corporate name on the ground of priority of adoption. 218
b.
Even a foreign corporation may sue a domestic corporation
to prevent the latter from using its name. The foreign corporation has
a legal right to restrain an officer of the Government "from issuing
a certificate of incorporation to residents of the Philippines who are
attempting to organize a corporation for the purpose of pirating the
corporate name of a foreign corporation and of engaging in the same
business, for the purpose of making the public believe that the goods
it proposes to sell are the goods of the foreign corporation and of
defrauding it and its local dealers of their legitimate trade."219
c.
A corporation can use a trademark or trade name that is
separate from its corporate name. However, the corporation cannot
use the name of another corporation even if the corporate name is
an unregistered trade name or mark. Otherwise, this practice would
214Indian Chamber of Commerce of the Philippines, Inc. v. Filipino Indian
Chamber of Commerce in the Philippines, Inc., G.R. No. 184008, August 3, 2016;
De La Salle Montessori International of Malolos Inc. v. De La Salle Brothers, Inc.,
G.R. No. 205548, February 7, 2018.
215
Ang Mga Kaanib sa Iglesia ng Diyos Kay Kristo Jesus, H.S.K. sa Bansang
Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay sa Katotohanan,
supra; Industrial Refractories Corporation of the Philippines v. Court of Appeals,
supra.
216
Philips Export B.V. v. Court of Appeals, G.R. No. 96161, February 21, 1992.
211/bid.
21
8United Church of Christ in the Philippines, Inc. v. Branford United Church
of Christ, Inc., et al., G.R. No. 171905, June 20, 2012.
219Western Equipment and Supply Co. v. Reyes, 50 Phil. 115.
r fu ion and open the door to frauds and evasions and
f administration and supervision. 220
Name in Articles of Incorporation. A corporation
ot u e any corporate name other than what is reflected in the
t' ·l of Incorporation. For instance, in intervening in or filing a
, the corporation should use its corporate name and not another
that it had not registered.221
a.
A corporation may use a trade name or business name
at i different from its corporate name.222 In fact under paragraph
, £ EC Memorandum Circular No. 13, Series of 2019 dated June
1, 019 quoted below, ''business or trade name which is different
fr m the corporate or partnership name shall be indicated in the
nrti les of incorporation or partnership. A company may have
rn re than one business or trade name." It should be noted that
. 1d r the Business Name Law, juridical persons need not register
th - corporate or partnership name that they registered with the
urities and Exchange Commission. 223 These juridical persons are
r · quired to register only if they are using business names that are
different from their corporate or partnership names.224
(1) However, the SEC pointed out that there are
instances wherein a corporation is mandated to use, issue and/
or submit papers reflecting therein not only just the business
name but also its corporate name. An example is when the
corporation files official papers, such as Financial Statements
and the like, with the SEC and other agencies like the Bureau
of Internal Revenue or for the Official Receipts issued by the
corporation in the conduct of its business.225
b.
A case may proceed against a corporation even if the name
of the real party in interest was not specified in the case. In one case, 226
the petitioner was not named as the respondent in the case and the
220
Red Line Transportation Company Co. v. Rural Transit Co., supra.
Laureano Investment and Development Corporation v. Court of Appeals,
G.R. No. 100468, May 6, 1997, 272 SCRA 253, 264.
222
SEC-OGC Opinion No. 11-39 dated September 21, 2011; SEC-OGC Opinion
No. 10-32 dated December 17, 2010.
223
Act No. 3883.
224Jbid.
225SEC-OGC Opinion No. 11-39 dated September 11, 2011.
226
Pison-Arceo Development Corporation v. NLRC, et al., G.R. No. 117890,
September 18, 1997, 279 SCRA 312, 324.
221
MMENTARI • AN J . I . RU •N '
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24
N
249
In orp ration that th y shall conduct microfinance operations
pur uant to Republic Act No. 8425 or the Social Reform and
P v rty Alleviation Act. 229
complainants named as the respondent the non-juridical arm of the
petitioner called "Hacienda Lanutan." The Supreme Court allowed
the case to prosper against the petitioner corporation because the
petitioner represented itself to be "Hacienda Lanutan" in dealing
with the complainants. "Hacienda Lanutan" was considered by the
Court as "roughly equivalent to its trade name or even nickname or
alias." 227 Although the name used by the complainant is different,
there was no dispute as to the identity of the petitioner.
At rm that describes the business of a corporation in its name should
r f r to its primary purpose. If there are two such terms, the first
hould refer to the primary purpose and the second to the secondary
purpose.
7.
SEC Rules. The rules on corporate names as embodied
in SEC Memorandum Circular No. t3, Series ,of 2019 dated June 21,
2019 entitled "Amended Guidelines and Procedures on the Use of
Corporate and Partnership Names" 228 provide as follows:
a)
The name shall not be distinguishable from other corporate
or partnership name registered with the Commission, or with
the Department of Trade and Industry, in the case of sole
proprietorships;
b)
If the name applied for is similar to that of a registered
corporation or partnership, the applicant shall add one or more
distinctive words to the proposed name to remove the similarity
or differentiate it from the registered name;
To keep abreast with developments in business and information
technology in the country, the Commission is adopting the following
guidelines and procedures in the registration of corporate, one person
corporate and partnership names:
1.
a)
The corporate name shall contain the word "Corporation"
or "Incorporated," or the abbreviations "Corp." or "Inc.,"
respectively;
b)
In the case of a One Person Corporation, the corporate name
shall contain the word "OPC" either below or at the eBd of its
corporate name;
c)
The partnership name shall bear the word "Company" or "Co."
and if it is a limited partnership, the word "Limited" or "Ltd." A
professional partnership name may bear the word "Company,"
"Associates," or "Partners," or other similar descriptions;
d)
The corporate name of a foundation shall use the word
"Foundation";
e)
The corporate name of all non-stock, non-profit corporations
including non-governmental organizations and foundations,
engaging in microfinance activities shall use the word
"Microfinance" or "Microfinancing''; provided that said
corporations shall state in the purpose clause of their Articles of
227
Pison-Arceo Development Corporation v. NLRC, et al., ibid., citing Eden v.
Ministry of Labor and Employment,182 SCRA 840,847,February 28,1990.
228
Previously SEC Memorandum Circular No. No. 14, Series of 2017
dated December 8, 2017; SEC Memorandum Circular No. 21, Series of 2013 as
amended by SEC Memorandum Circular No. 8, Series of 2015 dated July 31, 2015,
SEC Memorandum Circular No. 6, Series of 2015, dated June 2, 2015 and SEC
Memorandum Circular No. 5,Series of 2015 dated April 16,2015.
However, the addition of one or more distinctive words
shall not be allowed if the registered name is coined or unique
unless the board of directors or majority of the partners of
the subject corporation or partnership gives its consent to the
applied name;
c)
Punctuation marks, spaces, signs, symbols and other similar
characters, regardless of their form or arrangement, shall
not be acceptable as distinguishing words for purposes of
differentiating a proposed name from a registered name;
d)
A name that consiste solely of special symbols, punctuation
marks or specially designed characters shall not be registered.
4.
Business or trade name which is different from the corporate or
partnership name shall be indicated in the Articles of Incorporation
or Partnership. A company may have more than one business or trade
name.
5.
A trade name or trademark registered with the Intellectual Property
Office may be used as part of the corporate or partnership name of a
party other than its owner if the latter gives its consent to such use.
6.
a)
The full name or surname of a person may be used in a corporate
or partnership name if he or she is a stockholder, member or
partner of the said entity and has consented to such use; if the
person is already deceased, the consent shall be given by his or
her estate;
229
As added by SEC Memorandum Circular No. 8,Series of 2015 dated July
31,2015.
250
'l'l'J7LJ1]
OMMENTARIE AND J RI PRUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
b)
IZA'I'I
b
A single stockholder of a One Person Corporation (OPC) may
use his/her name; provided that said name shall be accompanied
with descriptive words aside from the suffix OPC.
7.
The Commission may require a registrant to explain to its
satisfaction the reason for the use of a person's name;
d)
The meaning of initials used in a name shall be stated by the
registrant in the Articles of Incorporation, Articles of Partnership
or in a separate document signed by an incorporator, director or
partner, as the case may be.
d)
8.
The name of a local geographical unit, site or location cannot be used
as a corporate or partnership name unless it is accompanied by a
descriptive word or phrase, e.g., Pasay Food Store, Inc.
9.
Pursuant to existing laws, the following words and phrases can be used
in the corporate or partnership name only in the manner enumerated
below:
a)
"Finance Company," "Financing Company," "Finance and
Leasing Company" and "Leasing Company," "Investment
Company," "Investment House" by entities engaged in the
financing or investment house business (R.A. 8556 and Pres.
Decree 129);
"United Nations," "UN," in full or abbreviated form exclusively
by the United Nations and its attached agencies (R.A. 226);
f)
"SPV-AMC" by corporations authorized to act as special purpose
vehicle (R.A. 9182);
g)
The name of an international governmental organization, such
as "International Criminal Police Organization (INTERPOL),
"International Monetary Fund (IMF), and "International Labour
Organization" (ILO) may not be used as part of a corporate or
partnership name unless when duly authorized or allowed by
the Commission"; and
h)
ASEAN (protected under Article 6ter of the Paris Convention
for the Protection of Industrial Property, adopted in 1883 and
revised in Stockholm in 1967).
10.
The practice of a profession regu�ated by a special law �h�ch, amo�g
_
others, provides for the perm1ss1ble use of the profess10n s name m
a firm, partnership or association shall govern the use of the name,
e.g., "Engineer" or "Engineering'' R.A. 1582), "Architect" (R.A. 9266) or
"Geodetic Engineer" (R.A. 8560).
Notwithstanding the limitations mentioned above, any
association registered by entities engaged in the listed activities
may use the profession's name, e.g., Association of Engineers of the
Philippines, Inc.
11.
Unless otherwise authorized by the Commission, the words and
phrases enumerated below can be used only by the entities mentioned:
a)
"lnvestment(s)" or "Capital" by entities organized as investment
house or investment company;
b)
"Capital" by entities organized as investment house, investment
company or holding company;
c)
"Asset/Investment/Fund/Financial Management," or "Asset/
Investment/Fund/Financial Adviser," or any similar words or .
phrases - by entities organized as investment company adviser
or holders of investment management activities (IMA) license
from the Bangko Sentral ng Pilipinas;
230
Paragraph 8 of SEC Memorandum Circular No. 5, Series of 2008 provides
that "a subsidiary or affiliate of a foreign corporation that applies for the registration
of all or substantially all of the name of its parent company shall use the word
"Philippines" as part of its name which shall be written as "(Philippines)" or "(Phil.)"
after the name." Although this provision does not appear in SEC Memorandum
Circular No. 21, Series of 2013, it is believed that is advisable to include the word
Philippines if the name of the parent company will be used (with its consent) so that
there will be no confusion.
"L nding
ompany" and "Lending Investor" by l� nding
mpanies (R.A. 9474), or "Pawnshop" by entities authorized to
op rat pawnshops (P.D. 114);
"Bonded" by entities with licensed warehouses (R.A. 247);
The name of an internationally known foreign corporation, or
something similar to it, cannot be used by a domestic corporation
unless it is a subsidiary and the parent corporation has consented to
such use;230
However, a name written in a foreign language, even if registered
in another country, shall be not registered if the name violates good
morals, public order or public policy, or has an offensive or indecorous
meaning in any of the country's official languages or major dia:lects.
2 1
"Bank," "Banking," "Banker," "Savings and Loan Association,"
(R.A. 8367), "Trust Corporation," "Trust Company," or words
of similar meaning by entities engaged in the banking or trust
business (R.A. 8791);
The single stockholder may also use the name of another
person provided consent was given by the said person or
if deceased, his estate. Provided, that the name shall be
accompanied by the descriptive words other than the suffix
OPC.
c)
UP RA
IV 'l'E
12.
13.
14.
2 3
MM •NT-· I• AND SURI PRUD •N E
DE
THE REVI ED CORP RATION
OF THE PHILIPPINES
252
d)
"National," "Bureau," "Commission," "State," and other
similar words, acronyms, abbreviations that have gained
wide acceptance in the Philippines by entities that perform
governmental functions;
b)
th r -registration is approved by the majority vote of
th directors or trustees and the vote of the stockholders
representing the majority of the outstanding capital stock
or membership;
e)
"Association" and "Organization" or similar words which pertain
to non-stock corporations by entities primarily engaged in non­
profit activities; and
c)
they shall include a statement in the articles of
incorporation of the new corporation that the same is
using the name of the expired corporation; 231 and
f)
"Stock Exchange/Futures Exchange/Derivatives Exchange," "Stock
Broker/Securities Broker/Derivatives Broker," "Commodity/
Financial Futures Merchant/Broker," "Securities Clearing
Agency/Stock Clearing Agency," "Plans" or any similar words
or phrases by entities organized as an exchange, broker dealer,
commodity futures broker, clearing agency, or pre-need company
under the Securities Regulation Code (R.A. 8799).
d)
If applicable, they will no longer file a petition to set aside
the order of revocation.
11.
Affidavit, executed under oath by the hold-over corporate
secretary, attesting that:
Pursuant to Republic Act No. 10530, or "The Act Defining the Use and
Protection of the Red Cross, Red Crescent and Red Crystal Emblems,"
the use of the words "red cross," "red crescent," or' "red crystal" or
their translation in any official language and dialect cannot be used
or registered as part of a corporate or partnership name, unless with
the consent of the Philippine National Red Cross.
The enumeration in paragraphs 10, 11 and 12 are not exclusive and
may increase or decrease depending on future legislative issuances
or administrative orders of the appropriate or duly authorized
government offices.
The name of a corporation or partnership that has been dissolved or
whose registration has been revoked shall not be used by another
corporation or partnership within five (5) years from the approval of
dissolution or five (5) years from the date of revocation, unless its use
has been allowed at the time of the dissolution or revocation by the
stockholders, members or partners who represent a majority of the
outstanding capital stock or membership of the dissolved corporation
or partnership, as the case may be.
No application for re-registration of the expired corporation,
however, shall be processed by the Commission unless the application
is accompanied by the following documents.
1.
Board Resolution, executed and signed under oath by the hold­
over board of directors/trustees of the expired corporation,
attesting that:
a)
the applicant for re-registration is a new corporation
intending to use the name of the expired corporation
(specially identifying the corporate name and registration
number);
Latest General Information Sheet of the expired corporation,
stamped "received" by the Commission; and
a)
there are no properties owned by the dissolved/revoked
corporation corporation due for liquidation or in case
there are properties owned by the expired corporation,
no property is transferred to the new corporation or, in
case of stock corporations, used for subscription payment
without undergoing corporate liquidation process;
b)
there is no pending intra-corporate dispute or claim
involving the expired corporation (**provision from me no.
14 2017); and
c)
that the expired corporation has no derogatory information
with the Commission at the time of its application for re­
registration.
Upon approval of the re-registration, the certificate of
registration to be issued to the new corporation shall indicate its
new SEC registration number and pre-generated Tax Identification
Number (TIN) as confirmation that the same is a separate and distinct
entity from the expired corporation.
15.
A corporate or partnership name, which was previously used but
become the subject of amendment, shall not be re-registered or used
by another corporation or partnership for a period of three (3) years
from the date of the approval of the adoption of the new corporate or
partnership name.
An earlier period may be allowed for the registration or use of the
former corporate or partnership name provided that the corporation
or partnership, which previously owned the used corporate or
partnership name, gives its consent. The requirement to wit, as:
231
As amended by SEC Memorandum Circular No. 6, Series of 2015, dated
June 2, 2015.
MM , N1'ARI • AND J RI PR DEN E
THE REVISED CORP RAT! N ODE
OF THE PHILIPPINES
254
R
For Corporations:
a)
Directors/Trustees' Certificate approved by the majority of the
Directors/Trustees approving the use of the former name by
another corporation or partnership; and
b)
Secretary Certificate of non-existence of intracorporate dispute
from the Corporation that use the former corporate name.
n quir cl a prior right to the use of such name, that the name has
b n 1 ·. 1 r d not distinguishable from a name already registered
or r s rv d for the use of another corporation, or that it is contrary
to law, public morals, good customs or public policy. The affidavit
shall b signed by at least two incorporators or partners in the form
pr cribed by the Commission. This affidavit shall not be required if
th undertaking is already included as one of the provisions of the
Articles of Incorporation or Partnership of the registrant.
For Partnerships:
a)
Partnership's Resolution approved by the majority of the
Partners approving the use of the former name by another
corporation or partnership.
For One Person Corporations:
a)
16.
17.
18.
The consent of the sole stockholder or, in cases of incapacity
or death, his/her designated nominee, given in a notarized
instrument and countersigned by the Corporate Secretary.
Names of absorbed/constituent corporation may not, be used unless
it is the surviving corporation intending to use the said absorbed/
constituent corporate name. Provided, however, that another
corporation may use the names of absorbed/constituent corporation if
consent of the surviving corporation is obtained such as:
a)
Directors' Certificate ofthe surviving corporation permitting the
usage of the said absorbed/constituent corporation by another
corporation; and
b)
Secretary's Certificate ofnon-existence ofintracorporate dispute
of the Corporation from the Surviving Corporation.
a)
The reservation or notice of availability of a name shall not
constitute an approval of the use of such name or an application
for a change of name;
b)
No erasures, changes, modifications or alterations on a name
reservation form shall be allowed; and
c)
Appeals from or opposition to the approval of corporate and
partnership names of new companies, or complaints against
proposed new names of existing companies or partnerships,
shall be resolved by the Company Registration and Monitoring
Department (CRMD). The decisions of CRMD may be appealed
to the Commission En Banc through the Office of the General
Counsel.
At the time of its registration, a corporation or partnership shall
submit an affidavit containing an unqualified undertaking to change
its change the name, immediately upon receipt of notice from the
Commission that another corporation, partnership or person has
N
J •
This Memorandum Circular shall amend all issuances, orders, rules
and regulations of the Commission that may be inconsistent with it,
and shall take effect immediately.
a.
Corporation and Incorporated. The rules require
th inclusion in the corporate name of the word "Corporation"
r "Incorporated," or the abbreviations "Corp." or "Inc." The
r quirement is imposed to distinguish corporations from the other
bu iness organizations like partnerships, sole proprietorships and
unregistered associations. 232 This requirement is also reflected in
ction 14 of the RCCP which requires as the First Paragraph of the
Articles the following: "That the name of said corporation shall be
________, Inc., Corporation or 'OPC'."
b. Revocation, Dissolution and Expiration of Term.
The rules provide that the name of a corporation or partnership that
has been dissolved or whose registration has been revoked shall
not be used by another corporation or partnership unless approved
by the SEC. However, only expired corporations may apply for re­
r gistration using the same corporate name. If a new corporation
i organized using the name of a dissolved corporation, the newly
formed corporation cannot be considered as the legal successor of
the dissolved corporation. The new corporation has a personality
eparate and distinct from the dissolved corporation. The new
corporation cannot enjoy the rights and privileges of the dissolved
corporation although the new corporation has the same or similar
name. 233
(1) Under the previous rule before the amendment by the
latest circular, the names of dissolved corporation can be used
after three years from dissolution. In the case of corporations
with revoked registration, their names can be used after six
SEC Opinion dated August 16, 1996.
233SEC Opinion dated June 7, 2002.
232
256
MMENTARIE AN J RI PR E
•
THE REVISED ORP RATION ODE
OF THE PHILIPPINES
N
years.234 Under the present rules, "the name of a corporation or
partnership that has been dissolved or whose registration has
been revoked shall not be used by another corporation, within
five years from the approval of dissolution or five years from
the date of revocation. 235
8.
Change of Name. A corporation may change its corporate
name. Even in the absence of Section 1 7 of the RCCP that expressly
allows change of name, a corporation has the right to apply for such
change if there is no express prohibition in the statute. "The name
of a corporation in this respect designates the corporation in the
same manner as the name of an individual designates the person.
Since an individual has the right to change his name under certain
conditions, there is no compelling reason why a corporation may not
enjoy the same right. There is nothing sacrosanct in a name when
it comes to artificial beings. The sentimental considerations that
individuals attach to their names are not present in corporations
and partnerships. Of course, as in the case of an individual, such
change may not be made exclusively by the corporation's own act.
It has to follow the procedure prescribed by law for the purpose;
and this is what is important and indispensably prescribed - strict
adherence to such procedure."236
a.
A general power to alter or amend the charter of a
corporation necessarily includes the power to alter the name of the
corporation. 237 Statutes are to be found in the various jurisdictions
dealing with the matter of change in corporate names. Such statutes
have been subjected to judicial construction and have, in the main,
been upheld as constitutional. In direct terms or by necessary
implication, they authorize corporations to adopt new names and
prescribe the mode of procedure for that purpose. The same steps
must be taken under some statutes to effect a change in a corporate
name, as when any other amendment of the corporate charter
234
Indian Chamber of Commerce of the Philippines, Inc. v. Filipino Indian
Chamber of Commerce in the Philippines, Inc., G.R. No. 184008, August 3, 2016.
235
SEC Memorandum Circular No. 13, Series of 2019.
236
Philippine First Insurance Company, Inc. v. Hartigan, et al., G.R. No.
L-26370, July 31, 1970.
237
Philippine First Insurance Company, Inc. v. Hartigan, et al., ibid. citing Ft.
Pitt Bldg., etc., Assoc. v. Model Plan Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In
re Fidelity Mut. Aid Assoc., 12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa. Co. Ct. 184;
Wetherill Steel Casting Co., 5 Pa. Co. Ct. 337.
TITLE JI-
IZA'rI
F PRlVAT
N
2 7
ht. Wh n th g n ral law thus deals with the subject, a
ti n an change its name only in the manner provided. 238
b.
The corporation, upon the change of its name is in no
a new corporation or the successor of the original corporation.
th same corporation with a different name, and its character is
· 1 n respect changed.
"An authorized change in the name of a corporation has no more effect
n its identity as a corporation than a change of name of a natural person
upon his identity. It does not affect the rights of the corporation or
n or add to its obligations. After a corporation has effected a change in
name it should sue and be sued in its new name.... (13 Am.Jur. 276-277,
·iting cases.)
A mere change in the name of a corporation, either by the legislature
r by the corporators or stockholders under legislative authority, does not,
g nerally speaking, affect the identity of the corporation, nor in any way
affect the rights, privileges, or obligations previously acquired or incurred
by it. Indeed, it has been said that a change of name by a corporation has
no more effect upon the identity of the corporation than a change of name
by a natural person has upon the identity of such person. The corporation,
upon such change in its name, is in no sense a new corporation, nor the
uccessor of the original one, but remains and continues to be the original
corporation. It is the same corporation with a different name, and its
character is in no respect changed.... (6 Fletcher, Cyclopedia of the Law of
Private Corporations, 224-225, citing cases.)
The change in the name of a corporation has no more effect upon its
identity as a corporation than a change of name of a natural person has
upon his identity. It does not affect the rights of the corporation, or lessen
or add to its obligations.
The fact that the corporation by its old name makes a format transfer
of its property to the corporation by its new name does not of itself show that
the change in name has affected a change in the identity of the corporation.
Palfrey u. Association for Relief, etc., 110 La. 452, 34 So. 600. The fact that a
corporation organized as a state bank afterwards becomes a national bank
by complying with the provisions of the National Banking Act, and changes
its name accordingly, has no effect on its right to sue upon obligations or
liabilities incurred to it by its former name. Michigan Ins. Bank u. Eldred
143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
238
Philippine First Insurance Company, Inc. v. Hartigan, et al., supra, citing 6
Fletcher 212-213.
25
MMEN1'ARI I A D JURI PR D , N E N
THE REVI . • D ORPORATION ODE
OF THE PHILIPPINES
·
A deed of land to a church by a particular name has been held no t to
be a�fected by
the fact that the church afterwards took a different name
_
Cahill v. Bigger, 8 B. Mon (ky) 211.
A change in th� name of a corporation is not a divestiture of title or
such a change as requires a regular transfer of title to property whether real
or personal, fr om the c orporation under o ne name to the sa�e corporation
unde� another name.
_ McCloskey v. Doherty, 97 Ky. 300, 30 S. w. 649. (19
American and Enghsh Annotated Cases 1242-1243.)
�s was very aptly said in Pacific· Bank v De Ro 37 Cal. 538
"The
changmg of the �ame of a corporation is no more .
the creation of a corpo�ation
than the changmg of the name of a natural
person is the begetting of a
na�ural person. The act, inboth cases, would
seem tobe what the language
wh1c� we use to designate it imports - a chan
ge of name and not a change
ofbemg.
XXX
Actio nsbroughtby a corporation after it has changed its name should
be b�ought und�r the new name although for the enforcement of rights
_
existmg at the time the change was made. Lomb v. Pioneer Sau., etc., Co.,
106�a. 591, 17 So 670: Newlan v. Lombard University, 62 III. 195; Thomas
·
:
v. Visitor ofFrederick County School' 7 Gill & J (Md)
• 388·, De zaware, etc., R.
·
Co. v. Tric�, 23 N. J. L. 321; Northumberland Country Bank v. Eyer, 60 Pa·
St. 436; Wilson v. Chesapeake etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not affect its right to
_
.
brmg an act10n on a note given to the corporation under its former name
.
Cumberland College_v. Ish, 22. Cal. 641; Northwestern College v. Schwagler
37 Ia. 577. (19 American and English Annotated Cases 1243.)"
c.
A change in corporate name does not make a new
.
corporat10n, whether effected by a special act or under a general
law. It ha� no effe�t �� �he identity of the corporation or on its
�roperty, :1�hts or hab1hties. The corporation, upon such change in
its na��, is m no sense a new corporation; it is not the successor of
the origma� corporation. It is the same corporation with a different
name, and its character is in no respect changed.2as
239P.C. Javier & Sons, Inc., et al. v. Hon. Court of Appeals' et al., G.R. No.
1295 52, June 29, 2005, 462 SCRA 36, 45.
N
2 9
(1)
on qu ntly, the renamed corporation remains
li bl for th illegal dismissal of its employees who were
parat d under the guise that a new corporation was created
wh n the employer corporation was renamed.240
(2) In another case, it appears that there was a bona
fide bidding process for respondent's designated cargo handling
contract, and the project or contract was awarded to one of the
participating bidders, which for whatever reason - eventually
changed its corporate name during the bidding process,
prompting the execution of the awarded cargo handling
contract under its new corporate name instead of the old one
used during the submission of bids. The signing of the contract
under the new name is valid because there is no change in
the person of the winning bidder. The fact that the original
bidder and winner bears the original name of the bidder, and
the resulting cargo handling contract is in the new name of the
bidder has no bearing; in legal contemplation, the bidder and
the signatory to the contract are one and the same.241
d. The corporation that changed its name was not required
under the Corporation Code to formally notify its debtors. There is
also no such requirement under the RCCP. Notification to debtors is
discretionary. Courts cannot impose on a corporation that changes
its name the duty to notify a debtor of such change absent any
law, circular or regulation requiring such notice. Courts will be
ngaged in judicial legislation if the obligation to notify is imposed
in the absence of statutory or administrative rule to that effect.242
However, applicable rules require notice to government agencies
like the Bureau of Internal Revenue or the Philippine Economic
Zone Authority for registered companies.
e.
The old name of the corporation shall be indicated in the
Certificate of Filing of Amended Articles of Incorporation. Another
corporation cannot appropriate such old name. The former corporate
name of a corporation cannot likewise be registered by other
individuals with the SEC.243
240Zuellig Freight and Cargo Systems v. NLRC, G.R. No. 157900, July 22, 2013;
Avon Dale Garments, Inc. v. NLRC, G.R. No. 117932, July 20, 1995.
241Northern Mindanao Industrial Part and Service Corp. v. Iligan Cement
Corp., G.R. No. 215387, April 23, 2018.
242P.C. Javier & Sons, Inc., et al. v. Hon. Court of Appeals, et al., supra, p. 43.
243SEC Opinion dated August 3, 1988.
261
MMENTARI I AND JU.RI PRUDEN E
THE REVISED CORPORATION
DE
OF THE PHILIPPINES
260
instant p tition" on account of the change of name of pe� itioner
B
from "PCI Leasing and Finance, Inc." to "BDO Leasmg and
Finance Inc." The CA opined that since the Board Resolution
and Sp�cial Power of Attorney issued by petitioner BDO
.
_
authorizing its officer to initiate the appropriate court action on
behalf of the company was still under the name of "PCI Leasing
and Finance, Inc.," and considering that petitioner BDO has
already changed its name, the aforesaid Board Resolution and
Special Power of Attorney have no more binding effect. Was the
dismissal proper?
f.
In practice, a corporation that applies for the approval
of the amendment of its Articles of Incorporation to change its
corporate name usually includes the amendment of its By-Laws.
However, there is an opinion to the effect that it is not necessary to
amend the By-Laws in order to reflect the new corporate name. The
amendment of the Articles of Incorporation to change the corporate
name impliedly amends the name appearing in the By-Laws. 244
9.
Corporations with Same Name. Even if two
corporations have the same name, the corporations do not have a
single legal personality. The two registration, certificates show the
separate nature of these juridical entities. 245
PROBLEMS:
Q:
A:
a.
Can a corporation validly change its corporate name under
its general power to amend its Articles of Incorporation?
b.
Does a change in the name of a corporation result in its
dissolution? Explain your answer.
a.
Yes, a corporation may validly change its name. However,
the corporation must comply with the procedure for
amendment of the Articles of Incorporation. In fact,
the right to change the corporation name is recognized
under Section 18 of the Corporation Code, now Section
17 of the RCCP, but subject to the approval of the SEC.
Section 18 of the Corporation Code provided that when a
change in the corporate name is approved, the SEC shall
issue an amended certificate of incorporation under the
amended name. The new provision (Section 17, RCCP) is
substantially the same and states that: "Upon the approval
of the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name."
b.
2.
Q:
No, the change in name does not result in the corporation's
dissolution. The juridical entity is the same although
under a different name. The situation is no different
from a natural person who does not cease to exist due to
a change of name. (See Philippine First Insurance Co. v.
Hartigan, 34 SCRA 252) (1976 Bar)
The Court of Appeals (CA) dismissed outright a Certiorari
Petition on the ground that petitioner BDO Leasing and
Finance, Inc. (BDO) lacked "legal capacity to initiate or file the
244 SEC
Opinion dated February 27, 1991.
SEC-OGC Opinion No. 11-13 dated March 9, 2011.
245
A:
No. The dismissal was not proper. A corporation that changes its
name is in no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a differe� t
name and its character is in no respect changed. A change m
the c�rporate name does not make a new corporation. Hence,
with petitioner BDO's change of name from "PCI Leasing and
Finance, Inc." to "BDO Leasing and Finance, Inc." having no
effect on the identity of the corporation, on its property, rights,
or liabilities with its character remaining very much intact, the
Board Resoiution and Special Power of Attorney authorizing
its officer to institute the Certiorari Petition did not lose any
binding effect whatsoever. The officer remains authorized to
file a petition for the same entity which is now named BDO
(BDO Leasing and Finance, Inc. v. Great Domestic Insurance
Company, Inc., G.R. No. 205286, June 19, 2019).
SEC.
18.
Registration,
Incorporation and
Commencement of Corporate Existence. - A person or
group of persons desiring to incorporate shall submit
the intended corporate name to the Commission for
verification. If the Commission finds that the name
is distinguishable from a name already reserved or
registered for the use of another corporation, not
protected by law and is not contrary to law, rules and
regulations, the name shall be reserved in favor of th�
incorporators. The incorporators shall then submit
their articles of incorporation and bylaws to the
Commission.
If the Commission finds that the submitted
documents and information are fully compliant with the
requirements of this Code, other relevant laws, rul�s and
regulations, the Commission shall issue the certificate
of incorporation.
62
OMMENTARI • AND JURI PRUDEN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
N
A private corporation organized under this Code
commences its corporate existence and juridical
personality from the date the Commission issues the
certificate of incorporation under its official seal and
thereupon the incorporators, stockholders/members
and their successors shall constitute a body corporate
under the name stated in the articles of incorporation for
the period of time mentioned therein, unless said period
is extended or the corporation is sooner dissolved in
accordance with law.
NOTES
1.
Certificate of Incorporation. The issuance of the
certificate of incorporation by the Securities and Exchange
Commission marks the commencement of the corporate term
of corporations incorporated under the RCCP. The certificate of
incorporation is therefore an indispensable requirement before
corporate life can ensue. It is only then that the incorporators,
stockholders/members and their successors shall constitute a
body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein. 246
a. "There is no corporation to speak of prior to an entity's
incorporation. And no contract entered into before incorporation can
bind the corporation." 247 Thus, a "Management Contract" providing
for specific benefits to a General Manager that was entered into
before incorporation is not binding on a corporation. The corporation
may be bound if there is proof that the corporation adopted, ratified
or confirmed the "Management Contract" after incorporation.248
b. A certificate of incorporation from the SEC is not necessary
if the corporation is created through special law. If a corporation is
created by a special law without imposing a condition precedent,
corporate existence commences as soon as the law takes effect and
is expressly or impliedly accepted. If the act requires organization
or the performance of conditions precedent, corporate existence
commences only when there has been substantial performance.249
19, Corporation Code (now Section 18, RCCP).
Marc II Marketing, Inc. v. Joson, G.R. No. 171993, December 12, 2011.
24BJbid.
249
8 Fletcher 544.
246Section
247
'1' 'l'LE I -1
RP RAT!
R ANIZATI N F PRIVATE
AN.
RP RATI N
2
.
Contract Law in Corporate Law. Ordinarily, a non­
nt p r on cannot be a subject of a contract or transaction. Thus,
t is nly fter the issuance of the certificate of r�gistration t�a� a
_
o, oration can transact business. Nevertheless, It IS a pecuharity
f rporate law that certain contracts may bind a corporation even
if th ame are entered into before incorporation. For example, the
11 P makes irrevocable pre-incorporation subscription agreement
£ r a period of six months.250 It should be noted that a subscription
11 gr ment is a contract between the corporation a�d the subscriber.
_
_
nee the law makes the pre-incorporation subscnpt10n agreement
bindiu'g even if one of the parties - the corporation - is still legally
non-existent.
2.01.
Other Binding Pre-Incorporation Contracts.
There are also other instances when both the corporation and the
other party to a contract may be bound by pre-incorporation contracts
-ven if the contracts were entered into before the corporation secured
its Certificate of Incorporation.261 A contracting party, for instance,
annot claim that the contract is the personal contract of the officer
who signed the agreement if it knew all along that the contract is
upposed to be a corporate contract. The fact that the �orpo:ation
was only incorporated after the contract was entered mto �s �ot
•ontrolling because the contracting party is estopped from claimmg
that the contract (like lease) is not intended for the corporation. 262
The corporation, on the other hand, is bound because it is deemed to
have ratified the contract after its incorporation especially since it
njoyed all the contractual rights.
3.
Promoters. Similarly, contracts entered into by the
promoter may, in certain cases, bind a corporation. Th� general rule,
_
however, is that the acts of the promoter are not bmdmg on the
corporation that will be organized.
a.
A basic definition of the term promoter can be found
in the Securities Regulations Code (SRC for short). Under said
law, promoters are persons who, acting alone or with others, take
_
_
initiative in founding and organizing the busmess or enterpnse. 268
250Section 60, RCCP.
261Paz v. New International Environmental Universality, Inc., G.R. No.
203993, April 20, 2015.
262Supra. (Note that the Supreme Court cited Section 21 of the Corporation
Code on Corporation by estoppel)
263Section 3.1, Republic Act No. 8799 otherwise known as the "Securities
Regulation Code" or SRC; See Appendix "1."
264
However, the definition in the SRC pertains to the organization of
issuer of securities and presupposes payment of consideration to the
promoter.
b.
Promotional activities include (1) discovery, (2)
investigation, and (3) assembly. "Discovery consists of finding the
business opportunity to be developed. Investigation entails an
analysis of the proposed business to determine whether or not it is
economically feasible." Assembly includes the bringing together of
the necessary personnel, property and money to set the business in
motion as well as the secondary details of setting up the corporation
itself.254
c.
Promoters could not act as agents for a projected
corporation since that which has no legal existence could have no
agent. A corporation, until organized, has no life and therefore
no faculties. It is, as it were, a child in ventre sa mere. This is not
saying that under no circumstances may the acts of promoters of a
corporation be ratified by the corporation if and when subsequently
organized. There are, of course, exceptional cases when a corporation
can be deemed to have expressly or impliedly ratified the acts of
promoters.255
d.
It was further explained that a corporation should
have a full and complete organization and existence as an ··entity
before it can enter into any kind of a contract or transact any
business. 256 It should be pointed out, however, that the rule is not
absolute and under certain circumstances the acts of promoters
of a corporation may be ratified or accepted by the corporation if
and when subsequently organized. It will be noted that American
courts generally hold that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified by the
corporation when organized. 257
e.
The stockholders and the corporation cannot be held
personally liable for the compensation claimed by the promoter for
the services performed by him in the organization of the corporation.
Even if the stockholders benefited from such services of the promoter,
there is no justification to hold them personally liable therefor.
Henn and Alexander, p. 237.
Cagayan Fishing Development Co., Inc. v. Sandiko, G.R. No. L-43350,
December 23, 1937.
266
TI'rLE II-I
OMMENTARIE AND JURI PRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
IZATI N
f.
N vertheless, any benefit derived by a promoter for the
, p r tion should be given to the corporation. In a sense, promot�rs
_
t ta.in a fiduciary relationship to the subscribers, the corporati n
�
nd the stockholders and cannot deal unfairly with them or retam
n
cret profit. 258 The promoter cannot appropriate for himself any
b n fit that properly pertains to the corporation. For example, the
r moter must account for profits derived from transactions entered
· 1 t in behalf of the prospective corporation.
4.
Underwriters. Promoters must be distinguished from
mderwriters. An underwriter is a person who guarantees on firm
, mmitment and/or declared best effort basis the distribution and
ale of securities of any kind by another company.259
SEC. 19. De facto Corporations. - The due
incorporation of any corporation claiming in good faith
to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation
may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
NOTES
1.
Defective Corporations. Certain basic rules can be
used in determining if the corporation is a de jure corporation or one
that is defectively formed, viz.:
(1) Non-compliance with directory provisions of law or
regulations will not affect the de jure existence of a corporation.
(2) Non-compliance with mandatory provisions will
affect the de jure existence. However, only substantial
compliance is required and mere colorable compliance may
result in a de facto corporation.
(3) Non-compliance with conditions precedent to
incorporation may affect the dejure existence of the corporation.
For example, issuance of a Certificate of Incorporation is a
condition precedent and there can be no de jure corporation
without it.
254
255
256Supra.
251Jbid.
258
Frick v. Howard, 23 Wis. 2d 86, 126 N.W. 2d 619 (1964).
3.15, SRC.
259Section
26
MMENTAI IE
· I PR
TI
THE REVI ED
OF THE PHILIPPINES
(4) Non -compliance with conditions subsequent to
incorporation may not affect the existence of a corporation but
may be a ground for revocation of the certificate of incorporation.
(5) Condition subsequent to carry on the business will
not affect the corporation's de jure status but non-compliance
may be a ground to revoke the certificate of incorporation.
2.
Requisites of De Facto Corporation. To constitute a
corporation de facto under Section 20, the weight of authority is that
there must be:
(1)
A valid law under which the corporation is organized;
(2)
An attempt in good faith to incorporate; and
(3)
An assumption of corporate powers.
2.01. Valid Law. No de facto corporation will result if there
is no law under which the corporation is organized even if the
components thereof assume corporate powers. This is consistent
with the proposition that to be a de facto corporation, it must be
possible to be a corporation de jure. 260 The absence of law erases such
possibility.
a.
There are two views regarding the effect of unconstitutional or invalid laws. The orthodox view is expressed in Article 7
of the New Civil Code which states that when the courts declare a
law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern. Thus, under this orthodox view,
an unconstitutional law is not a law, confers no rights, imposes no
duties and affords no protection. Therefore, under the orthodox
view, if the law under which the corporation is organized is void,
there is no resulting de facto corporation.
b.
The other view declares unconstitutional laws as an
"operative fact"; that for a period of time, the law is actually in
existence.261 Thus, under this view, an unconstitutional law does not
bar the existence of a de facto corporation.
2.02. Good Faith. Attempt in good faith to incorporate
means that there must be colorable compliance with the law. The
260Evenson v. Ellingson, 67 Wis. 634, 31 N.W. 342.
261Fernandez v. Cueva, 21 Phil. 1095; See also De Agbayani v. Philippine
National Bank, 38 SCRA 429 (1971) and Manila Motors Co. v. Flores, 99 Phil. 738.
TITLE II - lN
RP RATI N AND
R ANIZATI N F PRIVAT •
RP RATI N
267
is co�patible with
·la: m that a corporation de facto was created
with a tot_al or
xistence of errors and irregularities; but not
th
been an �vident
ub tantial disregard of the law. Unless there has
a corporation h�s
att mpt to comply with the law, the claim that
could not be made m
b n constituted under the Corporation Code
26
2
ood faith.
There
Certificate of Incorporation Indispensa�le.
a.
e
t
if
co porate
� SEC
can be no claim of attempt in good faith to in �
filmg of Artic�es of
issues no Certificate of Incorporation. The
of Incorporati?n ��
I ncorporation and the issuance o� the Certificate
facto corporat�on.
the SEC are essential for the existence of a de
t the perso�ahty �f
All incorporators know or ought to know th�
the certificate is
a corporation begins to exist only from the time
issued. 264
to some
Steps must be taken and the attempt made m�st,
b.
o
the effectmg f those
extent and in some degree, have resulted in
ites to a �orporate
things which the law designates as pre-requis
proceedmgs and
existence, however, informal and irregular such
265
results may be.
There must be colorable compliance with the law. Defects
that �� not preclude the existence of a de facto corporation i�cl�de
the following: (1) the corporate name resembles that of a pre-existmg
corporation;266 (2) ineligibility of one or more incorporators; 267 (3) one
of the purposes is not authorized by law. 268
2.03. Assumption of Powers. It is also required that t�ere
is a user of corporate powers. "A corporation must have � xercised
its franchise to be a corporation by doing business under it. There
_
must be some corporate act or acts in attempted execution of t�e
powers conferred by the Articles of Incorporation or by the spe�ial
_
charter granted by the legislature. The acts rehed upon as showmg
Fisher on the Law of
262H a11 V. p·lCClO,
. . No . L-2598 , June 29 , 1950 citing
· GR
75.
Stock Corporations, p.
263The Missionary Sisters of Our Lady of Fatima v. Alzona, G.R. No. 224307,
August 6, 2018.
264Hall v. Piccio, ibid.
2658 Fletcher 101.
2668 Fletcher 110.
2678 Fletcher 111.
2 688 Fletcher 112.
26
MMENTARIE AND J RI RU
THE REVISED ORP RATION
OF THE PHILIPPINES
N
�ser must be corporate acts, as distinguished from acts which might
Just as well be performed by an unincorporated association or from
acts of individuals which would not be corporate acts if there were a
charter."269
a.
However, "there is no fixed rule for determining just how
much business must be done. But acts done relative to the formation
of a corporation before taking any of the statutory steps to that
end do not constitute user nor does the mere organization of the
corporation by the election of officers."270
3.
Distinguished from De Jure Corporations. A de
Jure corporation has a right to corporate existence even against the
State. In the case of a de facto corporation, it has a right to corporate
existence even against the State if the attack is collateral but not if
the attack is direct. Nevertheless, "the State, which alone, has the
power to incorporate, may waive irregularities in the organization
of the corporation; and, so long as the State remains inactive in the
premises, individuals must acquiesce."271
4.
Policy Considerations. The de facto corporation
doctrine prevents collateral attack on the personality of the
corporation. The policy considerations for this purpose are: (a) The
merits of the controversy seldom are affected by corporate existence
of a party to the action, where the de facto doctrine is applicable; and
(b) If any rights and franchises have been usurped, they are rights
and franchises of the State, and the State alone can object.272
5.
Nature and Status of De Facto Corporations. The
personality of a de facto corporation is subject to attack by the
State in a proper proceeding. However, so long as it exists, a de
facto corporation is a reality and has substantial, legal existence
and independent status recognized by the law as distinct from that
of its members or shareholders.273 A de facto corporation enjoys the
attributes of a corporation until the State questions its existence.
a.
The only difference between the powers, rights and
liabilities of a de Jure and a de facto corporation is that the latter
may have its existence inquired into and forfeited by the State.274
2698 Fletcher 150-151.
270Guevara (1956), p. 18.
2
71Clark on Corporations, p. 98.
272Henn and Alexander, p. 330.
2738 Fletcher 65.
2748 Fletcher 179.
TI'!' I!.! II R AN ZA'rI N
N
26
t kholder in a de facto corporation have the same
s d by the stockholders in a de Jure corporation unless
the
iL 1 rwi provided by the Statute but no greater rights than
ies
liabilit
the
n
betwee
nce
differe
no
is
there
ally,
1 tL r ·la s. Gener
in
olders
stockh
of
those
and
ation
corpor
facto
de
a
in
f t ·kholders
d jure corporation.275
.
As Justice Fisher observed: "The result is, therefore, that
rporation de facto which, if regularly organized might have be�n
de jure, may contract, hold property, and sue and be sued m
ame manner as if it were a corporation de jure, for no one can
ct but the government, and that in a direct proceeding. As to all
th world except the paramount authority from which it receives
it charter it occupies the same position as though in all respects
valid."216
6.
Dissolved Corporation. A group of employees who
•ontinued the operations of a dissolved corporation or a corporation
whose registration had been revoked cannot acquire the status of a
de facto corporation. If the charter of a corporation is forfeited and
its legal existence terminated, it is no longer a corporation either de
jure or de facto. 277
7.
Effect of Non-Filing of By-Laws. In SawadJaan v. Court
of Appeals, 278 the Supreme Court observed that a corporation may be
considered a de facto corporation because of the corporation's failure
to submit its by-laws on time. As a de facto corporation, its right to
exercise corporate powers may not be inquired into collaterally in
any private suit to which such a corporation is a party.
It is submitted that the observation is erroneous. The
a.
from
nature of a juridical entity as a de facto corporation arises
with
s
by-law
the very beginning of its existence. The filing of the
of
nce
existe
the
the SEC is not a mandatory provision that affects
s
by-law
the
of
the corporation from the very beginning; the filing
with
ce
mplian
is a condition subsequent. As noted earlier, non-co
existence
conditions subsequent to incorporation may not affect the
of the
tion
revoca
for
d
of a corporation; it is, however, a groun
certificate of incorporation.
2758 Fletcher 207.
276Fisher, The Philippine Law of Stock Corporations, 1929 Ed., p. 73, hereinafterreferred to as "Fisher, p. 73."
277SEC Opinion dated June 7, 2002 citing 16A Fletcher 23.
278G.R. No. 141735, June 8, 2005, 459 SCRA 516, 529.
270
OMMENTARIE AND JURI PRUDEN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
PROBLEM:
1.
Q:
A corporation was created by a special law. Later, the law
creating it was declared invalid. May such corporation claim to
be a de facto corporation?
A:
No. The corporation is not a de facto corporation. The requisites
for its existence are absent because there is no valid law under
which it was organized. There would therefore be no continuity
of good faith. (1994 Bar)
SEC. 20. Corporation by Estoppe/1 - All persons
who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred
or arising as a result thereof: Provided, however, That
when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use its
lack of corporate personality as a defense. A�yone who
assumes an obligation to an ostensible corporation as
such cannot resist performance thereof on the ground
that there was in fact no corporation.
NOTES
1.
Estoppel. One who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on the ground
that there was in fact no corporation. 279 When a third person has
entered into a contract with an association which represented itself
�o be a corporation, the association will be estopped from denying
its corporate capacity in a suit against it by such third person. It
cannot allege lack of capacity to be sued to evade responsibility on
a contract it had entered into and by virtue of which it received
advantages and benefit. 280
2.
Liability as General Partner. Those who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners. Therefore, they are liable even beyond
their investment; in other words, their personal properties may be
made to answer for what is purportedly a corporate debt of the non­
existent corporation. It was explained in one case:
279Lim
3, 1999.
N
N
71
"Th r ·an b n que tion that a corporation has a juridical personality
r t
r d di tinct from its component members or stockholders and
s su ·h that a corporation cannot be held liable for the personal
lnd bt dn
of a stockholder even if he should be its president (Walter A.
rr ith o. us. Ford, SC-G.R. No. 42420) and conversely, a stockholder or
m b r cannot be held personally liable for any financial obligation of the
rp ration in excess of his unpaid subscription. But this rule is understood
to r £ r merely to registered corporations and cannot be made applicable
t th liability of members of an unincorporated association. The reason
b hind this doctrine is obvious - since an organization which before the
1 w i non-existent has no personality and would be incompetent to act and
ppropriate for itself the powers and attributes of a corporation as provided
by law; it cannot create agents or confer authority on another to act in its
b h lf; thus, those who act or purport to act as its representatives or agents
do o without authority and at their own risk. And as it is an elementary
pl'il'lciple of law that a person who acts as an agent without authority or
without a principal is himself regarded as the principal, possessed of all
th rights and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence
a •umes such privileges and obligations and comes personally liable for
ntracts entered into or for other acts performed as such, agent (Fay v.
Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of
the Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo,
a president of the unregistered corporation Philippine Fibers Producers
o., Inc., was the moving spirit behind the consummation of the lease
greement by acting as its representative, his liability cannot be limited or
r stricted to that imposed upon corporate shareholders. In acting on behalf
of a corporation which he knew to be unregistered, he assumed the risk of
r aping the consequential damages or resultant rights, if any, arising out of
such transaction."281
a.
This also means that those without knowledge of the
non-existence of the corporation are liable as if they are regular
stockholders of a corporation. They are not liable beyond their
investments.
b.
Even if the ostensible corporate entity is proven to be
legally non-existent, a party may be estopped from denying its
orporate existence. The reason behind this doctrine is obvious an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at_
v. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, November
280Christian
Children's Fund v. NLRC, G.R. No. 84502, June 30, 1989.
281Salvatierra
v. Garlitos, G.R. No. L-11442, May 23, 1958, 103 SCRA 757.
272
MMENTARIE AND JORI PRUDEN •
THE REVISED CORPORATION ODE
N
TITLE II - I
HP MTI N
IZA'I'I N • PRIVA'rE
RP RATI N
OF THE PHILIPPINES
their own risk. It is an elementary principle of law that a person who
acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to
all the liabilities of a principal. A person acting or purporting to
act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent.2s2
c.
The doctrine of corporation by estoppel may apply to
the alleged corporation and to a third party. In the first instance,
an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity
in a suit against it by a third person who relied in good faith on
such representation. It cannot allege lack of personality to be sued
to evade its responsibility for a contract it entered into and by virtue
of which it received advantages and benefits.283
d.
On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from
denying its corporate existence in a suit brought against the
alleged corporation. In such case, all those who benefited from the
tr8:nsaction made by the ostensible corporation, despite knowledge
of its legal defects, may be held liable for contracts they impliedly
assented to or took advantage of.284
In one case, the Supreme Court ruled that a lessor is
e.
bound under Section 21 of the Corporation Code (now Section 20
?f the RCCP) by the contract with a corporation (as lessee) even
if the contract was entered into before the latter's incorporation.2ss
The lessor was estopped from claiming that the contract was the
personal contract of the officer who represented the corporation
_
smce the statements of the parties show that it was really meant
for the corporation. However, it seems that the more appropriate
doctrine is plain estoppel under the New Civil Code and the rule
on corporation by estoppel need not even be cited because the
corporation eventually existed and there was no misrepresentation
as to the existence of a corporation.
282Lim v. Philippine Fishing Gear Industries, supra.
2B3Jbid.
284Supra.
285Paz
v. New International Environmental Universality, G.R. No. 203993,
April 20, 2015.
27
f.
In The Mi ionary Sisters of Our Lady of Fatima v.
Alz no., 286 a D ed of Donation of a house and lot executed by the
cl n r b fore the issuance of a Certificate of Incorporation was
;1, t invalidated.
The Supreme Court explained that the doctrine
f rporation by estoppel is founded on principles of equity and
i d signed to prevent injustice and unfairness. It applies when a
n n- xistent corporation enters into contracts or dealings with third
p r ons. In such case, the person who has contracted or otherwise
d -alt with the non-existent corporation is estopped to deny the
l· tter's legal existence in any action leading out of or involving such
·ontract or dealing. The doctrine of corporation by estoppel rests
n the idea that if the Court were to disregard the existence of an
ntity which entered into a transaction with a third party, unjust
nrichment would result as some form of benefit have already
accrued on the part of one of the parties. It was further explained
that donation is rooted on liberality. However, the subject properties
were given by the donor as a token of appreciation for the services
rendered to her during her illness.
2.01. Enterprise Liability. Prof. Berle summarized the
different situations involving cases when liability is imposed for "De
Facto corporations."287 However, the "De Facto corporations" that
he was referring to are not the equivalent of De Facto corporations
contemplated in this jurisdiction under the RCCP and are more
consistent with "Corporations by Estoppel" because he referred to
enterprises that "have not secured creation of the entity." The main
sequences according to Prof. Berle are these: 288
(1) "The enterprise contracts with an outsider, who
later brings actions against the enterprise as though it were a
corporation";
"The enterprise contracts with the outsider, and
(2)
subsequently brings action in corporate form against the
outsider";
(3) "The enterprise contracts with an outsider, and the
outsider brings action against the component individuals"; and
(4)
"The enterprise contracts with an outsider, and the
component individuals seek to hold the outsider liable on his
contract."
G.R. No. 224307, August 6, 2018.
Jr., pp. 344-345.
268/bid. at p. 346.
286
287Berle,
274
COMMENTARIE AND JURI PRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
a.
The first situation is a case involving true estoppel
according to Professor Berle while courts likewise use the word
estoppel in resolving the issue of liability in the second situation. In
this jurisdiction, liability must be resolved on the basis of Section 20
of the RCCP. If there is cause of action on the part of the plaintiff/s
in the first and the second situations, actions contemplated therein
may be allowed to prosper on the basis of Section 20. With respect
to the third situation, it is believed that since there is really no
corporation, the outsider or third party can maintain an action
against the real parties in interest, the persons who compose the
corporation by estoppel subject to the rule that only those who
assume to act as a corporation knowing it to be without authority
can be made liable as general partners. On the other hand, the last
situation may also prosper because there is no separate juridical
personality to 1,peak of.
b. It should be noted in this connection that the conclusion is
not entirely the same if what is involved is a real De Facto corporation
under Section 19 of the RCCP. Definitely, the actions in the first two
situations enumerated above can prosper because there is, in fact,
a juridical person that can be sued and/or can sue/file an action in
the case of a De Facto corporation. On the other hand, ge:n,erally,
the actions in the third situation cannot be maintained against
the components and the components cannot maintain an action in
the fourth situation because the personality of the components is
separate and distinct from that of the corporation even if a De Facto
corporation.
2.02. Tort Liability. The liability under Section 20 of the
RCCP in case there is an ostensible corporation is applicable to tort
liability. There is a difference between tort liability and contractual
liability with respect to the application of estoppel. There are many
types of tort and tort cases when there is no contractual relationship
between the parties. Hence, there is ordinarily no reliance by a
third person on representations of the components of the ostensible
corporation when the cause of action arose. For example, in a case
involving negligence based on quasi-delict under Article 2176 of
the New Civil Code, the injured party may file an action against
an ostensible corporation with whom he or she has no previous
dealings. It is possible that the mistake - regarding the status
of the ostensible corporation - may occur only when the case is
already being filed.
Tl'l'LE JI - IN R RAT.l
R ANIZ TI N • PRIVAT •
275
Wh n Not Applicable. In one case, a contract was sought
b nforc d against an officer of an unincorporated association.
l'L wa argued however that the officer cannot be made personally
li bl b cause the other contracting party is estopped from claiming
·hat the association with whom he contracted is not in fact a
rporation. The Supreme Court rejected the argument explaining
that the "application of the doctrine applies to a third party only
wh n he tries to escape liability on a contract from which he has
b nefited on the irrelevant ground of defective incorporation." It is
not applicable if the party "is not trying to escape liability from the
·ontract but rather is the one claiming from the contract."289 This
appears to be the third situation contemplated by Prof. Berle as
numerated earlier. 290
4.
Cannot Override Jurisdictional Requirements. The
doctrine of corporation by estoppel cannot likewise be advanced to
verride jurisdictional requirements under the law. Jurisdiction is
fixed by law and is not subject to the agreement of the parties. It
cannot be acquired through or waived, enlarged or diminished by,
any act or omission of the parties; neither can it be conferred by
the acquiescence of the court. Thus, if a law will be passed granting
an administrative tribunal jurisdiction to hear cases involving
corporations, the same tribunal cannot assume jurisdiction over a
case filed against a non-existent corporation just because one party
is allegedly estopped from claiming that the corporation is non­
existent.291
5.
Rules of Court Provision. Section 15 of Rule 3 of the
1997 Rules of Civil Procedure provides that when two or more
persons not organized as an entity with juridical personality enter
into a transaction, they may be sued under the name by which they
are generally or commonly known. In the answer of such defendant,
the names and addresses of the persons composing said entity must
all be revealed. However, these persons cannot sue under the name
by which they are generally or commonly known if they are not
organized as a juridical entity.
289
International Express Travel & Tours, Inc. v. Hon. Court of Appeals, G.R. No. 119002, October 19, 2000.
290See Note on Theory of Enterprise Entity above.
291
Lozano v. De Los Santos, G.R. No. 125221, June 19, 1997.
276
OMMENTARIE AN JURI PI UD I N E N
THE REVI ED CORPORATION CODE
OF THE PHILIPPINES
PROBLEM:
Q:
A:
Mamuhunan was invited by his friends to invest in A Corp., a newl�
organized firm engaged in money market and financing operation.
Because of his heavy investments, Mamuhunan became the firm's
president and, as such, purchased a big number of computers,
typewriters and other equipment from Taktak Corp. on installment
basis. A Corp. paid the down payment and Taktak Corp. issued the
corresponding receipt. To his chagrin, Mamuhunan discovered that
the articles of incorporation had not been filed by his friends on
that date so he hurriedly attended to the matter. No sooner had the
certificate of incorporation been issued by the, SEC, A Corp. became
bankrupt after three months. Upon being sued by Taktak corporation
in its personal capacity, Mamuhunan raised among its defenses the
doctrines of de facto corporations and corporations by estoppel. Can
the two defenses be validly raised? Explain.
No, the two defenses cannot be raised because they are not available.
It cannot be argued that there was a de facto corporation. The Articles
of Incorporation was not filed with the SEC; hence there can be no
attempt in good faith to incorporate.
The defense that the corporation is a corporation by estoppel is
not also a valid defense. Although there was a corporation by estoppel,
the same can be invoked only for the purpose of protecting third
persons or creditors. It cannot be invoked by persons who represent
themselves as stockholders of the corporation by estoppel. Ho�ever,
Mamuhunan can invoke the defense of good faith to limit his liability
only up to the extent of his investment. Section 21 of the Corporation
Code (now Section 20 of the RCCP) makes liable as general partner
only those who assume to act as a corporation knowing it to be without
authority. (1986 Bar)
SEC. 21. Effects of Non-Use of Corporate Charter
and Continuous lnoperation. - If a corporation does
not formally organize and commence its business
within five (5) years from the date of its incorporation,
its certificate of incorporation shall be deemed revoked
as of the day following the end of the five (5)-year period.
However, if a corporation has commenced its
business but subsequently becomes inoperative
for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place
the corporation under delinquent status.
A delinquent corporation shall have a period of
two (2) years to resume operations and comply with
277
TI'l'.
R ANIZATI
all requirements that the Commission shall prescribe.
Upon compliance by the corporation, the Commission
shall issue an order lifting the delinquent status. Failure
to comply with the requirements and resume operations
within the period given by the Commission shall
cause the revocation of the corporation's certificate of
incorporation.
The Commission shall give reasonable notice to,
and coordinate with the appropriate regulatory agency
prior to the suspension or revocation of the certificate
of incorporation of companies under their special
regulatory jurisdiction.
NOTES
1.
Conditions Subsequent. Section 22 of the Corporation
Code, now Section 21 of the RCCP, involves conditions subsequent
to incorporation. It involves these three violations of conditions
subsequent:
(1) Failure
incorporation;
to
organize
within
five
years
from
(2) Failure to commence business within five years from
incorporation; and
(3) Becoming continuously inoperative for a period of at
least five consecutive years.
2.
Period to Organize. While the five-year period to
commence business or to organize is counted from the date of
incorporation, the five-year period in case of continuous inoperation
may commence thereafter or on a date after the date of incorporation.
Thus, even if the corporation has been operating for 10 years, there is
a ground to revoke the franchise if it ceased to operate continuously
thereafter for at least five years. The Supreme Court stressed in
one case that substantial compliance with conditions subsequent
would suffice to perfect corporate personality. Organization and
commencement of transaction of corporate business are but
conditions subsequent and not prerequisites for acquisition of
corporate personality.292
292Chung Ka Bio v. Intermediate Appellate Court, G.R. No. 71837, July 26,
1988, 163 SCRA 534.
278
COMMENTAI IES AND JURI PRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
3.
Effect of Failure to Organize and Commence
Business. The provision of the Corporation Code previously stated
that "its [the corporation's] corporate powers [shall] cease and the
corporation shall be deemed dissolved" if it fails to organize and
commence the transaction of its business within two years from
incorporation. Under the RCCP, the effect of failure to organize
and commence business is that "its [the corporation's] certificate of
incorporation shall be deemed revoked as of the day following the
end of the five (5)-year period." The language indicates an intent
to make the effect of failure to organize and to commence business
automatic.
a.. �nder the Corporation Code, although the wording of
the law md1cates that the corporation is automatically dissolved, it
was also explained that if the corporation failed to organize within
two years but exercises corporate powers after such period the
corporation is deemed to be exercising its powers illegally. 293 It was
observed however that it is the SEC that will determine whether
the corporation is already exercising the powers illegally.294 In effect
the dissolution is not automatic. The SEC also had occasion to opin�
that the effect of failure to organize and commence business is not
automatic. Citing Section 6(1) of Presidential Decree No. 902-A, the
SEC opined that proper proceedings for revocation of the Articles of
Incorporation must be initiated. 295 Under Section 21 of the.RCCP
however, the effect of failure to organize and commence busines�
appears to be automatic because in case of such non-compliance
with the conditions subsequent, the corporation's "certificate of
incorporation shall be deemed revoked as of the day following the
end of the five (5)-year period." Nevertheless, it is still necessary for
the SEC to determine in an appropriate proceeding if the life of the
non-compliant corporation ended the day following the end of the
five-year period.
4.
Delinquency for Non-Operation. Under Section 21
the SEC may place a corporation under delinquent status if it
fails to operate for at least five consecutive years. There must be
a positive action on the part of the government.296 Justification for
non-operation may be invoked and established by the corporation.297
293
III BP Record, at 1723.
294Jbid.
295
SEC Opinions dated December 10, 1985, April 14, 1987 and October 4 1989.
297
lbid. at pp. 1723-1724.
-III BP Record, p. 1723, December
11, 1979.
R
RI RA.TI N AND
PRfVATE
RP RATIONS
279
umption of Operations. A delinquent corporation
a period of two (2) years to resume operations and
' mply with all requirements that the SEC shall prescribe. Upon
r pliance by the corporation, the SEC shall issue an order lifting
h d linquent status. Failure to comply with the requirements and
r ume operations within the period given by the SEC shall cause
Lh r vocation of the corporation's certificate of incorporation. 298
R
b.
Failure to Submit Reports. A corporation may also be
placed under delinquent status if it fails to comply with the reportorial
r · quirements three (3) times, consecutively or intermittently within
a period of five (5) years. 299
5.
Meaning of Organization. Organize or organization as
used in reference to corporations has a well-understood meaning,
which is the election of officers, providing for the subscription and
payment of the capital stock, the adoption of by-laws, and such
other similar steps. 300 It relates to the systematization and orderly
arrangement of the internal and managerial affairs and organs of
the corporation.301 Organization means simply the process of forming
and arranging into suitable disposition the parties who are to act
together in, and defining the objects of, the compound body.302
a.
Thus, organization under SEC rules include: (1) adoption,
filing by the corporation and approval by the SEC of the corporate
By-laws after incorporation; (2) election of Directors or Trustees and
of officers; (3) establishment of the principal office; and (4) providing
for the subscription and payment of the capital stock; (5) taking
such steps as are necessary to endow the legal entity with capacity
to transact the legitimate business for which it was created. 303
6.
Meaning of Commencement of Business. On the
other hand, the corporation "shall be considered to have commenced
the transaction of its business when it has performed preparatory
298Section 21, RCCP.
Section 177, RCCP.
300
Benguet Consolidated Mining Co. v. Pineda, G.R. No. L-7231, March 28,
1956, 98 Phil. 711, 720; SEC SGC Opinion No. 07-23, December 4, 2007.
301
Benguet Consolidated Mining Co. v. Pineda, ibid.
302
Benguet Consolidated Mining Co. v. Pineda, ibid., citing Abbott v. Omaha Smelting & Refining Co., 4 Neb. 416, 421.
303
Section 2(A), (a. l) to (a.4), Rules on Suspension/Revocation of the Certificate
of Registration of Corporation (SMD Series of 1992) dated December 29, 1992; SEC
Quarterly Bulleting, Vol. XXVIII, No. 9, June 1994, pp. 90-91.
299
COMMENTARIE AND JURI PRUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
280
acts geared toward the fulfillment of the purposes for which it was
established such as but not limited to the following": 304 (1) entering
into contracts or negotiation for lease or purchase of properties
to be used as business or factory site; (2) making plans for and
the construction of the factory; (3) taking steps to expedite the
construction of the company's working equipment. 305
PROBLEM:
Q:
A:
In the Articles of Incorporation of 3D Corporation, eleven members
were named to constitute the board of directors. These eleven elected
from among themselves a secretary-treasu,rer but did not elect a
president. The board used to hold meetings to transact business, which
was done through the secretary-treasurer. In a proceeding to forfeit
its charter, the question was posed as to whether the corporation may
be considered to have formally organized. Resolve the question.
Yes, the corporation is considered to have formally organized.
Organize or organization as used in reference to corporations has a
well-understood meaning, which is the election of officers, providing
for the subscription and payment of the capital stock, the adoption
of by-laws, and such other similar steps. In the present case, the
corporation had a governing board, which directed its affairs, as well
as a secretary-treasurer. The corporation actually functioned and
engaged in the business for which it has been organized. By those acts,
the corporation is deemed to have formally organized. Consequently,
the charter of the corporation cannot be forfeited on the ground alone
of its failure to elect a president. (1979 Bar)
TITLE Ill
BOARD OF DIRECTORS/TRUSTEES/
OFFICERS
SEC. 22. The Board of Directors or Trustees
of a Corporation; Qualification and Term. - Unless
otherwise provided in this Code, the board directors or
trustees shall exercise the corporate powers, conduct all
business, and control all properties of the corporation.
Directors shall be elected for a term of one (1) year
from among the holders of stocks registered in the
corporation's books, while trustees shall be elected for
a term not exceeding three (3) years from among the
members of the corporation. Each director and trustee
shall hold office until the successor is elected and
qualified. A director who ceases to own at least one (1)
share of stock or a trustee who ceases to be a member
of the corporation shall cease to be such.
The board of the following corporations vested
with public interest shall have independent directors
constituting at least twenty percent (20%) of such board:
304
Section 2(B), Rules on Suspension/Revocation of the Certificate of
Registration of Corporation (SMD Series of 1992) dated December 29, 1992; SEC
Quarterly Bulleting, Vol. XXVIII, No. 9, June 1994, p. 91.
305
Section 2(B), (b.1) to (b.3), Rules on Suspension/Revocation of the Certificate
of Registration of Corporation (SMD Series of 1992) dated December 29, 1992; SEC
Quarterly Bulleting, Vol. XXVIII, No. 9, June 1994, p. 91.
(a) Corporations covered by Section 17.2 of Republic
Act No. 8799, otherwise known as "The Securities
Regulation Code", namely those whose securities are
registered with the Commission, corporations listed
with an exchange or with assets of at least Fifty million
pesos (P50,000,000.00) and having two hundred (200)
or more holders of shares, each holding at least one
hundred (100) shares of a class of its equity shares;
281
2 2
MM • NTARIE A D JURI PRUDE E
'l'HE REVI •D
RP RATION
DE
N
TITLB 1J -13 /IRD I•
TR TEE / FF!
OF THE PHILIPPINES
Ht
2 3
(b) Banks and quasi-banks, NSSLAs, pawnshops,
corporations engaged in money service business,
preneed, trust and insurance companies, and other
financial intermediaries; and
-t . 1 Und r Section 22, the Board is the body which: (1)
r i , 11 powers provided for under the RCCP and other existing
w ; (2) conducts all business of the corporation; and (3) controls
d holds all properties of the corporation. 2
(c) Other corporations engaged in businesses
vested with public interest similar to the above, as
may be determined by the Commission, after taking
into account relevant factors which are germane to
the objective and purpose of requiring the election of
an independent director, such as the extent of minority
ownership, type of financial products or securities
issued or offered to investors, public interest involved in
the nature of business operations, and other analogous
factors.
a.
It is the Board that exercises almost all the corporate
p w r in a corporation. 3 Thus, generally, an agreement entered
in 'O by a corporate officer without Board approval cannot bind
l
orporation. 4 Similarly, the filing of cases should be upon prior
pproval of the Board. 5
An independent director is a person who, apart
from shareholdings and fees received 'from the
corporation, is independent of management and free
from any business or other relationship which could,
or could reasonably be perceived to materially interfere
with the exercise of independent judgment in carrying
out the responsibilities as a director.
Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors. Independent directors
shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements,
duration of term and term limit, maximum number
of board memberships and other requirements that
the Commission will prescribe to strengthen their
independence and align with international best
practices.
NOTES
1.
Corporate Management. Section 22 expresses the
basic rule on corporate management that the Board of Directors or
Trustees exercises the corporate powers, conducts all business, and
controls all properties of the corporation. The directors or trustees
are the executive representatives of the corporation, charged with
the administration of its internal affairs and management and use
b.
The management of the business of a corporation is
nerally vested in its Board of Directors, not its stockholders.
tockholders are basically investors in a corporation. They do not
have a hand in running the day-to-day business operations of the
rporation unless they are at the same time directors or officers of
th corporation."6
c.
With the exception only of some powers expressly
·anted by law to stockholders (or members, in case of non-stock
orporations), the Board of Directors (or Trustees, in case of non­
tock corporations) has the sole authority to determine policies, enter
into contracts, and conduct the ordinary business of the corporation
within the scope of its charter, i.e., its Articles of Incorporation, By­
Laws and relevant provisions of law. Verily, the authority of the
Board of Directors is restricted to the management of the regular
business affairs of the corporation, unless more extensive power is
xpressly conferred. 7
d.
A corporation can act only through its directors and
officers. The Board is the central power that authorizes the executive
agents to enter into contracts and to embark on a business. 8 The
1McQuade v. Stoneham, 263 N.Y. 323, 189 N.E. 234.
Engineering Geoscience, Inc. v. Philippine Savings Bank, Inc., G.R. No.
187262, January 10, 2019; Raniel v. Jochico, G.R. No. 153413, March 2, 2007, 517
SCRA 221, 228.
3Riosa v. Tabaco La Suerte Corporation, G.R. No. 203786, October 23, 2013.
4
Tom v. Rodriguez, G.R. No. 215764, July 13, 2016.
5
Engineering Geoscience, Inc. v. Philippine Savings Bank, G.R. No. 187262,
January 10, 2019.
6Espiritu, Jr. v. Petron Corporation, G.R. No. 170891, November 24, 2009.
7
Filipinas Port Services, Inc., et al. v. Go, G.R. No. 161886, March 16, 2007,"
518 SCRA 453; Cebu Mactan Members Center, Inc. v. Tsukahara, G.R. No. 159624,
July 17, 2009.
8
SEC Opinion dated January 2, 1981.
2
MM
2 4
2
RI PR DEN E N
THE REVI
RATION
OF THE PHILIPPINES
DE
relationship between the stockholders, directors and officers was
explained in Tan v. Sycip9 as follows:
"Under the Corporation Code, stockholders or members periodically
elect the board of directors or trustees, who are charged with the management
of the corporation. The board, in turn, periodically elects officers to carry
out management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major
corporate changes.
While stockholders and members (in some instances) are entitled to
receive profits, the management and direction of the corporation are lodged
with their representatives and agents - the board of directors or trustees.
In other words, acts of management pertain to the board; and those of
ownership, to the stockholders or members. In the latter case, the board
cannot act alone, but must seek approval of the stockholders or members.
Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right, to vote - either
personally or by proxy- for the directors or trustees who are to manage the
corporate affairs. The right to choose the persons who will direct, manage
and operate the corporation is significant, because it is the main way in
which a stockholder can have a voice in the management of corporate
affairs, or in which a member in a non-stock corporation can have a say on
how the purposes and goals of the corporation may be achieved. Once the
directors or trustees are elected, the stockholders or members relinquish
corporate powers to the board in accordance with law."
e.
Since the Board controls and administers the properties
of the corporation, the Board can give authority to corporate officers
or stockholders to enter into or take corporate properties. Thus, i�
a case, respondents (incorporators of the corporation) implemented
a Board Resolution authorizing them to break open the door lock
system of the corporation's unit in a building and to install a new door
lock system. In addition, boxes containing personal properties were
allegedly taken. The Court n,iled that no robbery was committed
because "one who takes the property openly and avowedly under
claim of title offered in good faith is not guilty of robbery even though
the claim of ownership is untenable." 10
R a on for Concentration of Power. The
ntration of powers (of control of corporate business and of
is
intment of corporate officers and managers) in the Board
olders
Stockh
.
zation
sary for efficiency in any large organi
of
too numerous, scattered and unfamiliar with the business
of
plan
a rporation to conduct its business directly. And so the
rs
rporate organization is for the stockholders to choose the directo 1
ss." 1
who shall control and supervise the conduct of corporate busine
on of
Indeed, the concentration of powers in a Board is a 2 questi
ning
Conve
1
tion.
motiva
(3)
and
ise,
(1) speed and cost, (2) expert
may
made
be
should
n
decisio
a
numerous shareholders every time
tment
appoin
n,
additio
In
be cumbersome and may entail great costs.
f a small group of shareholders who are experts in management
ver, if
is more desirable than involving all shareholders. Moreo
not
may
a shareholder is only one of numerous shareholders, he
the
have the incentive to actively participate in the management of
corporation. 13
At any rate, the issue of desirability of concentration of
a.
only
powers in only a group of individuals (directors) is material
if
and
when there is separation of management and ownership
is
numerous shareholders hold ownership. Concentration of power
cases
a non-issue in a substantial number of cases, because in those
are
rs
eholde
s-shar
owner
the
and
few
a
by
the shares are held only
the directors.
3.
Theories on Source of Powers. There are various
theories on the status of directors and the source of their powers.
These theories are: (1) Agency Theory, (2) Concession Theory, (3)
Platonic Guardian Theory, and (4) Sui Generis Theory. 14
(1) Agency Theory. Under this theory, all powers reside
in the stockholders and are just delegated to the directors as
agents. 15
citing Agbayani, Commentaries
11Filipinas Port Services, Inc., et al. v. Go, supra,
Ed., Vol. III;
and Jurisprudence on the Commercial Laws of the Philippines, 1980
December
182008,
and
181455
Nos.
G.R.
,
Ocampo
Miguel
v.
al.
et
Jr.,
Santiago Cua,
4, 2009.
p. 13.
p. 13.
.
14Model Business Corp. Act Ann. 2d, Sec. 35; Hamilton, pp. 320-321
12Davies,
13Davies,
G.R. No. 153468, August 17, 2006, 499 SCRA 216, 226-227.
Sy v. Hon. Secretary of Justice, G.R. No. 171579, November 14, 2012.
9
10Lily
15Ibid.
2 6
MMENTARIE AND JURI RUDE E
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
'l'l'l' E 111-.13
UI
F
'rit
'rF1E I FFl
N
(2) Concession Theory. The power of directors under this
t�eory is derived from the State. It is the State that permits the
directors to perform only such functions as the State allows. 1G
(3) Platonic Guardian Theory. Every corporation under
.
this theory must have a board and "the board is an aristocracy or
group of Platonic guardians created by legislative ordainment."
The board is not a mere caretaker but it exercises control
over corporate affairs. The board is considered an inviolable
institution. 17
(4) Sui Generis Theory. "The directors are not agents
of the stockholders who elect them; they are fiduciaries whose
duties run primarily to the corporation. They are not trustees
in the strict sense. Their powers are derived from the state
through the statute under which the corporation is organized
yet they �o not qualify solely as Platonic guardians. They ar�
mdeed sui generis. 18
a.
The Supreme Court subscribed to the Agency Theory
of Bo:3-rd authority in Valle Verde Country Club, Inc. v. Africa 19
_
e�plamm� that t�e power of the Board is delegated. "The board of
d1�ectors 1s _the directing and controlling body of the corporation.
It 1s a_ creat10n of the stockholders and derives its power to control
and direct the affairs of the corporation from them. The b�ard of
direct?rs, in d��wing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the stockholders in
the sense that the �oa�d should exercise not only care and dilige�ce,
but utmost good faith m the management of corporate affairs." The
Court further /�xplained tha� the underl�ng policy of Philippine
,
corporate law 1s that the busmess 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 stockholders
on an annual basis. Only in that way can the directors' continued
accountability to shareholders, and the legitimacy of their decisions
7
rp ration'. to ·kholders, be a sured. The shareholder
i ritical to the theory that legitimizes the exercise of power by
ifr ctor or officers over properties that they do not own."20
However, it was also observed in one case that in corporate
b.
di , the powers of the Board of Directors are, in a very important
n , original and undelegated. The stockholders do not confer and
th y are not empowered to revoke the powers of directors. The powers
f th Board are derivative only in the sense of being received from
th State in the act of incorporation. The directors convened as a
Board are the primary possessors of all the powers that the charter
onfers. 21
c.
Nevertheless, regardless of the theories on the status and
powers of directors, "the board of directors has become an institution
f recognized position charged with the duty and responsibility of
managing the business, controlled by law and the corporate charter,
erving in a fiduciary capacity, and otherwise responsible to no one
in the exercise of prudent judgment in carrying out their functions.
Elected by stockholders, they in turn elect the officers who carry out
the policies the directors establish. In a great many respects they
are sui generis as directors and their powers derive from statutory
concessions."22
4.
Independence. The independence of directors is reflected
in Section 22 of the RCCP that expressly states that the directors
control all businesses of the corporation. In the management of
affairs of the corporation, the directors are dependent solely upon
their own knowledge of its business and their own judgment as
to what the corporation's interests require. 23 The stockholders do
not control the directors and the concurrence of the stockholders
is not necessary for their actions unless the RCCP, the Articles of
Incorporation, or the By-Laws provides otherwise.
a.
Stockholders cannot reverse the decisions of the Board.
The theory of a corporation is that the stockholders may have all the
profits but they shall turn over the management of the enterprise to
Ibid.
16
Model Business Corp. Act Ann. 2d, Sec. 35; See also Hoyt v. Thompson's
Executor, 19 N.Y. 207 (1859).
18
Model Business Corp. Act Ann. 2d, Sec. 35; See also Hoyt v. Thompson's
Executor, 19 N.Y. 207 (1859).
19G.R. No. 151969, September 4, 2009 citing Legarda v. La Previsora Filipina,
.
66 Phil. 173 (1938) and Angeles v. Santos, 64 Phil. 697 (1937); See also Santiago Cua,
Jr. v. Ocampo, supra; See also Bernas v. Cinco, G.R. Nos. 163356-57 and 163368-69
July 1, 2015.
17
2
°Valle Verde Country Club, Inc. v. Africa, G.R. No. 151969, September 4, 2009
citing Comae Partners, L.P., et al. v. Ghaznavi, et al., Del. Ch., 793 A.2d 372 (2001),
citing Bentas v. Haseotes, Del. Ch., 769 A.2d 70, 76 (2000) and Blasius Indus., Inc. v.
Atlas Corp., Del. Ch., 564 A.2d 651, 659 (1988) .
21
Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559 (1918).
22Hamilton, pp. 320-321.
23Manson v. Curtis, supra.
2
MMENTARIE
, N
THE REVI ED RP RATION OD ,
OF THE PHILIPPINES
the directors. Consistently, the directors, and not the shareholders,
must make all contracts with third persons. The corporation in
such matters is represented by the former and not by the latter. It
results that where a meeting of the stockholders is called for the
�urpose o� passing on the propriety of making a corporate contract,
its resolut10ns are at most advisory and not in any wise binding on
the Board. 24
b.
The stockholders, as owners of the corporation, are not
.
entirely helpless. As Justice Holmes explained in one case "if
�tockholders want to make their power felt, they must unite. There
IS no reason why a majority should not agree to keep together."25
Nevertheless, the power to unite is limited to removal and election
of directors and is not extended to contracts whereby limitations
are placed on the power of directors to manage the business of the
corporation by the selection of agents.26 If the stockholders do not
agree with the policies of the board, their remedy is to wait for the
election of the directors or to remove the directors if they have the
required vote.27
5.
Business Judgment Rule. Under this rule the will of
the majority of the Board members controls in corpo;ate affairs
and contracts intra vires entered into by the board of director�
are binding on the corporation and courts will not interfere ,unless
such contracts are so unconscionable and oppressive as to amount
to a wanton destruction of rights of the minority.28 Courts cannot
undertake to control the discretion of the Board of Directors about
admi�ist;ative matters as to �hich the Board has legitimate powers
?f act10n. 9 Judges are not busmess experts; they cannot replace their
Judgment for the judgment of the directors on business matters.
Stated differently, questions of policy or management
a.
are left solely to the honest decision of officers and directors of a
corporation and the courts are without authority to substitute their
::Ramirez v. Orientalist Co., G.R. No. 11897, September 24, 1918, 38 Phil. 634.
Brightman v. Bates, 175 Mass. 105, 111, 55 N.E. 809, 811.
26McQuade v. Stoneham, 263 N.Y. 323, 189 N.E. 234.
27Sant·mgo Cua, Jr. v. Miguel Ocampo Tan, G.R. Nos. 181455 and 182008
December 4, 2009.
281ngersoll v. Malabon Sugar Co., G.R. No. L-27770 ' December 31 ' 1927' 53
Phil. 745.
29
Gamboa, et al. v. Victoriano, et al., G.R. No. L-40620, May 5' 1979' 90 SCRA
40, 47.
'IITL • l!I­
TR
judgm nt of th Board of Directors; the Board is
u in
manager of the corporation and so long as it acts in
d faith its orders are not reviewable by the courts or the SEC.30
b.
The directors are also not liable to the stockholder
in making decisions using their business judgments.31 The rule
n rally provides that corporate officers and directors, absent self­
d aling or other personal interest, shall be shielded from liability for
any harm to the corporation resulting from their decisions if such
d cisions lie within the powers of the corporation and the authority
f management and are reasonably made in good faith and with
loyalty and due care. 32 Thus, the directors will not be liable even if
the corporation will suffer losses or if its profits will decrease so long
as the resolution of the Board was passed in good faith.33
c.
Even if there was mismanagement resulting in corporate
damages and/or business losses, still the directors may not be held
liable in the absence of a showing of bad faith in doing the acts
complained of. 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. 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. The directors will not be liable if there is no proof of
"dishonest purpose" or "some moral obliquity," or "conscious doing of
a wrong'' on the part of the directors that "partakes of the nature of
fraud."34
d.
One legal writer explained that the business judgment
rule is a standard of judicial review, entailing only slight review
of business decisions. Alternatively, it could be called a standard
of non-review, entailing no review of the merits of a business
30Philippine Association of Stock Transfer and Registry Agencies, Inc. v. Court
of Appeals, et al., G.R. No. 137321, October 15, 2007, 536 SCRA 61; Philippine Stock
Exchange, Inc. v. Court of Appeals, G.R. No. 125469, October 27, 1997, 281 SCRA
232.
31Montelibano v. Bacolod-Murcia Milling, Co., G.R. No. L-15092, May 18, 1962,
5 SCRA 36; Philippine Stock Exchange, Inc. v. Court of Appeals, ibid.
32Marc I. Steinberg, Corporate Internal Affairs, 1983 Ed., pp. 235-236.
33Montelibano v. Bacolod-Murcia Milling Co., supra.
34Filipinas Port Services, Inc. v. Go, G.R. No. 161886, March 16, 2007, 518
SCRA 453, 465.
29
J a HI PR
E N
MMENTARlE
THE REV! ED RP RATION C DE
OF THE PHILIPPINES
decision that a corporate official made. 35 This is a display of judicial
pragmatism on the proposition that interference or meddling with
free and lawful enterprise honestly conducted is repugnant to our
concept of government.
e.
Mere errors of judgment are not sufficient grounds for
equity interference, for the powers of those entrusted with corporate
management is discretionary.36 The directors are entitled to exercise
honest business judgment on the information before them and to
act within their corporate powers. That they may be mistaken,
that other courses of action might have differing consequences or
that their action might benefit some shareholders more than others
present no basis for the superimposition of judicial judgment, so
_
long as 1t appears that the directors have been acting in good faith.31
The reasons for rarely imposing liability for bad judgment according
to one authority are as follows:38
(1) Shareholders to a very real degree voluntarily
undertake the risk of bad business judgment;
(2) Courts recognize that after-the-fact litigation is a
most imperfect device to evaluate corporate business decision.
The circumstances surrounding a corporate decision are not
easily reconstructed in a courtroom years later, since business
imperative often call for quick decisions, inevitably based on
less than perfect information; the entrepreneur's function is
to encounter risks and to confront uncertainty, and a reasoned
decision at the time made may seem a wild hunch viewed years
later against a background of perfect knowledge;
(3) Potential profit often corresponds to the potential
risk; it is very much in the interest of shareholders that the
law does not create incentives for overly cautious corporate
business.
f.
Similarly, it was further explained that: "The director of a
business corporation is given a wide latitude of action. The law does
not seek to deprive him of initiative and daring and vision. Business
35Douglas - Bra son, The Rule That Isn't a Rule -The Business Judgment
�
i:i
_ Law Review 632 (2001), hereinafter
ule,
36 Valparaiso University
referred to as
�
Branson, p. 632."
36Kamin v. American Express Company, 86 Misc.2d 809, 383 N.Y.S.2d 807.
37
Kamin v. American Express Company, ibid.
38Joy v. North, 692 F.2d 880 (2d Cir. 1982).
Tl'l'U: lll - B Al
TR
'rEE I
Fl IR
291
h
it dv · ntur , its bold adventures; and those who in good faith,
nd in th int r st of the corporation they serve, embark upon them,
r not to b p nalized if failure, rather than success, results from
h i.r fforts. The law will not permit a course of conduct by directors,
wl i h would be applauded if it succeeded, to be condemned with a
Ii t f adjectives simply because it failed. Directors of a commercial
· rp ration may take chances, the same kind of chances that a man
w uld take in his own business. Because they are given this wide
latitude, the law will not hold directors liable for honest errors, for
mi takes of judgment. The law will not interfere with the internal
affairs of a corporation so long as it is managed by its directors
pursuant to a free, honest exercise of judgment uninfluenced by
p rsonal, or by any consideration other than the welfare of the
rporation."39
5.01. Requirements. From the above discussion, it is clear
that the business judgment rule shields the directors only if
the following are present: (1) the presence of a business decision
including decisions on policy, management and administration, (2)
the decision must be intra vires and must comply with the procedural
and substantive requirements of law, (3) good faith, (4) due care in
making the decision, and (5) the director must not have personal
interest or must not be self-dealing or must not otherwise be in
breach of the duty of loyalty governed by provisions of the RCCP,
specifically Sections 30, 31, 32, and 33 thereof (previously Sections
31-34 of the Corporation Code).
5.02. Rationale for Business Judgment Rule. It has been
posited that at least three strong policy considerations support this
rule. "First, if management were liable for mere good faith errors
in judgment, few capable individuals would be willing to incur the
financial and emotional risks of serving in such roles. Second, courts
are generally ill-equipped to evaluate business judgments. Finally,
management has the expertise to discharge the responsibility of
making such determinations."40 It was further observed by another
legal writer that the business judgment rule serves the following
purposes: 41
(1) It acts as a presumption in favor of corporate
management's actions;
39Bayer v. Beran, 49 N.Y.S. 2d 2 (1944).
40
Heller v. Boylan, 29 N.Y.S. 2d 653 (1941).
41
Steinberg, Corporate Internal Affairs, 1983 Ed., p. 236.
OMM <'NTARI • AND JURI PR
EN .•
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
29
N
(2) It provides a safe harbor that makes both directors
and their actions unassailable if certain prerequisites have
been met;
(3) It is a means of conserving judicial resources thereby
permitting courts to avoid being mired down in rehashing
judgments that are inherently subjective;
(4) The rule is the law's implementation of broad eco­
nomic policy built upon economic freedom and encouragement
of informed risk taking;
I
(5) It is a means by which Boards of Directors adopt
take-over defenses and by which the courts review the adoption
of those defenses; and
(6) It is a means by which corporations and their
lawyers evaluate and, based upon that evaluation, recommend
the dismissal of derivative suits.42
6.
Resolution. The Board must act, not individually or
separately, but as a body in a lawful meeting.43 The actions of the
Board are expressed in resolutions passed in its meetings. The Board
of Directors or Trustees acts as a body and the directors are not
agents individually. The collective action of the directors is required
in order that action may be deliberately taken after opportuiiity for
discussion and an interchange of views.44
a.
Section 23 of the RCCP provides that the "directors or
trustees elected shall perform their duties as prescribed by law,
rules of good corporate governance, and bylaws of the corporation."
b. The directors and trustees act as a body and not
individually. The action of one director or trustee does not bind
the corporation. Absent any valid delegation or authorization from
the Board, the declarations of an individual director relating to
the affairs of the corporation are not binding on the corporation.46
A Board resolution authorizing an officer to act is necessary.46
TJ'l'
' n i t ntly, a director cannot sell the property of the corporation
ith ut uthority from the Board itself. 47
Unless the Articles of
6.01. Approval of Resolution.
rporation or the By-Laws provides for a greater majority, a
maj rity of the number of directors or trustees as fixed in the Articles
f In orporation shall constitute a quorum for the transaction
f rporate business, and every decision of at least a majority of
th directors or trustees present at a meeting at which there is a
:rum shall be valid as a corporate act. The basis for determining
presence of the required majority of directors or trustees in order
t confirm that there is a quorum for a meeting is the number of
oard members as fixed in the Articles of Incorporation and not the
actual present/available number of members of the Board.48 The
rules on meetings are further discussed in the notes to Section 52 of
the RCCP.
6.02. Proof of Resolution. A Secretary's Certificate - a
rtificate issued by the Corporate Secretary of the corporation
- is sufficient proof of the existence of a resolution adopted by
the Board.49 The truthfulness of the certification is presumed. To
vercome the presumption, there must be sufficient, clear and
onvincing evidence as to exclude all reasonable controversy as
to the falsity of the certificate.50 The Secretary's Certificate is not
rendered invalid even if it is alleged that the Corporate Secretary
did not appear before the notary public who notarized the same.51
The non-appearance before the notary merely exposes the notary
public to administrative liability. 52
a.
Similarly, the Minutes of Meeting of the Board of Directors
can also establish the existence of a Resolution of the Board.53 The
43
Tan v. Sycip, G.R. No. 153468, August 17, 2006; Lopez Realty, Inc. v. Spouses
Tanjanco, G.R. No. 154291, November 12, 2014.
44
Bayer v. Beran, supra.
45
AF Realty & Development, Inc. v. Dieselman Freight Services Co., et al., G.R.
No. 111448, January 16, 2002.
46
Gonzalez v. Climax Mining, Ltd., et al., G.R. No. 161957, February 28, 2005,
452 SCRA 607, 619.
AF Realty & Development, Inc. v. Dieselman Freight Services, Co., et al.,
47
supra.
2013.
42lbid.
2 3
48
Yoshizaki v. Joy Training Center of Aurora, Inc., G.R. No. 174978, July 31,
49See Metropolitan Bank and Trust Co. v. Centro Development Corporation, et
al., G.R. No. 180974, June 13, 2012.
50
St. Mary's Farm, Inc. v. Prima Real Properties, Inc., et al., G.R. No. 158144,
July 31, 2008.
51
lbid.
52
St. Mary's Farm, Inc. v. Prima Real Properties, Inc., et al., supra.
53See China Banking Corporation v. QBRO Fishing Enterprises, Inc., G.R. No.
184556, February 22, 2012 and Santiago Cua, Jr. v. Miguel Ocampo Tan, et al., G.R.
Nos. 181455-56 and 182008, December 4, 2009.
294
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9.
members of the Board need not sign the Minutes of the Meeting;
the certification of the Corporate Secretary is enough. "It is the
signature of the corporate secretary, as the one who is tasked to
prepare and record the minutes, that gives the minutes of meeting
probative value and credibility."54
7. Ratification. "The general rule is that a corporation,
through its board of directors, should act in the manner and within
the formalities, if any, prescribed by its charter or by the general
law. Thus, directors 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 any objecting director or shareholder.
However, the actions taken in such a meeting by the directors or
trustees may be ratified expressly or impliedly."55
Term.
F DinE
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ction 22 of the RCCP states the following rules:
(1) Directors shall be elected for a term of one (1) year from
among the holders of stocks registered in the corporation's
books;
(2) Trustees shall be elected for a term not exceeding three
(3) years from among the members of the corporation; and
(3) Each director and trustee shall hold office until the
successor is elected and qualified.
a.
The provision that states that directors "shall hold
office for one year until their successors are elected and qualified"
was construed by the Supreme Court to mean that the term of the
members of the Board of Directors shall be only for one year; their
term expires one year after election to the office. 58 "Only in this way
can the continued accountability to shareholders, and the legitimacy
of their decisions that bind the corporation's stockholders, be assured.
The shareholder vote is critical to the theory that legitimizes the
exercise of power by the directors or officers over the properties that
they do not own."59
a.
It was held that the power to ratify the previous resolutions
and actions of the Board of Directors lies in the stockholders. 56
The cited case involved an alleged defective resolution because
the meeting was held without prior notice to one of the directors.
However, there was a subsequent ratification in a joint meeting
of the directors and stockholders including the director who was
not previously notified. 57 In this case, the stockholders and the
directors are the same persons. It is submitted though that if there
is a separation of management (the Board) and stockholders, the
stockholders cannot ratify defective Board actions on matters
over which the stockholders have no power. In those cases, the
stockholders are not, in a sense, principals of the directors especially
on matters covered by the business judgment rule.
b.
The provision is explicit that the term is for one year in a
stock corporation. The By-Laws cannot provide for a longer term. 60
The rationale for a one-year term "is to protect the corporation,
as well as its creditors and the public dealing with it so that if an
improvident or wrongful act is committed by the board of directors,
the subsequent board can redress or prevent the perpetration of the
wrong, and thereby protect its stockholders, creditors and the public
having dealings with it."61
8.
Proxy Not Allowed. Section 52 of the RCCP provides
that directors or trustees cannot attend or vote by proxy at Board
meetings. A director cannot even delegate his powers as director to
another person. An alternate director who will act as a director in
the absence of the duly elected director is also unacceptable under
Section 52.
c.
The word "term" has acquired a definite meaning in
jurisprudence. In several cases, the Supreme Court defined "term"
as the time during which the officer may claim to hold the office as
of right, and fixes the interval after which the several incumbents
shall succeed one another. 62 Term is distinguished from tenure
in that an officer's "tenure" represents the term during which the
Valle Verde Country Club, Inc. v. Africa, G.R. No. 151964, September 4, 2009.
Bernas, et al. v. Cinco, et al., G.R. Nos. 163356-57 and 163368-69, July 1,
58
Lopez Realty, Inc. v. Spouses Tanjanco, G.R. No. 154291, November 12, 2014;
People v. Dumlao, 599 Phil. 565 (2009).
55
lbid., citing Yasuma v. Heirs of Cecilio S. de Villa, 531 Phil. 62, 68 (2006).
56
Lopez Realty, Inc. v. Spouses Tanjanco, G.R. No. 154291, November 12, 2014;
Cua, Jr. v. Tan, G.R. Nos. 181455-56 and 182008, December 4, 2009.
57
Lopez Realty, Inc. v. Spouses Tanjanco, G.R. No. 154291, November 12, 2014.
59
54
2015.
60SEC Opinion No. 12-08 dated May 17, 2012.
SEC Opinion No. 12-08 dated May 17, 2012; SEC Opinion dated October 29,
61
2001.
62Valle Verde Country Club, Inc. v. Africa, G.R. No. 151969, September 4, 2009.
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incumbent actually holds office. The tenure may be shorter (or, in
case of holdover, longer) than the term for reasons within or beyond
the power of the incumbent.63
d. Lifetime or unlimited term of the directors is not allowed
because the same deprives other stockholders or members the
opportunity to participate in the management of the corporation.
Under the same rule, it cannot likewise be provided that the
presence of the original board members shall constitute the quorum
because the same presupposes that the original board members will
be holding office as members of the hoard for an unlimited term.64
e.
Section 13(g) of the RCCP provides that "the names,
nationalities, and residence addresses of persons who shall act as
directors or trustees until the first regular directors or trustees
are duly elected and qualified" should be stated in the Articles of
Incorporation. Hence, it was opined that the one-year term (or
the term that is not more than three years in the case of trustees)
does not apply to the incorporating directors (or trustees) because
they shall act only as such until the first regular directors are duly
elected and qualified. 66 The regular directors shall be elected during
the first organizational meeting of the corporation, which shall
be called immediately after registration with the Securities and
Exchange Commission. The election of regular directors may even
be counted as an act that satisfies the requirement under Section 21
of the RCCP that the corporation must organize within a period of
five years from incorporation.
9.01. Term of Trustees. In the case of a non-stock corporation,
the term of the trustees is not more than three (3) years. 66 This
means that the Articles of Incorporation can provide for a term of
less than three years.
a.
For the term of members of the Board of Trustees of nonstock corporations, the RCCP has removed the staggered term of
office of trustees previously provided in Section 92 of the Corporation
Code. The previous law provided that unless otherwise provided in
the Articles of Incorporation or the By-Laws, the term of 1/3 of the
63Jbid.
SEC-OGC Opinion No. 16-07 dated April 4, 2016.
Section 13, RCCP.
66
Sections 22 and 91, RCCP.
64
65
·rl'l'LE Ill - , ARD F DIRE
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s first elected shall expire every year, such that
11m.1a.l 1 tion shall be held thereafter for 1/3 of the members of
h
ard of Trustees and the trustees so elected shall then have a
r n of three years.
.02. Effect of Pending Cases. If the election of the new
dir tors is questioned for being irregular in a case duly filed for
u h purpose, "the whole process will be overtaken by the yearly
t kholders' meeting and election of directors and officers of
Lh corporation as mandated by law. No director or officer of the
rporation can claim his office in perpetuity. He has to submit
himself to a yearly election if he wants to continue in the service of
th corporation." 67 An injunction issued against the directors whose
-1 ction is being questioned is not a bar to the holding of an annual
1 ction in accordance with the provisions of the By-Laws.68
a. The same rule applies even if the directors were
ubsequently declared to have been invalidly removed. 69 A
ubsequent valid annual election prevents them from continuing
or from being reinstated as directors. The directors have "no right
to continue as director of the corporation unless re-elected by the
stockholders in a meeting called for that purpose every year."70 If a
subsequent annual stockholders meeting was SEC supervised, the
ame "gave rise to the presumption that the corporate officers who
won the election were duly elected to their positions and therefore
can be rightfully considered as de jure officers."71
PROBLEMS:
1.
Q:
Three out of five directors of X Corporation resolved to assign
the corporation's right of redemption over its remaining assets,
the lots mortgaged to a bank. A deed of assignment was
subsequently executed in favor of M who then redeemed the
said properties. However, R, who was the highest bidder at the
public auction, assailed the validity of the deed of assignment
for being an ultra vires act of the Board of Directors contending
that the three directors who made the resolution were not
67
Lee Hiong Wee v. Dee Ping Wee, G.R. No. 163511, June 30, 2006, 494 SCRA
258, 277; Legaspi Towers 300, Inc. v. Muer, G.R. No. 170783, June 18, 2012.
68
B.H. Silen, et al. v. Vera, et al., G.R. No. 45574, October 27, 1937.
69
Bernas, et al. v. Cinco, et al., G.R. Nos. 163356-57 and 163368-69, July 1, 2015.
10Ibid.
71 Ibid.; Multinational Village Homeowners' Association v. Gacutan, G.R. No.
188307, August 17, 2017.
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2.
3.
Q:
Yes, R's argument is tenable. Under Section 22 of the Revised
Corporation Code, only persons who own at least one share of
the capital stock of the corporation can be directors. Ownership
of shares is determined by the books of the corporation. Since
the three directors are not stockholders in the corporate
books, they are automatically disqualified to be directors. The
three directors ceased to be directors when they ceased to be
stockholders of X Corporation. Hence, they cannot validly
approve and execute transactions in behalf of the corporation.
(Pena v. Court of Appeals, G.R. No. 91478, February 7, 1991)
A claim was filed by Ms. CO against the National Irrigation
Administration (NIA) for the latter to pay compensation for the
portion of her property used in the construction of the canal.
The Regional Trial Court rendered a decision in favor of CO.
On appeal, the decision was affirmed by the Court of Appeals.
SE, as Project Manager of the NIA, filed a petition for certiorari.
The verification and certification against forum shopping were
signed by CG, the administrator of the agency. It was contended
that said petition must be dismissed because of failure to comply
with the provisions of Section 5, Rule 7 of the Revised' Rules
on Civil Procedure on certification against forum shopping. No
Board resolution was attached to the petition. Can SE or CG
sign the certificate against forum shopping accompanying the
petition?
A:
No. The defendant in this case is NIA, which is a corporation
organized under the law. Hence, all actions shall be done only
through the Board of Directors of NIA. Without being duly
authorized by resolution of the Board of the corporation, neither
SE nor CG is authorized to sign the certificate against forum
shopping accompanying the petition for review. (Santiago
Estaban, Jr. v. Vda. de Onorio, 360 SCRA 230)
Q:
PAW is a domestic corporation organized to operate a customs
bonded warehouse. To obtain a license for the operation of a
bonded warehouse from the Bureau of Customs; Mr. AP, the
corporation president, solicited a proposal from Mr. SS for the
preparation of a feasibility study. The initial proposal of SS
was accepted by AP. Later, upon AP's request, SS sent another
proposal to PAW for an operations manual and seminar/
workshop for its employees. The manual was sent to the Bureau
of Customs which thereafter issued a license in favor of PAW to
operate a bonded warehouse. SS likewise conducted a three-day
299
training seminar for the employees of the corporation. Alleging
non-payment, SS subsequently filed a collection suit against
the corporation. PAW resisted the claim on the ground that
the second contract for services did not bind it because it was
entered into by its president without authority of the Board of
Directors. Is the contention of the corporation valid?
among those listed as stockholders ofX Corporation in the stock
and transfer book and thus they cannot execute any transaction
for the corporation. Is the argument of R tenable? Explain your
answer.
A:
F
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A:
No, the facts show that the president was duly authorized. AP,
the president of PAW appears to be authorized. The conduct of
the president 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 to act and had recognized, approved and
ratified his former and similar actions. Furthermore, a party
dealing with the president of a corporation is entitled to assume
that he has the authority to enter, on behalf of the corporation,
into contracts that are within the scope of the powers of said
corporation and that do not violate any statute or rule on public
policy. In this case, AP was the one dealing with SS from the
very beginning.
Besides, SS has reason to believe that AP's conformity
to the contract in dispute was also binding on the corporation.
It is well-settled that if a corporation knowingly permits one
of its officers, or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as possessing
the power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent's authority. (People's
Aircargo Warehousing, Inc. v. Court of Appeals, G.R. No. 117847,
October 7, 1998)
4.
Q:
The Board of Directors of X Corporation issued a resolution
authorizing its Treasurer and General Manager, Mr. A, to
secure a loan from Y Corporation, a financing company, and
to sign all papers, documents or promissory notes necessary
to secure the loan. Another resolution was later approved by
the Board authorizing Mr. A to act as the signatory in securing
a discounting line with Y Corporation. Mr. A was authorized
to sign all instruments, documents and checks necessary to
secure the discounting line. Later, Mr. A signed Deeds of
Assignment and assigned postdated checks of X Corporation to
Y Corporation. A endorsed the checks by signing his name at the
back of the checks. The checks were all dishonored prompting
Y Corporation to demand payment from X Corporation. X
Corporation denied liability on the checks raising the defense
of lack of authority of A to sign the Deeds of Assignment and­
asserting that A signed the deeds and indorsed the checks in
his personal capacity. Can the defense be validly raised by X
Corporation?
A:
No. The corporation cannot validly raise such defense. A
corporation has the power to borrow funds and dispose of assets
in the ordinary course of business. In the exercise of such power
the Board authorizes one or more corporate officers to sign loan
document or deeds of assignment for the corporation. The Board
is the one empowered to do so because Section 22 of the Revised
Corporation Code (Section 23 of the Corporation Code) provides
that unless otherwise provided in this Code, the corporate powers
of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporation held by
the Board of Directors or Trustees. In this case, Mr. A was duly
authorized by the Board of X Corporation to sign the Deeds of
Assignment and to endorse the checks. A signed the Deeds of
Assignment as agent and authorized signatory ofX Corporation
under an authority expressly granted by Board resolutions.
Hence, the signature of A on the Deeds of Assignment binds the
Board of Directors andX Corporation itself. (Great Asian Sales
Corporation v. Court of Appeals, No. 105774, April 25, 2002)
5.
6.
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Q:
X Corporation sold its ice plant to Y Corporation who in return
executed a mortgage over a property to secure payment of the
purchase price. As a result of the sale,X Corporation terminated
all its employees and paid their separation pay. Y Corporation
thereafter, sold the same ice plant to Z Corp.oration, Mr. Q, the
General Manager of Z Corporation owns one half interes�_in said
corporation. Due to failure to pay the balance, X Corporation
extrajudicially foreclosed the property and was the highest
bidder in the public auction. Subsequently the latter sold the ice
plant, subject to the right of redemption by Y Corporation, to Mr.
T who rehired X Corporation's previous employees. Thereafter,
the ice plant was redeemed and possession was obtained by
virtue of the mandatory injunction. However, Z Corporation
did not re-employ the re-hired employees and through Mr. Q
terminated their services. Can the corporate officers like the
general manager be held personally liable for damages on
account of termination of services of the employees?
A:
No. An officer acting in good faith within the scope of his
authority to terminate the services of the employees cannot be
personally liable for damages. In the absence of evidence that
one acted maliciously or in bad faith in terminating the services
of the employees, his act shall be deemed to be within the scope
of his authority and as such was a corporate act. Hence, he
cannot be made personally liable. (Sunio v. NLRC, 127 SCRA
390)
Q:
Billy Bomba had been employed by DAD Realty Corporation as
a pump operator in 1990 and had since performed such work
F
FI
01
at it Maharlika Subdivision. In 1999, Bomba filed a complaint
with the Labor Arbiter against DAD Realty Corporation and its
Vice President Tita Gloria, for wage differentials, overtime pay,
incentive leave pay, 13th month pay, holiday pay and rest day
pay. The Labor Arbiter found that Bomba was indeed entitled
to such sought amounts. Is Vice President Gloria solidarily
obligated with DAD Realty Corporation for the corporate
liability?
7.
8.
A:
No. A corporation acts through its directors, officers, and
employees. While acting for the corporation, the directors,
officers and employees are not liable to persons with whom
they are transacting. Obligations incurred by them while they
were acting as such corporate agents are corporate obligations.
Although there may be exceptional circumstances that may
justify solidary liability, there is nothing in the problem that
indicates that solidary liability should be imposed on the officers.
Q:
Where the board of directors of a corporation consists of 9
members, two having died during their term of office, 1 being
abroad, what would be the quorum? How many affirmative
votes would be necessary to pass a resolution? Explain.
A:
Five members constitute the quorum. The Revised Corporation
Code (and previously, the Corporation Code) provides that a
majority of the number of directors as fixed in the Articles of
Incorporation shall constitute a quorum for the transaction of
corporate business. Vacancy does not reduce the quorum. If five
members are present, the majority thereof or three may pass a
resolution unless a greater number is required under the RCCP
(previously, the Corporation Code). (1970 Bar)
Q:
On December 9, 1985, Matatag Corporation revalued its assets.
On the basis of reappraisal, the Board of Directors also declared
cash dividends for all stockholders. On December 16, 1985,
Matatag Corp. amassed substantial profits in a highly lucrative
transaction. Some minority stockholders, however, did not want
to complicate their income tax problems for 1985 and refused to
accept the cash dividends. They also filed suit to compel the other
stockholders to return to Matatag Corp. the money received as
dividends. Not one of the stockholders who formed the majority
joined in the suit since they were happy with the money they
received. When a case was filed against the Board, the Board
of Directors raised the "Business Judgment Rule." What is the
business judgment rule and does it have any relevance to this
case?
A:
Under the Business Judgment Rule, the acts of the Board
within the powers conferred upon them cannot be reviewed by
302
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courts. They are generally binding on the stockholders and the
courts. The Board of Directors is authorized to exercise absolute
but sound discretion on matters regarding the operation of the
Corporation.
' Declaration of dividends is one of those actions that are within
the discretion of the Board. Thus, the Business Judgment Rule
is relevant because declaration of dividends is usually binding
and cannot be reviewed by courts. (1986 Bar)
10. Qualifications. The RCCP prescribes the following
qualifications for directors or trustees: (1) He must own at least one
share of the capital stock of the corporation in his own name or if
the corporation is a non-stock corporation, he must be a member
thereof; 72 (2) He must not be disqualified under the RCCP or any
applicable special law or rules; 73 (3) He must be of legal age; and (4)
He must possess other qualifications as may be prescribed in special
laws or regulations or in the by-laws of the corporation.
a.
Natural Persons. A director or trustee must be a natural
person. The RCCP expressly allows corporations, partnerships
and associations to be incorporators. There is no similar express
provision with respect to the directors. Hence, it is evident that the
requirement that the directors and trustees are, natural persons
remains.
b.
Residence. There is no residence requirement under the
RCCP. Previously, the Corporation Code required that a majority
of the directors/trustees must be residents of the Philippines. This
requirement was deleted by the RCCP.
c.
Age. There is no express statement in Section 22 requiring
directors to be of legal age. Nevertheless, minority restricts an
individual's capacity to act. 74 Hence, the SEC opined that the election
of minors to the Board or as corporate officer is not sound corporate
practice. Since their capacity to act is restricted, they will not be
able to participate in all corporate acts. 75 In addition, it is likewise
submitted that the requirement for incorporators to be of legal age
under Section 14 of the RCCP should also be applied to subsequent
directors.
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10.01.
Shares or Membership. Section 22 of the Revised
orporation Code provides that to be elected as a director one
must come from "among the holders of stocks registered i� the
corporation's books." In the case of a non-stock corporation, the
trustee to be elected must come "from among the members of the
corporation." 76
a.
Rationale. The requirement that the director must
be a stockholder of record is intended for the protection of the
corporation so that it may have means of knowing at any time who
are the stockholders who may participate in the management of the
corporation. 77
b.
Disqualification. "A director who ceases to own at least
one (1) share of stock or a trustee who ceases to be a member of
the corporation shall cease to be such."78 Therefore, the corporation
need not comply with the provisions of Section 27 of the RCCP
before a director is deemed removed from office. A director ceases
to be a director and a trustee ceases to be a trustee the moment
the director ceases to be a stockholder and the moment the trustee
ceases to be a member.
c.
Nature of Title. It is sufficient that legal title as it
appears in the books of the corporation is in the director since the
legal title is what counts. What is material is the legal title to, not
beneficial ownership of, the stock as appearing in the books of the
corporation.79 Thus, a person to whom one share of stock has been
transferred for the express purpose of qualifying him as director is
qualified. 80
(1) While a corporation cannot be elected as a director,
its duly authorized officer, agent or trustee who has been
designated as "nominee" may be eligible to be elected as
director.81 A shareholder corporation may have representation
in the board by giving one of its officers or any representative
one qualifying share, which said person holds as nominee.
However, the nominee is no longer qualified to be a director
76
Section 22, RCCP.
SEC Opinion dated January 25, 1985.
78
Sec. 22, RCCP.
79
Lee v. Hon. Court of Appeals, et al., G.R. No. 93695, February 4, 1992, 205
SCRA 752.
80
SEC Opinion dated January 25, 1985.
81
SEC OGC Opinion No. 09-02 dated January 12, 2009.
77
72Section 22, RCCP.
73Section 26, RCCP.
74
Article 38, New Civil Code.
75
SEC Opinion dated February 2, 1981.
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the moment his assignment as nommee 1s revoked by his
principal. 82
(2) The trustee in a voting trust agreement is also
qualified to run as a director. The trustee has legal title over
the shares.83
(3) Unless he is a stockholder (or member) in his own
right, a proxy cannot be elected as a director (or a trustee).
The right to be a candidate cannot be delegated. The right is
peculiar only to members or stockholder� of a corporation.84 In
Lim v. Moldex Land, Inc., 85 the Court explained that Republic
Act No. 4726 (Condominium Act sanctions the creation of a
condominium corporation which is especially formed for the
purpose of holding title to the common areas and membership
in a condominium corporation is limited only to the unit
owners of the condominium project. Hence, even the developer
that is still the registered owner of a number of unsold units
should be considered a member. However, while the developer
corporation may rightfully designate proxies or representatives,
the latter cannot be elected as directors or trustees. "First, the
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
trustee."86
(4) It has been opined, however, that a person who does
not own any stock at the time of his election or appointment is
not disqualified as director if he becomes a shareholder before
assuming the duties of his office. 87
82
SEC Opinion dated February 4, 2002.
83
Lee v. Court of Appeals, 205 SCRA 752 (1992).
84
SEC Opinion No. 09-07 dated September 9, 2009; SEC Opinions dated
November 19, 1985 and February 17, 1986.
85G.R.No. 206038, January 25, 2017.
86
/bid.; It should be noted that it was previously opined that in the case of con­
dominium corporations where all or part of the members thereof are corporate mem­
bers or juridical persons, an officer or duly authorized agent or trustee who has been
designated as its representative for the express purpose of qualifying him as director,
may be eligible to be elected as director (See for example SEC SGC Opinion No. 05-06
dated June 8, 2005). However the Supreme Court ruled that SEC opinion cannot be
relied upon because they were not issued by the Commission En Banc.
87
SEC Opinion dated April 5, 1990.
(5) One cannot be a director if he is not a stockholder of
record. Hence, the assignee of a share cannot be elected as a
Director if the assignment in his favor is not yet registered in
the books of the corporation.
(6) The SEC is of the opinion that a holder of a non­
voting share cannot be elected as a director. 88 Non-voting
shares cannot participate in the management and the holders
of such shares cannot be elected to a position that is purposely
created to manage the corporation.
(7) The one share requirement is only the minimum.
The Articles of Incorporation may provide that a director must
have more than one share so long as the required number of
shares is reasonable.
10.02.
Citizenship. There is no citizenship requirement for
directors and trustees under the RCCP. Foreigners can be elected as
directors or trustees subject to the provisions of special laws. There
may even be corporations where all the directors or trustees are
foreigners. There are cases, however, where the number of foreign
directors is restricted by nationalization laws. For example, in
nationalized activities, the rule under Commonwealth Act No. 108,
as amended by Presidential Decree No. 715, otherwise known as the
Anti-Dummy Law, is that foreigners can be elected as directors only
in proportion to their allowable equity participation in the capital of
the said activities. 89
a.
Dual Citizens. Natural born Filipinos who lost their
citizenships by assuming foreign citizenship may re-acquire and
retain their Filipino citizenship under Republic Act No. 9225. They
can be directors and officers of corporations engaged in partly
nationalized or wholly nationalized industries even if they possess
"dual citizenship." 90
10.03.
Qualifications under Special Laws. Other
special laws may provide for qualifications and disqualifications of
directors or trustees. For example, those who are to be elected as
directors of banks are also subject to the other requirements of the
General Banking Law and circulars issued by the Bangko Sentral
ng Pilipinas. 91
SEC Opinion dated March 20, 1996.
See Annotations in Section 17 of this work.
90SEC-OGC No. 10-25 dated August 10, 2010.
91
See Sections 15 and 16, General Banking Law and Subsections X141.2,
Manual of Regulations for Banks.
88
89
306
MMENTAIUE
D JORI PR DEN E
THE REVISED CORPORATION ODE
N
TITL • III - B ARD F DIRE T
TRU TEE I FFI ER
OF THE PHILIPPINES
(1) Another example is Republic Act No. 6713 or the
Code of Conduct and Ethical Standards for Public Officials
and Employees. Section 7 of the said law prohibits a public
officer from being employed in a private enterprise regulated,
supervised or licensed by his office unless expressly allowed by
law: The Code likewise prohibits conflict of interest situations.
Conflict of interest arises when a public official or employee is
a member of a board, an officer or substantial stockholder of a
private corporation or owner or has a substantial interest in a
business, and the interest of such corpo:ration or business, or
his rights or duties therein, may be opposed to or affected by
the faithful performance of official duties. 92
10.04.
Qualifications under the By-Laws. Section 46(f)
of the RCCP provides that a corporation is empowered to provide
in its By-Laws the qualifications and disqualifications of members
of the Board. If a disqualified director is elected, the stockholders
do not waive their right to question his election as a director;
qualification cannot be waived. The remedy is to amend the By­
Laws if the shareholders feel that the qualifications prescribed in
the By-Laws should no longer operate. 93
(1) The proVIs1ons prescribing qualifications- and
disqualifications are devices to protect the interest of the
corporation. For instance, a provision in the By-Laws
disqualifying stockholders who are already directors in
competing corporations or the controlling stockholder thereof
is considered a valid provision in the By-Laws.94 To prevent the
existence of disloyal directors, it is proper to prescribe in the
By-Laws a provision disqualifying stockholders with interest
adverse to the business of the corporation, to be a director.
By express provision in the By-Laws, directors in competing
corporations are thus deprived of the right to participate in the
management of the business.95
92
Section 3(i), Republic Act No. 6713; see also SEC Opinion No. 06-17, March
13, 2006.
93
111 BP Record, pp. 1613-1614, December 4, 1979.
94Gokongwei v. SEC, G.R. No. L-48911, April 11, 1979; SEC Opinions dated
June 22, 1995, April 23, 1993 and January 22, 1982; See also SEC-OGC Opinion No.
14-05 dated April 21, 2014.
95SEC Opinion dated January 22, 1982.
307
(2) It is a settled state law in the United States,
according to Fletcher, that corporations have the power to
make By-Laws declaring a person employed in the service of
a rival company to be ineligible for the corporation's Board
of Directors. An amendment which renders ineligible, or if
elected, subject to removal, a director if he be also a director
in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid. This is based
upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but must
betray one or the other. 96
(3) It has been held that an officer of a corporation
cannot engage in a business in direct competition with that of
the corporation where he is a director by utilizing information
he has received as such officer, under the established law
that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of
the corporation of which he is an officer or director. 97
(4) Similarly, the SEC considered as valid a provision in
the By-Laws of a rural bank that bars a stockholder who is at
the same time an employee of the said bank to run as director
unless he resigns as an employee. 98
(5) It would not be acceptable, however, if the By-Laws
will just provide that the disqualifications are subject to the
judgment or determination of the directors. The additional
qualifications or disqualifications must be spelled out in the
By-Laws. 99 In the absence of a provision in the By-Laws,
a corporation cannot require additional qualifications for
directors other than those provided in Sections 22 and 91 of
the RCCP as well as other pertinent special laws. 100
(6) The directors or trustees should come from the
stockholders or members. Hence, a proposal that the directors
or trustees shall come from the officers is not in accordance
with law. 101
96
Gokongwei v. SEC, supra.
1bid., cited in SEC-OGC Opinion No. 14-04 dated April 21, 2014.
98
SEC Opinion dated July 29, 1999.
99
SEC Opinion dated April 23, 1993.
1
00SEC Opinion June 16, 1995.
1
10 SEC Opinion November 13, 1989.
91
MMENTARIE AND J' RI PR DE E
THE REV! ED ORPORATION ODE
OF THE PHILIPPINES
N
11. Ex Officio Member. A person who is not a stockholder
in a corporation governed by the RCCP cannot be a director but he
can be an ex officio member without voting rights in the Board. 102
However, Republic Act No. 10148 provides for Ex Officio Board
Member and Alternates in Government-Owned or Controlled
Corporations (GOCC). Ex Officio Board Member refers to any
individual who sits or acts as a member of the Board of Directors/
Trustees by virtue of one's title to another office, and without further
warrant or appointment. 103 The ex officio members of the GOCC may
designate their respective alternates who shall be the officials next­
in-rank to them, and whose acts shall be considered the acts of their
principals.
12. Effect of Disqualification. A disqualified stockholder
cannot run for election as director. If the ground for disqualification
was present at the time of election, but the disqualified
stockholder was nevertheless elected as a director, the subsequent
disqualification of the director would not render the Board incapable
of transacting business for as long as the remaining directors still
constitute a quorum. Such situation merely gives rise to a vacancy in
the Board. 104 The same rule should be applied if the stockholder was
not disqualified at the time of election but he beca,me disqualified
thereafter.
13. Re-Election. Unless there is a provision in the Articles
oflncorporation or By-Laws that disqualifies an incumbent director
or officer from seeking another term of office, the incumbent is not
prevented from seeking re-election. 105
14. Hold-Over. The policy of the law is to avoid or shorten
the tenure of hold-over directors or trustees. This will be discussed
under Section 23 in relation to Section 25 of the RCCP. It is noted
that the presence of hold-over directors or trustees cannot be totally
avoided. If no election is held, the directors and officers shall hold­
over until their successors are elected. 106 This rule on hold-over
directors and officers applies to a going concern where there is no
09
hr al in th x rcise of the duties of the officers and directors. 107
However, once an annual stockholders' meeting takes place and
n w directors are elected, the old directors cannot continue to serve
as directors. The hold-over principle cannot be invoked as a shield
to perpetuate oneself in office. 108 After the annual election, the old
directors cannot serve in a hold-over capacity even if the latter were
previously illegally prevented or enjoined from performing their
functions during their term.
a.
The term of office is not affected by the hold-over. The term
of one year is fixed by statute and it does not change simply because
the office may have become vacant, nor because the incumbent
holds over in office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify. 109
b.
The hold-over period - that time from the lapse of one
year from a member's election to the Board and until his successor's
election and qualification - is not part of the director's original
term of office, nor is it a new term; the hold-over period, however,
constitutes part of his tenure. Corollarily, when an incumbent
member of the Board of Directors continues to serve in a hold­
over capacity, it implies that the office has a fixed term, which has
expired, and the incumbent is holding the succeeding term. 110
c.
The power of the directors who are continue serve in a
hold-over capacity is not diminished. The board has the same power
as the board during the term of the directors. Thus, the power of the
hold-over board is not limited to the daily routine operations. The
business judgment rule still applies. 111
PROBLEMS:
1.
Q:
"A", as owner of a certain number shares of stock in X
Corporation, entered into a voting trust agreement with B. On
the basis of the voting trust agreement, B announced his desire
to run for a seat in the Board of Directors of X Corporation. C,
107
2
Grace Christian High School v. Court of Appeals, G.R. No. 108905, October
23, 1997, 281 SCRA 133.
103 Section 3(i), Republic Act No. 10149.
104 SEC Opinion December 17, 1992.
105 SEC Opinion No. 06-18 dated March 20, 2006.
106
See III BP Record, p. 1692, December 10, 1979.
10
SEC Opinion dated December 13, 1987.
Bernas, et al. v. Cinco, et al., G.R. Nos. 163356-57 and 163368-69, July 1,
2015; Multinational Village Homeowners' Association v. Gacutan, G.R. No. 188307,
August 17, 2017.
109Valle Verde Country Club, Inc. v. Africa, G.R. No. 151964, September 4,
2009.
108
110Ibid.
msEC OGC Opinion No. 19-12 dated March 19, 2019.
310
MM •NTARI • AN
JURI PR
•N
•
THE REVI ED ORI ORATION ODE
OF THE PHILIPPINES
-B AR
F IRE 'T
'rR 'l'E • /OFFI E'R
N
ha:r in th books of the Corporation, both E and F appeared.
E claimed that notwithstanding the sale of his shares to F, he
remained a director since the Corporation Code provides that
directors "shall hold office for one year and until their successors
are elected and qualified." On the other hand, F claimed that
since he would have been elected as director had it not been for
E's nomination and election, he (F) should now be considered
as a director as he had acquired the shares of E. Decide with
reasons.
another stockholder, objected and questioned the eligibility of B
to be a director ofX Corporation. Is C's contention correct? Why?
A:
2.
Q:
A:
No. The contention of C is not correct. A trustee in a voting
trust agreement has legal title over the shares. Section 58 of
the Revised Corporation Code provides that the stock certificate
of the trustor shall be cancelled and a new certificate shall be
issued in the name of the trustee. The books of the corporation
shall state that the transfer in the name of the trustee or
trustees is made pursuant to the voting trust agreement. Since
legal title is all that is required, Mr. B is eligible to run for a
position in the Board of Directors.
The Board of Directors of Seiko Corporation, acting on a standing
authority of the stockholders to amend the by-laws, so amended
the by-laws disqualifying any of its stockholders, who is also a
stockholder and director of a competitor, from being elected to
the board of directors. Assunta Estrada, a stockholder holding
shares sufficient to assure her of a seat in the board, filed a
petition with the Securities and Exchange Commission for the
declaration of nullity of the amended by-laws. She alleged,
among other things, that as a stockholder she had acquired
rights inherent in stock ownership such as the right to vote and
be voted for in the election of directors. Is her petition tenable?
No, her petition is not tenable. It is true that a 'stockholder has
the right to vote and be voted for in the election of directors.
However, such right does not mean that a stockholder has
vested right to be elected to the board of directors. The election
process prescribed under the Revised Corporation Code should
be followed and a stockholder cannot force other stockholders to
elect her as director.
Her contention that the by-laws is null and void is not tenable
either. Corporations have the power to make by-laws declaring
a person employed in the service of a rival company ineligible
for election to its board of directors. It is well-settled that a
director who is ineligible cannot be elected as such. In addition,
a director is subject to removal if a ground for disqualification
exists. One such ground is a provision that a stockholder is
disqualified if his business is in competition with or antagonistic
to the other corporation. (1998 Bar)
3.
Q:
At the annual meeting of ABC Corporation for the election of five
directors as provided for in the articles of incorporation, A, B, C,
D, E, F, and G were nominated. A, B, C, D, and E received the
highest number of votes and were proclaimed elected. F received
ten votes less than E. Subsequently, E sold all his shares to F.
At the next Board of Directors' meeting following the transfer of
·11
A:
E is disqualified to continue as director. Section 22 of the Revised
Corporation Code (previously Section 23, Corporation Code)
provides that every director must own at least one share of the
capital stock of the corporation of which he is a director, which
share shall stand in his name in the books of the corporation.
Any diFector who ceases to be the owner of at least one share
in the capital stock of the corporation of which he is a director
shall thereby cease to be a director. The requirement of owning
at least one share is a continuing requirement. E became
disqualified when he sold all his shares of the corporation; he
thus ceased to be a director.
F's claim is also untenable because a director should be duly
elected as such and he was not elected to be a director in the
annual meeting of ABC Corporation. (1984 Bar)
15. Corporate Governance. In 2009, the SEC issued
Memorandum Circular No. 6, Series of 2009 dated June 22, 2009,
entitled Code of Corporate Governance.112 The Code of Corporate
Governance app. lies to registered corporations and to branches and
subsidiaries of foreign corporations operating in the Philippines
that: (I) sell equity and/or debt securities to the public that are
required to be registered with the SEC; or (2) have assets in excess
of P50,000,000.00 or such other amount as the Commission shall
prescribe, and having 200 or more shareholders each holding at
least 100 shares of a class of its equity securities; or (3) whose equity
securities are listed in an Exchange; or (4) are grantees of secondary
licenses from the SEC. However, the SEC issued Memorandum
Circular No. 19, Series of 2016 dated November 22, 2016 that
superseded Memorandum Circular No. 6, Series of 2009 with respect
to listed companies.
112Hereinafter referred to as the 2009 Code of Corporate Governance, which
took effect on July 15, 2009. It replaced Memorandum Circular No. 02, Series of 2002.
12
31
MM •NTARI • AND J'URI PRUDEN
THE REVl ED CORPORATION ODE
OF THE PHILIPPINES
a.
Memorandum Circular No. 19, Series of 2016 defines
Corporate Governance as the system of stewardship and control to
guide organizations in fulfilling their long-term economic, moral,
legal and social obligations towards their stakeholders. The said
Circular likewise state that "corporate governance is a system of
direction, feedback and control using regulations, performance
standards and ethical guidelines to hold the Board and senior
management accountable for ensuring ethical behavior - reconciling
long-term customer satisfaction with shareholder value - to the
benefit of all stakeholders and society. "The p· urpose is to maximize
the organization's long-term success, creati�g sustainable value
for its shareholders, stakeholders and the nation." On the other
hand, the 2009 Code of Corporate Governance defines "Corporate
Governance" as the framework of rules, systems and processes in the
corporation that governs the performance by the Board of Directors
and Management of their respective duties and responsibilities
to the stockholders and other stakeholders which include, among
others, customers, employees, suppliers, financiers, government and
community in which it operates. 113
b.
The enumeration of the corporations that are covered
by the Code shows the intent to provide a framework of rules,
systems and processes primarily when there is a regime of dispersed
ownership. In covered "public companies" - which have more
than 200 shareholders or corporations whose equity securities are
listed in an exchange - there is a greater possibility that there
is a separation between management and ownership. Hence, it
is necessary to provide for a framework that will focus on the
relationship between the directors and officers on one hand and the
stockholders on the other.
c.
Additionally, the inclusion of firms that sell equity/debt
securities to the public and corporation that have secondary licenses
within the coverage of the Code indicates the intent to cover entities
that directly affect the public in their operation.
d. The law of corporate fiduciary duties and remedies for
violation of those duties are distinct from the aspirational goals of
ideal corporate governance practices. "Aspirational ideals of good
corporate governance practices for board of directors that go beyond
the minimal legal requirements of the corporation law are highly
113Article
l(a), Code of Corporate Governance, as amended by SEC
Memorandum Circular No. 9, Series of 2014, dated May 6, 2014.
d irabl , ft n tend to benefit stockholders, sometimes reduce
l'ti ation and can usually help directors avoid liability. But they
r not required by the corporation law and do not define standards
f liability."rn Consistently, the coverage of the Code of Corporate
ov rnance issued by the SEC is limited to those expressly
numerated therein. Nevertheless, even corporations that are not
included in the enumeration may voluntarily adopt the principles
and rules that are included in the Code of Corporate Governance
because these principles and rules partake the nature of institutional
best practices. 115
e.
The 2016 Code of Corporate Governance adopts the
"comply or explain" approach. "This approach combines voluntary
compliance with mandatory disclosure. Companies do not have to
comply with the Code, but they must state in their annual corporate
governance reports whether they comply with the Code provisions,
identify any areas of non-compliance, and explain the reasons for
non-compliance."116 The 2016 Code "does not, in any way, prescribe
a 'one size fits all' framework. It is designed to allow boards some
flexibility in establishing their corporate governance arrangements.
Larger companies and financial institutions would generally be
expected to follow most of the Code's provisions. Smaller companies
may decide that the costs of some of the provisions outweigh the
benefits, or are less relevant in their case. Hence, the Principle of
Proportionality is considered in the application of its provisions." 117
f.
The 2016 Code is arranged into (a) Principles, (b)
Recommendations, and (c) Explanations:
(1) The Principles can be considered as high-level
statements of corporate governance good practice, and are
applicable to all companies.
(2) The recommendations are objective criteria that are
intended to identify the specific features of corporate governance
good practice that are recommended for companies operating
according to the Code. Alternatives to a Recommendation may
be justified in particular circumstances if good governance can
be achieved by other means. When a Recommendation is not
4
11 Brehm v. Eisner, 746 A.2d
5
11 Brehm v. Eisner, 746 A.2d
6
11 Introduction, Sections 2-5.
7
11 Brehm v. Eisner, 746 A.2d
244 (Del. 2000).
244 (Del. 2000).
2016 Code of Corporate Governance.
244 (Del. 2000).
MMENTARIE AND J RI PRUDEN E
THE REV! ED CORPORATION ODE
OF THE PHILIPPINES
314
complied with, the company must disclose and describe this
non-compliance, and explain how the overall Principle is being
achieved. The alternative should be consistent with the overall
Principle.
(3) Descriptions and explanations should be written in
plain language and in a clear, complete, objective and precise
manner, so that shareholders and other stakeholders can
assess the company's governance framework. The Explanations
strive to provide companies with additional information on the
recommended best practice.
15.01.
Alternative Theories on Corporate Governance.
There are two alternative theories regarding corporate governance,
to wit: (1) The Shareholder Primacy Theory which is also known
as the "Shareholder-Wealth-Maximization Theory," and (2) Social
Responsibility Theory/Stakeholder Protection Theory. The Share­
holder Primacy Theory is known as the conservative school of
t�ought while the Social Responsibility Theory is known as progress1ve.
a.
As the term implies, the Shareholder Primacy Theory
holds that the corporation should be run for the excLusive benefit
of shareholders.118 One of the best known supporters of. the
shareholder's primacy theory was Milton Friedman who said in
his Capitalism and Freedom that "few trends could so thoroughly
undermine the very foundations of our society as the acceptance
by corporate officers of a social responsibility other than to make
as much money for their shareholders as possible." 119 Friedman
believes that those who espouse the social responsibility theory
show a fundamental misconception of the character and nature of a
free economy. In a free economy, there is allegedly "one and only one
social responsibility of business - to use its resources and engage
in activities designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open and free
competition, without deception or fraud." 120 Other theorists use the
term Wealth Maximization Theory because the shareholder's interest
Adam Winkler, Corporate Law or Law of Business?: Stakeholders and
Corporate Governance at the End of History, 67 Law and Contemporary Problems
109 [2004], hereinafter referred to as "Winkler"; See also Frank H. Eastbrook and
Daniel Fisher, The Economic Structure of Corporate Law (1991).
9
11 2002 Ed, p. 133.
120
Supra.
118
31
N
rv d if th managers of a corporation will use as a criterion for
luating th performance of a corporation the maximization of
long-term market value of the firm. 121 This includes not only the
value of equity but all the sum of the values of all financial claims on
the firm such as debt, warrants, preferred stocks, as well as common
shares.
b.
Corporate Social Responsibility Theory prefers the
limitation on excessive pursuit of profit and promotion of employee,
customer, and community voice in corporate governance. 122 One of
the strains of this progressive school is to focus on the so-called
Stakeholders. It signifies an acceptance that corporate governance
at a general level can be described as a problem involving the
corporation and multiple constituencies. The corporation is a legal
fiction that serves as a nexus of contracts. "Corporate governance
also implicates how the various constituencies that define the
business enterprise serve, and are served by, the corporation.
Implicit and explicit relationships between the corporation and its
employees, creditors, suppliers, customers, host communities and relationship among constituencies themselves - fall within the
ambit of.a relevant definition of corporate governance. As such, the
phrase calls into scrutiny not only the definition of the corporate
form, but also its purposes and its accountability to each of the
relevant constituencies."123
(1) It has been said that mandatory corporate governance
rules are necessary for two main reasons: (a) to overcome the
collective action problem resulting from the dispersion among
stockholders, and (b) to ensure that the interests of all relevant
constituencies are represented.
(2) There is an origoing debate between two groups of
theorist as to what should be the controlling theory - the
Stockholders Primacy Theory or the Stakeholders Theory. There
are those who opine that the Stockholders Primacy Theory had
already vanquished the Stakeholders Theory leading to what
is called the end of history of corporate governance. 124
C. Jensen, Vale Maximization, Shareholder Theory and Corporate
Objective Function, reproduced in Corporate Governance at the Crossroads, 2005 Ed.,
p. 7, Donald H. Chew, Jr. and Stuart L. Gillan, Editors.
122 Winkler, p. 110.
123
Winkler, p. 110.
124Winkler, p. 110.
121 Michael
316
17
MMENTARIE ANO J RI PRUDEN E N
THE REVISED ORPORATION CODE
OF THE PHILIPPINES
15.02.
Corporate Social Responsibility (CSR). Before
the 2014 amendments, the focus of the rules was on the relationship
between the directors and the stockholders. Noteworthy is the
difference in the definition of "corporate governance" in the 2002
Code of Corporate Governance and in the 2009 Code of Corporate
Governance. The 2002 Code of Corporate Governance defines
"corporate governance" as a system whereby shareholders, creditors
and other stakeholders of a corporation ensure that management
enhances the value of the corporation as it competes in an
increasingly global market place. Fortunately, the 2009 Revised
Code of Corporate Governance was amended in SEC Memorandum
Circular No. 9, Series of 2014 to include other stakeholders in the
definition of corporate governance and to expressly provide for
duties of the Board to other stakeholders. On the other hand, the
2016 Code of Corporate Governance expressly states the system is
for the benefit of the stakeholders and society.125 The principles that
are sought to be upheld under the 2016 Code are as follows:
Prin ipl 5: Th Board should endeavor to exercise objective and
ind p nd nt judgm nt on all corporate affairs.
Principle 6: The best measure of the Board's effectiveness is through
an assessment process. The Board should regularly carry out
evaluations to appraise its performance as a body, and assess whether
it possesses the right mix of backgrounds and competencies.
Principle 7: Members of the Board are duty-bound to apply high
ethical standards, taking into account the interests of all stakeholders.
DISCLOSURE AND TRANSPARENCY
Principle 8: The company should establish corporate disclosure
policies and procedures that are practical and in accordance with best
practices and regulatory expectations.
Principle 9: The company should establish standards for the
appropriate selection of an external auditor, and exercise effective
oversight of the same to strengthen the external auditor's inde­
pendence and enhance audit quality.
THE BOARD'S GOVERNANCE RESPONSIBILITIES
Principle 10: The company should ensure that material and reportable
non-financial and sustainability issues are disclosed.
Principle 1: The company should be headed by a competent, working
board to foster the long-term success of the corporation, and to
sustain its competitiveness and profitability in a manner consistent
with its corporate objectives and the long-term best interests of its
shareholders and other stakeholders.
Principle 11: The company should maintain a comprehensive and
cost-efficient communication channel for disseminating relevant
information. This channel is crucial for informed decision-making by
investors, stakeholders and other interested users.
Principle 2: The fiduciary roles, responsibilities and accountabilities
of the Board as provided under the law, the company's articles and
by-laws, and other legal pronouncements and guidelines should be
clearly made known to all directors as well as to stockholders and
other stakeholders.
Principle 12: To ensure the integrity, transparency and proper
governance in the conduct of its affairs, the company should have
a strong and effective internal control system and enterprise risk
management framework.
Principle 3: Board committees should be set up to the extent possible to
support the effective performance of the Board's functions, particularly
with respect to audit, risk management, related party transactions,
and other key corporate governance concerns, such as nomination and
remuneration. The composition, functions and responsibilities of all
committees established should be contained in a publicly available
Committee Charter.
Principle 4: To show full commitment to the company, the directors
should devote the time and attention necessary to properly and
effectively perform their duties and responsibilities, including
sufficient time to be familiar with the corporation's business.
125Introduction,
Sec. 7, 2016 Code of Corporate Governance.
INTERNAL CONTROL AND RISK MANAGEMENT
SYNERGIC
CULTIVATING
STOCKHOLDERS
RELATIONSHIP
WITH
Principle 13: The company should treat all shareholders fairly and
equitably, and also recognize, protect and facilitate the exercise of
their rights.
DUTIES TO STAKEHOLDERS
Principle 14: The rights of stakeholders established by law, by
contractual relations and through voluntary commitments must be
respected. Where stakeholders' rights and/or interests are at stake,
stakeholders should have the opportunity to obtain prompt effective
redress for the violation of their rights.
Principle 15: A mechanism for employee participation should be
developed to create a symbiotic environment, realize the company's
goals and participate in its corporate governance processes.
l
MMENTAJU.E AN JUIU PRU EN E N
THE REVI ED ORPORATION ODE
OF THE PHILIPPINES
Principle 16: The company should be socially responsible in all its
dealings with the communities where it operates. It should ensure that
its interactions serve its environment and stakeholders in a positive
and progressive manner that is fully supportive of its comprehensive
and balanced development.
a.
It is believed that corporate governance practices in
this jurisdiction cannot disregard the different stakeholders in the
corporation. The intent of the legislature was to encourage social
and civil responsibility of corporations. Hence, the importance of
Corporate Social Responsibility (CSR) is recognized and adopted in
this jurisdiction. The provisions of the RCCP adopt good corporate
governance principles.
'l'J'J'LE JU - D AR
l" umE 'J'Olt /
'rR TEE / FFI Ell
3 .9
.· h r- hold r Primacy Theory. The same power is expressly provided
tion 35 of the RCCP.
Different constituencies of the corporation are likewise
p - t ct din other laws. Special laws are also part of the regulatory
t u ture for corporations. Thus, environmental laws, labor laws,
in olvency and rehabilitation laws and consumer protection laws
ar part of the regulatory framework that covers corporations and
ther business organizations.
b.
The intent to adopt good governance principles was
likewise present under the Corporation Code. The sponsor of the
Corporation Code in the legislature explained that the provisions of
the Code demonstrate an awareness that corporations are not mere
business organizations exclusively intended to serve the personal
interests of shareholders or managers but are social institutions in
which all sectors of society have an interest. While inanimate, they
cannot be without moral values or ethical concerns; nor can they be
bereft of social and civil responsibilities. Thus, as an assurance of a
welcome place in society, while the code does not directly map.date
the performance of specific social and civil obligations, it encourages
and provides corporations with every means of becoming valuable
social institutions." 126
f.
Firms likewise voluntarily adopt Corporate Social
Responsibility standards. For example, compliance with CSR
tandards is required before getting the widely coveted IS0 121 and
OHAS 128 Certifications. In addition, corporations likewise voluntarily
adopt the principles of corporate governance of the OECD 129 even
if the Philippines is not a member country. The OECD principles
mandate that the corporate governance framework must recognize
the rights of stakeholders established by law or through mutual
agreements and encourage active cooperation between corporations
and stakeholders. Compliance with OECD principles is brought
about by the aspiration of corporations to be globally competitive
and acceptable to business entities in the OECD member countries.
Additionally, corporations are also pressured by their valued
customers to comply with CSR principles. Corporations who supply
products to big companies are compelled by the latter companies
to comply with good governance principles including protection of
labor and the environment.
c.
In other words, regard for the different constituencies is
not a new concept and is in fact one of the considerations when the
Corporation Code was passed by the legislature. Thus, as observed
in the Sponsorship Speech, the Corporation Code was supposed to be
a balanced response to the interests of the shareholders, directors,
officers, employees and the public in general and of those who deal
with the corporation in particular, as well as of the corporate entity
at such a time when the economic demands of the nation are acute
and pressing.
g.
Indeed, even the Board of corporations that are not
covered by the provisions of the 2009 Code of Corporate Governance
should assume the responsibility to foster the long-term success of
the corporation, and to sustain its competitiveness and profitability
in a manner consistent with its corporate objectives and the best
interests of its stockholders. 130 It is also good practice for the Board
to formulate the corporation's vision, mission, strategic objectives,
policies and procedures that shall guide its activities, including the
means to effectively monitor Management's performance. 13 1
d.
Consequently, Section 36 of the then Corporation Code
expressly allowed corporations to make reasonable donations for,
among other purposes, civic or charitable purposes. This power
will be absent if the Corporation Code strictly complied with the
126
Records of the Batasan, Second Regular Session, 1979-1980, Vol. III, pp.
1212-1213, hereinafter referred to as "III BP Record, pp. 1212-1213."
127International Organization for Standardization; The certifications include
ISO 14000 for environmental management, ISO 26000 for Social Responsibility and
ISO 36000 for risk management.
12 8
Occupational Health and Safety Certifications include OHAS 18001.
129Organization for Economic Co-Operation and Development.
1301st paragraph, Article 3(F)(l), Memorandum Circular No. 6, Series of 2009.
1 3 1 2nd paragraph, Article 3(F)(l), ibid.
MM •N'l'
THE R
RATION
OF THE PHILIPPINES
EN E
DE
15.03.
Good Governance Principles under the RCCP.
A good number of the amendments to the Corporation Code under
the RCCP were proposed to strengthen good corporate governance
to protect the rights of stockholders, and deter corporate abuses
and fraud as well as graft and corrupt practices. 132 The intent of
the amendments is to apply good governance principles not only on
listed companies but on all corporations as well. 133 The provisions
of the RCCP that adopt good corporate governance include the
following:
"a. Directors composition: (1) Additional disqualifications
of directors are imposed (Sec. 26, RCCP); (2) Independent directors
are required for corporations vested with public interest (Sec. 22,
RCCP); (3) Provisions that are designed to prevent perpetual or long
term holdover directors (Secs. 23 and 25, RCCP).
b.
Increased disclosure and transparency: (1)
Requirement to submit to the stockholders and the SEC an annual
report of salary of the total compensation of directors or trustees
(Sec. 29, RCCP); (2) Improved provisions and additional remedies for
the exercise of the right to inspect and to secure copies of the records
of the corporation (Sec. 73, RCCP); (3) Encourage whistleblowers by
punishing retaliation against them (Sec. 169, RCCP); (4) Additional
reportorial requirements of the corporations especialiy those vested
with public interest (Sec. 177, RCCP).
c.
Management: (1) Preventing a vacuum in management
or preventing the absence of decision-making body by providing for
an Emergency Board even without quorum (Sec. 28, RCCP); (2)
Directors or trustees are not allowed to participate in the approval
of their own per diems or compensation (Sec. 29, RCCP.)
d.
Ensuring Participation of Directors in Decision­
making: Expressly allowing attendance in meetings through
alternative modes of communication (Sec. 52, RCCP).
e.
Increased Participation of Stockholders through
"seamless exercise of stockholder rights and remedies against
oppressive acts of the corporations" (Explanatory Note to S.B.
231): (1) Attendance of Meetings through Remote Communication
132Explanatory Note to S.B. No. 1011; Explanatory Note to House Bill Nos. 877
and 528.
133Explanatory Note to S.B. Nos. 1011 and 231.
8 1
nd Votin in Ab entia ( c. 49, RCCP); (2) Strengthened right �o
in p t and t r produc records (Sec. 73, RCC�'); (3) Remedy m
a meetings are postponed or when there is unJust refusal to call
_
m etings (Sec. 49, RCCP); ( 4) Administrative and Penal sanct10ns
are imposed for violation of rights.
f.
Fostering Corporate and Civic Resp?n�ibil�ty: �1)
_
Curbing corporate abuses and fraud; (2) l�posing c�immal habihty
_
on the corporation itself; (3) Specifying addit10nal crimes.
g.
Fortify or Strengthen the SEC as R:egulat<:»r of
Corporations: (1) Additional express powers are p�ovided f�r m t�e
_
RCCP (Sec. 179, RCCP); (2) Provision strengthen�ng the VISitonal
_
powers of the SEC (Sec. 178, RCCP); (3) Harmomzat10n of powers
f the SEC under the SRC and the RCCP (Secs. 154, 156, 158, and
� 79, RCCP); (4) Power to order the removal of signag�s of disallowed
or deregistered names (Sec. 17, RCCP); (5) Power to issue �ease and
desist orders (Sec. 156, RCCP); and (6) Power to call meetmgs (Sec.
49, RCCP)." 134
15 04
Independent Directors. One of the provis10ns
that ai�s to adopt good corporate governance principles is the rule
_
under Section 22 of the RCCP that the board of corporat10�s ".ested
with public interest shall have independent directors consti�utmg at
least twenty percent (20%) of such board.135 These corporations that
are vested with public interest are specified in Section 22 as follows:
(1) Corporations covered by �ection 17.2 �f Republic �ct
_
No. 8799, otherwise known as The Secur1ties Reg':1lat1on
_
Code", namely those whose securities are registered with �he
Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and
having two hundred (200) or more holders of sha:es, e8:ch
holding at least one hundred (100) shares of a class of its eqmty
shares;
(2) Banks and quasi-bank�, NS SLAs, pawnshops,
_
corporations engaged in money service busi�ess; preneed: tr:1s�
and insurance companies, and other financial mtermedianes,
and
134Aquino and Aquino, The Revised Corporation Code of the Philippines, A·
Short Introduction, 2019 Ed., Chapter 1,
1s5Previously, independent directors are required under the rules that was
issued pursuant to the Securities Regulations Code.
322
nm
:MM •N'J'AIU • · D JURl RUDE' E N
·nrn REVISED CORPORATION C DE
OF THE PHILIPI INES
(3) Other corporations engaged in businesses vested
with public interest similar to the above, as may be determined
by the Commission, after taking into account relevant factors
which are germane to the objective and purpose of requiring
the election of an independent director, such as the extent of
minority ownership, type of financial products or securities
issued or offered to investors, public interest involved in the
nature of business operations, and other analogous factors.
a.
Definition of Independent Director. Under Section
22 of the RCCP, "an independent director is 1a person who, apart
�om shareholdings and fees received from the corporation, is
mdependent of management and free from any business or other
relationship which could, or could reasonably be perceived to
materially interfere with the exercise of independent judgment in
carrying out the responsibilities as a director."
(1) The definition under the RCCP is substantially the
same as the definition under the rules that implement Section
38 of Republic Act No. 8799 or the Securities Regulation
Code (SRC). Section 38 of the SRC is implemented by Rule
38, Sections 38.1 to 38.9 of the 2015 Implementing Rules and
Regulations of the SRC. Section 30 of the SRC provides:
SEC. 38. Independent Directors. -Any corporation
with a class of equity securities listed for trading on
an Exchange or with assets in excess of Fifty million
pesos (P50,000,000.00) and having two hundred (200)
or more holders, at least of two hundred (200) of
which are holding at least one hundred (100) shares
of a class of its equity securities or which has sold a
class of equity securities to the public pursuant to an
effective registration statement in compliance with
Section 12 hereof shall have at least two (2) Independent
directors or such Independent directors shall constitute
at least twenty percent (20%) of the members of such
board, whichever is the lesser. For this purpose, an
"independent director" shall mean a person other
than an officer or employee of the corporation, its
parent or subsidiaries, or any other individual having a
relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying
out the responsibilities of a director.
Ell
a.
mu t b
328
ependent directors
El ction and Qualifications. "Ind
led to vote in
lected by the shareholders present or entit
tors shall
direc
ent
pend
Inde
ab entia during the election of directors.
tions,
ifica
qual
their
g
rnin
be subject to rules and regulations gove
and
term
of
tion
dura
,
disqualifications, voting requirements
r
othe
and
hips
bers
mem
term limit, maximum number of board
n
gthe
stren
to
cribe
pres
requirements that the Commission will
136
nal best practices."
natio
inter
with
align
and
their independence
outside directors
The underlying thesis on appointment of
b.
, broadened
ence
pend
inde
,
is that said directors bring expertise
ion making
decis
orate
corp
experience and perspective to the
and self­
ent
lvem
invo
y
process. They are unhampered by day-to-da
ework of
fram
the
r
unde
interest.137 The role of independent directors
because
t
rtan
impo
more
the rules on corporate governance is even
rent
diffe
the
also
ders but
of the aim not only to protect the sharehol
constituencies of the corporation.
of 2009 dated
SEC Memorandum Circular No. 9, Series
c.
director who
lar
regu
a
June 24, 2009 additionally provides that
shall only
ion
elect
the
of
resigns or whose term ends on the day
to: only
direc
dent
pen
_
qualify for nomination and election as inde
irman
Cha
as
appomted
after a two-year cooling off period. Persons
any
of
bers
or Mem
"Emeritus," "Ex-Officio" Directors/Officers
to
city
capa
inted in a
Executive Advisory Board or otherwise appo
s
ilitie
onsib
duties and resp
assist the Board in the performance of its
his
to
off period" prior
shall be subject to a one-year "cooling
tor.
direc
qualification as an independent
appointment
According to the SEC, the policy behind the
d.
tor must
direc
executive
of an independent director is that a nonrially
mate
d
on that woul
not have a relationship with the corporati
ing
carry
judgment in
interfere with his exercise of independent
Any
covered company.
out his responsibilities as director in any
have with the covered
may
tor
direc
relationship the independent
tor's objectivity and loyalty
company must not compromise said direc
138
to the shareholders.
136Section 22, RCCP.
37
Corporation and Other Business Enterprises,
J Hazen and Markham,
Ed., p. 163.
May 24, 2007.
8
13 SEC-OGC Opinion No. 07-11 dated
2003
MMENTARIE AND um R EN E N
THE REVISED ORPORATION CODE
OF THE PHILIPPINES
324
.
e . It is during the annual stockholders/members' meeting
_
.
that the mdependent directors are elected. Hence, "it is not correct to
say that it is either the majority block or the minority one which has
the burden to elect the independent directors since to do so would
be anathema to the policy behind the appointment of independent
directors.Rather it is the stockholders themselves who will elect the
independent directors."139
15.05. Corporations Vested with Public Interest. The
RCCP contains a number of rules dealing with "corporations vested
with public interest." These special rules imposed on corporations
vested with public interest include the following:
(1)
Requirement that there must be an independent director (Sec.
22, RCCP);
(2)
Right of stockholders/members to vote in the election of
directors/trustees through remote communication or in absentia
in corporations vested with public interest, notwithstanding the
absence of a provision in the bylaws of such corporations (Sec.
23, RCCP);
(3)
Requirement that a compliance officer is elected by the Board
(Sec. 24, RCCP);
(4)
Requirement to submit to the shareholders and to the SEC an
annual report of the total compensation of each of the di;ectors
or trustees (Sec. 29, RCCP);
(5)
Additional requirement is imposed for self-dealing directors material contracts shall be approved by at least two-thirds (2/3)
of the entire membership of the board, with at least a majority
_
of the mdependent directors voting to approve the material
contract (Sec. 31, RCCP);
(6)
With respect to independent trustees of nonstock corporations
vested with public interest, they need not be a member/s of the
corporation to be elected as a trustee (Sec. 91, RCCP);
(7)
A corporation vested with public interest cannot be incorporated
as a close corporation (Sec. 95, RCCP);
(8)
The Congress of the Philippines may set maximum limits for
stock ownership of individuals or groups of individuals related
to each other by consanguinity, affinity, or by close business
�nterests, in corporations declared to be vested with public
mterest, or whenever necessary to prevent anti-competitive
139/bid.
'l'l'l'L!D 1IT -
rl'R
AR
F
TEE / FFI
Il1E
•R
82
practic as provided in Republic Act No. 10667, otherwise
known as the "Philippine Competition Act", or to implement
national economic policies designed to promote general welfare
and economic development, as declared in laws, rules, and
regulations (Sec. 176, RCCP); and
(9)
In addition to reportorial requirements applicable to all
corporations, corporations vested with public interest must
also submit to the SEC the following: (a) A director or trustee
compensation report; and (b) A director or trustee appraisal or
performance report and the standards or criteria used to assess
each director or trustee. (Sec. 177, RCCP). 'Ho
Section 176 of the RCCP provides for the different factors
a.
that will be considered in the determination of which entities will be
considered as "corporations vested with public interest."Section 1 76
provides that in recommending to the Congress which corporations,
businesses and industries will be declared as vested with public
interest, "the NEDA [National Economic and Development
Authority] shall consider the type and nature of the industry, size
of the enterprise, economies of scale, geographic location, extent of
Filipino ownership, labor intensity of the activity, export potential,
as well as other factors which are germane to the realization and
promotion of business and industry."
SEC. 23. Election of Directors or Trustees. Except when the exclusive right is reserved for holders
of founders' shares under Section 7 of this Code,
each stockholder or member shall have the right to
nominate any director or trustee who possesses all of
the qualifications and none of the disqualifications set
forth in this Code.
At all elections of directors or trustees, there must
be present, either in person or through a representative
authorized to act by written proxy, the owners of majority
of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. When
so authorized in the bylaws or by a majority of the board
of directors, the stockholders or members may also
vote through remote communication or in absentia:
Provided, That the right to vote through such modes
140
Aquino and Aquino, The Revised Corporation Code of the Philippines A
Short Introduction, 2019 Ed., Chapter 1.
2
Tl'l'LB lII - J3 A ltD
MM 1 N'l'ARI • AN J .RI PR D •N E N
THE REVI ED ORPORATION ODE
OF THE PHILIPPINES
The election must be by ballot if requested by any
.
votmg stockholder or member.
In stock corporations, stockholders entitled to
vote shall have the right to vote the number of shares of
stock standing in their own names in the stock books of
the corporation at the time fixed in the bylaws or where
the bylaws are silent, at the time of the election. The said
stockholder may: (a) vote such number of shares for as
many persons as there are directors to be elected; (b)
cumulate said shares and give one (1) candidate as many
votes as the number of directors to be elected multiplied
by the number of the shares owned; or (c) distribute
them on the same principle among as many candidates
as may be seen fit: Provided, That the totai number
of votes cast shall not exceed the number of shares
owned by the stockholders as shown in the books of the
corporation multiplied by the whole number of directors
to be elected: Provided, however, That no delinquent
stock shall be voted. Unless otherwise provided in the
articles of incorporation or in the bylaws, members
of nonstock corporations may cast as many votes as
there are trustees to be elected but may not cast more
than one (1) vote for one (1) candidate. Nominees for
directors or trustees receiving the highest number of
votes shall be declared elected.
If no election is held, or the owners of majority of
the outstanding capital stock or majority of the members
entitled to vote are not present in person, by proxy, or
through remote communication or not voting in absentia
at the meeting, such meeting may be adjourned and the
corporation shall proceed in accordance with Section
25 of this Code.
HlE
327
The directors or trustees elected shall perform their
duties as prescribed by law, rules of good corporate
governance, and bylaws of the corporation.
�ay be exercised in corporations vested with public
interest, notwithstanding the absence of a provision in
the bylaws of such corporations.
A stockholder or member who participates through
remote communication or in absentia, shall be deemed
present for purposes of quorum.
.'
TRU TEE / FFICER
NOTES
1.
Manner of Election. The manner of electing directors
is prescribed in Section 23 of the RCCP. A corporation cannot adopt
a procedure other than what is prescribed in Section 23 for stock
corporations. 141
a.
For instance, the requirement that quorum must be
present cannot be dispensed with. 142 A provision that allows mere
designation of directors without election is also contrary to Section
23 of the RCCP. Execution of an agreement between stockholders
that the directors will be designated is not acceptable. 143
b. Automatic membership in the Board is also not allowed.
There must be an election in the manner prescribed under Section
23 of the RCCP. 144 For example, it cannot be provided in the By-laws
that past presidents are automatically members of the Board. 145
c.
Every qualified stockholder or member can be a candidate
in the election of the members of the Board. Section 23 of the RCCP
provides that stockholders and members shall have the right to
nominate any qualified director or trustee in a corporation. The
exception is a corporation with founders' shares where the founders
are given the exclusive right to be elected as directors.
d.
Stockholders elect directors at large. 146 There will be a
violation of Section 23 of the RCCP if the election of the members of
the Board of Directors of a stock corporation is by region. It cannot
be provided in the By-Laws of a stock corporation that each region
shall elect their own representative in the Board. 147 Election by
region is feasible only in a non-stock corporation. 148
3, 1989.
SEC Opinions dated September 3, 1992, August 5, 1992 and July
142
SEC Opinions dated September 3, 1992.
143
SEC Opinion dated March 18, 1991.
144
Grace Christian High School v. Court of Appeals, G.R. No. 108905, October
23, 1997, 281 SCRA 133; SEC Opinions dated April 8, 1997 and July 15, 1996.
145
SEC Opinion dated April 8, 1997.
146
Ao-As v. Court of Appeals, G.R. No. 128464, June 20, 2006, 491 SCRA 339,
141
367.
147
SEC Opinion dated February 7, 1992.
148Ao-As v. Court of Appeals, supra.
2
MME" TARI AND J'URI PRUDEN E N
THE REVI ED ORPORATION CODE
OF THE PHILIPPINES
2
I
e.
Staggered election of directors is not allowed in a stock
corporation. A staggered election would be violative of the rule
that provides for annual election of all directors.149 The RCCP even
removed the staggered term of trustees in non-stock corporations.
f.
An agreement by which selection of corporate directors is
reposed in anybody except the stockholders is in violation of public
policy and unenforceable.150
1.01. Voting Through Remote Communication or In
Absentia. The stockholders and members may vote in the election of
directors either: (1) personally by attending the meeting; (2) through
a proxy; or (3) through remote communication or in absentia.
a. Voting through remote communication or
is allowed only (a) when authorized by the By-Laws,
authorized by a majority of the Board of Directors,
without a provision in the By-Laws, in corporations
public interest.151
in absentia
or (b) when
or (c) even
vested with
1.02. Government - Owned or Controlled Corporation
(GOCC). By way of exception, under Republic Act No. 10149, known
as the GOCC Governance Act of 2011, there are Appointive Directors/
Trustees in GOCCs whom the State is entitled to nominate, to
the extent of its percentage shareholdings in such GOCC that are
created even under the Corporation Code. 162 The President appoints
these Appointive Directors in the GOCC.m In addition, Ex Officio
Directors are likewise provided for in R.A. No. 10149. 1M
2.
Plurality of Votes. Majority vote is not necessary for the
election of each director or trustee. The candidates who will receive
the highest number of votes shall be declared as duly elected.155
Section 23 of the RCCP does not require a specific number of votes
for one to be elected as director.156
Ill BP Records, p. 1692, December 10, 1979.
SEC Opinion dated June 3, 1981.
1512nd Paragraph, Sec. 23, RCCP; See Memorandum Circular No. 6, Series of
9
14
0
15
2020.
152Section 3(b), Republic Act No. 10149.
153Section 15, Republic Act No. 10149.
154Section 3(i), Republic Act No. 10149.
155SEC Opinion dated April 11, 1992 and March 5, 1992.
156SEC-OGC Opinion No. 14-09 dated June 2, 2014.
3.
Quorum. It is necessary that there is a quorum and in
th bsenc thereof, the election shall be considered invalid. 15� The
quorum for election purposes is the stockholders representmg a
_
majority of the outstanding capital stock entitled to vote. �tho� gh
more cumbersome, the requirement is meant to prevent ra1lroadmg
of election of directors. 158 Under Section 23 of the RCCP, a stockholder
or member who participates through remote communication or in
absentia, shall be deemed present for purposes of quorum.
a.
In determining the quorum, all the stockholders at the
time of the election should be considered. However, it is also proper
for the By-Laws to provide a record date.159 For instance, the By­
Laws of the corporation may provide that only stockholders of record
two days before the election are entitled to vote.
Presence of Candidate. It is not necessary, however,
4.
that the candidate stockholder be present during the meeting before
160
he can be elected as director. A director can be elected in absentia.
a
However, the By-Laws may require the physical presence of
161
director who will be elected.
5.
Cumulative Voting. Cumulative voting is allowed in
_
this jurisdiction in the election of directors of stoc� corpora!1ons.
Cumulative voting is allowed in non-stock corporati?ns only if t�e
same is provided for in the Articles of Incorporation. Th� ba�lC
effect of cumulative voting is to increase the chances of the mmority
stockholders to elect a director; cumulative voting ensures minority
representation in the Board.162 The options of the stockholder under
Section 23 of the RCCP are as follows:
(1) Vote such number of shares standing/recorded in his/
her/its name in the stock books for as many persons as there
are directors to be elected;
(2) Cumulate said shares and give one (1) candid�te as
.
many votes as the number of directors to be elected mult1phed
by the number of the shares owned; or
157Ibid., dated March 8, 1995.
158III BP Record, pp. 1307-1308, November 12, 1979.
159Section 23, RCCP.
160Memorandum Circular No. 6, Series of 2020.
1s1sEC Opinions dated September 19, 1995, November 23, 1992, and January
21, 1991.
1s2111 BP Record, p. 1720, December 11, 1979.
330
MMENTARIE AND JURI PRUDEN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
TITLE III - B AR
F DIR •
TRU TEE /OFFI ER
N
331
(c) Distribute the votes on the same principle among as
many candidates as may be seen fit.
narrow partisan goals, particularly to give an insurgent group a
toehold in the corporation in an effort to obtain control. 167
a.
Cumulative voting is defined as a method of concentrating
votes devised to give sufficient opportunity to minority shareholders
to secure representation in the board. 163
5. 03. Distinguished from Straight Voting. Under straight
voting, a stockholder can cast one vote per share for each candidate/
director up to the number of positions to be elected. For example,
if a shareholder has 1 0 shares and five directors are supposed to
be elected, the said shareholder can give 10 votes to each of the
five candidates that he wants to elect. In cumulative voting, he can
cumulate all his votes and give to one candidate all his votes or he
may divide the votes among two or more candidates.
b.
It is not required that the total votes a shareholder
is entitled to cast under the cumulative voting be evenly or
proportionately distributed among his candidates. He can give all
his votes to one candidate164 or he can distribute his votes and give
such number of votes to each of his candidates' at his own discretion
without any limitation except that the total votes cast by him shall
not exceed the number of shares owned by him multiplied by the
number of directors to be elected.165 For example, if Mr. A has 10
shares and there are five directors to be elected, he can cast 50
votes (10 shares x 5 directors) which he can give to one candidate
or distribute to any number of candidates in the proportion that he
may deem fit.
5.01.Advantages of Cumulative Voting. The advantages
of cumulative voting are: (1) it is democratic in that persons with
large (but minority) holdings would have a voice in the conduct
of the corporation; (2) it is desirable to have as many viewpoints
as possible represented on the Board of Directors; and (3) the
presence of minority director may discourage conflicts of interest by
management since discovery is considerably more likely.166
5.02. Grounds Used to Oppose Cumulative Voting. Those
who oppose cumulative voting usually cite one or more of the
following grounds: (1) the introduction of a partisan on the Board
is inconsistent with the notion that the Board should represent
all interests in the corporation; (2) a partisan director may cause
disharmony which reduces the efficiency of the Board; (3) a partisan
director may criticize management unreasonably so as to make it
less willing to take risky but desirable actions; (4) a partisan director
may leak confidential information; and (5) it may be used to further
a.
It should be noted that even if cumulative voting is pro­
vided for under the RCCP, there is nothing that prevents stockholders
from resorting to straight voting. It is up to the stockholder how he
will divide his votes.
5. 04. Formula. With cumulative voting in place, the formula
that is prescribed in order to determine the number of shares needed
to elect a single director is as follows: 168
s
--- +1=
D+l
Number of Shares
Needed to Elect One Director
a.
"S" is the total number of shares voting and "D" is the
number of the directors to be elected. For example, there are 1, 000
outstanding shares in the corporation and five directors will be
elected and the stockholders representing all the shares are present
and are going to vote. In this case, 168 voting shares ([1, 000/5 + 1] +
1 = 167.67) are necessary to elect one director.
b.
On the other hand, the suggested formula to determine
the number of shares necessary to elect a desired number of directors
is:'69
Number of Shares Necessary to Elect a
Desired Number of Director =
S x (Desired Number of Directors)+ 1
D+w
163SEC Opinion dated April 21, 1997.
11>1Tuis is referred to as cumulative voting for one candidate in SEC-OGC No.
14-10 dated June 2, 2014.
16
5SEC Opinion dated June 6, 1991. Referred to as cumulative voting by
distribution in SEC-OGC No. 14-10 dated June 2, 2014.
166
Hamilton, p. 345.
167Hamilton,
ibid.; See also Williams, Cumulative Voting, 33:3 Harv. Bus. Rev.
108, 111 (1955).
168Hamilton, p. 491.
169
Salonga, p. 255.
32
f
MMEN'.'ARI • AND JURI PR
EN E
THE REVI ED
RP RAT! N
DE
OF THE PHILIPPINES
c.
Any fractional part of one in the result should be dropped
in using this formula. Thus, if there are 1, 000 voting shares, five
directors will be elected, and the desired number of directors is 2 the
number of shares necessary to elect the desired number of diredtors
is 334 shares.
1000 X (2)
+ 1 = 334
5+1
d. A case decided by the Supreme Court provides a concrete
example of the application of the fo;mula used in determining how
many votes are necessary to elect one director.170 The given facts are
as follows: (1) The Articles oflncorporation of the subject corporation,
EPCIB, provides for 15 directors; and (2) a stockholder, TMEE, owns
51, 827, 640 shares equivalent to 7.13% of the outstanding capital
stock. The Supreme Court concluded that 7 .13% is sufficient to elect
one director. Considering that there are 15 directors, a stockholder
in control of at least 6.67% of the outstanding capital stock could
cumulate his controlled shares to be able to elect one seat in the
Board of Directors. 171
e.
The number of directors that can be elected by a
shareholder holding a specific number of shares may be determined
using the formula given below where "N" is the number of shares of
the shareholder, "D" is the number of directors to be elected and "S"
is the total number of shares to be voted by all shareholders: 172
Number of Directors that can be elected by ''N" =
(N- 1) (D + 1)
s
6.
Election of Incomplete Directors. The stockholders
may elect less than the total number of directors specified in the
Articles of Incorporation. Nevertheless, an incomplete Board
may still function so long as the remaining directors constitute a
quorum. 173
170
Trans Middle East (Phils.) v. Sandiganbayan, G.R. No. 172 556, June 9,
2006 , 490 SCRA 455, 491.
171 Since 51,827 ,640 is equivalent to 7.13% of the capital stock.
172
Hazen and Markham, p. 269.
7
1 3 SEC Opinions dated November 18, 1998 and July 28, 1993.
TITLE III - B AR
TR TEE I
33
It may happen that the number of directors is incomplete
a.
b aus the stockholders who are willing to serve as directors are
l
than the total number of directors that should be elected. In
other cases, the stockholders may not want to elect other candidates
or may simply want to elect less than the total number of vacant
positions leaving the line-up of the directors incomplete. In those
cases, the election would still be valid and the directors, though
incomplete, can still perform their functions provided that a quorum
remains. 174 "In case the number of candidates does not exceed the
number of seats in the board, said candidates, provided they received
votes, can be said to have received the highest number of votes, as
the law requires only plurality of the votes cast at the election." 175
7.
Failure to Hold an Election. If the Board or the officer
authorized to call a meeting (like the President) refuses to call an
election of directors, the stockholders may ask for the assistance of
the SEC to compel the holding of such election.
a. If a meeting was called but the directors were not
elected during the meeting, the meeting can be adjourned but the
adjournment must be not sine die or indefinitely. 176 Section 25 of
the RCCP expressly provides that the date for the election shall
not be later than sixty (60) days from the scheduled date. This rule
prevents the indefinite hold-over of the directors.
Election Contests. The election of the directors is
8.
presumed to be valid. 177 Complaints involving election contests
should be filed with the proper Regional Trial Court. An election
contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the
validation of proxies, the manner and validity of elections, and the
qualifications of candidates, including the proclamation of winners,
to the office of director, trustee or other officer directly elected by
the stockholders in a close corporation or by members of a non­
stock corporation where the Articles of Incorporation or By-Laws so
provide.178
174
111 BP Record, p. 1640, December 5, 1979; SEC Opinion dated September
1995.
175 SEC-OGC Opinion No. 14-09 dated June 2, 2014.
176
111 BP Record, p. 1629, December 5, 1979.
177
Estate of Juvencio P. Ortanez v. Lee, G.R. No. 184251, March 9, 2016 .
178Section 2, Rule 6, A.M. No. 01- 2 -04 -SC, Interim Rules of Procedure for IntraCorporate Controversies.
20,
3 4
MMENTARIE AND JURI PRUDEN ,
THE REVISED ORPORATION CODE
OF THE PHILIPPINES
TOH. I
N
·
a.
In addition to the formal requirements of a complaint
under Section 4, Rule 2 of the Interim Rules of Procedure for Intra­
Corporate Controversies, the complaint in an election contest must
state the following:
PROBLEM :
l.
(1) The case was filed 15 days from the date of the
election if the By-Laws of the corporation do not provide for a
procedure for resolution of the controversy, or within 15 days
from the resolution of the controversy by the corporation as
provided in its By-Laws;' 79 and
Q:
The incorporators of a proposed stock corporation want to
include the following provision in the Articles of Incorporation:
"Shares are classified as Class "A" shares and Class "B'' shares
and Class "N' shares shall be entitled to one vote and Class "B"
shares shall be entitled to three votes." Is the provision legally
acceptable?
A:
No, the provision is not acceptable. The provisions of the Revised
Corporation Code requiring votes of stockholders are always
determined on the basis of the number of shares. Each share is
entitled to one vote. (SEC Opinion, May 23, 1994)
Q:
The incorporators of a proposed stock corporation want to
include the following provision in the Articles of Incorporation:
"Class A shares shall be entitled to vote one director and Class B
shares, voting as a separate class, shall be entitled to vote three
directors." Is the provision legally feasible?
A:
No, the provision is not legally feasible. Section 23 of the Revised
Corporation Code provides for the procedure for the election of
directors. Adoption of a manner of electing the directors other
than what is provided for in the Revised Corporation Code is
prohibited. (Section 46, RCCP; SEC Opinion May 23, 1994)
1
(2) The plaintiff has exhausted all intra-corporate
remedies in election cases as provided for in the By-Laws of
the corporation. 180
b.
Questions regarding the validity of the election of the
Board of Directors for a given year may be rendered moot and
academic by a valid election of a new set of Board of Directors for
the next succeeding year. 181
c.
There was an election contest in Eismendi, Jr. v.
Fernandez 182 because the allegation in the complaint for invalidation
of corporate acts and resolutions partly assails the authority of the
Board of Directors to suspend the complainant's membership on
the ground that despite the lack of quorum at the meeting, the
individual petitioners proceeded to have themselves constituted as
the new members of the Board. The Supreme Court ruled that the
complaint clearly raises an issue on the validity of the election of the
individual petitioners. The Court also cited its previous resolution
in Valle Verde Country Club, Inc. v. Eizmendi Jr., et al., 183 where it
ruled that the complaint for misrepresentation of corporate office
filed by the non-stock corporation against the respondents falls
under the definition of election contest because it raises the issues of
the validation of proxies, and the manner and validity of elections.
179See Estate of Juvencio P. Ortanez v. Lee, G.R. No. 184251, March 9, 2016
and Eismendi, Jr. v. Fernandez, G.R. No. 215280, September 5, 2018.
180
Section 3, Rule 6, A.M. No. 01-2-04-SC, Interim Rules of Procedure for IntraCorporate Controversies.
181
Legaspi Towers 300, Inc., et al. v. Muer, G.R. No. 170783, June 18 2012.
182
G.R. No. 215280, September 5, 2018.
183
G.R. No. 209120, October 14, 2013. (Minute Resolution)
2.
SEC. 24. Corporate Officers. - Immediately after
their election, the directors of a corporation must
formally organize and elect: (a) a president, who must
be a director; (b) a treasurer, who must be a resident;
(c) a secretary, who must be a citizen and resident of
the Philippines; and (d) such other officers as may be
provided in the bylaws. If the corporation is vested with
public interest, the board shall also elect a compliance
officer. The same person may hold two (2) or more
positions concurrently, except that no one shall act as
president and secretary or as president and treasurer at
the same time, unless otherwise allowed in this Code.
The officers shall manage the corporation and
perform such duties as may be provided in the bylaws
and/or as resolved by the board of directors.
NOTES
I.
Corporate Officers. Corporate officers are officers who
are designated or specified as such or given that character in the law,
336
OMMENTARIE AND JURI PRUDEN •
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
N
the Articles of Incorporation and the By-Laws of the corporation. 184
Under Section 52 of the RCCP, corporate officers are elected by the
majority of all the members of the Board of Directors or Trustees
(that is, majority of the number of directors/trustees as fixed in the
Articles of Incorporation) and not merely by the majority of those
who are present during the meeting.
a.
Section 24 of the RCCP specifies four (4) corporate officers,
namely: (1) President, (2) Treasurer, (3) Secretary, and (4) in case
of a corporation vested with public interest, Compliance Officer. In
addition, Section 62 of the RCCP recognizes the existence of a Vice­
President and an Assistant Secretary.
337
empowers the Board of Directors to create additional offices.186
"The mere designation as a high-ranking employee, however, is
not enough to consider one as a corporate officer." 187 The Board of
Directors has no power to create other corporate offices without first
amending the corporate By-Laws so as to include therein the newly
created corporate office. 188 Thus, these two requisites must concur:
(1) the creation of the position is under the corporation's charter
or By-Laws; and (2) the election of the officer is by the directors or
stockholders. 189
(1) It is also possible for one to have a dual role of officer
and employee. For example, the corporate secretary may
concurrently act as a managerial employee. A corporation is not
prohibited from hiring a corporate officer to perform services
under circumstances that will make him an employee. 190
b.
The Articles of Incorporation and By-Laws may create
other corporate offices. For instance, the By-Laws of corporations
typically provides for a Chairman of the Board. The By-Laws
may also provide for a General Manager, Auditor, Comptroller or
such other specified officers as may be necessary in a particular
corporation.
(2) In one case, the By-Laws of the corporation provided
for a position of Vice President and the Board already
appointed a person to such position. Later, another person
was appointed as Vice President with the operational title of
Managing Director. The Supreme Court ruled that the second
appointment was an appointment to a non-existing corporate
office because only one Vice President was recognized under
the By-Laws of the corporation. The Court did not consider
the second appointee as a corporate officer but a regular
employee.191 In the same manner, the Assistant Vice President
is not a corporate officer if such office is not expressly provided
for in the By-laws. 192
c.
The term of office of officers is one year. This is implicit
from Section 24 which provides that election shall ensue after the
directors are elected in the annual stockholders' meeting. It is also
clear that the officers shall be elected by the majority of all the
directors or trustees and not by a mere majority of the directors or
trustees present.
1.01. Officers Specified in By-Laws. The By-Laws may and
usually do provide for other officers. The Supreme Court clarified
in Matling Industrial and Commercial Corporation v. Coros, 185
that "conformably with Section 25 (now Section 24 of the RCCP),
a position must be expressly mentioned in the [b]y-[l]aws in order
to be considered a corporate office. Thus, the creation of an office
pursuant to or under the [b]y-[l]aw enabling provision is not enough
to make a position a corporate office." The corporate office must be
specifically indicated in the roster of corporate offices in the By­
Laws of the corporation. It is not enough that the By-Laws merely
184
Gomez v. PNOC Development and Management Corp., G.R. No. 174044,
November 27, 2009.
185
G.R. No. 157802, October 13, 2010 cited in Cacho v. Balagtas, G.R. No.
202974, February 7, 2018; Cosare v. Broadcom Asia, Inc., G.R. No. 201298, February
5, 2014; Barba v. Liceo De Cagayan, G.R. No. 193857, November 28, 2012; Marc II
Marketing, Inc. and Lucila V. Joson v. Alfredo Joson, G.R. No. 171993, December 12,
2011.
Matling Industrial and Commercial Corporation v. Coros, supra.
Macalba v. Prohealth Parma Philippines, Inc., G.R. No. 209085, June 6,
186
187
2018.
188
Cosare v. Broadcom Asia, Inc., G.R. No. 201298, February 5, 2014; Marc II
Marketing, Inc. v. Alfredo Joson, supra; WPP Marketing Communications, Inc. v.
Galera, 630 Phil. 410, 425 (2010).
189
Cosare v. Broadcom Asia, Inc., G.R. No. 201298, February 5, 2014; See also
Loreche-Amit v. Cagayan De Oro Medical Center, Inc., G.R. No. 216635. June 3,
2019.
190
Gomez v. PNOC Development and Management Corporation, ibid.; Rural
Bank of Coron (Palawan), Inc. v. Cortes, G.R. No. 164888, December 6, 2006, 510
SCRA 443, 450; See',also Elleccion Vda. de Lecciones v. NLRC, G.R. No. 184735,
September 17, 2009 where it was held that the NLRC has jurisdiction over a
complaint filed by one who served both as corporate secretary and administrator.
191
WPP Marketing Communications, Inc. v. John Steedman, et al., G.R. Nos.
169207 and 169239, March 25, 2010.
192
Macalba v. Prohealth Parma Philippines, Inc., G.R. No. 209085. June 6,
2018.
COMMENTARIE AND JURI PRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
33
a.
If the By-Laws does not specify the corporate office,
the Board may still create appointive positions since the Board
is the corporation's governing body with the power to exercise its
prerogatives in managing the business affairs of the corporation. 193
However, the officers who are appointed are not corporate officers
within the meaning of Section 24 of the RCCP.194 These officers are
not empowered to exercise functions of the corporate officers except
those functions lawfully delegated to them.195
(1) The determination of the necessity for additional
offices and/or positions in a ·corporatiqn is a management
prerogative which courts are not wont to review in the absence
of any proof that such prerogative was exercised in bad faith or
with malice.196 In other words, Business Judgment Rule covers
the creation of additional offices or positions.
(2) The intent to create an additional office must be
clear. In addition, the relationship of a person to a corporation,
whether as officer or agent or employee is not determined by
the nature of the services he performs but by the incidents of
his relationship with the corporation as they actually exist. 197
1.02. Office and Employment Distinguished. An "o/fice"is
a creation of the charter of a corporation, while an "officer" is the
person elected by the directors or stockholders. On the other hand,
an "employee" occupies no office and is generally employed not by
action of the directors and stockholders but by the managing officer
of the corporation, who also determines the compensation to be paid
to such employee.198
a.
If one is a corporate officer, jurisdiction over his election
or appointment is vested with the Regional Trial Court pursuant
to Section 5.2 of the Securities Regulation Code199 that transferred
jurisdiction of the Securities and Exchange Commission to regular
TITL • Ill - B ARD F DIR , T
TRU TEES/OFFICERS
339
courts over cases enumerated in Section 5 of Presidential Decree No.
902-A.
(1) Dismissal of a corporate officer is always a corporate
act, or an intra-corporate controversy. In addition, the question
of remuneration involving a stockholder and officer, not a mere
employee, is not a simple labor problem but a matter that
comes within the area of corporate affairs and management
and is corporate controversy in contemplation of the RCCP. 200
b.
If an officer is not a corporate officer, it is the labor
arbiters that are vested with jurisdiction to hear illegal dismissal
cases involving such officer. 201
2.
Qualification and Functions. Minimum qualifications
and duties of the corporate officers are provided for in the RCCP and
the By-Laws. Section 46 of the RCCP states that the By-Laws may
provide for the qualifications, duties and compensation of directors
or trustees, officers and employees.202 In addition, the Board may
likewise expressly delegate other duties to officers through board
resolutions.
2.01. President. There can be only one president in a
corporation. The Articles and By-Laws of the corporation cannot
provide for more than one president because Section 24 of the RCCP
provides for the election of "a president." The RCCP prescribes the
following qualifications for the position of president: (1) He/she must
be a director (and consequently must be a stockholder); and (2) He/
she cannot be concurrently the treasurer or secretary.
a.
Unless there is a provision in the By-Laws to the
contrary, a president who has reached the retirement age of 60 can
continue with his term as president. A president is not covered by
the compulsory retirement age for employees. 203
193Filipinas Port
Services, Inc. v. Go, G.R. No. 161886, March 16, 2007, p. 466.
SEC Opinion dated November 25, 1993.
195
Barba v. Liceo De Cagayan, G.R. No. 193857, November 28, 2012, citing
SEC Opinion dated November 25, 1993 quoted in Matling Industrial and Commercial
Corporation v. Coros, supra.
196
Filipinas Port Services, Inc. v. Go, supra, p. 469.
197
Gomez v. PNOC Development and Management Corporation, G.R. No.
174044, November 27, 2009.
198
Easycall Communications Philippines, Inc. v. King, G.R. No. 145901,
December 15, 2005, 478 SCRA 103, 110; Tabang v. NLRC, G.R. No. 121143, January
21, 1997, 226 SCRA 462.
199
Republic Act No. 8799.
194
0
20 Tan v. Downtown Realty Investment, Inc., G.R. No. 201497, October 3, 2018
(Resolution); Cacho v. Balagtas, G.R. No. 202974, February 7, 2018; Leslie Okol v.
Slimmers World International, Behavior Modifications, Inc., et al., G.R. No. 160146,
December 11, 2009.
20 1
Macalba v. Prohealth Parma Philippines, Inc., G.R. No. 209085. June 6,
2018.
202
Nacpil v. Intercontinental Broadcasting Corp., G.R. No. 144767, March 21,
2002.
203
SEC OGC Opinion No. 08-25 dated November 6, 2008.
OMMENTARI
AND JURI
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THE REVISED CORPORATION ODE
OF THE PHILIPPINES
340
N
b.
Certain duties of the president are provided for in the
RCCP and have been enumerated by the SEC as follows: 204
(1) To order the calling by the Secretary of a special
meeting of the stockholders or members of a corporation for
the purpose of removal of directors and trustees; 205
(2) To call for a special meeting of the Board of Directors
or Trustees at any time or as provided in the By-Laws;206
(3) To preside at all mee_tings of the directors or trustees
as well as of the stockholder or members\ in the absence of the
chairman, unless the By-Laws provide otherwise;207
(4) To sign the certificates of stock representing shares
issued by the corporation;208
(5) To certify under oath the financial statements
of the corporation if the total assets or total liabilities of
the corporation are less than six hundred thousand pesos
(P600,000.00), or such other amount as may be determined
appropriate by the Department of Finance;209
(6) To sign the Articles of Merger or Consolidation; 210
(7) For a One-Person Corporation, to prepare and sign
explanations or comments on every qualification, reservation,
or adverse remark or disclaimer made by the auditor in the
latter's report; 211
(8) To sign the verification of a petition for dissolution of
the corporation. 212
c.
A corporate president is often given general supervision
and control over corporate operations. Hence, the strict rule that
said officer has no inherent power to act for the corporation is slowly
giving way to the realization that such officer has certain limited
204SEC
OGC Opinion No. 15-13 dated November 3, 2015.
RCCP.
206Section 52, RCCP.
207Section 53, RCCP.
208Section 62, RCCP.
209Sections 74 and 129, RCCP.
210Section 77, RCCP.
211Section 129, RCCP.
212Section 135, RCCP.
205Section 27,
TITL
41
p w r in the transaction of the usual and ordinary business of
th corporation. In the absence of a charter or By-Laws provision
t th 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 or her usual duties.213
d.
It has been held that the president of a 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." Furthermore, a party dealing with the president
of a corporation is entitled to assume that he has the authority to
enter, on behalf of the corporation, into contracts that are within the
scope of the powers of said corporation and that do not violate any
statute or rule on public policy.214
2.02. Vice-President. Sections 62 and 77 of the RCCP
recognize that there may be a vice-president in a corporation. As
a general rule, in the absence of the president or if the office of the
president becomes vacant, the vice-president, if one has been elected
or appointed, has the authority to act in his stead, or to perform any
duty of the office.215 Likewise, the By-Laws ordinarily assign to the
vice-president the duty of succession to the position of chief executive
in the absence or disability of the president or the chairman of the
board and such other duties as the board may assign.216
2.03. Chairman. The concept of board chairman and his
functions as executive vary so widely in different companies. The
chairman may be concurrently the president and may be designated
as the chief executive officer of the corporation. In other corporations,
there may be a president who shall be the chief executive officer and
a chairman whose function relate to presiding at meetings of the
Board and of committees of which he is a member. In such latter
case, the duty of the chairman as presiding officer is not an executive
one. 211
213People's Aircargo & Warehousing Co., Inc. v. Court of Appeals, G.R. No.
117847, October 7, 1998, 297 SCRA 170.
214Ibid.
215SEC Opinion dated April 18, 1985.
216Jbid.
217SEC Opinion dated May 15, 1985.
COMMENTARIE AND JURISPRUDEN E ON
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
342
that
The 2016 Code of Corporate Governance provides
a.
g
amon
de,
inclu
the duties of the Chair in relation to the Board may
others, the following:
Makes certain that the meeting agenda focuses on strategic
matters, including the overall risk appetite of the corporation,
considering the developments in the business and regulatory
environments, key governance concerns, and contentious issues
that will significantly affect operations;
(1)
(2)
Guarantees that the Board receives accurate, timely, relevant,
insightful, concise, and cle�r information to enable it to make
sound decisions;
(3)
Facilitates discussions on key issues by fostering an environment
conducive for constructive debate and leveraging on the skills
and expertise of individual directors;
inquires on
Ensures that the Board sufficiently challenges and
gement;
Mana
by
made
ons
entati
repres
and
itted
reports subm
(4)
for first-time
Assures the availability of proper orientation
all directors;
for
es
tuniti
oppor
ng
traini
uing
contin
and
directors
and
is evaluated at least
Makes sure that performance of the Board
218
on.
up
once a year and discussed/followed
(5 )
(6)
b.
As an implementation of the SRC, th� SEC requires
the Chairman of the Board, Chief Executive Officer, and the Chief
Finance Officer or persons holding equivalent positions under the
By-Laws to sign the Statement of Management's Responsibility
(SMR) as prescribed by SRC Rule 18. 219
2.04. Secretary. The RCCP provides that the corporate
secretary must be a resident and citizen of the Philippines. Other
qualifications may be provided for in the By-Laws. However, it
is clear from Section 24 that there shall be only one Corporate
Secretary as the same provides for the election of "a secretary".
a. It is not prohibited that the By-Laws provide for the
position of assistant corporate secretary. The position of assistant
corporate secretary is even expressly recognized under Sections 62
and 77 of the RCCP.
Article 2, Recommendation 2.3, Memorandum Circular No. 19, Series of
218
2016.
219Paragraph
II(4), SEC Memorandum Circular No. 16, Series of 2009 dated
December 10, 2009; Article 2, Memorandum Circular No. 19, Series of 2016.
TITL • I I
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• DIR
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343
b.
A foreigner cannot be a corporate secretary. It follows that
a for igner cannot likewise be appointed as an assistant corporate
cretary. To allow a foreigner to be an assistant corporate secretary
would be tantamount to a circumvention of the imperative under
Section 24 of the RCCP that a corporate secretary must be a citizen
of the Philippines. 220
c.
The corporate secretary must not only be a citizen, but
also a resident of the Philippines under Section 24 of the RCCP.
"Residence" or "resident" as used in corporate statute is equivalent to
"domicile," the pertinent elements of which are physical presence in
the State and an intention to remain therein. 221 The term "resident"
imports more than a temporary stay in the place for the performance
of a single piece of job or work, especially where the workman at the
same time has a home and permanent place of abode in another
place.222
d.
The corporate secretary need not be a lawyer. However,
if the corporation is covered by the Revised Code of Corporate
Governance and the corporate secretary also acts as the compliance
officer, it is preferred that the corporate secretary is also a lawyer. 223
e.
Primarily, the corporate secretary is duty-bound to keep
the corporate records and to make proper entries thereto. 224 Other
specific functions of the corporate secretary under the law are as
follows:
(1) Maintains the stock and transfer book. The corporate
secretary makes the entries and records transfer of shares in
the stock and transfer book.
(2)
Signs the certificates of stocks of a corporation. 225
(3) Responsible for sending notices of the meeting/s of
the directors (trustees) and/or stockholders (members).
(4) Takes and prepares the written minutes of Board/
stockholders' meetings.
220SEC
Opinion No. 08-06 dated January 23, 2008.
SEC Opinion dated January 17, 1985.
222Jbid.
223SEC OGC Opinion No. 10-17 dated April 23, 2010.
224Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997); SEC Opinion dated
•
April 21, 1988.
225Section 62, RCCP.
221
34
OMMENTARIE AND JURI PRUDEN E N
THE REVISED CORPORATION CODE
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344
(1 ) ubmit a report to the SEC should a director
tru t or officer die, resign or in any manner cease to hold
office, within seven (7) days from knowledge thereof. 236
(5) Certifies minutes of meetings of stockholders/
members and directors/trustees.
(6) Issues certificates commonly known as "Secretary's
Certificate" regarding the passage, existence, and binding
effect of a Board resolution.
(7) Calls meetings of stockholders for the removal of
directors/trustees upon order of the president or on written
demand of the stockholders representing or holding at least a
majority of the outstanding capital stock. 226
(8) Certifies under oath the following: (a) amendment/s
to the Articles of Incorporation; 227 (b) increase or decrease
of authorized capital or increase of bonded indebtedness· 228
(c) resolution of stockholders and members authorizing the
delegation of the power to amend and/or adopt new By-Laws; 229
(d) the articles of merger or consolidation. 230
(9) Counter-signs: (a) the By-Laws to be submitted to
the SEC; 231 (b) the resolution approving the dissolution of the
corporation. 232
(10) Verifies the Petition for Voluntary Dissolution of the
corporation where creditors are affected. 233
(11) Submits the report (General Information Sheet)
on the election of directors, trustees, and officers to the SEC,
within thirty (30) days after such election, which report shall
contain the names, nationalities, shareholdings, and residence
addresses of the directors, trustees and officers so elected. 234
(12) Submits a report to the SEC on the non-holding of
elections. 235
226
Section 27, RCCP.
22 7 Section 15, RCCP.
228Section 37, RCCP.
229Section 47, RCCP.
230Section
77, RCCP.
231 Section 45, RCCP.
2 32Sections 134 and135, RCCP.
233Section 135, RCCP.
234Section 25, RCCP.
235Section 25, RCCP.
(14) Receives the written objection of a director or officer
of a corporation to the issuance of watered stocks; 237 and
(15) Receives the written objection of a director to an
tion
within the corporate powers taken at a meeting held
a�
without proper call or notice in a close corporation. 238
f.
With respect to the minutes of the meetings unless
otherwise directed by the Board, the corporate secretary �eed not
prepare a transcript of what transpired during the meeting. The
_
mmutes need not be a word-for-word record of what transpired. 239
It only contains a summary and the highlights of the matters taken
up during the meeting. However, the actual resolutions that were
passed should be stated in the minutes.
Section 3 of SEC Memorandum Circular No. 8, Series
g.
of 2?13 imposes on corporate secretaries the responsibility of
_
momtor�ng and observing compliance with the provisions of Filipino
and foreign ownership requirements provided for in the Constitution
the For�ign Investment Act, its IRR, other applicable laws, rules and
regulat10ns and with the provisions of the Circular. The corporate
secretary cannot delegate the responsibility of complying with the
provisions of the Circular without the express authority from the
Board of Directors or Trustees, as the case may be.
h.
The 2016 Code of Corporate Governance provides that
"the �orporate Secretary is primarily responsible to the corporation
and its shareholders, and not to the Chairman or President of the
Company."240 The 2016 Code of Corporate Governance likewise
enumerates the functions of a corporate secretary in a covered
corporation as follows:
"a. Assists the Board and the board committees in the conduct
of their meetings, including preparing an annual schedule of Board and
236Jbid.
237Section
64, RCCP.
Section 100, RCCP.
239SEC Opinion.
240
·
Art·1cIe 1 , Recommendat10n
1.5, Memorandum Circular No. 19, Series of
8
23
2016.
46
OMMENTARIE AND JURI PRUDEN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
committee meetings and the annual board calendar, and assisting the
chairs of the Board and its committees to set agendas for those meetings;
b. Safe keeps and preserves the integrity of the minutes of the
meetings of the Board and its committees, as well as other official records
of the corporation;
c. Keeps abreast on relevant laws, regulations, all governance
issuances, relevant industry developments and operations of the corporation,
and advises the Board and the Chairman on all relevant issues as they
arise;
\
d. Works fairly and objectively with the Board, Management and
stockholders and contributes to the flow of information between the Board
and management, the Board and its committees, and the Board and its
stakeholders, including shareholders;
e. Advises on the establishment of board committees and their terms
of reference;
f. Informs members of the Board, in accordance with the by-laws, of
the agenda of their meetings at least five working days in advance, and
ensures that the members have before them accurate information that will
enable them to arrive at intelligent decisions on matters that require their
approval;
g. Attends all Board meetings, except when justifiable causes, such as
illness, death in the immediate family and serious accidents, prevent him/
her from doing so;
h. Performs required administrative functions;
i. Oversees the drafting of the by-laws and ensures that they conform
with regulatory requirements; and
j. Performs such other duties and responsibilities as may be provided
by the SEC." 241
2.05. Treasurer. The treasurer normally takes care of the
funds of the corporation. The treasurer is ordinarily the custodian
of the funds of the corporation with authority to disburse them
in proper cases. In the absence of provisions in the by-laws to the
contrary, the treasurer is authorized to receive funds, issue receipts,
and keep the money of the corporation.242 There shall only be one
treasurer in the corporation under Section 24 of the RCCP which
provide for the election of "a treasurer."
Article 1, Recommendation 1.5, Memorandum Circular No. 19, Series of
241
2016.
SEC Opinion dated May 27, 1991.
242
'rI'rL ' m - B ARD F !HE
'l'R
TEE I FFI ER
N
347
a. Th Corporation Code did not require the treasurer to be
a resident or a citizen of the Philippines. The RCCP changed this
and now expressly requires (under Section 24) the treasurer to be
a resident of the Philippines. Notably, even without an express
requirement under the Corporation Code, the SEC, as a matter of
policy, already imposed the residence requirement for treasurers.
The policy was adopted in view of the nature of the functions of a
treasurer. 243
b. The functions of the treasurer that are expressly provided
for in the RCCP are as follows:
(1) Signs the Articles of Incorporation and certifies the
information set forth in the seventh clause (on the corporation's
authorized capital stock) and the eighth clause (on the
number of shares of the authorized capital stock that has been
subscribed and paid) thereof and that the paid-up portion of
the subscription in cash and/or property for the benefit and
credit of the corporation has been duly received; 244
(2) In case of increase of authorized capital stock, executes
a sworn statement showing that at least twenty-five percent
(25%) of the increase in capital stock has been subscribed
and that at least twenty-five percent (25%) of the amount
subscribed has been paid in actual cash to the corporation or
that property, the valuation of which is equal to twenty-five
percent (25%) of the subscription, has been transferred to the
corporation; 245 and
(3) Certifies under oath the financial statements, if the
total assets or total liabilities of the corporation are less than
Six hundred thousand pesos (P600,000.00), or such other
amount as may be determined appropriate by the Department
of Finance;246
3. Concurrent Positions. The same person may hold any
two or more positions concurrently. For example, the president may
serve concurrently as the chairman.247 Similarly, a director may be
the legal counsel of the corporation.248
243SEC
Opinion dated May 27, 1991 and January 30, 1990.
Section 14, RCCP.
245
Section 37, RCCP.
246Sections 74, 129, and 177, RCCP.
247
SEC Opinion dated July 21, 1994.
248
SEC Opinion dated July 17, 1996.
244
MM •NTA I• AND J RI RUDEN E N
THE I EVI ED 01 PORATION CODE
OF THE PHILIPPINES
,13
a.
However, Section 24 of the RCCP provides that no one
shall act as president and secretary or as president and treasurer at
the same time. The law therefore considers the positions of secretary
and treasurer as inconsistent with the position of a president.
b.
Verily, no incompatible positions may be held even if the
RCCP allows concurrent positions. For example, the internal auditor
may not be the external auditor of the company. 249 Similarly, a
person cannot be a chairman and vice-chairman at the same time. 250
4.
Corporate Officer Concurrently an Employee. A
corporation is not prohibited from hiring � corporate officer to
perform services under circumstances that will make him an
employee. Indeed, it is possible for one to have a dual role of officer
and employee. 251
a.
If the corporate officer is also an employee, the NLRC has
jurisdiction over a complaint filed by the same corporate officer who
served both as corporate secretary and administrator, if the money
claims were made as an employee and not as a corporate officer. 252
5. Anti-Dummy Law. Foreigners cannot be officers in
wholly nationalized and partly nationalized corporations. They
cannot also be directors in wholly nationalized activities. However,
while no foreigner could be elected or appointed as officer in a
corporation engaged in partly nationalized activities, a foreigner can
be elected as a director in a partly nationalized activity in proportion
to the equity participation allowed to foreigners. The difference lies
in the fact that a director cannot act on his own while an officer
acts individually for the corporation. 253 Commonwealth Act No. 108
known as the Anti-Dummy Law provides:
249
SEC Opinion dated July 10, 1995.
SEC Opinion dated July 21, 1994.
251
Gomez v. PNOC Management and Development Corporation, G.R. No.
174044, November 27, 2009; Rural Bank of Coron (Palawan), Inc. v. Cortes, G.R. No.
164888, December 6, 2006, 510 SCRA 443, 450, citing Mainland Construction Co.,
Inc. v. Movilla, G.R. No. 118088, November 23, 1995, 250 SCRA 290, 296.
252
Elleccion Vda. de Lecciones v. National Labor Relations Commission,
G.R. No. 184735, September 17, 2009; see also Gomez v. PNOC Management and
Development Corporation, supra.
253
SEC Opinion dated March 4, 1997; SEC-OGC Opinion No. 14-27 dated
October 2, 2014.
250
TI'l'L • JlJ - B An
F DIRE
T
'I'EE I FFI •R
Section 1. Penalty. - In all cases in which any
constitutional or legal provision requires Philippine
or any other specific citizenship as a requisite for the
exercise or enjoyment of a right, franchise or privilege,
any citizen of the Philippines or of any other specific
country who allows his name or citizenship to be used
for the purpose of evading such provision, and any
alien or foreigner profiting thereby, shall be punished
by imprisonment for not less than five nor more than
fifteen years, and by a fine of not less than the value
of the right, franchise or privilege, which is enjoyed or
acquired in violation of the provisions hereof but in no
case less than five thousand pesos.
The fact that the citizen of the Philippines or of
any specific country charged with a violation of this Act
had, at the time of the acquisition of his holdings in the
corporations or associations referred to in section two
of this Act, no real or personal property, credit or other
assets the value of which shall at least be equivalent to
said holdings, shall be evidence of a violation of this Act.
(As amended by, Commonwealth Act No. 421, Republic
Act No. 134, Republic Act No. 6084, and Presidential
Decree No. 715)
Section 2. Simulation of minimum capital stock. In all cases in which a constitutional or legal provision
requires that, in order that a corporation or association
may exercise or enjoy a right, franchise or privilege,
not less than a certain per centum of its capital must
be owned by citizens of the Philippines or of any other
specific country, it shall be unlawful to falsely simulate
the existence of such minimum stock or capital as
owned by such citizens, for the purpose of evading said
provision. The president or managers and directors
or trustees of corporations or associations convicted
of a violation of this section shall be punished by
imprisonment of not less than five nor more than fifteen
years, and by a fine not less than the value of the right,
franchise or privilege, enjoyed or acquired in violation
of the provisions hereof but in no case less than five
thousand pesos. (As amended by Republic Act No. 134)
49
3 0
MMENTAl�I • AN JUl11 PR DEN E N
THE REVI ED
RPORATI N ODE
OF THE PHILIPPINES
Section 2-A. Unlawful use, Exploitation or
enjoyment. - Any person, corporation, or association
which, having in its name or under its control, a right,
franchise, privilege, property or business, the exercise
or enjoyment of which is expressly reserved by the
Constitution or the laws to citizens of the Philippines
or of any other specific country, or to corporations or
associations at least sixty per centum of the capital
of which is owned by such citizens, permits or allows
the use, exploitation or enjoyment thereof by a
person, corporation or association not possessing the
requisites prescribed by the Constitution or the laws of
the Philippines; or leases, or in any other way, transfers
or conveys said right, franchise, privilege, property
or business to a person, corporation or association
not otherwise qualified under the Constitution, or the
provisions of the existing laws; or in any manner permits
or allows any person, not possessing the qualifications
required by the Constitution, or existing laws to acquire,
use, exploit or enjoy a right, franchise, privilege,
property or business, the exercise and enjoyment of
which are expressly reserved by the Constitution or
existing laws to citizens of the Philippines or of any
other specific country, to intervene in the management,
operation, administration or control thereof, whether as
an officer, employee or laborer therein with or without
remuneration except technical personnel whose
employment may be specifically authorized by the
Secretary of Justice, and any person who knowingly
aids assists or abets in the planning consummation or
per�etration of any of the acts herein above enumerated
shall be punished by imprisonment for not less than five
nor more than fifteen years and by a fine of not less than
the value of the right, franchise or privilege enjoyed or
acquired in violation of the provisions hereof but in no
case less than five thousand pesos: Provided, however,
That the president, managers or persons in charge of
corporations, associations or partnerships violating the
provisions of this section shall be criminally liable in lieu
thereof: Provided, further, That any person, corporation
or association shall, in addition to the penalty imposed
herein, forfeit such right, franchise, privilege, and the
1'l c i'L 1' lJI - D ARD F DlRJJ;
TR TEE I . , FI El
property or business enjoyed or acquired in violation of
the provisions of this Act: And provided, finally, That the
election of aliens as members of the board of directors
or governing body of corporations or associations
engaging in partially nationalized activities shall be
allowed in proportion to their allowable participation
or share in the capital of such entities. (Inserted by
Commonwealth Act No. 421, as amended by Republic
Act No. 134 and Presidential Decree No. 715)
Section 2-B. Any violation of the provisions of
this Act by the spouse of any public official, if both live
together, shall be cause for the dismissal of such public
official. (Inserted by Commonwealth Act No. 421)
Section 2-C. The exercise, possession or control by
a Filipino citizen having a common-law relationship with
an alien of a right, privilege, property or business, the
exercise or enjoyment of which is expressly reserved by
the Constitution or the laws to citizens of the Philippines,
shall constitute a prima facie evidence of violation of the
provisions of Section 2-A hereof. (Inserted by Republic
Act No. 6084)
Section 3. Any corporation or association violating
any of the provisions of this Act shall, upon proper court
proceedings, be dissolved.
Section 3-A. Reward to informer. - In case of
conviction under the provisions of this Act, twenty­
five per centum of any fine imposed shall accrue to the
benefit of the informer who furnishes to the Government
·original information leading to said conviction and who
shall be ascertained and named in the judgment of the
court. If the informer is a dummy, who shall voluntarily
take the initiative of reporting to the proper authorities
any violation of the provisions of this Act and assist
in the prosecution, resulting in the conviction of any
person or corporation profiting thereby or involved
therein, he shall be entitled to the reward hereof in the
sum equivalent to twenty-five per centum of the fine
actually paid to or received by the Government, and
351
2
MME" T
I
'l'l'l'
I
THE REVI ED
RP RATI N
OF THE PHILIPPINES
shall be exempted from the penal liabilities provided for
in this Act. (Inserted by Republic Act No. 134)
Section 4. This Act shall take effect upon its
approval.
a.
Section 2-A of the Anti-Dummy Law provides that
foreigners cannot "intervene in the management, operation,
administration or control (of the corporation), whether as an
officer, employee or laborer therein,_ with or without remuneration
except technical personnel whose employment may be specifically
authorized by the President of the Philippines."254 This applies only
to corporations with businesses that are reserved by the Constitution
or law to Filipino citizens or where Filipinos own 60% of the capital. 255
There is no prohibition for a foreign national to assume managerial
position in a corporation which is not engaged in a wholly or partly
nationalized industry. 256
b.
For example, in wholly nationalized activities like retail
trade, foreigners cannot even be appointed to a non-management
position. The prohibition under the Anti-Dummy Law covers the
entire range of employment regardless of whether they involve
control or non-control activities. When the law says that you cannot
employ an alien in any position pertaining to management, operation,
administration and control, "whether as an officer, employee, or
laborer therein," it only means one thing: the employment of a person
who is not a Filipino citizen even in a minor or clerical or non-control
position is prohibited. The reason is obvious: to plug any loophole or
close any avenue that an unscrupulous alien may resort to in order
to flout the law or defeat its purpose, for no one can deny that while
one may be employed in a non-control position who apparently is
harmless he may later turn out to be a mere tool to further the evil
designs of the employer. It is imperative that the law be interpreted
in a manner that would stave off any attempt at circumvention of
the legislative purpose. 257
c.
A foreigner cannot be appointed as president in a
corporation that is engaged in partly nationalized activity allowing
See SEC OGC Opinion No. 19-10 dated March 13, 2019
SEC OGC Opinion No. 09-02 dated January 12, 2009.
256Jbid.
257
King v. Hernaez, G.R. No. L-14859, March 31, 1962.
254
255
1 ly 40% £ r ign quity. 25 However, a foreign national may assume
th po t of Chairman of the Board even in partly nationalized
tivities if the power of the Chairman is limited to that of a presiding
ffi r during Board meetings. 259
6.
Authority of Officers. In some cases, corporate officers
like the President can also bind the corporation. The authority of
such individuals to bind the corporation is generally derived from
the (1) law; (2) Articles of Incorporation; (3) corporate By-Laws; (4)
authorization from the Board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business; or (5) those
inherent in the office. In the absence of a specific provision of law,
the corporate officers and other agents of the corporation can act for
the corporation only if authorized by the Board or the By-Laws. 260
a.
The reality in many corporations is that their respective
Boards do not often meet. In actual practice, the management of
these corporations is left to senior officers, particularly the President.
In many cases, the primary responsibility for the business of the
corporation is actually conducted by the senior officers and the
Board only regulates and monitors the activities of the officers. In
some cases, the directors, when they act collectively as a Board,
merely lay down policies for the operating offices to implement.261
b.
The general principles of agency govern the relation
between the corporation and its officers or agents subject to the
proV1s1ons of the Articles of Incorporation, By-Laws or relevant
provisions of law. 262 When authorized, their acts can bind the
258
SEC-OGC Opinion No. 12-01 dated January 31, 2012 (involving a real
estate company); See also SEC Opinion No. 16-02 dated February 12, 2016, SEC­
OGC Opinion No. 14-19 dated July 15, 2014, and SEC-OGC Opinion No. 14-05 (both
involving landholding companies).
269 SEC OGC Opinion No. 07-07 dated August 8, 2007.
260
Engineering Geoscience, Inc. v. Philippine Savings Bank, Inc., G.R. No.
187262, January 10, 2019; Heirs of Fausto C. Ignacio v. Home Bankers Savings and
Trust Company, et al., G.R. No. 177783, January 23, 2013; Manila Metal Container
Corporation v. Philippine National Bank, G.R. No. 166862, December 20, 2006, 511
SCRA 445; People's Aircargo & Warehousing Co., Inc. v. Court of Appeals, G.R. No.
117847, October 7, 1998, 297 SCRA 170; Inter-Asia Investment Industries, Inc. v.
Court of Appeals, G.R. No. 125778, June 10, 2003.
261
People of the Philippines v. Bello, et al., G.R. Nos. 166948-59, August 29,
2012; Ty v. De Jamil, 638 SCRA 671 (2010).
262Litonjua,
Jr. v. Eternit Corporation, G.R. No. 144805, June 8, 2006, 490
SCRA 204; San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, et al.,
G.R. No. 129459, September 29, 1998.
3 4
MMENTARI AND J CJRl PRUDEN
THE REVISED ORPORATI N ODE
OF THE PHILIPPINES
TI'r
I
?0!'faoration. Conver� ely, wh e? unauthorized, their acts cannot bind
�t. When an agent is authorized, the personality of the corporation
is extend ed through the facility of the agent.264
(1) A contract cannot be deemed perfected if the
corporatio n's Board did not accept or did not authorize an
officer to accept the counter-offer.269
(1) A corpor�tion_ is governed by the rule that an agency
ay
?e
express or implied from the act of the principal, from
�
his silence o: lack of action or his failure to repudiate the
a �ency knowmg that another person is acting on his behalf
witho1:1t authority. Agency may be oral unless the law requires
a specific form.265
(2) Powers may be incidental to the business of the
corporation. For example, corporate officers can freely enter
and perform acts of maintenance of a real property of the
corporation. The right includes breaking open the door and
replacing its locks, apparently due to loss of the keys.210
(2) For example, a special"power of attorney is necessary
to convey or creat e real rights over immovable property. Any
sale of real property of a corporation by a person purporting
to be an _agent thereof but without written authority from the
_
corpor�t10n is null and void. In other words, a resolution of the
Board is necessary for such purpose. 266
c.
A corporat e officer or agent may represent and bind the
. _
corpor�t10 n m transactions with third persons to the extent that the
authorit y to do so has been conferred upon him, and these include :
(1) Po�er� that, in the usual course of the particular
.
busmess, are mcidental to those expressly provided;
e.
If the By-Laws provides for specific powers of an officer
like the president, the officer need not secure a separate resolution
from the Board to exercise the specific power. Thus, if the By-Laws
expressly confers upon the president of the corporation the power
to borrow money, execute contracts, and sign and indorse checks
and promissory notes in the name of the corporation, it is no longer
necessary for the Board to pass another resolution for the same
purpose.271
f.
The officers may act in accordance with company policies.
Corporate policies may be written policies approved by the Board.
However, corporate policies need not be in writing and may be
established by sufficient evidence.272
(4) Apparent powers as the corporation has caused a
person dealing with th e officer or agent to believe that it has
conferred. 267
g.
With respect to service of summons, Section 11 of Rule 14
of the 1997 Rules of Civil Procedure, as amended provides that when
the defe ndant in a case is a corporation organized under the laws
of the Philippines, service may be made on the president, general
manager, corporate secretary, treasurer, or in-house counsel or in
their absence or unavailability, their secretaries. Service on officers
not specified under Section 11 is invalid and does not bind the
corporation .
d._ If th e authority of officers is provided for in a Board
resoluti �n, the corp�rate officers shall be deemed fully clothed by the
corpor�tion to exercise a power of the Board, if the Board specifically
authorizes them to do so.26s
h.
There are also cases when a written authority is
necessary to authorize an officer. For example, the power to borrow
money is o ne of those cases where corporate officers as agents of the
corporation need a special power of attorney.273
(2) Powers that may be implied from the powers
intentionally conferred;
�3� Powers added by custom and usage, as usually
pertammg to the particular officer or agent; and
263Yasuma v. Heirs of
Cecilio S. De Villa, G.R. No. 150350• August 22 2006
,
264L·1tonJu
·
· a, Jr. v. Eternit Corpo
ration, supra, p. 223.
265
lbid., p. 221, citing Article 1870, New Civil Code
.
266L·1tonJua
· , r. v. Eterm.t Corpo
ration, ibid., p. 221, citing Articles 1878(12)
�
_
and 1874, New C1v1! Code.
267peopl'A
e s ircargo &Warehousmg Co., Inc. Court of Appea
.
ls, supra· InterAsia
Investment Industries, Inc. v. Court of Appealsv. supra
.
'
268Reyes v. RCPI Empl
oyees Credit Union, Inc., G.R. No. 146535 August
18 '
'
2006, 499 SCRA
319, 327.
191.
269Manila Metal Container Corporation v. Philippine National Bank, supra.
270I!usorio v. Ilusorio, G.R. No. 171659, December 13, 2007, 540 SCRA 182,
271Cebu Mactan Members Center, Inc. v. Tsukahara, G.R. No.
17, 2009.
159624,
272Kwok v. Philippine Carpet Manufacturing Corporation, G.R. No.
April 28, 2005, 457 SCRA 465, 475.
3
27 Yasuma v. Heirs of Cecilio S. De Villa, supra.
July
149252,
356
OMMENTARIE AND JURI PRUD , N ,
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
N
7.
Implied Authority. A corporate officer, who is entrusted
:
with t�e general management and control of its business, has implied
authority t� make any contract or do any other act that is necessary
or appropriate to the conduct of the ordinary business of the
corporation. As sue� officer, he may, without any special authority
from the Board of Directors, perform all acts of an ordinary nature
that by usa�e or necessity are incident to his office, and may bind
the corporation by contracts in matters arising in the usual course
of business.274
a.
It is also well-settled that when, in the usual course of
.
busmess of a corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has been
permitted by the directors to manage its business. 27s
8.
Practice, Custom and Policy. Where the Board of
Directors approv_es similar acts as a matter of general practice,
custom, and pohcy, the officer may bind the company without
�ormal a�thorization of the Board. The existence of such authority
1s established, by proof of the course of business the usage and
p�actices of the company and by the knowledge that the Board of
D1rect�rs has, or must be presumed to have, of acts and doings of its
_
subordmates m and about the affairs of the corporation.21s
a. Authority to act for and bind a corporation may be
presumed from acts of recognition in other instances where the
power was in fact exercised. For example, the practice of the
.
corporation to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in the corporation's
behalf without prior Board approval makes the contracts entered
into by a corporate officer as valid corporate acts.211
9.
Ratification. The acts of corporate officers within the
scope of their authority are binding on the corporation, but when
these officers exceed their authority, their actions cannot bind the
corporation, unless the Board ratifies such acts or is estopped from
274The Board of Liquidators v. Heirs of Maximo M. Kalaw, G.R. No. L-18805,
August 14, 1967.
275Supra.
21slbid.
277Ibid.
TIT
.F
• l!l - IJ AR
TR TEE I FFI
7
di claiming them. 278 Thus, the contract entered into by an officer like
th President is binding on the corporation if the Board ratified the
same.279
a.
The corporation may ratify the unauthorized act of its
corporate officer. Ratification means that the principal voluntarily
adopts, confirms and gives sanction to some unauthorized act of its
agent on its behalf. It is this voluntary choice, knowingly made, which
amounts to a ratification of what was theretofore unauthorized and
becomes the authorized act of the party so making the ratification.
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. "However, silence, acquiescence, retention of benefits,
and acts that may be interpreted as approval of the act do not by
themselves constitute implied ratification. For an act to constitute
an implied ratification, there must be no acceptable explanation for
the act other than that there is an intention to adopt the act as his
or her own."280
b.
Ratification by a corporation of an unauthorized act or
contract by its officers or others relates back to the time of the act
or contract ratified, and is equivalent to original authority and the
corporation and the other party to the transaction are in precisely
the same position as if the act or contract had been authorized at
the time.281 The adoption or ratification of a contract by a corporation
is nothing more or less than the making of an original contract.
Thus, an express ratification of a contract by the Board of Directors
cleanses the contract from all its defects from the moment it was
constituted; the contracts are thus purged of whatever vice or defect
they may have.282
278Reyes v. RCPI Employees Credit Union, Inc., G.R. No. 146535, August 18,
, 2006, 499 SCRA 319, 327.
279Georg v. Holy Trinity College Inc., G.R. No. 190408, July 20, 2016 (the case
involves a loan to finance the transportation expenses of the members of a chorale
group sanctioned by the school).
280Virata v. Wee, G.R. Nos. 220926, 221058, 221109, 221135, and 221218,
March 21, 2018 citing University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas,
G.R. No. Nos. 194964-65, January 11, 2016.
281 The Board of Liquidators v. Heirs of Maximo M. Kalaw, supra.
282Supra.
MMENTARIE
TI-IE REVI ED ORP RAT! NC
OF THE PHILIPPINE
c.
Any party who alleges that the corporation ratified the
action of the officer must prove such ratification. For example,
ratification of a loan agreement cannot be inferred from the fact
that the officer who signed the promissory note was the company
president; that the president signed the postdated checks which
were used to pay for the note; that the checks were dishonored upon
presentment; and that the president failed to raise the defense of
lack of authority when a Batas Pambansa Blg. 22 case was filed
against him. 283
10. Agency by Estoppel. Article 1873 o(the New Civil Code
is the statutory recognition of agency by estoppel. The rule on agency
by estoppel applies to corporations. In proper cases, the corporation
may be estopped from claiming that corporate officers are not agents
with respect to specific transactions.
10.01.
Apparent Authority. In addition, based on
decisions of the Supreme Court, an officer may also bind the
corporation if he has apparent authority. 284 "The doctrine of apparent
authority is a species of the doctrine of estoppel."285 An officer may be
clothed with apparent authority for specific acts. Apparent authority
may also be derived from practice. It is a familiar doctrine that if a
corporation knowingly permits its officers or any other agent, to do
acts within the scope of an apparent authority, and holds the officer
or agent out to the public as possessing power to do those acts, the
corpqration will, as against any one who has in good faith dealt with
the corporation through such agent, be estopped from denying his
authority. 286
a.
The doctrine of apparent authority that is being applied
in agency law is similarly applicable to corporations. Apparent
authority is derived not only from practice - its existence may be
ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act, with which
Reyes v. RCPI Employees Credit Union, Inc., supra.
Georg v. Holy Trinity College Inc., G.R. No. 190408, July 20, 2016.
285
Nogales v. Capitol Medical, G.R. No. 142625, December 19, 2006; See also
Advance Paper Corporation v. Arma Traders Corporation, et al., G.R. No. 176897,
December 11, 2013.
286
Engineering Geoscience, Inc. v. Philippine Savings Bank, G.R. No. 187262,
January 10, 2019; Development Bank of the Philippines v. Ong, G.R. Nos. 144661
and 144797, June 15, 2005, 460 SCRA 170; Rural Bank ofMilaor (Camarines Sur) v.
Ocfemia, et al., G.R. No. 137686, February 8, 2000 citing Ramirez v. Orientalist Co.,
38 Phil. 634, 654-655.
283
284
TITL I III - B ARD F DIR '
TRU TE• / FFI ER
3 9
it clothes him, or, (2) the acquiescence in his acts of a particular
n ture, with actual or constructive knowledge thereof, with or
beyond the scope of his ordinary powers. 287
b.
It is not the quantity of similar acts that establishes
apparent authority, but the vesting of a corporate officer with the
power to bind the corporation - the third person has little or no
information as to what occurs in corporate meetings; and he 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. 288
c.
Anybody who alleges that the corporate officer has
apparent authority is required to present evidence of similar act
or acts executed either in his favor or in favor of other parties. It
is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with power to bind
the corporation. 289
d.
There must be proof of reliance upon the representations,
and that, in turn, needs proof that the representation predated the
action taken in reliance thereof. 290
e.
The action in behalf of the corporation must likewise
be established. For instance, in a contract of sale, the doctrine of
apparent authority cannot be invoked if there is no showing that the
officer of the corporation approved the proposed sale. 291
f.
The principal's liability, however, is limited only to third
persons who have been led reasonably to believe by the conduct of
the principal that such actual authority exists, although none was
v. Holy Trinity College Inc., supra; Advance Paper Corporation
v. Arma Traders Corporation, et al., G.R. No. supra; Banate, et al. v. Philippine
Countryside Rural Bank, et al., G.R. No. 163825, July 23, 2010; Associated Bank
v. Pronstroller, 558 SCRA 113 (2008); Inter-Asia Investment Industries v. Court of
Appeals, G.R. No. 125778, June 10, 2003.
2
88Associated Bank v. Pronstroller, ibid.; Ayala Land, Inc. v. ASB Realty
Corporation, G.R. No. 210043, September 26, 2018.
289People's Aircargo & Warehousing Co., Inc. v. Court of Appeals, G.R. No.
117847, October 7, 1998, 297 SCRA 170.
290
Litonjua, Jr. v. Eternit Corporation, G.R. No. 144805, June 8, 2006, 490 SCRA 204.
291 Development Bank of the Philippines v. Ong, G.R. Nos. 144661 and 144797,
June 15, 2005, 460 SCRA 170, 183.
2 7Georg
8
360
Ml\1ENTARIE AN. JU I PR DEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
given.292 In other words, apparent authority is determined only by
the acts of the principal and not by the acts of the agent.293 There
can be no apparent authority of an agent without acts or conduct
on the part of the principal; such acts or conduct must have been
known and relied upon in good faith as a result of the exercise of
reasonable prudence by a third party as claimant, and such acts or
conduct must have produced a change of position to the third party's
detriment.294
g.
The Doctrine of Apparent Authority was applied in a
situation where the sole management was l�ft to the President
and the Treasurer who are both incorporators of the corporation.
The other stockholders, directors and officers never dealt with the
business of the corporation for 14 years and the stockholders and
the Board of Directors never had its meeting. Thus, the corporation
bestowed upon the president and treasurer broad powers by allowing
them to transact with third persons without the necessary written
authority from its non-performing Board of Directors.295
TIT
ffi rs without being lawful officers. The official dealings of officers
r directors de facto with third persons are sustained as rightful �nd
valid, on the ground of continuous acquiescence by the corporat�on
and suffering them to hold themselves out as having such authority,
thereby inducing others to deal with them in such capacity,298
e that the �oard
12. Compensation. The By-Laws may provid299
Even w1th�ut
s.
officer
ate
shall fix the compensation of the corpor
re
the
fix
to
power
�unerat10n
any provision in the By-Laws, the
fixm
The
.
Board
the
with
� of the
of corporate officers still rests
that
at10n
corpor
the
of
ss
busine
r
compensation is part of the regula
the Board conducts.
PROBLEMS:
1.
Q:
11. De Facto Officers. A person is a de facto officer if he acts
as such, under color of authority, through election or appointment.
By color of authority is meant authority derived from an election or
appointment, although irregular or informal, so that the incumbent
must be more than a v:olunteer.296 The operation of the principle of de
facto officership "is limited to third persons who were originally not
part of the corporation but became such by reason of voting" certain
shares.297
a.
The de facto doctrine was introduced as a matter of
public policy and necessity to protect the interests of the public and
individuals where those interests were involved in the acts of the
292Banate, et al. v. Philippine Countryside Rural Bank, et al., G.R. No. 163825,
July 23, 2010, citing 2 Am Jur 102.
293Banate, et al. v. Philippine Countryside Rural Bank, et al., ibid., citing 3 Am
Jur 2d 79.
294Banate, et al. v. Philippine Countryside Rural Bank, et al., ibid.; Yun
Kwan Byung v. Philippine Amusement and Gaming Corporation, G.R. No. 163553,
December 11, 2009.
296Advance Paper Corporation v. Arma Traders Corporation, et al., G.R. No.
176897, December 11, 2013.
296Conjuanco v. Roxas, 273 Phil. 168 (1991); SEC Opinion dated September
27, 1993.
297Bernas, et al. v. Cinco, et al., G.R. Nos. 163356-57 and 163368-69, July 1,
2015.
361
A:
IAI, Inc. (IAI) by a Stock Purchase Agreement, so!d to AI, Inc.
(Al) for the sum of P19.5 Million all its outstandmg shares of
stocks in "F" Corp. The agreement was signed by LG and JV,
presidents of IAI and AI respectively. IAI expressly warr��ted
in the agreement that the networth of "F' Corp. is P1_2 !"11lhon.
IAI agreed that if the networth is less than P12 M1lhon, IAI
will pay AI the deficiency. AI paid IAI P12 Million 3:nd re�ained
the amount of P7.5 million to answer for any deficiency m the
net worth. Instead of reflecting a net worth, it turned out that
"F' had a deficiency of Pl.2 Million. Hence, IAI is obligated to
reimburse AI the amount of P13.2 Million (P12 Million plus
the deficiency of Pl.2 Million). However, considering that AI
retained P7.5 Million, the balance to be reimbursed i� only �?-2
Million. Later, LG, the president of IAI proposed m wntmg
that Al's claim for refund be reduced to P4.09 Million but he
promised to pay the costs of certain superstructures in behalf
to
_
of AI. AI accepted the proposal. Later, IAI's Board refused
he
while
that
m
gro
the
on
l
�
� �
implement the accepted proposa
said Board authorized LG to sell the shares, 1t did not authorize
LG to make the last proposal. Is the position of IAI's Board
tenable?
The position of the Board of IAI is not tenable. An officer of
a corporation who is authorized to sell the stock of �no� her
corporation has the implied power to perform all other obhgat1ons
arising therefrom, such as securing payment of the shares of
stock. By allowing its president to sign the Stock Purch�se
Agreement on its behalf, IAI clothed him with apparent cap�c1ty
to perform all acts that are expressly provided for or imphedlr
298Supra.
299pilipinas Port Services, Inc. v. Go, G.R. No. 161886, March 16, 2007.
362
MMENTARIE AN J RI PR DEN E N
THE REVISED ORPORATION CODE
OF THE PHILIPPINES
and inherently included in such powe r to se ll. (Inter-Asia
Investment Industries, Inc. v. Court ofAppeals, G.R. No. 125778,
June 10, 2003)
2.
3.
4.
Q:
Can the President of a Corporation or the Chairman of its Board
of Directors bind the corporation? Explain.
A:
Yes, if he is acting within his express, implied or apparent
authority. The president of the corporation and the chairman
of the Board of Directors are both officers of the corporation.
So long as either of these two officers act within the scope of
their express or apparent authority, their acts would be binding
on the corporation. The rule on agency would cover the binding
force of their acts. (1969 Bar)
Q:
Evans, the President of 3D Corporation, wrote a letter to Ed,
offering to sell the latter 5,000 bags of fertilizer at Pl 00.00 per
bag. Ed signed his conformity to the lette r-offer, and paid a
downpayment of P 50,000.00. A few days later, the Corporate
Secretary of 3D informed Ed of the decision of their Board of
Directors not to ratify the letter-offer. However, since Ed had
already paid the downpayment, 3D Corporation delivered 500
bags of fertilizer, which Ed accepted. 3D made it clear that
the delivery should be considered an entirely new transaction.
Thereafter, Ed sought enforceme nt of the letter-offer. Is there a
binding contract for the 5,000 bags of fertilizer? Explain.
A:
No, there is no binding contract for the 5,000 bags of fertilizer.
First, the facts do not indicate that Evans, the President of 3D
Corporation, was authorized by the Board of Directors to enter
into the said contract or that he was empowered to do so under
som e provision of the By-Laws of 3D Corporation. Secondly, the
facts do not also indicate that Evans has been clothed with the
apparent power to execute the contract or agreements similar
to it. Lastly, 3D Corporation has specifically informed Ed that it
has not ratified the contract for the sale of 5,000 bags of fertilizer
and that the delivery to Ed of 500 bags, which Ed accepted, is an
entirely new transaction. (1996 Bar)
Q:
Acme Trading Company, Inc. (Acme), a trading company wholly
owned by foreign stockholders, was persuaded by Paulo Alva, a
Filipino, to invest in 20% of the outstanding shares of stock of a
corporation he is forming which will engage in the department
store business (the "department store corporation"). Paulo also
urged Acme to invest in 40% of the outstanding shares of stock of
the realty corporation he is putting up to own the land on which
the departme nt store will be built (the "realty corporation").
a.
May Acme invest in the said department store corporation?
Explain your answe r.
UE
ER
363
oration? Discuss with
May Acme invest in the realty corp
reasons.
er, sit in the Board of
May the President of Acme, a foreign
c.
corporation? May he be a
Directors of the said department store
uss with reasons.
director of the realty corporation? Disc
same
er foreigner, �ccupy the
d. May the Treasurer of Acme, anoth
h
corporation? May e be
position in the said department store
Explain your answers.
treasurer of the said realty corporation?
in the "department sto�e
A: a. The right of Acme to inve st
paid-up capital of said
corporation" would depend on the
ic �ct No. 8�62 or the
publ
corporation as provided for in Re
paid up capital of the
e
th
If
Retail Trade Liberalization Act.
US$2,500,0?0.0 ?,
than
ss
e
l
is
"department store corporation"
If the paid up c�pital is
Acme may not invest in the same.
_
invest in such activity.
US$2, 500,000. 00 or more, Acme may
ownership to Filipino citizens
b. Yes. The Constitution limits land
capital is locally owned.
and to companies at le ast 60% of whose
alty corporation" provided
The refore Acme may invest in the "re
of the latter corporation
that at le�st 60% of the capital stock
b elongs to Filipinos.
the election of aliens as
No. The Anti Dummy Law allows
c.
of
d of Directors or governing body
membe rs of the Boar
d
e
aliz
ation
ly
a
in parti : �
corporations or associations engaged
e
_
shar
or
tion
icipa
e part
activities, in proportion to their allowabl
e
th
to
ct
e
resp
with
,
in the capital of such entities. As such
or
may
e
Acm
of
nt
e
e sid
"department store" corporation, the Pr
ther as per
ectors depending on whe
Dir
of
d
Boar
the
in
sit
may not
ed by law
allow
is
e
Acm
the paid-up capital of said corporation,
oration,"
corp
alty
e
"r
e
th
to
to inve st in the same. With respect
.
ctors
e
Dir
of
d
Boar
the Pre sident of Acme may sit in the
the same position (or
d. The treasurer of Acme may not hold
the "departm�nt store
any other officer position) eithe r in
since the Anti -Du�my
corporation" or in the "realty corporation"
_
ed
ens in su�h natlonah�
Law prohibits the employment of ali
cal
chni
e
t
ly
high
for
call
areas of business except those that
the "de�artment store
of
case
the
in
r,
e
ev
How
.
tions
qualifica
e
by foreigners becaus
d
e
_
corporation", if it can be wholly own
uf
tal
capi
up
paid
has
it
as
it is no longer a nationalized entity
e can also be
e n the tr easurer of Acm
more than $2, 5 00, 000, th
the treasurer thereof. (1990 Bar)
b.
64
5.
J'UR( R DEN ,
MM •NTAl1IE
THE REVI ED
RI RATI N OD ,
OF THE PHILIPPINES
0
N
Q:
The purpose of the proposed X Corporation is the extraction
and treatment of water. The capital of X Corporation is divided
as follows: 70% of the outstanding capital shall be owned by A
Corporation, a 60% Filipino and 40% foreign-owned corporation.
The remaining 30% shall belong to a foreign company. Can X
Corporation engage in the proposed purpose or business?
A:
Yes. The extraction and treatment of water can be considered
exploration, development, and utilization of natural resources.
Hence, the required Filipino capital is 60% under Article XII,
Section 2 of the Constitution. In the given problem, 70% of
the outstanding capital of X Corporation; shall be owned by A
Corporation that is considered as a Philippine National because
60% of its outstanding capital stock belongs to Filipinos.
However, it is necessary that 60% of the members of the Board
of the proposed corporation are also Filipinos. (SEC Opinion
dated July 16, 2001)
SEC. 25. Report of Election of Directors, Trustees
and Officers, Non-holding of Election and Cessation
from Office. - Within thirty (30) days after the election of
the directors, trustees and officers of the corporation,
the secretary, or any other officer of the corporation,
shall submit to the Commission, the names,
nationalities, shareholdings, and residence addresses
of the directors, trustees and officers elected.
The non-holding of elections and the reasons
therefor shall be reported to the Commission within
thirty (30) days from the date of the scheduled election.
The report shall specify a new date for the election,
which shall not be later than sixty (60) days from the
scheduled date.
If no new date has been designated, or if
the rescheduled election is likewise not held, the
Commission may, upon the application of a stockholder,
member, director or trustee, and after verification of the
unjustified non-holding of the election, summarily order
that an election be held. The Commission shall have
the power to issue such orders as may be appropriate,
including orders directing the issuance of a notice
stating the time and place of the election, designated
presiding officer, and the record date or dates for the
determination of stockholders or members entitled to
vote.
Notwithstanding any prov1s1on of the articles of
incorporation or bylaws to the contrary, the shares of
stock or membership represented at such meeting and
entitled to vote shall constitute a quorum for purposes
of conducting an election under this section.
Should a director, trustee or officer die, resign or
in any manner cease to hold office, the secretary, or
the director, trustee or officer of the corporation, sha�I,
within seven (7) days from knowledge thereof, report m
writing such fact to the Commission.
NOTES
1.
Rationale. The objective sought to be achieved by Section
25 of the RCCP is to give the public information, under sanction
of oath of responsible officers, of the nature of business, financ�al
condition and operational status of the company together w�th
information on its key officers or managers so that those dealmg
with it and those who intend to do business with it may know or have
the means of knowing facts concerning the corporation's financial
resources and business responsibility. 300
2.
Report after Annual Election. Corporations are
required under Section 25 of the Corporation Code to _sub�i! to the
SEC within 30 days after the election the names, nahonahhes and
residence addresses of the elected directors, trustees, and officers of
the Corporation. This is in order to keep stockholders and the public
transacting business with domestic corporations properly informed
of their organizational operational status.
(1) The SEC rules provide that a "General Information
Sheet" (GIS) shall be filed with the Commission within 30 days
following the date of the annual stockholders' (or members')
meeting. 301 The GIS contains the names of the stockholders,
directors and corporate officers. The recent enhancement of the
GIS includes a portion that is designed for compliance with
the Anti-Money Laundering Law as well as entries that are
designed to comply with the provisions of the Data Privacy Act.
Premium Marble Resources, Inc. v. Court of Appeals, 264 SCRA 11 (1996).
Monfort Hermanos Agricultural Development Corp. v. Monfort Ill, et al.,
G.R. No. 152542, July 8, 2002.
300
301
366
MMENTARIE AN J Rl PRUD •N E N
THE REVI ED ORPORATION CODE
OF THE PHILIPPINES
(2) Any change in the information in the GIS between
annual meetings must be reflected in an Amended GIS that
must be filed within 30 days from the effectivity or occurrence
of the change. The Amended GIS should be labeled as such and
the changes should be underscored.
3.
GIS as Evidence. The GIS indicates who and who is not
a corporate officer or director or stockholder. 302 However, the GIS
is only a piece of evidence and is subject to stronger proof if entries
therein are in question.303 In Premium. Marble Resources, Inc. v. Court
of Appeals, 304 the Court was confronted with the issue of capacity of
officers of the corporation to file a complaint for damages in behalf of
the corporation. In the said case, the Supreme Court sustained the
dismissal of the complaint because it was not established that the
Members of the Board who authorized the filing of the complaint were
the lawfully elected directors of the corporation. It was pointed out
that in the cited case, the General Information Sheet filed pursuant
to Section 26 of the Corporation Code (now Section 25 of the RCCP)
does not show the names of the persons who authorized the filing of
the case. Similarly, in Monfort Hermanos Agricultural Development
Corporation v. Antonio B. Monfort III, 305 the Supreme Court did
not give credence to the allegation that the alleged members cJf the
Board whose names do not appear in the General Information Sheet
were duly elected. It was noted that these alleged members were
reported to the SEC only more than two years later.
4.
Report in Case of Vacancy. Section 25 of the RCCP
provides that should a director, trustee or officer die, resign or
in any manner cease to hold office, the secretary, or the director,
trustee or officer of the corporation, shall, within seven (7) days from
knowledge thereof, report in writing such fact to the SEC. If a new
director is elected because of a vacancy in the Board, the Corporate
Secretary must submit an Amended General Information sheet
indicating the change of director within 30-calendar days from the
occurrence of such change.306
5.
Report on Non-Holding of Election. Section 25 of the
RCCP provides that the non-holding of election shall be reported
302Ellice A o-Industrial Corp. v. Young, G.R. No. 174077, November 21, 2012.
gr
303See Cosare v. Broadcom Asia, Inc., G.R. No. 201298, February 5, 2014.
304Supra.
305Supra.
306SEC Memorandum Circular No. 3, Series of 2007.
'l'l'l'
3 7
t th
E within 30 day from the date of the scheduled ele? tion.
Th r port hall include the following: (1) the fact of non-holdmg of
1 tion on the scheduled date; (3) the reason for the non-holding of
th election; and (3) the new date for the election, which shall not
b later than 60 days from the scheduled date.
6.
Remedy if No Election is Set. If no new date has been
designated, or if the rescheduled election is likewise n?t held, the
remedy of a stockholder, member, director or trustee 1s to �le an
application with the SEC for the latter to � rde: that the elect10n be
held. The SEC, upon the filing of such application, shall: (1) conduct
_
a verification of the unjustified non-holding of the elect10n; and
thereafter (2) summarily order that an election be held.
a.
SEC Orders. The SEC shall have the po"'. er t? issue
such orders as may be appropriate, including orders directing the
_
issuance of a notice stating: (1) the time and place of the elect10n; (2)
the designated presiding officer; and (3) the recor� date or dates for
the determination of stockholders or members entitled to vote.
b.
Emergency Quorum. Section 25 of the RCCP ex_pressly
provides that "notwithstanding any provision of the articles of
incorporation or bylaws to the contr:3-ry, the s�ares of stock or
membership represented at such meetmg and entitled to vote shall
constitute a quorum for purposes of conducting an election." In ot�er
words stockholders representing a majority of the outstanding
share�, or a majority of the members is no longer ne�essary for the
existence of the quorum. This will ensure that there 1s no prolonged
tenure of hold-over directors and officers.
SEC. 26. Disqualification of Directors, Trustees or
Officers. - A person shall be disqualified from being a
director trustee or officer of any corporation if, within
five (5) 'years prior to the election or appointment as
such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a
period exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise
known as "The Securities Regulation Code";
36
OMMENTARIE AND JURI PRUDEN E N
THE REVISED CORPORATION ODE
OF THE PHILIPPINES
(b) Found administratively liable for any offense
involving fraudulent acts; and
(c) By a foreign court or equivalent foreign
regulatory authority for acts, violations or misconduct
similar to those enumerated in paragraphs (a) and (b)
above.
'l'l'l'Ll')Ill
TR
Non-Exclusive. The list of disqualifications under
tion 26 of the RCCP is not exclusive. Additional grounds for
di qualification are contemplated in other provisions of the RCCP.
For instance, a person who ceases to be a shareholder because he
transferred all his shares to another person is disqualified to be a
director. Other qualifications and disqualifications may be provided
for in:
(1) Regulations issued by the SEC;
The foregoing is without prejudice to qualifications
or other disqualifications, which the Commission
the primary regulatory agency, or the Philippin�
Competition Commission may impose in its promotion
of good corporate governance or as a sanction in its
administrative proceedings.
(2) Special laws applicable to specific corporations (such
as the General Banking Law for banks and the Insurance
Code for insurance companies) as well as regulations issued
by the primary regulatory agency (like the Bangko Sentral ng
Pilipinas or the Insurance Commission);
NOTES
(3) Regulations issued by Philippine Competition
Commission in its promotion of good corporate governance;
1.
Grounds for Disqualification. The RCCP added
grounds for disqualification of directors, trustees and officer. Under
Sec�ion 26 of the RCCP, a person is disqualified to hold the position
of director, trustee or officer if, within five years prior to the election
or appointment as such, the person was:
(4) Decisions or orders in administrative proceedings and
imposed as sanction;
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known
as "The Securities Regulation Code";
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c! By a foreig� court or equivalent foreign regulatory
authority for acts, v10lations or misconduct similar to those
enumerated in paragraphs (a) and (b) above.
2.
Rationale. The disqualifications under Section 26 of the
RCCP are meant to assure that only persons of rectitude can act as
directors. "The position of director in a corporation is a position of
trust. A director in a corporation has the personality of managing
_
the funds belongmg to other persons or individuals." 307
307III BP Record, p. 1308, November 12, 1979.
(5) Provisions of the Articles of Incorporation or By-Laws.
4.
Grounds in the Articles and By-Laws. Other grounds
may be provided for in the By-Laws or Articles oflncorporation. In
Government u. El Hagar Filipino, 308 the Supreme Court sustained
the validity of a provision in the corporate By-Laws requiring that
persons elected to the Board of Directors must be holders of shares
of the paid up value of P5,000.00, which shall be held as security
for their action. The law then in force, Section 21 of the Corporation
Law, authorized corporations to provide in their By-Laws for the
qualifications of directors and is highly prudent and in conformity
with good practice. Section 46 of the RCCP, previously Section 47 of
the Corporation Code, likewise provides that directors' or trustees'
qualifications may be included in the By-Laws.
5.
Corporate Governance. Disqualifications are likewise
provided under the 2009 Code of Corporate Governance and the
2016 Code of Corporate Governance. The 2016 Code provides that
"the nomination and election process also includes the review and
evaluation of the qualifications of all persons nominated to the
Board, including whether candidates: (1) possess the knowledge,
skills, experience, and particularly in the case of non-executive30850 Phil. 399 (1927).
70
OMM • NTARI • AND J RI PRUDEN •
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directors, independence of mind given their responsibilities to the
Board and in light of the entity's business and risk profile; (2) have
a record of integrity and good repute; (3) have sufficient time to
carry out their responsibilities; and (4) have the ability to promote a
smooth interaction between board members. A good practice is the
use of professional search firms or external sources when searching
for candidates to the Board."309 The 2016 Code likewise provides
that the process also includes monitoring the qualifications of the
directors. The qualifications and grounds for disqualification are
contained in the company's Manual qn Corporate Governance and
the recommended grounds for the permanent disqualification of a
director are enumerated therein. 310
SEC. 27. Removal of Directors or Trustees. -Any
director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the outstanding
capital stock, or in a nonstock corporation, by a vote of
at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a
regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of
the intention to propose such removal at the meeting.
A special meeting of the stockholders or members for
the purpose of removing any director or trustee must
be called by the secretary on order of the president, or
upon written demand of the stockholders representing
or holding at least a majority of the outstanding capital
stock, or a majority of the members entitled to vote.
If there is no secretary, or if the secretary, despite
demand, fails or refuses to call the special meeting or
to give notice thereof, the stockholder or member of the
corporation signing the demand may call for the meeting
by directly addressing the stockholders or members.
Notice of the time and place of such meeting, as well
as of the intention to propose such removal, must be
given by publication or by written notice prescribed
309
Recommendation No. 2.6, Memorandum Circular No. 19, Series of 2016
dated November 22, 2016.
310
Recommendation No. 2.6, Memorandum Circular No. 19, Series of 2016
dated November 22, 2016.
I
371
in this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used
to deprive minority stockholders or members of the
right of representation to which they may be entitled
under Section 23 of this Code.
The Commission shall, motu proprio or upon
verified complaint, and due notice and hearing, order
the removal of a director or trustee elected despite the
disqualification, or whose disqualification arose or is
discovered subsequent to an election. The removal of a
disqualified director shall be without prejudice to other
sanctions that the Commission may impose on the
board of directors or trustees who, with knowledge of
the disqualification, failed to remove such director or
trustee.
NOTES
1.
Right to Remove. At common law, stockholders have the
traditional inherent power to remove a director for cause, which is
known as "amotion. '1311 Under the RCCP, the authority to remove the
directors is a prerogative reposed in the stockholders or members
of the corporation under Section 27. Hence, the directors cannot
indirectly usurp or disregard the said power of the stockholders. 312
2.
Requisites of Removal. The requirements for a valid
removal are as follows:
(1) It must take place either at a regular meeting or
special meeting of the stockholders or members called for the
purpose;
(2) The call of the special meeting shall be made by the
secretary on order of the president or on the written demand
of the stockholders representing or holding at least a majority
of the outstanding capital stock or of majority of the members
entitled to vote;
(3) There must be previous notice to the stockholders or
members of the intention to remove a director or trustee at the
regular or special meeting;
Application of Burking, 1 N.Y.2s 570, 154 N.W.S. 2d 898.
SEC Opinion dated June 3, 1981.
311
312
372
MMEN'.l'ARIE A D J RI PR
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37
N
(4) The removal must be by a vote of the stockholders
representing 2/3 of the outstanding capital stock or 2/3 of the
members entitled to vote;
h aring, rd r th r moval of a director or trustee elected despite
th di qualification, or whose disqualification arose or is discovered
ub quent to an election.
(5) A director/trustee who was elected by the minority
must be removed only for cause.
5.
Effect on the Shares. Generally, the removal of the
director does not result in the transfer of his shares; the removed
director remains a shareholder. 318 A share is a personal property
under Article 41 7 of the New Civil Code and the transfer of property
should be only through the modes recognized under the New Civil
Code. However, the By-Laws may provide for a procedure for
expulsion of a stockholder and the sale of his shares. 319
2.01 Election of Replacement. Under Section 28 of the
RCCP, the stockholders/members may elect the removed director's/
trustee's replacement during the same stockholders'/members'
meeting that the director/trustee was removed the meeting that
will fill the vacancy in the Board created by removal will be called
immediately on the same day that the removal was made or soon
thereafter.313
2.02 Call. A special meeting to remove a director shall be void if
it was called by an unauthorized committee and not by the secretary
as provided for in Section 27 of the RCCP or the authorized officer
identified in the By-Laws. The defect cannot be ratified. 314
3.
Removal Without Cause. A director who was elected
by the majority may actually be removed with or without cause. The
requirement that there must be cause for removal is limited to a
director who was elected by the minority.
6.
Removal of Corporate Officers. Since the authority to
elect corporate officers rests with the Board, there is a correlative
authority to remove the corporate officers. The removal of corporate
officers is a corporate act. 320
PROBLEMS:
1.
a.
The Supreme Court declared valid the removal of two
directors where 400 shares voted for their removal and 2/3 of the
outstanding capital was only 333.33 shares. The votes of 400 shares
were more than enough to oust the two directors, with or without
cause. 315
4.
Disqualified Director. Removal should be distinguished
from ouster because of disqualification.316 There is no need to follow
the procedure of removal required under Section 27 if the director
is disqualified. By operation of law, such director is disqualified
to act as director thereby creating vacancies in the Board. Mere
declaration of disqualification as the cause of vacancy is sufficient. 317
a.
Remedy. Section 27 of the RCCP provides that the SEC
shall, motu proprio or upon verified complaint, and due notice and
III BP Record, p. 1630, December 5, 1979.
Bernas v. Cinco, G.R. Nos. 163356-57 and 163368-69, July 1, 2015.
315
Raniel v. Jochico, G.R. No. 153413, March 2, 2007, 517 SCRA 221, 231.
316
III Record, pp. 1613-1614, December 4, 1979.
317
SEC Opinion dated February 3, 1992.
2.
Q:
If the minority stockholders in a stock corporation cumulate
their votes so that they could be assured of being represented
in the Board of Directors, what assurance do they have that the
director or directors representing them would not be removed,
considering that under the Revised Corporation Code of the
Philippines (RCCP), a director may be removed from office
with or without cause by the vote of stockholders holding or
representing at least 2/3 of the outstanding capital stock?
A:
Assurance is provided for under Section 27 of the RCCP because
although removal of a director with or without cause is allowed,
it contains a proviso to the effect that such removal, if without
cause, cannot be used to deprive the minority stockholders of
their right to representation through the use of cumulative
voting. Therefore, the minority stockholders who cumulate their
votes to elect a representative to the Board of Directors can be
assured of his/her continuance in office during his term, unless
there exists just cause for his removal. (1983 Bar)
Q:
Assuming that the minority block of the XYZ Corporation
is able to elect only one director and therefore, the majority
stockholders can always muster a 2/3 vote, would you allow the
majority stockholders to remove the one director representing
the minority?
313
314
SEC Opinion dated June 30, 1994.
Bernas v. Cinco, supra.
320
Tabang v. NLRC, G.R. No. 121143, January 21, 1997.
318
319
374
3.
MM •NTARI • AND JlJRI PR DEN E
THE REVI ED ORPORATION ODE
OF THE PHILIP! INES
N
A:
No, I will not allow the majority stockholders to remove the
director. Section 27 of the RCCP is explicit that the directors
elected by the minority shall be removed only if there is
justifiable cause. Thus, without just cause, the majority cannot
deprive the minority of representation in the board of directors.
(1991 Bar)
Q:
In 1999, Corporation "A" passed a board resolution removing
"X" from his position as manager of said corporation. The
by-laws of "A" corporation provide that the officers are the
president, vice-president, treasurer and secretary. Upon
complaint filed with the SEC, it held t�at a manager could be
removed by mere resolution of the board of directors. On motion
for reconsideration, "X" alleged that he could only be removed
by the affirmative vote of the stockholders representing 2/3 of
the outstanding capital stock. Is the contention of "X'' legally
tenable? Why?
A:
No. The contention of X is not tenable. The approval of
stockholders is not necessary for the removal of officers.
Stockholders' approval is necessary only for the removal of the
members of the Board. The vote of the Board of Directors is
sufficient for the removal of an officer. (2001 Bar)
SEC. 28. Vacancies in the Office of Director or
Trustee; Emergency Board. -Any vacancy occurring in
the board of directors or trustees other than by removal
or by expiration of term may be filled by the vote of at
least a majority of the remaining directors or trustees,
if still constituting a quorum; otherwise, said vacancies
must be filled by the stockholders or members in a
regular or special meeting called for that purpose.
When the vacancy is due to term expiration, the
election shall be held no later than the day of such
expiration at a meeting called for that purpose. When
the vacancy arises as a result of removal by the
stockholders or members, the election may be held on
the same day of the meeting authorizing the removal
and this fact must be so stated in the agenda and notice
of said meeting. In all other cases, the election must
be held no later than forty-five (45) days from the time
the vacancy arose. A director or trustee elected to fill a
vacancy shall be referred to as replacement director or
trustee and shall serve only for the unexpired term of
the predecessor in office.
'll'l'Lt,; Lil - B AR
THU TEE I
37
However, when the vacancy prevents the remaining
directors from constituting a quorum and emergency
action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation, the
vacancy may be temporarily filled from among the
officers of the corporation by unanimous vote of the
remaining directors or trustees. The action by the
designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease
within a reasonable time from the termination of the
emergency or upon election of the replacement director
or trustee, whichever comes earlier. The corporation
must notify the Commission within three (3) days from
the creation of the emergency board, stating therein the
reason for its creation.
Any directorship or trusteeship to be filled by
reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so
stated in the notice of the meeting.
In all elections to fill vacancies under this section,
the procedure set forth in Sections 23 and 25 of this
Code shall apply.
NOTES
1.
Filling Up of Vacancies in the Board. Vacancies
may be filled either by the stockholders (or members) or by the
remaining directors (or trustees) constituting a quorum depending
on the reason for the vacancy. Vacancy is the operative fact that
justifies the election or appointment of the replacement. Thus, an
election to choose replacements cannot be allowed to continue if
there is a complete Board. The law contemplates and intends that
there shall be one set of directors at a time and that new directors
shall be elected only as vacancies occur in the directorate by death,
resignation, removal or otherwise. 321
321
Roxas, et al. v. De la Rosa, et al., G.R. No. 26555, November 16, 1926, 49
Phil. 609, 613.
376
MME
RIE AN
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TH•R•VI ED RP RATI N
OF THE PHILIPPINES
EN E N
TITL
D•
a.
The stockholders or members shall replace/elect the
director if the vacancy is due to: (1) removal, (2) expiration of term,
(3) a ground other than removal or expiration of term (e.g., death,
resignation, abandonment) where the remaining directors do not
constitute a quorum, or (4) increase in the number of directors.
b.
If the vacancy is due to causes other than those specified
in the preceding paragraph (cases reserved to stockholders or
members), the Board (without the concurrence of stockholders or
members) can fill the vacancy, if the remaining directors constitute
a quorum. Allowing the remaining directors, or trustees to fill up
vacancies avoids -the expenses and inconveniences attending the
calling of stockholders' or member's meeting, especially where there
are many of them.322 The two requisites before the remaining directors
or trustees can fill-up the vacancies are as follows: (1) the vacancy
was occasioned by reasons other than removal by the stockholder or
expiration of the term, and (2) the remaining directors constitute a
quorum.323 Both requisites must concur otherwise the stockholders
or members in a regular or special meeting called for the purpose
must do the filling-up of vacancies.324
c.
The filling up of the vacancy by the remaining directors
presupposes that the vacancy occurred within the directors' term.325
(1) The directors are allowed to elect th@ replacement in
certain cases so that the operation of the corporation cannot be
hampered or jeopardized. There may be too many vacancies in
certain cases and there would be no directors to perform their
functions.326
d.
Note that filling up of vacancies by the remaining Board
members, if proper, is not mandatory. For instance, the remaining
directors may choose not to fill up the vacancy and leave the matter
to the stockholders. For such purpose, the directors may call a
special stockholder's meeting.327
13-06.
2009.
322SEC Opinion dated January 3, 1986.
323SEC-OGC Opinion No 14-07 dated May
19, 2014;
SEC-OGC Opinion No.
324SEC-OGC Opinion No. 13-06 dated May 6, 2013.
325Valle Verde Country Club, Inc. v. Africa, G.R. No.
151969,
September
326III BP Records, p. 1631, December 5, 1979.
327SEC Opinions dated September 21, 1990 and September 20, 1990.
4,
I
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TR
·77
(1) Th phras "may be filled" in Section 28 shows that
th filling of vacancies in the Board by the remaining direc�ors
_
or trustees constituting a quorum is merely perm1ss1ve,
not mandatory. 328 Corporations, therefore, may choose how
vacancies in their respective Boards may be filled up - either
by the remaining directors constituting a quorum, or by the
stockholders or members in a regular or special meeting called
for the purpose.329
(2) The Board may still function despite a vacancy
provided that there is still a quorum. The power of the Board
of Directors is not suspended by vacancies in the Board unless
the number is reduced to below a quorum.330
e.
Vacancy may occur if the director abandoned his position.
A director is deemed to have abandoned his position where a
director of a corporation accepts a position in which his duties are
incompatible with and which will render him physically incapable of
performing his duties as director.331
2.
Effect of Vacancy. The Board may continue to function
even if there is a vacancy so long as there is a quorum. Any act,
transaction or resolution of the Board shall be considered valid even
.
332
"
o usmess.
if there is a vacancy so long as there 1s a quorum to db
3.
By-Laws. The By-Laws may provide for the proced�re
for the filling up of the vacancy. Thus, the By-Laws may pr?v�de
that the stockholders must fill the vacancy instead of the remammg
directors.333 However, such provisions must be consistent with the
other provisions of the RCCP. Inconsistent provisions in the By­
Laws cannot prevail over the RCCP. 334 For instance, the By-Laws
cannot provide that the stockholders with the most s hareholdings in
_
the outstanding capital shall take the place of the director.
4.
Holdover Directors. If after the expiration of the term
of the directors, and while the same directors continue to function in
32sTan v. Sycip, G.R. No. 153468, August 17, 2006, 499 SCRA 216, 232.
329Tan v. Sycip, ibid.
330SEC-OGC Opinion No. 13-06 dated May 6, 2013.
331Mead v. McCullogh, 21 Phil. 95 (1911).
332SEC Opinion dated September 23, 1991.
333SEC Opinion dated July 28, 1993.
334SEC Opinion dated July 15, 1991.
378
COMMENTARIE AND JURI PRUDEN ◄
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OF THE PHILIPPINES
N
a holdover capacity, one of them resigns, the position of the resigning
director cannot be filled by the remaining holdover directors. The
vacancy is, in legal effect, not due to resignation but to expiration of
the term of the directors. A vacancy is created the moment the term
of the directors expires. Hence, only the stockholders can fill the
vacancy. 335
a.
The rule that the remaining holdover directors cannot
replace a director who resigned after the expiration of their term
rests on the theory of delegated power of the Board of Directors.
The theory similarly explains why; under Section 28 of the RCCP,
in cases where the vacancy in the corporation's Board of Directors is
caused not by the expiration of a member's term, the successor "so
elected to fill in a vacancy shall be elected only for the unexpired term
of his predecessor in office." The law has authorized the remaining
members of the Board to fill in a vacancy only in specified instances,
so as not to retard or impair the corporation's operations; yet, in
recognition of the stockholders' right to elect the members of the
Board, it limited the period during which the successor shall serve
only to the "unexpired term of his predecessor in office." 336
b.
Section 28 limits the instances when the remaining
directors can fill in vacancies in the Board, i.e., when the remaining
directors still constitute a quorum and when the, vacancy is for
reasons other than by removal by the stockholders or by expiration
of the term. Section 28 contemplates a vacancy occurring within
the director's term of office. When a vacancy is created by the
expiration of a term, logically, there is no more unexpired term to
speak of. Hence, Section 28 declares that it shall be the corporation's
stockholders who shall possess the authority to fill in a vacancy
caused by the expiration of a member's term. 337
5.
Rules to Prevent Hold-Overs. Holdover directors or
trustees are supposed to serve for a limited period only because
Section 28 requires the holding of an election to fill the vacancy.
Thus, Section 28 requires the holding of an election within the
following period:
335
2009.
Valle Verde Country Club, Inc. v. Africa, G.R. No. 151969, September 4,
TJT
AUSE OF VACANCY
IRE
ER
WHEN ELECTION OF REPLACEMENT
SHOULD BE MADE
Term expiration
No later than the day of such expiration at a
meeting called for that purpose.
Removal by the
stockholders or members
May be held on the same day of the meeting
authorizing the removal, provided that the
agenda and notice of the meeting provide
for such election of a replacement director/
trustee.
Increase in the number of
directors or trustees
At a regular or at a special meeting of
stockholders or members duly called for the
purpose, or in the same meeting authorizing
the increase in the number of directors
or trustees if so stated in the notice of the
meeting.
All other grounds
No later than 45 days from the time the
vacancy arose.
6.
Term of Replacement Director or Trustee. The
director who will fill up the vacancy will not serve for another one­
year term. The replacement does not change the length of the term.
Being a fixed period, the term cannot be split into two or more
terms so as to consider the remaining period as another term. The
replacement will serve only for the remaining period of the original
term of the director that he replaced. 338
7.
Emergency Board. There are cases when the vacancy
prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and
irreparable loss or damage to the corporation. Section 28 of the
RCCP provides that the vacancy may be temporarily filled from
among the officers of the corporation by unanimous vote of the
remaining
directors or trustees. The Emergency Board is subject to
1
the following conditions:
(1) The action by the designated director or trustee shall
be limited to the emergency action necessary;
(2) The term shall cease within a reasonable time from
the termination of the emergency or upon election of the
replacement director or trustee, whichever comes earlier; and
336
Valle Verde Country Club, Inc. v. Africa, ibid.
331Ibid.
379
338
SEC Opinion, February 8, 1993.
TIT
OMM •NTARIE AND JURI PR D ◄N E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
380
functions in a hold-over capacity. Before the new scheduled
date of the meeting of the stockholders, one of the hold-over
directors, Mr. A, resigned. Can the remaining directors, who
still constitute a quorum, appoint a replacement for Mr. A?
(3) The corporation must notify the SEC within three (3)
days from the creation of the emergency board, stating therein
the reason for its creation.
PROBLEMS:
1.
Q:
There is a proposal in X corporation to amend its By-Laws so that
it will provide that in case of vacancy in the Board of Directors,
the losing candidate who garnered the highest number of votes
in the immediately preceding election shall be the automatic
replacement. Is the proposed provision yalid?
A:
The provision is invalid. Section 28 of the Revised Corporation
Code provides that the vacancy may be filled in an election by
the stockholders or the directors in certain cases. Automatic
replacement is not allowed. Section 28 cannot be disregarded
because the By-Laws is subordinate thereto. (SEC Opinion,
February 8, 1993)
2.
Q:
Primera, Segundo, Tercero, Pedro, and Juan are the original
members of the Board of Directors of a stock corporation.
The only interest of Primera is that 50% of the corporation's
stocks were pledged to him. Pedro and Juan died in a vehicular
accident.
Primera, Segundo, and Tercero held an emergency .-Board
meeting to fill up the vacancy in the board. Primero and
Tercero were able to push the selection of Cuatro and Cinco
as new directors over the strong objections of Segundo who, as
corporation president, wanted two others as Board members.
At another Board meeting, the four members of Primero's group
voted for Seis as the 6th director. When the six-member Board
convened, it decided by a five to one vote to replace President
Segundo with Tercero as the new President.
Was the election of Tercero as new President valid?
A:
3.
Q:
No. The election of Tercero as new President is not valid. In
the first place, the election of the three new members of the
board was not valid because Primera was not validly elected as
a director since he was not a stockholder. Upon the death of
Pedro and Juan only two remained as duly elected directors,
namely, Segundo and Tercero. They could not fill the vacancies
because they do not constitute a quorum. Hence, any action of
the illegally constituted Board is not valid. (1986 Bar)
The term of the directors of X Corporation expired on June
1, 2009. However, the annual meeting of stockholders was
postponed, hence, the directors continued to perform their
l
A:
No, the hold-over directors cannot appoint a replacement for
Mr. A The vacancy in the Board already occurred on June 1,
2009. In other words, the vacancy was not due to resignation but
to expiration of the term. Hence, only stockholders can elect a
replacement under Section 28 of the Revised Corporation Code.
The stockholders must elect the replacement for all the directors
in a meeting called for such purpose. (Valle Verde Country Club,
Inc. v. Africa, C.R. No. 151969, September 4, 2009)
SEC. 29. Compensation of Directors or Trustees.
- In the absence of any provision in the bylaws fixing
their compensation, the directors or trustees shall not
receive any compensation in their capacity as such,
except for reasonable per diems: Provided, however,
That the stockholders representing at least a majority of
the outstanding capital stock or majority of the members
may grant directors or trustees with compensation
and approve the amount thereof at a regular or special
meeting.
In no case shall the total yearly compensation of
directors exceed ten percent (10%) of the net income
before income tax of the corporation during the
preceding year.
Directors or trustees shall not participate in the
determination of their own per diems or compensation.
Corporations vested with public interest shall
submit to their shareholders and the Commission, an
annual report of the total compensation of each of their
directors or trustees.
NOTES
1.
Rules on Compensation. Section 29 contemplates the
following rules:
(1) The By-Laws may provide for a fixed compensation
of the members of the Board of Directors/Trustees;
382
COMMENTARlE AND J URI PRUDEN E
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
(2) If the By-Laws does not provide for the directors'/
trustees' compensation, compensation may be granted to the
directors/trustees by the vote of the stockholders representing
at least a majority of the outstanding capital stock or by the
majority of the members in case of a non-stock corporation;
(3) Even if the By-Laws does not provide for
compensation, the directors/trustees are still entitled to
reasonable per diems;
(4) The total compensation of directors shall not exceed
10% of the net income before income tax of the corporation
during the preceding year;
(5) Directors or trustees shall not participate in the
determination of their own per diems or compensation; and
(6) Corporations vested with public interest shall
submit to their shareholders and to the SEC, an annual report
of the total compensation of each of their directors or trustees.
a.
Section 29 of the RCCP expressly provides that directors
or trustees shall not participate in the determination of their own per
diems or compensation.339 This rule falls within the broader concept
of self-dealing director. The rule is consistent with the director's/
trustee's duty of loyalty.
2. No Salary. Therefore, directors or trustees are not
entitled to salary or other compensation when they perform nothing
more than the usual and ordinary duties of their office. This rule is
founded upon a presumption that directors/trustees render services
gratuitously, and that the return upon their shares adequately
furnishes the motives for service, without compensation.340
3. Per Diem. The term "per diem" is limited to pay for a
day's services. They are allowances of money for expenses each
day. The power of the directors to fix per diems for themselves
emanates from the statute itself. On the other hand, the word
"compensation" does not imply an immediate payment. It does not
imply an immediate or direct return or the payment of cash fare or
its equivalent. The rule was carried-over from the Corporation Code.
As intended by the legislators who enacted the Corporation Code,
339
2019.
See Tetangco, Jr. v. Commission on Audit, G.R. No. 244806, September 17,
Western Institute of Technology, Inc. v. Salas, G.R. No. 113032, August 21,
340
1997.
'l'l'J'Lti; l J TR.
N
3
th t rm "compensation" is treated as synonymous with "salary."341
Compen ation therefore includes salaries, remunerations, bonuses,
gifts or any incentive for services rendered for the corporation. 342
a.
The corporation, through the Board of Directors, may
insure the lives of the directors and make the proceeds payable to
them as beneficiaries instead of the company. The premium paid
thereon is analogous to a continuing bonus or gift and thus falls
within the context of additional compensation. 343
b.
Compensation includes Christmas gifts that are given to
the directors as well as bonuses extended to them.344
c.
In the absence of provisions in the By-Laws, the Board
may fix the amount of their per diems. The per diem of the directors
may vary from year-to-year provided the same is reasonable. 345 The
stockholders are afforded relief if, upon review, they determine that
the per diem given by the Board is not reasonable.346
d. A provision in the By-Laws of a corporation providing for
a Pl,000.00 per diem for every Board meeting is valid. The directors
are allowed to receive only per diems of Pl,000.00 for every meeting
that they actually attended. However, the Board of Directors may
increase or decrease the amount of per diems when prevailing
circumstances shall warrant. No other compensation may be given
to them, except only when they serve the corporation in another
capacity. 347
4.
Limitations. The 10% limit means that the compensation
can be given only if there are profits. The intent of the legislators is
that if the corporation did not earn profits, the directors may not be
given salaries except reasonable per diems.348
a. The limitation is intended for the protection not only of
the stockholders but also of the corporate creditors and prospective
investors. Hence, the same should be strictly observed. 349
SEC Opinions dated June 13, 1991 and December 8, 1987.
SEC Opinion dated May 21, 1992.
343
SEC Opinion dated December 8, 1987.
344
SEC Opinion dated May 21, 1992.
345
SEC Opinion dated June 3, 1982.
346
SEC Opinion dated June 13, 1991.
347
Gabriel C. Singson, et al. v. Commission on Audit, G.R. No. 159355, August
9, 2010.
348
1V BP Records, pp. 2338-2339, March 11, 1980.
349
SEC Opinion dated June 13, 1991.
341
342
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b.
"Net income before income tax of the corporation during
the preceding year" refers to the net income of the year during which
the director served. 350 Thus, if he served in 1979, the net income for
said year would be determined only after the end of the year or in
1980. As intended by the legislators, the compensation of the director
is paid at the end of the year and he is paid his proportionate share
for the period that he has served as director. 351 The compensation
shall be recognized as an expense on the period it was incurred
(when the director served). 352
c.
The Board, subject to ratification of the stockholders, may
provide for bonuses. However, the total compensation, inclusive of
the bonus, shall be subject to the 10% threshold. 353
5.
Trustees. Section 29 of the RCCP applies to the members
of the Board of Trustees. While members of non-stock, non-profit
corporations are not supposed to receive part of the income of the
corporation, they may be given compensation if they actually render
services to the corporation as when they are acting as directors,
officers or employees of the corporation. 354
6.
Compensation of Officers. With respect to the officers,
the Board may fix their compensation. It is within the power of
the Board to fix the salaries of the officers by way of a resolution.
However, resolutions of the. Board fixing the compensation of officers
are prospective in application. 355
a.
The salaries of officers are not covered by the 10% limit
under Section 29 of the RCCP. If a resolution of the Board fixing
the salaries of officers is not tainted with irregularity and is not for
the purpose of disposing of the profits of the corporation, the only
question to be determined is whether the salary fixed is reasonable. 356
Compensation is dealt with as an issue of business judgment to be
questioned only in case of clear abuse. 357
SEC-OGC Opinion No. 15-12 dated September 22, 2015.
IV BP Records, pp. 2338-2339, March 11, 1980; SEC Opinions dated
November 28, 1995 and May 21, 1992.
352
SEC-OGC Opinion No. 15-12 dated September 22, 2015.
353
SEC Opinion dated December 1, 1983.
354
SEC Opinion dated October 16, 1990.
355
SEC Opinion dated June 3, 1982.
356
SEC Opinion dated Augi:ist 19, 1992.
357Jbid.
350
351
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b.
A dir ctor is also entitled to receive a salary if he is
p rforming functions as an officer. In such a case, the salary that
he receives as an officer is not subject to the restrictions on the
compensation of directors under Section 29 of the RCCP (previously,
Section 30 of the Corporation Code). 358
7.
Remedy in case of abuse. The remedies in case of clear
abuse of discretion to give salaries or in case of compensation or
per diems that are contrary to the provisions of the RCCP include a
derivative suit. 359 Thus, aper diem given without proper authorization
or is unreasonably excessive may ordinarily be recovered in a
stockholder's/member's suit. 360 This giving of excessive compensation
or allowances is a breach of the directors' duty of loyalty.
PROBLEM:
Q:
After many difficult years, which called for sacrifices on the part of
the company's directors, ABC Manufacturing, Inc. was finally earning
substantial profits. Thus, the President proposed to the Board of
Directors that the directors be paid a bonus equivalent to 15% of
the company's net income before tax during the preceding year. The
President's proposal was unanimously approved by the Board. A
stockholder of ABC questioned the bonus. Does he have grounds to
object?
A:
Yes, the stockholder has valid and legal grounds to object to the
payment to the directors of a bonus equivalent to 15% of the company's
net income. Section 29 of the Revised Corporation Code provides that
the total annual compensation of the directors cannot exceed 10% of
the company's net income before income tax during the preceding
year. Moreover, the authority to grant a bonus/compensation to the
directors lies with the stockholders, not the directors, pursuant to
Section 29 of the RCCP. (1991 Bar)
SEC. 30. Liability of Directors, Trustees or Officers.
- Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation
or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any
358
Western Institute of Technology v. Salas, supra; SEC Opinion dated _
November 25, 1993.
359
SEC Opinion dated June 4, 1981 addressed to M.S. Torralba; SEC Opinion
dated August 19, 1992.
360
SEC Opinion dated January 20, 1994.
386
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personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and
other persons.
and director but without unduly impeding them in the discharge of
their work with concerns of litigation."362
A director, trustee or officer shall not attempt
to acquire, or acquire any interest adverse to the
corporation in respect of any matter which has been
reposed in them in confidence, and upon which, equity
imposes a disability upon themselves1 to deal in their
own behalf; otherwise, the said director, trustee or
officer shall be liable as a trustee for the corporation
and must account for the profits which otherwise would
have accrued to the corporation.
a.
These duties, especially the duties of diligence and
loyalty, are rooted in the fiduciary nature of directors. Directors of
a business corporation are not strictly speaking trustees (under the
New Civil Code) and are not held to strict accountability as such.
"Nevertheless, their obligations are analogous to those of trustees.
Directors are agents; they are fiduciaries. The fiduciary has two
paramount obligations: responsibility (diligence) and loyalty. Those
obligations apply with equal force to the humblest agent or broker
and to the director of a great and powerful corporation. They lie at
the very foundation of our whole system of free enterprise and are as
fresh and significant today as when they were formulated decades
ago."sss
NOTES
1.
Rationale. The explanation of the sponsor of the
Corporation Code in the Batasang Pambansa regarding the rationale
of Section 31 (now Section 30 of the RCCP) is still relevant. It was
explained:
"Now, it might be true, as Your Honor suggested, ttat some persons
will be discouraged or disinclined to agree to serve the Board of Directors
because of this liability. But at the same time this provision - Section 31
- is really no more than a consequence of the requirement that the position
of membership in the Board of Director is a position of high responsibility
and great trust. Unless a provision such as this is included, then that
requirement of responsibility and trust will not be as meaningful as it
should be. For after all, directors may take the attitude that unless they
themselves commit the act, they would not be liable. But the responsibility
of a director is not merely to act properly. The responsibility of a director
is to assure that the Board of Directors, which means his colleagues acting
together, does not act in a manner that is unlawful or to the prejudice of the
corporation because of personal or pecuniary interest of the directors."361
a.
The Supreme Court explained that Sections 31 to 34 of
the Corporation Code (now Sections 30 to 33 of the RCCP) "were
intended to impose exacting standards of fidelity on corporate officers
361
III BP Record, p. 1614, December 4, 1979; N Record, pp. 2349-2350, March
11, 1980.
2.
Duties. In a broad sense, management has three
paramount duties, namely, (a) obedience, (b) diligence, and (c)
loyalty.
2.01. Obedience. Obedience requires compliance with laws
and rules. In relation to this duty, directors, trustees, and officers
have the duty to act intra vires and within authority. Additionally,
the duty of obedience requires directors and officers to comply with
the provisions of the corporation's Articles of Incorporation and By­
Laws.
a.
The directors, trustees, and officers must also obey the
orders of courts. The directors, trustees, and officers may be punished
for contempt if they failed to comply with court orders. "Even though
a judgment, decree, 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."364
2.02. Diligence. The directors and officers are required to
exercise due care in the performance of their functions. Negligence
on their part proximately causing damage to the corporation will
make them liable. The liability is imposed under Section 30 of the
362James lent v. Tullett Prebon (Philippines) Inc., G.R. Nos. 189159 and
189530, January 11, 2017.
363
Bayer v. Beran, 49 N.Y.S.2d 2 (Sup.Ct. 1944).
364The Heirs of Trinidad De Leon Vda. de Roxas v. Court of Appeals, G.R. No.
138660, February 5, 2004; 17 C.J.S. Contempt §34 (1963).
COMMENTARIE AND JURISPRUDEN E
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388
RCCP if the directors, trustees, and officers directed the affairs of
the corporation in bad faith or with gross negligence. This duty is
also referred to as the responsibility of directors that is proportioned
to the occasion. It is a concept that has "a wide penumbra of meaning
- a concept that is however sharpened in its practical application to
the given facts of a situation." 365
a.
Broadly speaking, the directors, in drawing to themselves
the power of the corporation, occupy a position of trusteeship
(fiduciary) in relation to the stockholders in the sense that the board
should exercise not only care and diligence bD.t also utmost good
faith in the management of corporate affairs. 366
b.
There is a radical difference when a stockholder is
voting strictly as a shareholder and when voting as a director. He
represents himself when he votes as a shareholder. The stockholder
exercises his legal right to vote with a view of his own benefits as
owner of the shares; he represents himself only when he votes as a
shareholder. When a stockholder votes as a director, he represents
all the stockholders in his capacity as trustee of the stockholders. He
cannot use his office as a director for his own personal benefit at the
expense of the stockholders.367
c.
The requirement of presence of bad faith and gross
negligence under Section 30 indicates that the directors and officers
are not liable for simple mistakes or negligence. 368 They are not
insurers and are not liable for errors of judgment or mistakes while
acting with reasonable diligence, care and skill.369 Nevertheless,
honesty or good faith alone does not suffice if there was gross
negligence. Gross negligence removes the act or omission from the
operation of the Business Judgment Rule.
d.
For example, the mere fact that the corporation suffered
heavy losses does not translate into liability of directors. In The
Board of Liquidators v. The Heirs of Maximo M. Kalaw, 370 the
Directors were not made liable although they ratified an unprofitable
Bayer v. Beran, supra.
366
Leogardo v. La Previsoria, 66 Phil. 723.
367
Zahn v. Transamerica Corporation, 162 F 2d 36 (3rd Cir. 1947).
368
111 BP Records, p. 1614, December 4, 1979; IV BP Records, pp. 2349-2350,
March 11, 1980.
369
Litwin v. Allen, 25 N.Y.S 2d 667 (1940).
370
G.R. No. L-18805, August 14, 1967.
365
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contract. The Supreme Court explained that fair dealing disagrees
with the idea that profitable contracts should be deemed accepted or
ratified while similar unprofitable contracts are rejected or are not
deemed ratified. "Profit or loss resulting from business ventures is
no justification for turning one's back on contracts entered into."
e.
The standard of care to be applied in the exercise of
diligence is that of a reasonably prudent person. The same standard
is also sometimes referred to as the standard of an ordinarily
prudent director under similar circumstances or an ordinarily
prudent person under similar circumstances in one's affairs.371
f.
Determination of exercise of due care entails examination
of the facts and circumstances of a particular case. Courts should
consider such circumstances such as the kind of corporation involved,
its size and financial resources, the magnitude of the transaction,
and the immediacy of the problem presented.372
g.
Although the directors and officers are not required to
personally conduct an audit, due diligence dictates that they must
maintain familiarity with the financial status of the corporation.
Moreover, under Section 3 of SEC Memorandum Circular No. 6,
Series of 2008, the President or Chief Executive Officer and the
Treasurer or Chief Financial Officer of the corporation are required to
sign a Management Representation under oath that the information
in financial statements, that accompany certain applications, is
correct. The same rule applies with respect to the Annual Financial
Statement filed by the auditors of corporations.
(1) In this connection, under the 2009 Code of Corporate
Governance, the Management is required to provide the Board
with adequate and timely information about the matters to be
taken up in the meetings. However, reliance on information
volunteered by Management would not be sufficient in all
circumstances and further inquiries may have to be made by
a member of the Board to enable him to properly perform his
duties and responsibilities.373
2.03. Loyalty. The director or officer owes loyalty and
allegiance to the corporation - a loyalty that is undivided and an
Anderson v. Akers, 7 F.Supp. 924 (1934); Atherton v. Anderson, 99 F.2d 883
(1938); Simon v. Socony-Vacuum Oil Co., 179 Misc 202 (1942).
372
Litwin v. Allen, supra.
373
Article 4, Memorandum Circular No. 6, Series of 2009.
371
390
COMMENTARIE AND JURI PRUDEN E
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N
allegiance that is influenced by no consideration other than the
welfare of the corporation. Any adverse interest of a director will be
subject to a rigid and uncompromising scrutiny.374
a.
The directors are bound by all those rules of conscientious,
fairness, morality, and honesty in purpose that the law imposes as
the guides for those who are under the fiduciary obligations and
responsibilities. They are held, in official action, to the extreme
measure of candor, unselfishness and good faith. Those principles
are rigid, essential and salutary. 375
b.
The importance of the duty of loyalty becomes even more
apparent where there is separation of ownership from management.
As aptly observed, "the separation of ownership from management,
the development of the corporate structure so as to vest in small
groups control of resources of great numbers of small and uninformed
investors, make imperative a fresh and active devotion to that
principle (of undivided loyalty) if the modern world of business is to
perform its proper function."376
c.
The director, as a fiduciary, cannot serve himself first
and his cestuis second.377 "He cannot manipulate the affairs of his
corporation to their detriment and in disregard of the standards
of common decency and honesty. He cannot by the i;µterventfon of
a corporate entity violate the ancient precept against serving two
masters. He cannot, by the use of the corporate device, avail himself
of privileges normally permitted outsiders in a race of creditors. He
cannot utilize his inside information and his strategic position for
his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do directly. He
cannot use his power to his personal advantage and to the detriment
of the stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to satisfy
technical terms."378
374Litwin v. Allen, supra.
151.
375Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 193, 123 N.E. 148,
376Stone, The Public Influence of the Bar, 48 Harvard Law Review 1, 8,cited in
Bayer v. Beran,49 N.Y.S 2d (Sup.Ct. 1944).
377Jones v. H.F. Ahmanson & Company,1 Cal.3d 93,81 Cal.Rptr. 592,460 P.2d
464 (1969),citing Remillard Brick Co. v. Remillard-Dandini,109 Cal.App.2d 405 and
Pepper v. Litton, 308 U.S. 295.
378
Jones v. H.F. Ahmanson & Company, ibid.
391
d.
Directors and officers owe fiduciary duty to the
corporation and to the shareholders. Hence, the RCCP provides
for rules on: (1) Self-dealing directors; 379 (2) Contracts between
corporations with inter-locking directorship; 380 (3) Usurpation of the
corporation's business opportunity; 381 (4) Oppression of the minority
shareholders; 382 and (5) Conflict of interest. 383 In addition, the duty of
loyalty is breached if: (1) corporate properties are diverted without
authority for personal benefit of the directors or officers; (2) directors
and officers acquire compensation for more than the fair value of
their services; (3) directors or officers provide false or deceptive
information on which the stockholders rely to their damage and
prejudice; (4) insider trading under the Securities Regulation Code;
(5) acceptance of bribes to benefit others; and (6) use of governance
machinery to protect entrenchment in office.384
e.
It is also well-established that corporate officers "are not
permitted to use their position of trust and confidence to further
their private interests." In a case where directors of a corporation
cancelled a contract of the corporation for exclusive sale of a foreign
firm's products, and after establishing a rival business, the directors
entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard
the new contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "fiduciary may not reap the fruits
of his misconduct to the exclusion of his principal."385
f.
There must also be loyalty to other stakeholders like
creditors. In one case, 386 the Supreme Court agreed with the view
of one party that when the corporation is insolvent, its directors
who are its creditors cannot secure to themselves any advantage
or preference over other creditors. They cannot take advantage of
their fiduciary relation and deal directly with themselves, to the
injury of others in equal right. If they do, equity will set aside the
transaction at the suit of other creditors of the corporation or their
379Section
31, RCCP.
Section 32, RCCP
38 1
Sections 30 and 33, RCCP.
38 2 See
proviso of Section 27,RCCP.
383Section 30, RCCP.
384Alan R. Palmiter, Corporations, 8th 2015 Ed., pp. 229 to 231.
385Gokongwei, Jr. v. SEC, et al., G.R. No. L-45911, April 11, 1979.
386Development Bank of the Philippines v. Court of Appeals, G .R. No. 126200,
August 16, 2001.
380
392
COMMENTARIE AND JURI PRUDEN E
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representatives. Absence of actual fraudulent intent on the part of
the directors is immaterial because the right of the creditors does
not depend upon fraud in fact, but upon the violation of the fiduciary
relation to the directors.
g.
Consistently, the governing body or officers of the
corporation are charged with the duty of conducting its affairs
strictly in the interest of its existing creditors, and it would be a
breach of such trust for them to undertake to give any one of its
members any advantage over any other creditors in securing the
payment of his debts in preference to all others. For example, in
insolvency cases, the mortgage/s in favor of the director/s should be
considered void because of the legal principle that prevents director/s
of an insolvent corporation from giving themselves a preference over
outside creditors.387
3. Liability of Directors/Officers. As a rule, directors
and officers are not personally liable or solidarily liable with the
corporation. Obligations incurred by them, acting as such corporate
agents, are not theirs but the direct accountabilities of the corporation
they represent.388
3.01. Criminal Liability. Corporate officers or employees,
through whose act, default or omission the corporation commits a
crime, may be individually held answerable for the crime.389 However,
the actions contemplated under Section 30 and Section 33 of the
RCCP (previously, Sections 31 and 34 of the Corporation Code), do
not result in criminal liability punishable under Section 170 of the
RCCP (previously, Section 144 of the Corporation Code) because no
penal sanction is expressly provided for in Sections 30 and 33.390
a.
Section 171 of the RCCP provides that "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,
stockholders, members, officers, or employees responsible for the
violation or indispensable to its commission." Moreover, Section
387Development
Board of the Philippines v. Court of Appeals, supra.
EDSA Shangri-la Hotel and Resort,Inc., et al. v. BF Corporation, G.R. No.
145842, June 27, 2008; See 1998 and 1996 Bar Examinations Questions.
389
Espiritu, Jr. v. Petron Corporation, et al., G.R. No. 170891, November 24,
2009.
390
James Lent, et al. v. Tullett Prebon (Philippines), Inc., G.R. Nos. 189158 and
189530, January 11, 2017.
388
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172 of th RCCP provid s that "anyone who shall aid, abet, counsel,
command, induce, or cause any violation of this Code, or any rule,
regulation, or order of the (SEC) 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."
3.02. Personal and Solidary Liability. Personal liability
may be incurred by directors/trustees and officers in the cases
enumerated below.391 In these cases, the liability of the directors/
trustees and officers may be solidary with the corporation. Thus,
directors/trustees and officers are personally liable even if the act
was done in the name of the corporation:
(I) When directors and trustees of the corporation (and
officers in proper cases if they are joint tortfeasors):
(i) Vote for or assent to patently unlawful acts of
the corporation;
(ii) Act in bad faith or with gross negligence in
directing the affairs of the corporation;
(iii) Are guilty of conflicts of interest to the prejudice
of the corporation, its stockholders or members, and other
persons;
(2) When a director or has consented to the issuance
of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection
thereto; 392
(3) When the director, trustee or officer has contractually
agreed or stipulated to hold himself personally and solidarily
liable with the corporation;
(4) When a director, trustee or officer is made, by specific
provisions of law, personally liable for his corporate actions.393
391Magaling, et al. v. Ong, G.R. No. 173333, August 13, 2008; Garcia v. Social
Security Commission Legal and Collection,G.R. No. 170735, December 17,2007,540
SCRA 456; Uy v. Villanueva, G.R. No. 157851, June 29, 2007, 526 SCRA 73, 89;
Petron Corporation v. NLRC,G.R. No. 154532,October 27,2006,505 SCRA 596,614;
MAM Realty Development Corp. v. NLRC, G.R. No. 114787,June 2, 1995,244 SCRA
797, 802-803.
392
Section 64, RCCP.
393Dimson v. Chua, G.R. No. 192318, December 5, 2016; Bank of Commerce
394
TITLE H-D
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a.
The burden is on the one claiming against the directors
and officers to prove that the said directors or officers performed
specific acts that are covered by any of the cases enumerated above.394
b.
The directors and officers are the only ones personally
liable if they are either not authorized at all or somehow acted
in excess of their authority as agents or representatives of the
corporation in entering into a contract. The officer or director would
be personally liable instead of the corporation.395
3.03. Piercing the Veil of Corporate Fiction. Broadly
speaking, the cases when directors and officers 'are made solidarily
liable are covered by the Doctrine of Piercing the Veil of Corporate
Fiction. The doctrine has, in fact, been used to justify this solidary
liability. 396 However, it should be noted that the cases when the
directors and officers are made personally liable under Section 30 of
the RCCP is not the same as the cases that are covered by the main
strain of the Doctrine of Piercing the Veil of Corporate Fiction. The
cases covered by Section 30 of the RCCP are not part of the Fraud
cases and Alter Ego cases discussed earlier because the probative
factors need not be established.397 It is not necessary to prove complete
dominance of the corporation and other circumstances that are
necessary for the application of the doctrine. Thus, a director may
be made liable so long as there is proof that he acted i:r;i bad faith or
with gross negligence in directing the affairs of the corporation; no
other probative factors are required to be established.
3.04. Patently Unlawful Acts. A patently unlawful act is one
declared unlawful by law that imposes penalties for commission of
v. Nite, G.R. No. L-30573, July 22, 2015; ABS-CBN Corporation v. Gozon, G.R. No.
195956, March 11, 2015; Shrimp Specialists, Inc. v. Fuji-Triump Agri-Industrial
Corporation, G.R. Nos. 168756 and 171476, December 7, 2009; Uy v. Villanueva, G.R.
No. 157851, June 29, 2007, 526 SCRA 73, 89; Aratea v. Suico, G.R. No. 170284, March
16, 2007, 518 SCRA 501, 508; Nisce v. Equitable PCI Bank, Inc., G.R. No. 167434,
February 19, 2007, 516 SCRA 231, 259.
394
Urban Bank, Inc. v. Magdaleno Pena, G.R. Nos. 145817, 145822, and
162562, October 19, 2011.
395
Perpetual Savings Bank v. Fajardo, G.R. No. 79760, June 28, 1993.
396
See Arco Pulp and Paper Co. v. Lim, G.R. No. 206806, June 25, 2014; Heirs of
Fe Tan Uy v. International Exchange Bank, G.R. Nos. 166282 and 166283, February
13, 2013; Alert Security and Investigation Agency, Inc. v. Pasawilan, et al., G.R. No.
182397, September 14, 2011.
397
The Probative Factors enumerated in Concept Builders, Inc. v. NLRC, G.R.
No. 108734, May 29, 1996, cited in Heirs of Fely Tan Uy v. International Exchange
Bank, G.R. Nos. 166282 and 166283, February 13, 2013.
m.m
ER
uch unlawful acts. Ther must be a law declaring the act unlawful
and providing the corresponding penalty. 398 lt follows therefore that
an act is not a patently unlawful act just because the act is ultra
vires. 399
(1) An example of a patently unlawful act is violation
of Article 287 of the Labor Code, which states that "[v]iolation
of this provision is hereby declared unlawful and subject to
the penal provisions provided under Article 288 of this Code."
Likewise, Article 288 of the Labor Code on Penal Provisions
and Liabilities, provides that "any violation of the provision
of this Code declared unlawful or penal in nature shall
be punished with a fine of not less than One Thousand Pesos
(Pl,000.00) nor more than Ten Thousand Pesos (Pl0,000.00),
or imprisonment of not less than three months nor more
than three years, or both such fine and imprisonment at the
discretion of the court."•00
(2) The executive officers of a corporation were made
personally liable when they conspired to defraud the investors
in a corporation by engaging in unlawful recruitment of
investors to invest in a foreign currency trading business
although there was no actual foreign currency trading. The
officers were found guilty of syndicated estafa.•01
3.05. Bad Faith and Fraud. "Bad faith does not connote bad
judgment or negligence. Bad faith imports a dishonest purpose.
Bad faith means breach of a known duty through some ill motive
or interest. Bad faith partakes of the nature of fraud."•02 Otherwise
stated, bad faith imports some moral obliquity and conscious doing
of a wrong; it is synonymous with fraud in that it involves a design
to mislead or deceive another.403
(1) Bad faith must be established. It cannot be
presumed.404 The long-standing rule is that corporate directors
Carag v. NLRC, G.R. No. 147590, April 2, 2007, 520 SCRA 519, 28, 49.
Bank of Commerce v. Nite, G.R. No. 211535, July 22, 2015.
398
399
•oolbid.
Yu v. Palana, A.C. No. 7747, July 14, 2008.
Sanchez v. Republic of the Philippines, G.R. No. 172885, October 9, 2009;
Carag v. NLRC, supra; See Aratea v. Suico, supra.
403
Solidbank Corporation v. Mindanao Ferroalloy Corporation, G.R. No.
153535, July 28, 2005, 464 SCRA 409, 426.
404
Carag v. NLRC, supra.
401
402
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396
and officers may be held solidarily liable with the corporation
for the illegal termination of an employment if done with malice
or in bad faith. 405
(2) More particularly, fraud refers to all kinds of
deception
whether through insidious machination,
manipulation, concealment or misrepresentation - that would
lead an ordinarily prudent person into error after taking the
circumstances into account.406 Nevertheless, fraud must be
established by clear and convincing evidence.407
(3) Cases involving bad faith include cases where the
corporate officers exceed their authority4°8 as well as cases when
officers prevent the performance of or unjustifiably refuse to
honor an obligation.409
3.06. Gross Negligence. For a director or officer to be made
liable for negligence, the negligence must be so gross that it could
amount to bad faith.410 Simple negligence is not enough. Gross
negligence is one that is characterized by the want of even slight
care, acting or omitting to act in a situation where there is a duty
to act, not inadvertently but willfully and intentionally with a
conscious indifference to consequences insofar as other persons may
be affected.411 It evinces a thoughtless disregard of consequences
without exerting any effort to avoid them; the want or absence of or
failure to exercise slight care or diligence, or the entire absence of
care.412 Gross negligence must be established by clear and convincing
evidence.413 Gross negligence amounts to bad faith.414
405
lf
N
Petron Corporation v. NLRC,G.R. No. 154532,October 27,2006,505 SCRA
596,614.
406Solidbank Corporation v. Mindanao Ferroalloy Corporation,supra.
401Ibid.
408Pamplona Plantation Co. v. Acosta, et al., G.R. No. 153193, December 6,
2006, 510 SCRA 249,257.
409
Arco Pulp and Paper Co. v. Lim,G.R. No. 206806,June 25,2014.
410
Heirs of Fe Tan Uy v. International Exchange Bank,G.R. Nos. 166282 and
166283,February 13, 2013; See also Virata v. Wee,G.R. No. 220926,221058, 221109,
221135,and 221218,March 21,2018.
411Magaling, et al. v. Ong, G.R. No. 173333, August 13, 2008; Fonacier v.
Sandiganbayan,G.R. No. 50691,December 5,1994,238 SCRA 655,687-689.
412
Sanchez v. Republic of the Philippines, supra; Heirs of Fe Tan Uy v.
International Exchange Bank,supra.
413
Magaling,et al. v. Ong,supra.
4t4Jbid.
lilE
ER
397
a.
For example, the president and controlling stockholder of
a corporation was made solidarily liable with the corporation under a
contract of loan because he was clearly grossly negligent in directing
the affairs of the corporation without due regard to the plight of
its investors-lenders. When the president testified, he alleged that
he had no knowledge of the following: (1) when the corporation
started its operations, he did not inform the new investors that
the corporation already had difficulties receiving payments from
borrowers; (2) formal insolvency proceedings have commenced; (3)
who took over when he allegedly resigned; (4) if the investors got
their money back; (5) who else invested in the company; (6) how
much the other directors invested in the company; (7) who got the
assets of the corporation because he was allegedly not attending to
the affairs of the subject corporation because he has many other
companies; (8) where the financial records of the corporation are; and
(9) where he placed his own personal copy of the financial statement
of the corporation. The president could not even remember if he
was the one who convinced the plaintiff to invest; he allegedly could
not remember if he informed the investor that he has other lending
corporations and he did not call a meeting of directors because no
director allegedly attended previous meetings.415 His own testimony
condemned him so to speak. The business judgment rule cannot
protect a member of the Board if the failure to inform the investors
of the relevant, material and available information amounts to gross
negligence especially if the information are reasonably available
and should be within the knowledge of the officers.
b.
In another case, the Board members were made liable
because they approved the credit line application of a company in
the amount of P2,500,000,000.00 despite the glaring signs that it
would be unable to make good its obligation. Worse, the directors
should not have allowed the exclusion of the surety from the
collection suit. It was explained that their subsequent actions reveal
that the exclusion of the surety was not a mere error in judgment
but a calculated maneuver to defraud its investors.416
c.
The directors would also be considered grossly negligent
if their action lacks business purpose, is so egregious as to amount to
a no-win decision, or a result from an obvious and prolonged failure
to exercise oversight or supervision.417
415
Magaling,et al. v. Ong,supra.
Virata v. Wee, G.R. No. 220926, 221058, 221109, 221135, and 221218,
March 21,2018.
417
Joy v. North,692 F. 2d 880 (2d. Cir. 1982).
416
MMENTARI • AND J RI PR DEN •
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d.
The President and Executive Vice President of one
corporation were made personally liable in one case when they failed
to remit the rentals and earnings to the Department of Education
and Culture and Sports (DECS) even if they were contractually
bound to do so. It was established that the said officers, "acting in
bad faith or with gross neglect did not turn over even one centavo
of rent to DECS nor render an accounting of their collections. Nor
did they account for the money they collected by submitting to
the Securities and Exchange Commission the required financial
statements covering such collections." The revenues were deposited
in the name of the Executive Vice President and the corporation's
accountant.418
e.
The treasurer of a corporation was not made liable just
because she was negligent in the performance of her duties by
allowing the corporation to contract a loan despite its precarious
financial position. The treasurer was not made liable because her
actions/negligence did not amount to gross negligence. 419
3.07. Watered Stocks. Watered stocks are stocks of a
corporation issued for less than their par or issued value or stocks
issued for a consideration other than cash, valued in excess of the
fair value of such consideration.•20 Section 64 of the RCCP provides
that a director or officer who consents to the issuance of watered
stocks shall be solidarily liable with the stockholder' concerned to
the corporation and to corporate creditors for the difference between
the value received at the time of the issuance of the stocks and the
par or issued value of the same.
3.08. Contractual Assumption of Liability. A director
or officer is personally liable for the corporation's debt if they so
contractually agree or stipulate.421 However, the mere fact that
the director or officer signed an agreement does not mean that
he is personally liable. He is not personally liable if he signs as a
corporate representative. 422 This may happen for instance if the
corporate officer signed a guarantee agreement with the description
''Vice-President-Treasurer." 423
Sanchez v. Republic of the Philippines, supra.
Heirs of Fe Tan Uy v. International Exchange Bank, supra.
420
Sections 64, RCCP.
421
Tupas IV v. Court of Appeals, G.R. No. 145578, November 18, 2005.
•22Ibid.
423Jbid.
418
419
'l'T'l'LI� TIT
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9
.09. Liability Imposed by Law. A specific provision of law
may make the director or officer personally liable for corporate
obligations. For example, a director may be required to pay collected
and unremitted Social Security System (SSS) contributions of an
mployee to the SSS. Although payment of SSS contributions is in
the nature of corporate obligation, the liability of directors is still
imposed by Section 28(±) of the Social Security Law.424
4.
Conflict of Interest. Section 30 of the RCCP provides for
two cases concerning the liability of directors, trustees, and officers
for conflict of interest situations that breach their duty of loyalty.
The first paragraph of Section 30 makes directors or trustees, who
acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees, liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. The provision expresses
the broad statement of liability that is consistent with the nature of
the identified persons as fiduciaries.
a.
The second paragraph of Section 30 provides for a
situation wherein a director, trustee or officer violates his or her
duty of loyalty and he/she is considered under the law to be liable as
a trustee for the corporation and as such, he/she must account for
the profits which otherwise would have accrued to the corporation.
In this case, the following requirements must be present:
(1) A director, trustee or officer attempts to acquire or
acquires, an interest adverse to the corporation;
(2) The adverse interest is on a matter that has been
reposed in him in confidence;
(3) Equity imposes a disability upon him/her to deal in
his/her own behalf.
5.
Agency Rules on the Duty of Loyalty. Consistent
with the duty of loyalty - in addition to the rules under Section 30
- agency rules may also be applied to make the director, trustee
or officer liable as a fiduciary. Article 1889 of the New Civil Code
provides that the agent shall be liable for damages if there is a
conflict between his interests and those of his principal, and said
424
Garcia v. Social Security Commission Legal and Collection, G.R. No. 170735,
December 17, 2007, 540 SCRA 456.
MMENTARI I AND JURI PR DEN E
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400
N
agent prefers his own interest. Thus, directors, trustees, and officers,
acting as agents, shall be liable for damages to the corporation that
they represent in conflict of interest situations covered by Article
1889 of the New Civil Code. As early as 1923, the Supreme Court
already explained that the relations of an agent to his principal are
fiduciary and "his position is analogous to that of a trustee and he
cannot consistently with the principles of good faith, be allowed to
create in himself an interest in opposition to that of his principal or
cestui que trust."425
a.
On the other hand, Article 1891 of the New Civil Code
provides that "every agent is bound to render an account of his
transactions and to deliver to the principal whatever he may have
received by virtue of the agency, even though it may not be owing
to the principal." For instance, in a sale of corporate properties, a
director, trustee or officer who takes a secret profit in the nature
of a bonus, gratuity or personal benefit from the vendee, without
revealing the same to the corporation, the vendor, is guilty of breach
of loyalty to his principal, the corporation. If the director, trustee or
officer takes such profit, bonus or gift from the vendee, the director,
trustee or officer, as agent, thereby assumes a position wholly
inconsistent with that of being an agent of the corporation.426
6.
Labor Cases. It has been suggested that directors and
corporate officers are personally liable in illegal termination cases
because of Article 212(e) of the Labor Code that defines employers as
any person acting in the interest of an employer, directly or indirectly.
However, in an En Banc decision, the Supreme Court declared that
Article 212(e) of the Labor Code, by itself, does not make a corporate
officer personally liable for the debts of the corporation.427 The
governing law on personal liability of directors and officers for debts
of the corporation is still Section 31 of the Corporation Code (now,
Section 30 of the RCCP). The liability of directors and officers in
illegal termination cases likewise includes their solidary obligation
with the corporation in the cases enumerated in note 3.02 above.428
Severino v. Severino, G.R. No. 18058, January 16, 1923.
Domingo v. Domingo, G.R. No. L-30573, October 29, 1971.
42
7 Carag v. NLRC, G.R. No. 147590, April 2, 2007, 520 SCRA 519, 28, 49.
428
Lowe, Inc., et al. v. Court of Appeals, G.R. Nos. 164813 and 174590, August
14, 2009.
425
426
401
a.
Gen rally, dir ctor and officers are personally liable in
ses when they acted with malice or bad faith in terminating the
rvices of an employee.4 29
b.
Although an employee is an "insider" in the corporation,
he may, in proper cases successfully use the Doctrine of Piercing the
Veil of Corporate Fiction to make a corporate officer liable for illegal
termination. The corporate entity may be disregarded in the interest
of justice in such cases as fraud that may work inequities among the
members of the corporation internally, involving no rights of the
public or third persons.430
7.
Duties of Officers. Like directors, officers are similarly
vested with the duties of obedience, loyalty and diligence. The
fiduciary duties of officers are subject to the general principles
of agency. As noted earlier, the Supreme Court recognized that
the general principles of agency govern the relation between the
corporation and its officers or agents. 431 The applicability of the
provisions of agency under the New Civil Code brings a different
dimension to the duties of obedience, loyalty and diligence of the
officers.
a. The duty of obedience requires the agent to act within the
authority given to him by the Board, the By-Laws or the Articles
of Incorporation. The officer must also act in accordance with the
instructions of the Board in the execution of the agency.432
b. The duty of loyalty requires the agent to avoid conflict
of interest situations. The officer who acts as the agent of the
corporation shall be liable for damages if, there being a conflict
between his interest and those of the principal, he should prefer his
own. 433 The duty of loyalty likewise requires the officer to deliver
429
Ever Electrical Manufacturing, Inc. v. Samahang Manggagawa ng Ever
Electrical, G.R. No. 194795, June 13, 2012; Wensha Spa Center, Inc. v. Yung, G.R. No.
185122, August 16, 2010; AMA Computer College-East Rizal, et al. v. Allan Raymond
R. Ignacio, G.R. No. 178520, June 23, 2009; Delima v. Gois, G.R. No. 178352, June
17, 2008; Supreme Steel Pipe Corporation v. Bardaje, G.R. No. 170811, April 24,
2007, 522 SCRA 155, 171; Acesite Corporation, et al. v. NLRC, G.R. Nos. 152308 and
152321, January 26, 2005, 449 SCRA 360, 377.
430
Suldao v. Cimech System Construction, Inc., G.R. No. 171392, October 30,
2006, 506 SCRA 256, 264.
431
Litonjua, Jr. v. Eternit Corporation, G.R. No. 144805, June 8, 2006.
432
Article 1887, NCC.
433
Article 1889, ibid.
rl'J'l'
OMMENTARIE AND JURI PRUDEN E N
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402
to the corporation whatever he may have received by virtue of the
agency even though it may not be owing to the corporation. 434
c.
The duty of diligence makes an officer liable for damages
that the principal may have suffered through his non-performance
of his duty. 435 In corporate law, there would be liability if the officer
commits gross negligence. 436
PROBLEMS:
1.
Q:
A:
A, B, and C ar shareholders of XYZ Company. A has an unpaid
ubscription of Pl00,000.00, B's shares are fully paid up, while C
owns only nominal but fully paid up shares and is a director and
officer. XYZ Company becomes insolvent, and it is established
that the insolvency is the result of fraudulent practices within
the company. If you were the counsel for a creditor of XYZ
Company, would you advise legal action against A, B, and C?
A:
I would advise the creditor to file an action against A for the
latter's unpaid subscription in the amount of Pl00,000.00. Since
the corporation is insolvent, the unpaid subscription becomes
due without need of call. However, the limit of a stockholder's
liability to the creditor is only up to the extent of his unpaid
subscription.
I would likewise advise the creditor to file an action for damages
against C in his capacity as director and officer because the
corporation's insolvency was the result of fraudulent practices
within the company. Under Section 31 of the Corporation Code
(now Section 30 of the RCCP), directors are liable jointly and
severally for damages sustained by the corporation, stockholders
or other persons resulting from gross negligence or bad faith in
directing the affairs of the Corporation.
No. Even assuming that there was infidelity or breach of trust,
the corporation cannot take the law in its own hands and
confiscate the shares of X. The corporation must file an action
in court and must avail of the appropriate remedy available
under the Rules of Court. Confiscation of shares is not one of the
remedies under the Rules of Court.
434Article
1891, ibid.
Article 1884, ibid.
436See Section 30, RCCP; See also Article 1909, NCC.
435
Q:
X subscribed and paid for Pl0,000.00 worth of shares of stock of
Rainbow Mines, Inc. as an incorporator.and original subscriber.
He was employed as the mine superintendent and as such,
made the design of certain equipment used in its mines. Due
to some technical error in the design, the corporation suffered a
loss of Pl million. The Board accused X of infidelity and breach
of trust, and confiscated his shares. Is the action of the Board
legal?
It should be noted that there is no indication 'in the problem if
Mr.X is a director or a corporate officer. If Mr.Xis a director or
a corporate officer, the action of the Board is not legal. In the
first place, it does not appear that there was gross negligence
on the part of X. Mere technical error will not make the officer
liable. Section 30 of the Revised Corporation Code provides
that a director or trustee can be made liable if he must have
voted or assented to a patently unlawful act, or be guilty of
bad faith or gross negligence, or be in conflict of interest with
the corporation. It is believed that the rule applies to officers.
However, such grounds are not the present in this case. If the
position of superintendent is not a corporate office and Mr. X is
not a director, then it is also believed that there is no basis for
infidelity and breach of trust. However, the applicable law is
labor law and labor law does not likewise allow confiscation of
shares (1989 Bar).
403
I will however inform the creditor that there is no cause of action
against B because he has already fully paid for his subscription.
Since the stockholder is not an officer, his liability as stockholder
is only up to the extent of his subscription. (1997 Bar)
3.
Q:
As a result of perennial business losses, a corporation's net worth
has been wiped out. In fact, it is now in a negative territory.
Nonetheless, the stockholders did not like to give up. Creditor­
banks, however, do not share the confidence of the stockholders
and refuse to grant more loans. (1) What tools are available to
the stockholders to replenish capital? (2) Assuming that the
corporation continues to operate even with depleted capital,
would the stockholders or the managers be solidarily liable for
the obligations incurred by the corporation? Explain.
A:
a.
A corporation may replenish capital by: (1) Issuing new shares
for subscription; (2) Obtaining advances from the stockholders of
the corporation; (3) Demanding payment of unpaid subscriptions
by the stockholders.
b.
No. A corporation has a personality separate and distinct from
that of its stockholders and officers. Hence, the stockholders or
the managers cannot be held solidarily liable for the obligations.
incurred by the corporation. However, under Section 30 of the
Revised Corporation Code, the managers/officers may be held
liable for gross negligence or fraud. (1999 Bar)
MME TARI• A DJ RI R D 1 N
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OF THE PHILIPPINES
404
4..
Q:
I
'Tl'l'LE II TR
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Mr. X had been employed as an accountant by Tiwala Bank.
Through years of exemplary service, he was appointed as bank
manager of Laguna branch, and was given commensurate
increase in salary and perquisites.
(a) The presence of such director or trustee in the
board meeting in which the contract was approved was
not necessary to constitute a quorum for such meeting;
During his service as bank manager, Mr. X learned of the
top-management orders regarding the transfer of three of his
branch's tellers. Mr. X made representations to retain the three
tellers. Irked by his actuations, officers of the bank questioned
Mr. X on alleged unauthorized credit accommodations. In order
to remove Mr. X from his post, the officers imposed upon the
former the burdensome task of explaining his side within 24
hours. Failure on his part would then co�stitute as basis for his
suspension and dismissal.
(b) The vote of such director or trustee was not
necessary for the approval of the contract;
(c) The contract is fair and reasonable under the
circumstances;
(d) In case of corporations vested with public
interest, material contracts are approved by at least two­
thirds (2/3) of the entire membership of the board, with
at least a majority of the independent directors voting to
approve the material contract; and
Mr. X, having inadequate time to explain his side, was
dismissed from office on the ground of loss of confidence. He
now comes to you seeking legal advice as to his rights and who
should be made to answer for his present predicament. If you
were the lawyer, what would be your advice to Mr. X?
A:
4
(e) In case of an officer, the contract has been
previously authorized by the board of directors.
I would advise Mr. X to institute an action against the corporation,
as well as the officers who caused his illegal dismissal.
Where any of the first three (3) conditions set forth
in the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may be
ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members in a meeting
called for the purpose: Provided, That full disclosure of
the adverse interest of the directors or trustees involved
is made at such meeting and the contract is fair and
reasonable under the circumstances.
There is no question that managerial employees should
enjoy the confidence of top management. This is especially true
in banks where officials handle big sums of money and engage
in confidential and fiduciary transactions. However, ioss of
confidence should not be simulated. It should not be used as a
subterfuge for causes which are improper, illegal, or unjustified.
Loss of confidence may not be arbitrarily asserted in the face of
overwhelming evidence to the contrary. It must be genuine, not
a mere afterthought to justify earlier action taken in bad faith.
The evidence showed that the officers of the corporation
acted jointly in causing the illegal and unjustifiable dismissal
of the plaintiff. As such, they should be jointly and severally
held liable to him. Clearly, the officers of the bank acted beyond
their authority and against what the law, particularly Article
1701 in relation to Articles 19, 20, and 21 of the Civil Code,
provides. (General Bank & Trust Co. v. Court of Appeals, G.R.
No. L-42724, April 9, 1985)
SEC. 31. Dealings of Directors, Trustees or Officers
with the Corporation. - A contract of the corporation
with one (1) or more of its directors, trustees, officers or
their spouses and relatives within the fourth civil degree
of consanguinity or affinity is voidable, at the option of
such corporation, unless all the following conditions
are present:
NOTES
1.
Self-dealing. Self-dealing directors, trustees, or officers
are those who personally contract with the corporation in which
they are directors, trustees or officers. It is discouraged because the
directors, trustees, and officers have fiduciary relationship with the
corporation, and there can be no real bargaining where the same
person/s is/are acting on both sides of the trade.
a.
"Fidelity in the agent is what is aimed at, and as a means
of securing it, the law will not permit the agent to place himself in a
situation in which he may be tempted by his own private interest to
disregard that of his principal."437 It was further explained:
437
1964).
State Ex Rel. Hayes Oyster Co. v. Keypoint Oyster Co., 391 P.2d 979 (Wash.
OMM •NTARIE AND JURI
406
RUDE
• N
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OF THE PHILIPPINES
"A director is a fiduciary. So is a dominant or controlling stockholder
or group of stockholders. Their powers are powers in trust. Their dealings
with the corporation are subjected to rigorous scrutiny and where any
of the contracts or engagements with the corporation is challenged the
burden is on the director or stockholder not only to prove the good faith of
the transaction but also to show its inherent fairness from the viewpoint
of the corporation and those interested therein. The essen[c]e of the test
is whether or not under the circumstances the transaction carries the
earmarks of an arm's length bargain. If it does not, equity will set it aside.
Referring directly to the duties of a director of court stated. 'He who is in
such a fiduciary position cannot serve himself first and his cesuis second.
He cannot manipulate the affairs of his corporati9n to the detriment and
in disregard of the standards of common decency and honesty. He cannot
by the intervention of a corporate entity violate the ancient precept against
serving two masters. He cannot by the use of the corporate device avail
himself of privileges normally permitted outsiders in a race of creditors.
He cannot utilize his inside information and his strategic position for his
own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do directly. He cannot use his
power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that the power may be and
no matter how meticulous he is to satisfy technical requirements. For the
power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference, or advantage of the fiduciary
to the exclusion or detriment of the cestuis. Where there is a violation of
those principles, equity will undo the wrong or intervene to prevent its
•
consummation."438
1.01. Status of Contract: Generally Voidable. The contract
between the corporation and the self-dealing director, trustee or
officer is voidable at the option of the corporation. It is not required
that there is intent to defraud or that the contract results in corporate
losses. The self-dealing contract is still generally voidable despite
the absence of fraud. Actual damage is also not required to make the
self-dealing contract voidable. The contract is still voidable although
the stockholders and directors are aware that the contract is self­
dealing so long as substantive and procedural fairness as required
by Section 31 are absent.
a.
Conditions to Make the Contract Valid. However, the
contract is valid if the following requirements for its validity are
present:
Remillard Brick Company v. Remillard-Dandini Company, Civ. No. 14814,
First Dist., Div. One, February 26, 1952, 241 P.2ds 66.
407
(1) The presence of the self-dealing director/trustee in
the Board meeting wherein the contract was approved was not
necessary to constitute a quorum;
(2) The vote of such director/trustee in said Board
meeting was not necessary for the approval of the contract;
(3) The contract is fair and reasonable under the
circumstances;
(4) In case of corporations vested with public interest,
material contracts are approved by at least two-thirds (2/3) of
the entire membership of the Board, with at least a majority
of the independent directors voting to approve the material
contract; and
(5) In the case of an officer, there was previous
authorization by the Board of Directors or Trustees.
b.
The law does not consider the contracts void and does not
impose more stringent voting requirements because of the following
view reflected in the deliberations in the legislature:
"... while contracts between corporations and its directors, trustees
or officers must be viewed with caution, such contracts are not necessarily
undesirable. As a matter of fact, very often, such contracts are to the
advantage and benefit of the corporation. It is not a rare occasion where a
director or an officer of a corporation decides to enter into a contract with a
corporation and agrees on more beneficial terms to the corporation precisely
because of the trust relationship."439
1.02. Ratification. A safe harbor prov1s1on is the provision
allowing ratification. Even if not all the requirements are met, the
contract with the self-dealing director, trustee or officer may still
be ratified by a vote of stockholders representing at least 2/3 of the
outstanding capital stock or by the vote of least 2/3 of the members
in a meeting called for the purpose. In order that ratification may
be considered valid and effective, it is however necessary that the
following conditions are present:
(1) There must be full disclosure of the adverse
interest of the directors/trustees involved that is made at the
stockholders'/members' meeting; and
438
III BP Record, p. 1296, November 12, 1979.
439
408
TLTLl'J 11
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COMMENTARIE AND JLJRI PR DEN E N
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(2) The contract must be fair and reasonable under the
circumstances.
a.
Section 31 of the RCCP states that the stockholders or
members may ratify the contract even if any one of the first three
conditions enumerated therein (see Paragraph 1.0l(a) herein)
is absent. This appears to be a clerical error because the third
requirement for a valid contract - that is, that the contract is fair
and reasonable under the circumstances - cannot be absent. This
requirement cannot be absent because of the proviso in Section
31 that for purposes of ratification by the stockholders/members,
there must not only be "full disclosure of the adverse interest of the
directors or trustees involved" but also, "the contract [must be] fair
and reasonable under the circumstances."
b.
In Balinghasay v. Castillo, 440 the requirements for the
ratification of the contract with the corporation for the operation of
ultrasound equipment were not complied with. Hence, the Supreme
Court ordered the erring directors to account for and return to
the corporation all the income that could have been earned by
the corporation due to the operation of the ultrasound equipment.
However, in the interest of the principle against unjust enrichment,
the directors were allowed to retain ownership of the machine.
1.03. Fair and Reasonable. Even if the self-dealing director
did not vote for the approval of the contract and even if his presence
was not necessary for the existence of a quorum, the contract may
be considered voidable if it is not fair and reasonable under the
circumstances. Fairness typically requires that the transaction
reflect terms one would expect in an arm's length transaction,
which means generally that a self-dealing director must treat his
corporation's interest as his own.441 The director should neither take
any advantage from his position on both sides of the transaction nor
act in conflict with the corporation's interest to even the slightest
extent.442 The burden is on the self-dealing director to prove that the
transaction is fair and reasonable.
4
"F ir and r asonable" means that there is substantive or intrinsic
fairn
in the transaction. This involves two aspects: (1) Objective
fairness which means that "the self-dealing transaction must
replicate an arm's-length market transaction by falling into a range
of reasonableness" including the price or consideration; 444 (2) Value
to the corporation which means that "the transaction must be of
particular value to the corporation, as judged by the corporation's
needs and the scope of the business."445
b.
Under this rule, even if the self-dealing director did not
vote, the contract is still voidable if the director did not disclose the
disastrous consequences of the contract. 446 Disclosure is sine qua non;
the efficacy of the approval of the impartial directors is necessarily
dependent on the Board's knowledge of all material facts.447 The self­
dealing director cannot remain silent, while the rest of the directors
are discussing the contract, knowing that there are circumstances
that may give rise to the precise evils that may eventually develop. 448
PROBLEMS:
1.
Q:
Leonardo is the Chairman and President, while Rafael is a
Director of PL Corporation. On one occasion, PL Corporation
represented by Leonardo, and NM Enterprises, a single
proprietorship owned by Rafael, entered into a dealership
agreement whereby PL Corporation appointed NM Enterprises
as exclusive distributor of its products in Northern Luzon. Is the
dealership agreement valid? Explain.
A:
No. The dealership agreement is voidable at the option of PL
Corporation. The dealership will be considered valid only if the
following requirements are present: (1) The presence of the self­
dealing director (Rafael) in the Board meeting approving the
contract was not necessary for constituting a quorum for such
meeting; (2) The vote of Rafael at such Board meeting was not
necessary for the approval of the contract; and (3) The dealership
contract is fair and reasonable under the circumstances. In the
present case, the facts do not indicate that the dealership contract
was approved by the Board of Directors of PL Corporation before
a.
Fairness is more encompassing than the adequacy of
consideration because it includes the entirety of the transaction.443
444
Palmieri, p. 290.
Palmieri, ibid.
446
Globe Woolen, Co. v. Utica Gas & Electric, Co., 224 N.Y. 483, 121 N.E. 378(1918].
447
Cox, Hazen & O'Neal, supra.
448
Globe Woolen, Co. v. Utica Gas & Electric, Co., supra.
446
440
G.R. No. 185664, April 8, 2015.
Cox, Hazen & O'Neal, Section 10.15.
442Jbid.
443Jbid.
441
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it was signed or, assuming such approval, that the requirements
under the law are present. (1996 Bar)
2.
Q:
A:
Pedro owns 70% of the subscribed capital stock of a company
which owns an office building. Paolo and Juan own the remaining
stock equally between them. Paolo also owns a security agency,
a janitorial company, and a catering business. In behalf of the
office building company, Paolo engaged his companies to render
their services to the office building. Are the service contracts
valid? Explain.
No. The service contracts are not valid; they are voidable
at the option of office building company, in which Paolo has
nominal interest (only 15% of the outstanding capital stock), as
provided in Section 32, in relation to Section 31 of the Revised
Corporation Code because they are self-dealing transactions
and/or transactions between companies with interlocking
directors. While not stated in the facts, since Paolo was able to
engage the services of his companies, he is presumably either a
Board member or an officer of the office building company. As
owner of the service companies, he is also presumably a director
thereof. Thus, the service contracts are voidable at the option of
the office building company, unless all the following conditions
are present: (1) The presence of Paolo in the Board meeting
in which the contracts were approved was not necessary to
constitute a quorum for such meeting; (2) The vote of Paolo was
not necessary for the approval of the contracts; (3) The contracts
are fair and reasonable under the circumstances; and (4) In case
Paolo is an officer of the office building company, the contracts
have been previously authorized by the Board of Directors. The
contracts may also be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding capital stock of
the office building company in a meeting called for the purpose
where any of the first two conditions mentioned above is absent,
provided that the contracts are fair and reasonable under the
circumstances and that full disclosure of the adverse interest of
the director involved is made at such meeting. (2008 Bar)
SEC. 32. Contracts Between Corporations with
Interlocking Directors. - Except in cases of fraud, and
provided the contract is fair and reasonable under the
circumstances, a contract between two (2) or more
corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the
interest of the interlocking director in one (1) corporation
is substantial and the interest in the other corporation
RE
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411
or corporations is merely nominal, the contract shall
be subject to the provisions of the preceding section
insofar as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty percent (20%)
of the outstanding capital stock shall be considered
substantial for purposes of interlocking directors.
NOTES
1.
Effect of Interlocking Directorship. Interlocking
directorship by itself is not prohibited under the Corporation Code
and the RCCP. However, the By-Laws may contain provisions
that disallow interlocking directorship in certain cases. A contract
between two or more corporations having interlocking directors
shall not be invalidated on that ground alone, except in case of fraud
or where the contract is not fair and reasonable.
a.
Nevertheless, when directors of a corporation "are on
both sides of transaction, they are required to demonstrate utmost
good faith and most scrupulous inherent fairness of bargain. The
requirement of fairness is unflinching in its demand that where one
stands on both sides of transaction, he has burden of establishing its
entire fairness, sufficient to pass test of careful scrutiny by courts.
There is no dilution of this obligation where one holds dual or multiple
directorships, as in a parent-subsidiary context. Thus, individuals
who act in a dual capacity as directors of two corporations, one of
whom is parent and the other subsidiary, owe the same duty of
good management to both corporations, and in the absence of an
independent negotiating structure, or the directors' total abstention
from any participation in the matter, this duty is to be exercised in
light of what is best for both companies."449
2.
Meaning of Interlocking Directorship. There is
interlocking directorship when one (or some or all) of the directors in
one corporation is (or are) also a director(s) in another corporation.
a.
The interest of the interlocking director in the corporation
is substantial if his stockholdings exceed 20% of the outstanding
449
Weinberber v. UOP, Inc., 457 A.2d 701 (1983), https://law.justia.com/cas­
es/delaware/supreme-court/1983/457-a-2d-701-4.html (Last accessed December 29,
2019).
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capital stock. The interest of the director is nominal if his equity is
20% or less of the outstanding capital stock.
3.
Effect on Contracts. If the interest of the interlocking
director in one of the corporations is nominal and substantial in the
other, a contract between the two corporations shall be voidable at
the instance of the corporation where the interlocking director has
nominal interest, unless the following conditions are present, in
which case the contract will be considered valid:
(1) The presence of the interlocking director in the
Board meeting (of the corporation where his interest is merely
nominal) in which the contract was approved was not necessary
to constitute a quorum for such meeting;
(2) The contract must be fair and reasonable under the
circumstances.
5.
Effect of Prejudice to Third Party. Section 32 of
the RCCP (previously, Section 33 of the Corporation Code), which
provides for rules regarding transactions between corporations with
interlocking directors, applies if the contract results in prejudice to
one of the corporations. This rule does not apply if the corporation
allegedly prejudiced is a third party, not one of the corporations with
interlocking directors. 450
PROBLEM:
Q:
Chito Santos is a director of both Platinum Corporation
(PLATINUM) and Kwik Silver Corporation (KWIK). He owns
one percent of the outstanding capital stock of PLATINUM and
40% of KWIK. PLATINUM plans to enter into a contract with
KWIK that will make both companies earn very substantial
profits. The contract is presented at the respective board
meetings of Platinum and KWIK. a) In order that the contract
will not be voidable, what conditions will have to be complied
with? Explain. b) If these conditions are not met, how may this
contract be ratified?
a.
The contract will not be voidable if at the meeting of the Board of
Directors of Platinum to approve the contract, (a) the presence of
Chito Santos as director is not necessary to constitute a quorum
for such meeting; (b) his vote is not necessary for the approval
of the contract; and (c) the contract is fair and reasonable under
the circumstances.
b.
If the condition relating to quorum and required number of
votes are not met, the contract may be ratified by the vote of
stockholders of Platinum representing 2/3 of the outstanding
capital stock in a meeting called for the purpose. The contract
may be ratified if the following conditions are present: (a) there
is no fraud involved; (b) the contract is fair and reasonable
under the circumstances; and (c) there is full disclosure of the
adverse interest of Chito Santos at the stockholders' meeting of
Platinum in which the contract is ratified.: {1995 Bar)
(2) The vote of such director was not necessary for the
approval of the contract; and
(3) The contract is fair and reasonable under the
circumstances.
a.
The contract is valid if the interests of the interlocking
director in the corporations involved are both substantial
(stockholdings exceed 20% of outstanding capital stock), or are both
nominal. This is consistent with the rule that contracts between
two or more corporations having interlocking directors shall not be
invalidated on that ground alone. The exception under Section 32
is when the contract is fraudulent or not fair and reasonable; the
contract is voidable at the option of the corporation that is the victim
of fraud or unfairness or unreasonableness. The contract may also
be annulled under the grounds provided in the New Civil Code for
voidable contracts, which include fraud.
4.
Ratification. Contracts between corporations with
interlocking directors must always meet the third condition cited
above, that is, said contracts must be fair and reasonable under the
circumstances. If the contract is fair and reasonable, the absence of
either the first or second condition makes the contract voidable and
capable of ratification.
a.
In the absence of any of the first two requirements, the
contract can be ratified by the vote of the stockholders representing
at least 2/3 of the outstanding capital stock (or at least 2/3 of the
members) in a meeting called for the purpose so long as the following
requisites are present:
(1) There must be full disclosure of the adverse interest
of the directors/trustees involved at such meeting; and
413
A:
SEC. 33. Disloyalty of a Director. - Where a
director, by virtue of such office, acquires a business
opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such
450Development Bank of the Philippines v. Court of Appeals, G.R. No. 126200,
August 16, 2001.
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corporation, the director must account for and refund to
the latter all such profits, unless the act has been ratified
by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock.
This provision shall be applicable, notwithstanding
the fact that the director risked one's own funds in the
venture.
NOTES
1.
Doctrine of Corporate Opportunity. Section 33 of the
RCCP is consistent with the duty of loyalty of a director. The duty of
loyalty mandates that directors should not give preference to their
own personal amelioration by taking the opportunity belonging to
the corporation. It was explained in one case:
"It is true that when a business opportunity comes to a corporate officer
or director in his individual capacity rather than in his official capacity, and
the opportunity is one which, because of the nature of the enterprise, is
not essential to his corporation, and is one in which it has no interest or
expectancy, the officer or director is entitled to treat the opportunity as his
own, and the corporation has no interest in it, if, of course, the officer or
director has not wrongfully embarked the corporation's resources ther:e. in...
Duty and loyalty are inseparably connected. Duty is that which is
required by one's station or occupation; is that which one is bound by legal
or moral obligation to do or refrain from doing; ..."451
a.
Section 33 applies if there is presented to a corporate
director: (1) a business opportunity which the corporation is
financially able to exploit; (2) from its nature, the business opportunity
is in line with the corporation's business; (3) the corporation has
an interest or a reasonable expectancy in the business opportunity;
and (4) by taking the business opportunity as his own, the director
will thereby be placed in a position inimical to his duties to the
corporation. 452
b.
By embracing the opportunity, the self-interest of
the officer or director will be brought into conflict with that of
his corporation. Hence, the law does not permit him to seize the
Guth v. Loft, Inc., 5 A2d 503 (Del. 1999).
Guth v. Loft, Inc., ibid.; Broz v. Cellular Information System, Inc., 673 A.2d
148 (Del. 1996).
451
452
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opportunity v n if he will use his own funds in the venture.
However, no criminal liability attaches to the offending director. 453
c.
The Doctrine of Corporate Opportunity, as originally
crafted by the courts, recognizes that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities with
competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection. 454
d.
The prohibition no longer applies if the action was made
after the resignation of the director. 455 Neither does it apply to
cases when two related corporations are involved even if there is
interlocking directorship. 456
2.
Tests. Courts have opened or closed the business
opportunity door to corporate managers upon the facts and
circumstances of each case by application of one or more of three
variant but often overlapping tests or standards. 457
a.
Interest or Expectancy Test which precludes acquisition
by corporate officers of the property of a business opportunity in
which the corporation has a ''beachhead" in the sense of a legal or
equitable interest or expectancy growing out of pre-existing right or
relationship. 458
(1) The interest or expectancy test is more restrictive
and inflexible than the two other tests.
b.
Line of Business Test which characterizes an opportunity
as corporate whenever a managing officer becomes involved in
an activity intimately or closely associated with the existing or
prospective activities of the corporation. 459
(1) The phrase "in the line of business" has a flexible
meaning that is to be applied reasonably and sensibly to
453
James lent, et al. v. Tullett Prebon Philippines, G.R. Nos. 189158, 189530,
January 11, 2017.
454
Gokongwei, Jr. v. SEC, et al., G.R. No. L-45911, April 11, 1979.
455
III BP Records, p. 1633, December 5, 1979.
456
III BP Records, p. 1721, December 11, 1979.
457
Miller v. Miller, 222 N.W. 2d 71, Supreme Court of Minnesota, 1974.
458Jbid.
459Jbid.
41
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the facts and circumstances of the particular case. Where
a corporation is engaged in a certain business, and an
opportunity is presented to it embracing an activity as to which
it has fundamental knowledge, practical experience and ability
to pursue, which, logically and naturally, is adaptable to its
business having regard for its financial position, and is one
that is consonant with its reasonable needs and aspirations for
expansion, it may be properly said that the opportunity is in
the line of the corporation's business. 460
Articles of Incorporation and By-Laws, a director can also be a
dir ctor in a competing corporation. 466 In addition, "non-competition"
lauses are expressly stipulated in agreements to prevent officers or
directors from competing with their employers.
c.
Fairness Test which determines the existence of a
corporate opportunity by applying ethical standards of what is fair
and equitable under the circumstances. 461
3.
Burden of Proof. The burden of proof on the questions
of good faith, fair dealing, and loyalty of the officer to the corporation
should rest upon the officer who appropriated the business
opportunity for his own advantage. Such a burden necessarily
lies with the acquiring officer because a fiduciary with a conflict of
interest should be required to justify his actions and because of the
practical reality that the facts with regard to such questions are
more apt to be within his knowledge. 466
(1) Under the fairness test, the basis of the Doctrine of
Corporate Opportunity rests fundamentally on the unfairness
in the particular circumstances of a director, whose relation to
the corporation is fiduciary, taking advantage of an opportunity
when the interest of the corporation justly calls for protection.
This calls for the application of ethical standards of what is fair
and equitable.462
a.
For example, a director usurped a corporate opportunity,
when the director purchased the shares from a shareholder because
a stockholders' agreement granted the corporation a right of first
refusal to purchase any outstanding shares of the corporation
that became available and also provided a mechanism for valuing
shares in the event of a dispute. The Court imposed, in favor of the
corporation, a constructive trust on stock. 467
d. Mixed Test. Another approach is to apply any two or all
the tests. For instance, one court applied a two stage test using both
the line of business test and the fairness test. The threshold question
to be answered is whether the business opportunity is of sufficient
importance and is so closely related to the existing or prospective
activity of the corporation as to warrant judicial sanctions against
its personal acquisition by a managing officer or director of the
corporation. 463 The second step is close scrutiny of the equitable
considerations existing prior to, at the time of, and following the
officer's acquisition. 464
b.
The following cases are cited as examples in the
annotations to the Delaware General Corporation Law where there
is no proof that the director unduly acquired or diverted a corporate
opportunity:
e.
It is believed that either the Fairness Test or the Mixed
Test can be applied in this jurisdiction. The Line of Business Test
cannot be strictly applied because there is no wholesale prohibition
against a director to engage in the same line of business as the
corporation. In fact, unless there is an express prohibition in the
(1) There is no diversion of corporate opportunity, when
a director's wholly owned subsidiary acquired options on
the corporation's shares, where (1) the transaction is merely
transfer of shares from one of his wholly owned subsidiaries to
another, (2) the shares were not essential to the corporation's
business, and (3) the corporation had no policy for buying its
own shares. 468
(2) There is also no violation when a director acquired
the opportunity to develop a new product where the inventor
Gokongwei v. SEC, supra.
Mi!ler v. Miller, supra.
467
Balotti and Finkelstein, The Delaware Law of Corporations & Business
Organization, Statutory Deskbook, 2013 Ed., p. 142 (hereinafter cited as "Balotti and
Finkelstein") citing Stephania v. Yiannatsis, No. 1508 (Ch Ct 10-4-93).
468
Balotti and Finkelstein, p. 141 citing Equity Corp v. Milton, 213 A2d 439 (Ch
Ct 1965), affd, 221 A2d 494 (1966).
465
466
Guth v. Loft, Inc., 5 A2d 503 (Del. 1999).
Miller v. Miller, supra.
462
Durfee v. Durfee & Canning, 323 Mass. 187, 199, 80 N.E.2d 522, 529 (1948).
463Mi!ler v. Miller, supra.
460
461
464Jbid.
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of the new product was unwilling to permit the corporation to
use his invention, and the corporation was neither inclined
nor financially able to develop new products. The inventor's
concept was not an opportunity available to the corporation. 469
(3) "Director of corporation did not usurp a corporate
' opportunity to acquire a cellular phone license where the
opportunity was presented to the director in his individual
capacity, the corporation had been divesting itself of similar
cellular holdings, the director had discussed the opportunity
with other directors of the corporation who had expressed no
interest in the opportunity, and at the time the opportunity
was presented to the corporation, the corporation was not
financially able to purchase the license."470
4.
Profits. Section 33 of the RCCP provides that a director
who, by virtue of his office, acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to
the prejudice of such corporation, must account for and refund to the
latter all such profits. The theory is that the profits made and the
advantage gained by an agent belongs to the principal.
5.
Ratification. The corporation may choose to ratify the
acts of the director. However, this requires a vote.of 2/3 of the
outstanding capital stock. Section 33 provides that if a director
seizes the opportunity thereby obtaining profits at the expense of the
corporation, he must account for all the profits and refund the same
to the corporation unless the act has been ratified by a vote of the
stockholders owning or representing at least 2/3 of the outstanding
capital stock.
6.
Financial Capability. Property or business opportunity
ceases to be a corporate opportunity and is transformed into
personal opportunity where the corporation is definitely no longer
able to avail itself of the opportunity. 471 The inability to avail itself of
a business opportunity may arise from financial insolvency or legal
469
Balotti and Finkelstein, p. 141 citing Science Accessories Corp. v. Summa­
graphics Corp, 425 A2d 957 (1980).
470Balotti and Finkelstein citing Broz v. Cellular Information Systems, Inc.,
673 A2d 148 (1996), rev'g, Cellular Information Systems, Inc. v. Broz, No. 14094 (Ch
Ct 5-8-95).
471III, BP Records, pp. 1721-1722, December 11, 1979.
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restrictions or any other factor that prevents the corporation from
acting upon the opportunity for its own advantage:'72
a.
It is then necessary for the director to take positive steps
which show that the opportunity was brought before the corporation
for its decision whether to avail of it or not and the corporation
rejected it. In other words, notice must be given to the corporation
that such opportunity exists and the corporation does not want to
avail of the opportunity. 473
b.
The director must inform the corporation that the loss of
a certain business is imminent and the corporation must be given a
reasonable chance to undertake the business. Normally, mere offer
by the director to the corporation to undertake the business and the
lack of funds are not sufficient justification for taking advantage of
the corporate opportunity. As a director, he is involved in raising the
necessary funds that the corporation needs. Hence, if a court allows
a "lack-of-funds" defense, it creates an incentive for directors to fail
to use their best efforts to help the firm raise the necessary funds.474
7.
Trustees and Officers Not Covered. Section 33 of the
RCCP specifies only the directors as the persons who are covered by
the Doctrine of Corporate Opportunity. Trustees are not included
because non-stock corporations are not supposed to be engaged
in business as a main purpose. Nevertheless, it is believed that
although the Doctrine of Corporate Opportunity under Section 33
does not expressly cover officers and trustees, they are nevertheless
prevented from unduly taking corporate opportunity under Section
33 of the RCCP as well as the New Civil Code provisions on agency
prohibiting conflict of interest in some cases. The difference is that
the ratification need not be by a vote of the stockholders owning or
representing at least 2/3 of the outstanding capital stock. Unless,
there is a specific statutory provision requiring stockholders'
ratification, the Board ratification is sufficient to cure any defect in
the transaction. 475
47211
Fletcher 227; SEC Opinion dated March 4, 1982.
473III Record, pp. 1217-1219, November 5, 1979.
474
William A. Klein and J. Mark Ramseyer, Business Associations, 1994 Ed., p.
338, hereinafter referred to as "Klein and Ramseyer, p. 338."
475
See The Board of Liquidators v. Heirs of Maximo M. Kalaw, G.R. No.
L-18805, August 14, 1967.
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PROBLEMS:
1.
Q:
A:
Mr. X, a director of Corporation A is also a director of Corporation
B. Mr. X acquired for Corporation B (not for himself) a business
opportunity identical to the business of Corporation A He could
not give the business opportunity to Corporation A allegedly
because its policies strongly impede its chances of winning said
business. Is there a violation of Section 34 of the Corporation
Code (now Section 33 of the RCCP)?
No. If it is true that Corporation A cannot engage competitively
in the subject business because of its aJleged policies, then it
may not be said that by delivering the business opportunity
to Corporation B, the director directly or indirectly competed
with the business of or is disloyal to Corporation A A business
opportunity ceases to be a corporate opportunity and transforms
into personal opportunity where the corporation is definitely
no longer able to avail itself of the opportunity. (SEC Opinion,
March 4, 1982)
2.
A:
3.
Q:
a.
Suppose that the by-laws of "X" Corporation, a mining firm,
provides that "The directors shall be relieved from all liability
for any contract entered into by the corporation with any firm
in which the directors may be interested." Thus, director "A:'
acquired claims which overlapped with "X's" claims and were
necessary for the development and operation of "X's" mining
properties. a) Is the by-law provision valid? 'Why? b) What
happens if director "A" is able to consummate his mining claims
over and above that of the corporation's claims?
No. The By-Laws must not be contrary to the provisions of the
Revised Corporation Code. The subject provision is clearly in
violation of Section 33 of the Revised Corporation Code that
disallows directors from taking advantage of corporate business
opportunities.
b.
Under Section 33 of the Revised Corporation Code, "A" should
account for and refund to the corporation all the profits that he
realized from the transaction. This is true even if "A" used his
own funds in the business venture. He acquired the business
opportunity to the prejudice of the corporation. (2001 Bar)
Q:
ABC Piggery, Inc. is engaged in raising and selling hogs in the
local market. Mr. De Dios, one of its directors, while traveling
abroad, met a leather goods manufacturer who was interested
in buying pig skins from the Philippines. Mr. De Dios set up a
separate company and started exporting pig skins to his foreign
contact but the pig skins exported were not sourced from ABC.
His fellow directors in ABC complained that he should have
given this business to ABC. How would you decide this matter?
ER
A:
421
I would decide in favor of Mr. De Dios. There is no conflict
between the business of ABC Piggery, Inc. and the separate
company of Mr. De Dios. ABC is engaged in raising and selling
hogs in the local market while the company of Mr. De Dios is
engaged in the export of pig skins. It cannot be said that the
opportunity to export pigskins belongs to ABC Piggery, Inc.,
which is only engaged in hog raising and selling. (1991 Bar)
SEC. 34. Executive, Management, and Other Special
Committees. - If the bylaws so provide, the board may
create an executive committee composed of at least
three (3) directors. Said committee may act, by majority
vote of all its members, on such specific matters within
the competence of the board, as may be delegated to it
in the bylaws or by majority vote of the board, except
with respect to the: (a) approval of any action for which
shareholders' approval is also required; (b) filling of
vacancies in the board; (c) amendment or repeal of
bylaws or the adoption of new bylaws; (d) amendment
or repeal of any resolution of the board which by its
express terms is not amendable or repealable; and (e)
distribution of cash dividends to the shareholders.
The board of directors may create special
committees of temporary or permanent nature
and determine the members' term, composition,
compensation, powers, and responsibilities.
NOTES
1.
Purpose. The executive committee is a corporate body
"with standing in law, although in a sense, it is an agent of the
Board of Directors because it performs what otherwise is vested
by law in the Board of Directors."476 The RCCP allows the creation
of an executive committee because the Board may not readily face
the contingency of confronting urgent matters that require its
attention. 477 It was further explained:
"So, essentially this is really a matter of policy. If one were to ask
what the basic rationale is for an executive committee, it would simply be
to facilitate the conduct of business by a corporation. To be realistic about
it, we may have a corporation with a Board of 11 members or 7 members
and sometimes this is not unusual. It is extremely difficult to muster a
476
III BP Records, p. 1619, December 4, 1979.
III BP Records, pp. 1296-1297, November 12, 1979.
477
422
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quorum at a time when the corporation must act on a vital matter. And the
only way not to paralyze a corporation in those instances is to provide for a
system whereby they may be able to confront or meet such contingencies.
And the present practice is, as I said, to create an executive committee. As
I said what we must really decide on is whether we would like to allow the
conferment of broad authority or we would like to restrict the authority that
may be conferred on an executive committee."478
2.
By-Laws. The executive committee can only be created
by virtue of a provision in the By-:J;,aws. 479 The Board, by itself,
cannot create an executive committee if nothing is stated in the By­
Laws. 480 As explained by the proponent of the provision, the executive
committee is a corporate body with a standing in law, although,
in a sense, it "is an agent of the Board of Directors. However, its
authority is not simply derived from the Board of Directors since
the organization or creation of the executive committee would be
through the By-Laws."481
3.
Composition. Section 34 of the RCCP provides that
an executive committee must be composed of not less than three
members of the Board, to be appointed by the Board. This means
that there can be members of the executive committee who are
not directors provided that at least three members are directors.
It is common to have a management committee composed of key
executives, some of whom are not members of the Board and others
of whom are not even elected officers. 482
a.
A foreigner can be a member of the executive committee
in proportion to the foreign shareholdings in the corporation. 4 83
4.
Authority. The executive committee has all the authority
of the Board to the extent provided in the resolution of the Board
or in the By-Laws. 484 The resolutions passed and approved by the
executive committee are as valid as the resolutions of the Board
provided the resolutions have been made at the time the committee
is constituted. 485 Thus, the executive committee is, within the limits
of its authority, as powerful as the Board as it actually performs
certain duties of the Board and in effect, it is acting as the Board
itself. 486
a.
However, there must be no undue abdication of the
powers of the Board. While the committee may manage the day-to­
day operation of the business of the corporation, the business and
affairs thereof shall be managed and all corporate powers shall be
exercised under the ultimate direction of the Board. 487 Moreover, the
rights of the minority should not be impaired. 488 The Board cannot
delegate the entire supervision and control of the corporation to an
executive committee for this is contrary to the charter and the law
that requires that the directors shall have general supervision and
control of the corporation.
b.
The decision of the executive committee is not subject to
appeal to the Board. 489 They are valid and unappealable. However,
the Board may ratify the resolution if the resolution of the executive
committee is invalid (as for instance it is not one of the powers
conferred thereto). 490 Additionally, just like any Board resolution, the
resolution of the executive committee may be repealed by subsequent
Board resolutions491 unless what is involved is an accomplished fact
or a contract that is binding on third persons.
c.
It has been suggested that in the meeting of the executive
committee, a member may ask for deferment of certain actions in
case the Board members feel strongly that it should be a matter
that should be decided by the entire Board and not by the executive
committee. 492
5.
Quorum. The general rule for quorum requirements for
the executive committee is the same as that for directors. A majority
1985.
47BJbid.
479IV BP Records, p. 2350, March 11, 1980.
480Records, December 4, 1979; SEC Opinion
dated September 27, 1993.
Record, p. 1619, December 4, 1979.
SEC Opinions dated September 16, 1986 and May 18, 1983.
483SEC Opinion dated June 3, 1998.
484SEC Opinions dated August 29, 1988, September 16, 1986, and May 18,
481 III
482
1983.
42
4861V
BP Records, pp. 2350-2351, March 11, 1980; SEC Opinion dated July 29,
486SEC
Opinion dated September 23, 1993.
SEC-OGC Opinion No. 11-16 dated March 14, 2011; SEC Opinion dated May
18, 1983.
488SEC
Opinion dated July 29, 1985.
489
IV Record, pp. 2350-2351, March 11, 1980.
490
SEC Opinion dated July 29, 1995.
491
111 BP Records, p. 1615, December 4, 1979.
492111 BP Records, p. 1615, December 4, 1979.
487
OMMENTARIE AND JORI PRUDEN E N
THE REVISED CORPORATION CODE
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424
of the group constitutes the quorum. 493
6.
Required Vote. The majority vote requirement for
an executive committee shall be interpreted to mean majority of
all the committee members, regardless of the classification of the
membership into director/members or non-director/members. This
is basically premised on the cardinal rule of statutory construction
that if the law does not qualify, no further qualification should be
made thereon. 494
7. De Facto Officers. If the executive committee was not
validly constituted, the members thereof mayoe considered de facto
officers. 495
8. Board Committees. The Board, in the exercise of its
business judgment can create committees that can give assistance
in the performance of the Board's functions. These committees are
distinct from the executive committee contemplated under Section
34. The "executive committee," referred to in Section 34 of the RCCP
that is as powerful as the Board of Directors and in effect acting for
the Board itself, should be distinguished from other committees that
the Board may create at anytime under the business judgment rule;
the actions of these committees require ratification and confirmation
by the Board. 496
.
a.
Section 34 of the RCCP provides that the ''board of directors
may create special committees of temporary or permanent nature
and determine the members' term, composition, compensation,
powers, and responsibilities." These special committees are not
executive committees. It was explained that even before the
RCCP, the Board of Directors had the power to create positions
not specifically provided for in the By-Laws since the Board is the
corporation's governing body, clearly upholding the power of the
Board to exercise its prerogatives in managing the business affairs
of the corporation. 497
9.
Code of Corporate Governance. Corporations that are
covered by the Code of Corporate Governance are required to create
an Audit Committee. The Board may also create a Nominations
SEC Opinion dated November 5, 1984.
494Jbid.
496
SEC Opinion dated September 27, 1993.
496
Filipinas Port Services, Inc. v. Go, G.R. No. 161886, March 16, 2007.
491/bid.
493
TITL I I 1 - B AR
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42
Committee and a Remuneration or Compensation Committee to
assist its corporate governance.
PROBLEM:
Q:
The Board of Directors of X Corporation through a resolution decided
to create an executive committee and to delegate all its powers to the
said committee. There is no provision in the Articles of Incorporation
and By-Laws conferring such power. Is the creation of the Executive
Committee valid?
A:
No. The creation of the Executive Committee is not valid. The executive
committee may be created only if the same is provided for in the By­
Laws. In addition, even assuming that there is a provision in the By­
Laws, not all powers can be conferred to the committee. Section 34 of
the Revised Corporation Code provides that the executive committee
cannot act on the following: (1) approval of any action for which
shareholders' approval is also required; (2) the filling of vacancies in
the Board; (3) the amendment or repeal of By-Laws or the adoption
of new By-Laws; (4) the amendment or repeal of any resolution of the
Board which by its express terms is not so amendable or repealable;
and (5) a distribution of cash dividends to the shareholders.
Tl'l' E J - fl
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4, 7
(h) To enter into a partnership, joint venture,
merger, consolidation, or any other commercial
agreement with natural and juridical persons;
TITLE IV
POWERS OF CORPORATIONS
SEC. 35. Corporate Powers and Capacity. - Every
corporation incorporated under this Code has the power
and capacity:
(a)
To sue and be sued in its corporate name;
(i) To make reasonable donations, including
those for the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes: Provided,
That no foreign corporation shall give donations in aid
of any political party or candidate or for purposes of
partisan political activity;
0) To establish pension, retirement, and other
plans for the benefit of its directors, trustees, officers
and employees; and
(b) To have perpetual existence unless the
certificate of incorporation provides otherwise;
(k) To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
To adopt and use a corporate seal;
NOTES
(d) To amend its articles of incorporation in
accordance with the provisions of this Code;
1.
Limited or Special Capacities. A corporation is a
person. As such, "the law vests in corporations rights, powers and
attributes as if they are natural persons with physical existence and
capabilities to act on their own." 1 However, it is also a "fundamental
principle that a corporation is a juridical entity created by law and,
therefore, possesses no power or authority other than what is vested
by law. A corporation is not like a natural person. The natural person
can do anything and everything except that which the law prohibits.
But a corporation can only do that which the_ law authorizes it
to perform."2 "As a creature of law, the power and attributes of a
corporation are those set out, expressly or impliedly, in the law."3
(c)
(e) To adopt bylaws, not contrary to law, morals
or public policy, and to amend or repeal the same in
accordance with this Code;
(f) In case of stock corporations, to issue or
sell stocks to subscribers and to sell treasury stocks
in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock
corporation;
(g) To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage, and otherwise
deal with such real and personal property, including
securities and bonds of other corporations, as the
transaction of the lawful business of the corporation
may reasonably and necessarily require, subject to the
limitations prescribed by law and the Constitution;
426
2.
Kinds of Powers. A corporation may exercise (1) express
powers, (2) implied powers, and (3) incidental powers.
a.
Express Powers. Express powers are the powers ex­
pressly provided in the RCCP, applicable special laws, administrative
1Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1, 2014.
2111 BP Records, p. 1702, December 10, 1979.
3
Urnale v. ASB Realty Corporation, G.R. No. 181126, June 15, 2011.
MM' NTARI I AND J RI PR
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THE REV! ED ORPORATION CODE
OF THE PHILIPPINES
regulations, and the Articles of Incorporation of the corporation. 4
The express powers under the RCCP include (1) the general powers
under Section 35, and (2) the specific powers under Sections 9, 15,
and 36 to 43 of the RCCP. The powers expressly provided for in the
RCCP are deemed part of the Articles of Incorporation even if such
powers are not enumerated therein. 5
b.
Implied Powers. The existence of implied power is
recognized under paragraph (k) of Section 35 of the RCCP. Under
paragraph (k) of Section 35 of the RCCP, a corporation is em­
powered to exercise such other powers as i;nay be essential or
necessary to carry out its purpose or purposes as stated in the
Articles of Incorporation.
(1) Implied powers include all powers that are
reasonably necessary or proper for the execution of the powers
expressly granted and are not expressly or impliedly excluded. 6
The term "implied powers" has also been defined as one which
the law will regard as existing by implication; such power must
be one in a sense necessary, i.e., needful, suitable and proper
to accomplish the object of the grant - one that is directly and
immediately appropriate for the execution of specific powers;
and not one that has slight, indirect or remote relation to the
specific purposes. 7
(2) For instance, a corporation that is engaged in mining
has the power to establish a local post office. The establishment
of a post office is a reasonable and proper adjunct to the conduct
of the business of the company. Indeed, such post office is a
vital improvement in the living condition of its employees and
laborers who come to settle in its mining camp which is far
removed from the postal facilities or means of communication
accorded to people living in a city or municipality.8
Advance Paper Corporation v. Arma Traders Corporation, et al., G.R. No.
176879, December 11, 2013. (The Articles of Incorporation expressly provides the
power to borrow or raise money to meet the financial requirements of the corporation
through the issuance of bonds, promissory note and other evidence of indebtedness.)
5
III BP Records, p. 1693, December 10, 1979.
6
Clark on Corporations, p. 146.
7
SEC Opinion dated May 31, 2001, citing Ballentine Law Dictionary, p. 614.
8
Republic of the Philippines v. Acoje Mining Company, Inc., G.R. No. L-18062,
February 28, 1963.
4
UTLE IV-P
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RP RTI
429
(3) Similarly, a corporation that is authorized to operate
a cement factory has the implied power to operate an electric
power plant for such factory.9
(4) A corporation engaged in advertising business may
pursue any and all related activities covered by the purpose
clause. The purpose clause of one corporation states: "The
primary purpose of this corporation is to engage in, operate and
maintain an advertising, promotions and wholesale marketing
business." With such primary purpose, the corporation can
legally engage in the business of supplying, managing, selling
and/or subleasing out to third persons, indoor and outdoor
advertising materials, sites and spaces in the Philippines.10
(5) The SEC opined that manufacturing is not implied
from or incidental to the business of selling that is stated in the
Articles of lncorporation.11 A seller, dealer, trader or importer
of goods does not automatically classify one as manufacturer
because manufacturing is not fairly and reasonably necessary
or incidental to the business of selling. 12 However, a
manufacturing corporation has an implied power to sell what
it manufactures.
(6) A corporation cannot operate an online casino
on the basis of its secondary purpose to operate amusement
centers for various computer games. 13 "The business concept
of an amusement center is mainly for entertainment purposes.
On the other hand, an online casino is primarily for gambling
activity, the amusement aspect being merely incidental." 14
(7) A corporation with a primary purpose of trading
goods can likewise import goods. The term "trading" necessarily
includes the activity of importation. Even if there is no express
provision in the Articles of Incorporation allowing importation,
the power to import is subsumed in the trading activity.15
9
Teresa Electric & Power Company, Inc. v. Philippine Service Commission, 21
SCRA 198.
10SEC Opinion No, 08-24 dated October 22, 2008.
11SEC-OGC Opinion No. 07-14 dated July 18, 2007.
12
/bid.
13SEC Opinion No. 09-32 dated December 7, 2009.
14
lbid.
15SEC Opinion No. 09-20 dated August 4, 2009.
MMENTARI , A
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THE REVI ED ORPORATION
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OF THE PHILIPPINES
430
N
(8) If the primary purpose of a corporation is
international freight forwarding, the said corporation can also
perform other forwarding services such as trucking. 16
(9) If the purpose of a corporation is to engage in retail directly selling goods to the general public, it is not necessary for
the corporation to amend its purpose clause in order to include
e-commerce or particularly selling goods online. The power to
engage in e-commerce is necessary for the accomplishment of
the purpose of the corporation. A corporation that is authorize
to sell in general may do so online.17
c.
Incidental Powers. Incidental powers are powers
that are deemed conferred on the corporation because they are
incidental to the existence of the corporation. 18 Corporations have
incidental powers as a consequence of the fact that they exist as
juridical persons. Incidental powers include: 19 1) right to succession,
2) right to have a corporate name, 3) right to make by-laws for its
government, 4) right to sue and be sued, and 5) right to acquire and
hold properties for the purposes authorized by the charter.
3.
Test to Determine if Power is Implied. The corporation
has the powers expressly granted in its charter or in the statutes
under which it is created or such powers as are necessary for the
purpose of carrying out its express powers. Only sucq powers as are
reasonably necessary to enable corporations to carry out the express
powers granted and the purposes of the creation are implied. Powers
merely convenient or useful are not implied if they are not essential,
having in view the nature and object of the corporation. The Supreme
Court explained that "it is a question, therefore, in each case of the
logical relation of the act to the corporate purpose expressed in the
charter. If that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends, and is
reasonably tributary to the promotion of those ends, in a substantial,
and not in a remote and fanciful sense, it may fairly be considered
within charter powers."20 The test to be applied is:
16SEC-OGC Opinion No. 16-08 dated April 20, 2016.
17SEC-OGC Opinion No. 19-33 dated September 18, 2019; SEC-OGC Opinion
No. 19-35 dated September 9, 2019.
18
Clark on Corporations, p. 145.
Ibid.
19
1962.
20Montelibano v. Bacolod Murcia Milling Co., Inc., G.R. No. L-15092, May 18,
TL• lV-P WER
RP
Tl N
431
"...whether the act in question is in direct and immediate furtherance
of the corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the power
to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-
268)"21
a.
Thus, in determining what businesses may be carried
on by a corporation, reference must be made to its Articles of
Incorporation and unless the power to carry a particular business
is either expressly or impliedly conferred thereby, it does not exist.
There should be a specification of the corporation's intended purpose
with sufficient clarity and elucidation in the Articles oflncorporation
in order to define with more certainty the scope of its business. 22
b.
In construing the powers of the corporation, the language
of the charter should in general neither be construed strictly nor
liberally but according to the fair and natural import of it, with
reference to the objects of the corporation.23
c.
It is a general rule that when the charter of a corporation
confers certain enumerated powers, it is to be construed as
including powers reasonably necessary for the proper exercise of
the enumerated powers and excluding all other non-enumerated
powers. For example, if the purpose of the corporation is to engage
in delivery service by air and sea, messengerial delivery service is
deemed excluded because it is not necessary to the proper exercise
of the express purpose.24
4
Stretching the Purpose Clause. The SEC adopted
the "Stretching of Purpose Clauses Rule" under which it is legal
to stretch the meaning of the purpose clause to cover new and
unexpected situations. Situations and circumstances may arise
which could not have been foreseen at the time of incorporation
that can be accommodated by the "stretched" interpretation of the
purpose clause. There is no more need to amend the Articles of
Incorporation to accommodate the new situations.25 For instance,
21
1962.
Montelibano v. Bacolod Murcia Milling Co., Inc., G.R. No. L-15092, May 18,
SEC Opinion dated February 7, 1994.
Downing v. Mr. Washington Road, Co., 40 N.W. 230 (1860).
24SEC Opinion dated January 26, 1994.
25
SEC Opinion No. 08-24 dated October 22, 2008; SEC Opinion dated March
24, 1982 citing Campos and Campos, p. 247.
22
23
432
•rt'I'LEJ -
OMMENTARIE AND JURI PRUDEN E N
THE REVISED CORPORATION CODE
OF THE PHILIPPINES
a provision in the Articles allowing a corporation to "affiliate or
contract with other local and international organizations" may be
stretched and construed in such a way as to allow the corporation to
remit donations to a foreign organization.26
5.
Specific Powers. The specific powers of corporations are
provided for in the RCCP, including the specific requirements and/
or procedure for their exercise. These include the following powers:
(1) to extend or shorten the corporate term under Sections 11 and 36;
27
�2) to amend the Articles of Incorporation under Section 15; (3) to
mcrease or decrease the capital stock under Section 37; (4) to incur
create or increase bonded indebtedness also u�der Section 37; (5) t�
deny pre-emptive right under Section 38; (6) to sell or dispose of all
or substantially all of the assets of the corporation under Section 39·
(7) to acquire its own shares under Section 40; (8) to invest corporat�
funds in another corporation, business or for any other purpose
under S�ction 41; (9) to declare dividends under Section 42; and (10)
to enter mto a management contract under Section 43.
6.
General Powers. As a rule, the Board exercises the
general powers of the corporation. Generally, approval of a resolution
by the Board is enough for the exercise of such powers. The exercise
of general powers and all regular business transactions is covered
by Section 52 of the RCCP that provides that every decision of at
lea�t a majo�ity of the directors or trustees present l:!t a meeting at
which th�re 1s a quorum shall be valid as a corporate act, except for
the election of officers which shall require the vote of a majority of
all members of the Board.
6.01. Power to sue and be sued. One of the incidental powers
of a corporation is the power to sue and be sued. "The power is
granted to a duly organized corporation, unless specifically revoked
by another law."28 The power to sue is exercised by the corporation
through the Board and/or its duly authorized officers and agents.29
The Court explained:
''The rule on real party-in-interest ensures, therefore, that the party
with the legal right to sue brings the action, and this interest ends when a
judgment involving the nominal plaintiff will protect the defendant from a
SEC-OGC Opinion No. 14-35 dated November 27, 2014.
This is also a general power of corporations under Section 35(d) of the
26
27
RCCP.
Umale v. ASB Realty Corporation, G.R. No. 181126, June 15, 2011; See also
Salenga v. Court of Appeals, G.R. No. 174941, February 1, 2012.
29
B. Sta. Rita & Co., Inc. v. Gueco, G.R. No. 193078, August 28, 2013.
28
F
HP l
'l'l
43
sub qu nt id ntical action. uch a rule is intended to bring before the court
th party rightfully interested in the litigation so that only real controversies
will be presented and the judgment, when entered, will be binding and
conclusive and the defendant will be saved from further harassment and
vexation at the hands of other claimants to the same demand.
In the case at bar, PNAS, as a corporation, is the real party-in-interest
because its personality is distinct and separate from the personalities of its
stockholders. A corporation has no power, except those expressly conferred
on it by the Corporation Code and those that are implied or incidental to its
existence. In sum, a corporation exercises said powers through its board of
directors and/or its duly-authorized officers and agents. Thus, it has been
observed that the power of a corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate powers. In
turn, pm.ysical acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by the
corporate by-laws or by a specific act of the board of directors. It necessarily
follows that "an individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from the
board of directors.
Section 23, in relation to Sec. 25 of the Corporation Code30 clearly
enunciates that all corporate powers are exercised, all business conducted,
and all properties controlled by the board of directors. A corporation has a
separate and distinct personality from its directors and officers and can only
exercise its corporate powers through the board of directors. Thus, it is clear
that an individual corporate officer cannot solely exercise any corporate
power pertaining to the corporation without authority from the board of
directors. Absent the said board resolution, a petition may not be given
due course. The application of the rules must be the general rule, and the
suspension or even mere relaxation of its application, is.the exception. This
Court may go beyond the strict application of the rules only on exceptional
cases when there is truly substantial compliance with the rule."3 1
(1) Generally, corporations are required to attach a
copy of the Board Resolution authorizing the filing of the
complaint or petition. The 1997 Rules of Civil Procedure and
Supreme Court Circular 28-91 require the parties themselves
to sign and submit a certificate on non-forum shopping. Such
requirement cannot be imposed directly on artificial persons,
30Now
Sections 22 and 24 of the RCCP,
Philippine Numismatic Ad Antiquarian Society v. Aquino, et al., G.R. 206617,
January 30, 2017.
31
434
MMENTARI • AND J RI PR DEN E N
THE REVI ED ORPORATION ODE
OF THE PHILIPPINES
like corporations, for the simple reason that they cannot
personally do the task themselves. Corporations act only
through their officers and duly authorized agents. In fact,
only specifically authorized individuals may perform physical
actions, like the signing and the delivery of documents, in
behalf of the corporate entity. It is noteworthy that the rules
do not require corporate officers to sign the certificate. More
importantly, there is no prohibition against authorizing agents
to do so. Hence, even a retained counsel may be authorized by
the board to execute the certificate. What is important is that
there is a Board resolution giving such ahthority. 32
(2) If no power of attorney, secretary's certificate or
Board resolution is attached to the petition or complaint,
the pleading is not properly verified and should be treated
as an unsigned pleading. A person, including the counsel of
the corporation, who alleges that he is duly authorized to file
an action must present a resolution issued by the Board that
specifically authorized him to institute the action and execute
the certification against forum shopping. Only then would his
actions be binding on the corporation.33
(3) It should be recalled that the authority may be
impliedly given by the Board. It was observecl in an earlier
edition of this work that it appears that implied authority is
32
Cosco Philippines Shipping, Inc. v. Kemper Insurance Company, G.R. No.
179488, April 23, 2012 (The complaint was dismissed because the lawyer who signed
the verification was not able to present a Board Resolution); San Miguel Bukid
Homeowners Association, Inc. v. The City ofMandaluyong, G.R. No. 153653, October
2, 2009 (where it was held that a Board Resolution authorizing the filing of an actions
for specific performance will not be sufficient for a special civil action for certiorari);
BS Savings Bank v. Sia, et al., G.R. No. 131214, July 27, 2000.
33
San Miguel Bukid Homeowners Association Inc., et al. v. The City of
Mandaluyong, G.R. No. 153653, October 2, 2009; United Paragon Mining Corporation
v. Court of Appeals, G.R. No. 150959, August 4, 2006, 497 SCRA 638, 646; Metro
Drug Distribution, Inc., et al. v. Narciso, G.R. No. 147478, July 17, 2006; San Pablo
Manufacturing Corporation v. CIR, G.R. No. 147749, June 22, 2006, 492 SCRA 192;
Gonzales v. Climax Mining Ltd., G.R. No. 161957, February 28, 2005, 452 SCRA 607,
619; PET Plans, Inc. v. Court of Appeals, G.R. No. 148287, November 23, 2004, 443
SCRA 510; BPI Leasing Corporation v. Court of Appeals, G.R. No. 127624, November
18, 2003, 416 SCRA 4; National Steel Corporation v. Court of Appeals, 388 SCRA 85
(2002); Zulueta v. Asia Brewery, Inc., G.R. No. 138137, March 8, 2001, 354 SCRA 100;
Shipside, Inc. v. Court of Appeals, G.R. No. 143377, February 20, 2001, 352 SCRA
334; Soller v. Commission on Elections, G.R. No. 139853, September 5, 2000, 339
SCRA 685; BA Savings Bank v. Sia, 336 SCRA 484 (2000).
TITLE J
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43
not acceptable for purposes of complying with the requirement
on the submission of the certification against forum shopping
because only a duly certified copy of the Board resolution is
acceptable as a formal requirement. However, the Supreme
Court has since relaxed the rule by ruling that in exceptional
cases, certain officers have implied authority to sign the
certification on non-forum shopping. 34 In those exceptional
cases, the Supreme Court dispensed with the requirement of
submission of a Board resolution. 35 Thus, in Cagayan Valley
Drug Corporation v. Commission on Internal Revenue, 36 the
Court, in summarizing numerous jurisprudence, "rendered a
definitive rule that the following officials or employees of the
company can sign the verification and certification 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. The rationale
behind the rule is that these officers are in a position to verify
the truthfulness and correctness of the allegations in the
petition."
6.02. Power of succession. Section 35 of the RCCP is explicit
that a corporation has the power and capacity to have perpetual
existence unless the certificate of incorporation provides otherwise.
Thus, if there is no fixed term, the right of the corporation to exist
continues until it is dissolved.
6.03. Power to adopt and use a corporate seal. The power
to adopt and use a seal of corporations can be traced in ancient
common law where all actions of the corporation were required to
be under seal. Under the RCCP, a seal is not indispensable for the
transactions or contracts of the corporation. A document may be
considered valid and binding even in the absence of a seal. However,
Colegio Medico-Farmaceutico De Filipinas, Inc. v. Lim, G.R. No. 212034, July
2, 2018; Pasos v. Philippine National Construction Corp., G.R. No. 192394, July 3,
2013; Mid-Pasig Land Development Corp. v. Tablante, G.R. No. 162924, February 4,
2010; Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue, G.R.
No. 151413, February 13, 2008.
35
See Nissan Car Lease Phils., Inc. v. Lica