Commercial Law - Corporation Code (Lex 2014)

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Law Encyclopedia First Release 2014 1

Batas Pambansa Blg. 68 - Corporation Code of the Philippines

Sec. 2 - Corporation Defined

Separate juridical personality

Piercing the veil of corporate fiction

Nature of the doctrine

When applicable

When not applicable

Grandfather rule

Rights and Liabilities of a corporation

Corporation may delegate powers and functions to officers, committees or agents.

Separate juridical personality

As a general rule, a corporation will be deemed a separate legal entity untilsufficient reason to the contrary appears. But the rule is not absolute. A corporation'sseparate and distinct legal personality may be disregarded and the veil of corporatefiction pierced when the notion of legal entity is used to defeat public convenience,justify wrong, protect fraud, or defend crime.

Siain Enterprises vs. Cupertino Realty Corp., et al., G.R. No. 170782, June 22, 2009

It is elementary that a corporation has a personality distinct and separate from itsindividual stockholders or members. Being an officer or stockholder of a corporationdoes not make one's property the property also of the corporation, for they are separateentities (Adelio Cruz vs. Quiterio Dalisay, A.M. No. R-181-P, July 31, 1987)

Traders Royal Bank vs. Court of Appeals, G.R. No. 78412, September 26, 1989

While a share of stock represents a proportionate or aliquot interest in the propertyof the corporation, it does not vest the owner thereof with any legal right or title to anyof the property, his interest in the corporate property being equitable or beneficial innature. Shareholders are in no legal sense the owners of corporate property, which isowned by the corporation as a distinct legal person.

Concepcion Magsaysay-Labrador vs. Court of Appeals, G.R. No. 58168, December 19,1989


Good Earth Emporium, Inc. vs. Court of Appeals, G.R. No. 82797, February 27, 1991

It is basic that a corporation is invested by law with a personality separate anddistinct from those of the persons composing it as well as from that of any other legalentity to which it may be related. Mere ownership by a single stockholder or byanother corporation of all or nearly all of the capital stock of a corporation is not ofitself sufficient ground for disregarding the separate corporate personality.

Alberto S. Sunio vs. National Labor Relations Commission, G.R. No. L-57767, January31, 1984

In La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa LaCampana, 93 Phil. 160, where a somewhat similar situation existed as in this case,We ruled: "The attempt to make the two factories appear as two separate businesses,when in reality they are but one, is but a devise to defeat the ends of the law andshould not be permitted to prevail. Although the coffee factory is a corporation and,by legal fiction, an entity existing separate and apart from persons composing it, T andhis family, it is settled that this fiction of law, which had been introduced as a matterof convenience and to subserve the ends of justice cannot be invoked to further an endsubversive of that purpose."

Reynolds Philippine Corp. vs. Court of Appeals, G.R. No. 36187, January 17, 1989

Piercing the veil of corporate fiction

The doctrine of piercing the veil of corporate entity applies when the corporatefiction is used to defeat public convenience, justify wrong, protect fraud, or defendcrime or where a corporation is the mere alter ego or business conduit of a person(Indophil Textile Mill Workers Union-PTGWO vs. Teodorico P. Calica, G.R. No.96490, February 3, 1992). To disregard the separate juridical personality of acorporation, the wrong-doing must be clearly and convincingly established. It cannotbe presumed (Del Rosario vs. NLRC, G.R. No. 85416, July 24, 1990)

James Yu vs. National Labor Relations Commission, G.R. Nos. 111810-11, June 16,1995

It is a fundamental principle of corporation law that a corporation is an entityseparate and distinct from its stockholders and from other corporations to which itmay be connected. But, this separate and distinct personality of a corporation ismerely a fiction created by law for convenience and to promote justice. So when thenotion of separate juridical personality is used to defeat public convenience, justify


wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws,this separate personality of the corporation may be disregarded or the veil of corporatefiction pierced. This is true likewise when the corporation is merely an adjunct, abusiness conduit or an alter ego of another corporation.

Concept Builders, Inc. vs. National Labor Relations Commission, G.R. No. 108734, May29, 1996

The question of whether one corporation is merely an alter ego of another is purelyone of fact generally beyond the jurisdiction of this Court. . . . Also, the fact that MarFishing's officers remained as such in Miramar does not by itself warrant a conclusionthat the two companies are one and the same. As this Court held in Sesbreo v. Courtof Appeals, the mere showing that the corporations had a common director sitting inall the boards without more does not authorize disregarding their separate juridicalpersonalities. Neither can the veil of corporate fiction between the two companies bepierced by the rest of petitioners' submissions, namely, the alleged take-over byMiramar of Mar Fishing's operations and the evident similarity of their businesses. Atthis point, it bears emphasizing that since piercing the veil of corporate fiction isfrowned upon, those who seek to pierce the veil must clearly establish that theseparate and distinct personalities of the corporations are set up to justify a wrong,protect a fraud, or perpetrate a deception.

Vivian T. Ramirez, et al. vs. Mar Fishing Co., Inc., et al., G.R. No. 168208, June 13,2012 citing Kukan International Corp. vs. Reyes, G.R. No. 182729, September 29, 2010

Nature of the doctrine

Piercing the veil of corporate entity is an equitable remedy, and may be awardedonly in cases when the corporate fiction is used to defeat public convenience, justifywrong, protect fraud of defend crime or where a corporation is a mere alter ego orbusiness conduit of a person. Piercing the veil of corporate entity requiresstockholders from liabilities that ordinarily, they could be subject to or distinguishesone corporation from a seemingly separate one, were it not for the existing corporatefiction. But to do this, the court must be sure that the corporate fiction was misused, tosuch an extent that injustice, fraud, or crime was committed upon another,disregarding, thus, his, her, or its rights. It is the protection of the interests of innocentthird persons dealing with the corporate entity which the law aims to protect by thisdoctrine. Though it is true that when valid reasons exist, the legal fiction that acorporation is an entity with a juridical personality separate from its stockholders andfrom other corporations may be disregarded, in the absence of such grounds, the


general rule must be upheld.

Traders Royal Bank vs. Court of Appeals, G.R. No. 93397, March 3, 1997

When applicable

The rule is that the veil of corporate fiction may be pierced when made as a shieldto perpetrate fraud and/or confuse legitimate issues (Jacinto vs. CA, G.R. No. 80043,June 6, 1991). The theory of corporate entity was not meant to promote unfairobjectives or otherwise, to shield them (Villanueva vs. Adre, G.R. No. 80863, April27, 1989). Likewise, where it appears that two business enterprises are owned,conducted, and controlled by the same parties, both law and equity will, whennecessary to protect the rights of third persons, disregard the legal fiction that twocorporations are distinct entities, and treat them as identical (Phil. VeteransInvestment Development Corp. vs. CA, G.R. No. 85266, January 30, 1990)

Sibagat Timber Corp. vs. Adolfo B. Garcia, G.R. No. 98185, December 11, 1992

A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commission, G.R. No.L-69494, May 29, 1987

When not applicable

Buenaflor C. Umali vs. Court of Appeals, G.R. No. 89561, September 13, 1990

Indophil Textile Mill Workers Union-PTGWO vs. Teodorico P. Calica, G.R. No. 96490,February 3, 1992

It is apparent, therefore, that the doctrine has no application to this case where thepurpose is not to hold the individual stockholders liable for the obligations of thecorporation but, on the contrary, to hold the corporation liable for the obligations of astockholder or stockholders. Piercing the veil of corporate entity means lookingthrough the corporate form to the individual stockholders composing it.

Quintin Robledo vs. National Labor Relations Commission, G.R. No. 110358,November 9, 1994

Adelio C. Cruz vs. Quiterio L. Dalisay, A.M. No. R-181-P, July 31, 1987

[The general manager] cannot be held personally liable for the obligation of thecorporation. . . . This Court upholds the doctrine of separate juridical personality ofcorporate entities. . . . A corporation is a juridical entity with a legal personalityseparate and distinct from those acting for and on its behalf and, in general, of the


people comprising it. Hence, the obligations incurred by the corporation, actingthrough its officers such as in this case, are its sole liabilities.

Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013citing Santos vs. NLRC, 325 Phil. 145 (1996)

[A]ny piercing of the corporate veil has to be done with caution. . . :

A court should be mindful of the milieu where it is to be applied. Itmust be certain that the corporate fiction was misused to such an extent thatinjustice, fraud, or crime was committed against another, in disregard ofrights. The wrongdoing must be clearly and convincingly established; itcannot be presumed. Otherwise, an injustice that was never unintended mayresult from an erroneous application. . . .

Therefore, we refuse to allow the execution of a corporate judgment debt againstthe general manager of the corporation, since in no legal sense is he the owner of thecorporate property.

Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013citing Sarona v. NLRC, G.R. No. 185280, January 18, 2012

Grandfather rule

Pedro R. Palting vs. San Jose Petroleum Incorporated, G.R. No. L-14441, December17, 1966

Rights and Liabilities of a corporation

A corporation is liable whenever a tortious act is committed by an officer or agentunder express direction or authority from the stockholders or members acting as abody, or, generally, from the directors as the governing body.

Philippine National Bank vs. Court of Appeals, G.R. No. L-27155, May 18, 1978

Smith, Bell & Co. vs. Joaquin Natividad, G.R. No. 15574, September 17, 1919

A corporation being an artificial person which has no feelings, emotions orsenses, and which cannot experience physical suffering or metal anguish is notentitled to moral damages.

Solid Homes, Inc. vs. Court of Appeals, G.R. No. 117501, July 8, 1997


A corporation can act only through its officers and agents, and where the businessitself involves a violation of the law, the correct rule is that all who participate in it areliable (Grall and Ostrander's Case, 103 Va., 855, and authorities there cited)

People of the Phils. vs. Tan Boon Kong, G.R. No. 32652, March 15, 1930

A corporation is vested by law with a personality separate and distinct from thepeople comprising it. Ownership by a single or small group of stockholders of nearlyall of the capital stock of the corporation is not by itself a sufficient ground todisregard the separate corporate personality. Thus, obligations incurred by corporateofficers, acting as corporate agents, are direct accountabilities of the corporation theyrepresent.

Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., G.R. Nos. 168756 &171476, December 7, 2009

Water districts are distinct from corporations organized under the CorporationCode.

The juridical entities known as water districts created by PD 198, althoughconsidered as quasi-public corporations and authorized to exercise the powers, rightsand privileges given to private corporations under existing laws, are entirely distinctfrom corporations organized under the Corporation Code. The Corporation Code hasnothing whatever to do with their formation and organization, all the terms andconditions for their organization and operation being particularly spelled out in PD198.

Marilao Water Consumers Association, Inc. vs. IAC, G.R. No. 72807, September 9,1991

Not every stockholder or officer can bind the corporation.

Not every stockholder or officer can bind the corporation considering the existenceof a corporate entity separate from those who compose it. The rationale for this is thatservice must be made on a representative so integrated with the corporation sued as tomake it a priori supposable that he will realize his responsibilities and know what heshould do with any legal papers served on him.

Ramon C. Lee vs. Court of Appeals, G.R. No. 93695, February 4, 1992


Chief of Finance falls under the term 'agent' authorized to receive processes.

An Administrative Chief is responsible for the management of the corporationwhich places him on the level of a manager contemplated by the Rules. As Chief ofFinance, he is conferred with vital and sensitive functions and responsibilities. Undercorporate and management organizational structure, a finance officer even holds ahigher position than that of a cashier. Otherwise stated, he is not one of the lesserofficers of the corporation who would not have been able to appreciate the importanceof the papers delivered to him. On the contrary, he falls squarely under the term Agentwho is authorized by law to receive the processes of the Court for the corporation.

Far Corporation vs. Ricardo J. Francisco, G.R. No. L-57218, December 12, 1986

Service of summons upon Assistant General Manager for Corporations serves thepurpose of the law.

Service of summons upon a corporation's Assistant General Manager forCorporations who was a former President and General Manager thereof serves thepurpose of the law. Should he refuse to receive the summons, tender unto him issufficient to confer jurisdiction over the corporation.

Villa Rey Transit, Inc. vs. Far East Motor Corp., G.R. No. L-31339, January 31, 1978

Test to determine the applicability of the doctrine of piercing the veil of corporatefiction

The Supreme Court laid down the test in determining the applicability of thedoctrine of piercing the veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, notonly of finances but of policy and business practice in respect to the transactionattacked so that the corporate entity as to this transaction had at the time no separatemind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud orwrong, to perpetuate the violation of a statutory or other positive legal duty, ordishonest and, unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or


unjust loss complained of.

Concept Builders, Inc. v. NLRC, G.R. No. 108734, May 29, 1996

"G" Holdings, Inc. vs. NAMAWU, et al., G.R. No. 160236, October 16, 2009

Sec. 3 - Classes of Corporations

Two requisites must concur before one may be classified as a stock corporation,namely: (1) that it has capital stock divided into shares; and (2) that it is authorizedto distribute dividends and allotments of surplus and profits to its stockholders. Ifonly one requisite is present, it cannot be properly classified as a stock corporation. Asfor non-stock corporations, they must have members and must not distribute any partof their income to said members.

Republic of the Phil. vs. City of Paraaque, G.R. No. 191109, July 18, 2012

Sec. 4 - Corporations Created by Special Laws or Charters

Provisions of Corporation Code apply in supplementary manner to allcorporations including electric cooperatives.

Section 4 of the Corporation Code renders the provisions of that Code applicable ina supplementary manner to all corporations, including those with special or individualcharters so long as those provisions are not inconsistent with such charters.

Benguet Electric Cooperative, Inc. vs. NLRC, G.R. No. 89070, May 18, 1992

Sec. 6 - Classification of Shares


Shares of stock in corporations may be divided into voting shares and non-votingshares, which are generally issued as "preferred" or "redeemable" shares.

Voting rights are exercised during regular or special meetings of stockholders;regular meetings to be held annually on a fixed date, while special meetings may beheld at any time necessary or as provided in the by-laws, upon due notice. TheCorporation Code provides for a whole range of matters which can be voted upon bystockholders, including a limited set on which even non-voting stockholders areentitled to vote on. On any of these matters which may be voted upon by stockholders,the proxy device is generally available.

GSIS vs. Court of Appeals, et al., G.R. Nos. 183905 & 184275, April 16, 2009

Advantages accorded to preferred shares upon conversion

The advantages accorded to the preferred shares are undeniable, namely: thesignificant premium in the price being offered; the preference enjoyed in thedividends as well as in the liquidation of assets; and the voting rights still retained bypreferred shares in major corporate actions. All things considered, conversion topreferred shares would best serve the interests and rights of the government or theeventual owner of the CIIF SMC shares.

COCOFED, et al. vs. Republic of the Phil., G.R. Nos. 177857-58, September 17, 2009

Preferred shares

A preferred share of stock is one which entitles the holder thereof to certainpreferences over the holders of common stock. The preferences are designed to inducepersons to subscribe for shares of a corporation. Preferred shares take a multiplicity offorms. The most common forms may be classified into two: (1) preferred shares as toassets; and (2) preferred shares as to dividends. The former is a share which gives theholder thereof preference in the distribution of the assets of the corporation in case ofliquidation; the latter is a share the holder of which is entitled to receive dividends onsaid share to the extent agreed upon before any dividends at all are paid to the holdersof common stock. There is no guaranty, however, that the share will receive anydividends.

Republic Planters Bank vs. Enrique A. Agana, Sr., G.R. No. 51765, March 3, 1997


Sec. 8 - Redeemable Shares

Redeemable shares

Redeemable shares are shares usually preferred, which by their terms areredeemable at a fixed date, or at the option of either issuing corporation, or thestockholder, or both at a certain redemption price. A redemption by the corporation ofits stock is, in a sense, a repurchase of it for cancellation. The present Code allowsredemption of shares even if there are no unrestricted retained earnings on the booksof the corporation. This is a new provision which in effect qualifies the general rulethat the corporation cannot purchase its own shares except out of current retainedearnings. However, while redeemable shares may be redeemed regardless of theexistence of unrestricted retained earnings, this is subject to the condition that thecorporation has, after such redemption, assets in its books to cover debts and liabilitiesinclusive of capital stock. Redemption, therefore, may not be made where thecorporation is insolvent or if such redemption will cause insolvency or inability of thecorporation to meet its debts as they mature.

Republic Planters Bank vs. Enrique A. Agana, Sr., G.R. No. 51765, March 3, 1997

Sec. 9 - Treasury Shares

A treasury share or stock, which may be common or preferred, may be used for avariety of corporate purposes, such as for a stock bonus plan for management andemployees or for acquiring another company. It may be held indefinitely, resold orretired. While held in the company's treasury, the stock earns no dividends and has novote in company affairs. Thus, the CIIF common shares that would become treasuryshares are not entitled to voting rights.

COCOFED, et al. vs. Republic of the Phil., G.R. Nos. 177857-58, September 17, 2009


Definition of treasury shares

San Miguel Corporation, et al. vs. Sandiganbayan, G.R. Nos. 104637-38, September14, 2000

Sec. 13 - Amount of Capital Stock to be Subscribed and Paid for Purposes ofIncorporation

Paid-up capital

MSCI-NACUSIP vs. NWPC, G.R. No. 125198, March 3, 1997

Sec. 14 - Contents of Articles of Incorporations

The charter of a corporation is a contract between three parties: (a) It is a contractbetween the state and the corporation to which the charter is granted; (b) it is acontract between the stockholders and the state and (c) it is also a contract betweenthe corporation and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and casescited.)

Government of the Phil. vs. Manila Railroad Company, G.R. No. 30646, January 30,1929

Sec. 17 - Grounds When Articles of Incorporation or Amendment May BeRejected or Disapproved

The amendment of the articles of incorporation requires merely that (a) theamendment is not contrary to any provision or requirement under the CorporationCode, and that (b) it is for a legitimate purpose.


IEMELIF, et al. vs. Nathanael Lazaro, et al., G.R. No. 184088, July 6, 2010

Sec. 18 - Corporate Name

Corporate name

Industrial Refractories Corporation of the Philippines vs. Court of Appeals, G.R. No.122174, October 3, 2002

Parties organizing a corporation must choose a name at their peril; and the use of aname similar to one adopted by another corporation, whether a business or a nonprofitorganization, 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 suitfor injunction against the new corporation to prevent the use of the name.

Ang Mga Kaanib Sa Iglesia Ng Dios Kay Kristo Hesus vs. Iglesia Ng Dios Kay CristoJesus, G.R. No. 137592, December 12, 2001

A change in the corporate name does not make a new corporation.

The corporation, upon such change in its name, is in no sense a new corporation,nor the successor of the original corporation. It is the same corporation with adifferent name, and its character is in no respect changed. A change in the corporatename does not make a new corporation, and whether effected by special act or under ageneral law, has no effect on the identity of the corporation, or on its property, rights,or liabilities. The corporation continues, as before, responsible in its new name for alldebts or other liabilities which it had previously contracted or incurred.

Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992

Sec. 18 applies only when corporate names are identical.

Section 18 of the Corporation Code is applicable only when the corporate names inquestion are identical.

Philips Export B.V. vs. Court of Appeals, G.R. No. 96161, February 21, 1992


Right of corporation to use its corporate and trade name is a property right.

A corporation's right to use its corporate and trade name is a property right, a rightin rem, which it may assert and protect against the world in the same manner as it mayprotect its tangible property, real or personal, against trespass or conversion. It isregarded, to a certain extent, as a property right and one which cannot be impaired ordefeated by subsequent appropriation by another corporation in the same field.


Western Equipment and Supply Co. vs. Fidel A. Reyes, G.R. No. 27897, December 2,1927

Name of corporation is esential to its existence.

The name of a corporation is essential to its existence. It cannot change its nameexcept in the manner provided by the statute. By that name alone is it authorized totransact business. The law gives a corporation no express or implied authority toassume another name that is unappropriated; still less that of another corporation,which is expressly set apart for it and protected by the law. If any corporation couldassume at pleasure as an unregistered trade name the name of another corporation, thispractice would result in confusion and open the door to frauds and evasions anddifficulties of administration and supervision.

Red Line Transportation Co. vs. Rural Transit Co., Ltd., G.R. No. 41570, September 6,1934

Importance of corporate name.

A name is peculiarly important as necessary to the very existence of a corporation.Its name is one of its attributes, an element of its existence, and essential to itsidentity. The general rule as to corporations is that each corporation must have a nameby which it is to sue and be sued and do all legal acts. The name of a corporation inthis respect designates the corporation in the same manner as the name of anindividual designates the person; and the right to use its corporate name is as much apart of the corporate franchise as any other privilege granted.



Requisites for application of Sec. 18 of the Corporation Code.

To come within the scope of the statutory prohibition, two requisites must beproven, namely: (1) that the complainant corporation acquired a prior right over theuse of such corporate name; and (2) the proposed name is either: (a) identical or (b)deceptively or confusingly similar to that of any existing corporation or to any othername already protected by law; or (c) patently deceptive, confusing or contrary toexisting law.

Philips Export B.V. Court of Appeals, G.R. No. 96161, February 21, 1992

A corporation has exclusive right to the use of its name.

A corporation has an exclusive right to the use of its name, which may be protectedby injunction upon a principle similar to that upon which persons are protected in theuse of trademarks and tradenames. Such principle proceeds upon the theory that it is afraud on the corporation which has acquired a right to that name and perhaps carriedon its business thereunder, that another should attempt to use the same name, or thesame name with a slight variation in such a way as to induce persons to deal with it inthe belief that they are dealing with the corporation which has given a reputation tothe name.


Sec. 19 - Commencement of Corporate Existence

Substantial compliance with conditions subsequent will suffice to perfect corporatepersonality.

Organization and commencement of transaction of corporate business are butconditions subsequent and not prerequisites for acquisition of corporate personality.The adoption and filing of by-laws is also a condition subsequent. Under Section 19of the Corporation Code, a corporation commences its corporate existence andjuridical personality and is deemed incorporated from the date the Securities andExchange Commission issues certificate of incorporation under its official seal. This


may be done even before the filing of the by-laws, which under Section 46 of theCorporation Code, must be adopted "within one month after receipt of official noticeof the issuance of its certificate of incorporation."

Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

Sec. 20 - De facto Corporations

De facto corporation

C. Arnold Hall vs. Edmundo S. Piccio, G.R. No. L-2598, June 29, 1950

Municipality of Malabang vs. Pangandapun Benito, G.R. No. L-28113, March 28, 1969

Emeterio A. Rodriguez vs. Court of Appeals, G.R. No. L-28734, March 28, 1969

Sec. 21 - Corporation by Estoppel

Corporation by estoppel

Mariano A. Albert vs. University Publishing Co., Inc., G.R. No. L-19118, January 30,1965

When a third person has entered into a contract with an association whichrepresented itself to be a corporation, the association will be estopped from denyingits corporate capacity in a suit against it by such third person. It cannot allege lack ofcapacity to be sued to evade responsibility on a contract it had entered into and byvirtue of which it received advantages and benefits.

Christian Children's Fund vs. National Labor Relations Commission, G.R. No. 84502,June 30, 1989

Corporation by estoppel is founded on principles of equity and is designed toprevent injustice and unfairness. It applies when persons assume to form a corporationand exercise corporate functions and enter into business relations with third persons.


Where there is no third person involved and the conflict arises only among thoseassuming the form of a corporation, who therefore know that it has not been registeredthere is no corporation by estoppel.

Reynaldo M. Lozano vs. Eliezer R. De Los Santos, G.R. No. 125221, June 19, 1997

Lim Tong Lim vs. Phil. Fishing Gear Industries, G.R. No. 136448, November 3, 1999

Merrill Lynch Futures, Inc. vs. Court of Appeals, G.R. No. 97816, July 24, 1992

People of the Phil. vs. Patricio Botero, G.R. No. 117010, April 18, 1997

Sec. 23 - The Board of Directors or Trustees

Exercise of corporate powers

Business judgment rule

Doctrine of Apparent authority

Doctrine of apparent authority not applicable

Board of trustees to be elected from among the members

A corporation can act only through its board of directors.


Authority of officers or agents is derived from the board of directors unless conferred bycorporate charter.

Derivative Suit

"Term" of office, defined; distinguished from "tenure

The word "term" has acquired a definite meaning in jurisprudence. In several cases,we have defined "term" as the time during which the officer may claim to hold theoffice as of right, and fixes the interval after which the several incumbents shallsucceed one another. The term of office is not affected by the holdover. The term isfixed by statute and it does not change simply because the office may have becomevacant, nor because the incumbent holds over in office beyond the end of the term dueto the fact that a successor has not been elected and has failed to qualify.


Term is distinguished from tenure in that an officer's "tenure" represents the termduring which the incumbent actually holds office. The tenure may be shorter (or, incase of holdover, longer) than the term for reasons within or beyond the power of theincumbent.

Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, September 4,2009

The holdover period constitutes part of a director's tenure, and not part of his termof office.

The term of the members of the board of directors shall be only for one year; theirterm expires one year after election to the office. The holdover period that timefrom the lapse of one year from a member's election to the Board and until hissuccessor's election and qualification is not part of the director's original term ofoffice, nor is it a new term; the holdover period, however, constitutes part of histenure. Corollary, when an incumbent member of the board of directors continues toserve in a holdover capacity, it implies that the office has a fixed term, which hasexpired, and the incumbent is holding the succeeding term.


As a general rule, officers and directors of a corporation hold over after theexpiration of their terms until such time as their successors are elected or appointed.

The holdover doctrine has, to be sure, a purpose which is at once legal as it ispractical. It accords validity to what would otherwise be deemed as dubious corporateacts and gives continuity to a corporate enterprise in its relation to outsiders.

Hans Christian M. Seeres vs. COMELEC, et al., G.R. No. 178678, April 16, 2009

The board of directors may validly delegate some of its functions and powers toofficers, committees or agents.

The power and the responsibility to decide whether the corporation should enterinto a contract that will bind the corporation are lodged in the board of directors,subject to the articles of incorporation, by-laws, or relevant provisions of law.However, just as a natural person may authorize another to do certain acts for and onhis behalf, the board of directors may validly delegate some of its functions and


powers to officers, committees or agents. The authority of such individuals to bind thecorporation is generally derived from law, corporate by-laws or authorization from theboard, either expressly or impliedly by habit, custom or acquiescence in the generalcourse of business.

Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17,2009

People's Aircargo and Warehousing Co., Inc. vs. Court of Appeals, G.R. No. 117847,October 7, 1998, 357 Phil. 850


A corporation, like a natural person who may authorize another to do certain actsfor and in his behalf, through its board of directors, may legally delegate some of itsfunctions and powers to its officers, committees or agents appointed by it. In theabsence of an authority from the board of directors, no person, not even the officers ofthe corporation, can validly bind the corporation.

Luzviminda Visayan vs. NLRC, G.R. No. 69999, April 30, 1991

Under Section 23 of the Corporation Code of the Philippines, authority overcorporate funds is exercised by the Board of Directors who, in the absence of anappropriate delegation of authority, are the only ones who can act for and in behalf ofthe corporation.

People's Broadcasting (Bombo Radyo Phils., Inc.) vs. Secretary of the DOLE, et al.,G.R. No. 179652, May 8, 2009

The corporate powers of a corporation, including the power to sue and be sued inits corporate name, are exercised by the board of directors. The physical acts of thecorporation, like the signing of documents such as verification and certification ofnon-forum shopping, can only be performed by natural persons duly authorized for thepurpose by corporate by-laws or by a specific act of the board of directors.

Marylou B. Tolentino vs. Shenton Realty Corp., G.R. No. 162103, June 19, 2009

Exercise of corporate powers

It must be borne in mind that Sec. 23, in relation to Sec. 25 of the CorporationCode, clearly enunciates that all corporate powers are exercised, all businessconducted, 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 exerciseits corporate powers through the board of directors. Thus, it is clear that an individualcorporate officer cannot solely exercise any corporate power pertaining to thecorporation without authority from the board of directors. This has been our constantholding in cases instituted by a corporation.

Cagayan Valley Drug Corp. vs. Commissioner of Internal Revenue, G.R. No. 151413,February 13, 2008

Indubitably, a corporation may act only through its board of directors or, whenauthorized either by its bylaws or by its board resolution, through its officers or agentsin the normal course of business. The general principles of agency govern the relationbetween the corporation and its officers or agents, subject to the articles ofincorporation, bylaws, or relevant provisions of law. Thus, this Court has held that "'acorporate officer or agent may represent and bind the corporation in transactions withthird persons to the extent that the authority to do so has been conferred upon him, andthis includes powers which have been intentionally conferred, and also such powersas, in the usual course of the particular business, are incidental to, or may be impliedfrom, the powers intentionally conferred, powers added by custom and usage, asusually pertaining to the particular officer or agent, and such apparent powers as thecorporation has caused persons dealing with the officer or agent to believe that it hasconferred.' " 05plpecda

San Juan Structural and Steel Fabricators vs. Court of Appeals, G.R. No. 129459,September 29, 1998

Since a corporation, such as the private respondent, can act only through its officersand agents, "all acts within the powers of said corporation may be performed byagents of its selection; and, except so far as limitations or restrictions may be imposedby special charter, by-law, or statutory provisions, the same general principles of lawwhich govern the relation of agency for a natural person govern the officer or agent ofa corporation, of whatever status or rank, in respect to his power to act for thecorporation; and agents when once appointed, or members acting in their stead, aresubject to the same rules, liabilities and incapacities as are agents of individuals andprivate persons." Moreover, ". . . a corporate officer or agent may represent and bindthe corporation in transactions with third persons to the extent that authority to do sohas been conferred upon him, and this includes powers which have been intentionallyconferred, and also such powers as, in the usual course of the particular business, areincidental to, or may be implied from, the powers intentionally conferred, powersadded by custom and usage, as usually pertaining to the particular officer or agent,


and such apparent powers as the corporation has caused persons dealing with theofficer or agent to believe that it has conferred."

Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15, 1992

Sps. Constante & Azucena Firme vs. Bukal Enterprises and Dev't. Corp., G.R. No.146608, October 23, 2003

Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No. 125778, June 10,2003

Rebecca Boyer-Roxas vs. Court of Appeals, G.R. No. 100866, July 14, 1992

Business judgment rule

This is in accord with the "business judgment rule" whereby the SEC and the courtsare barred from intruding into business judgments of corporations, when the same aremade in good faith. The said rule precludes the reversal of the decision of the PSE todeny PALI's listing application, absent a showing of bad faith on the part of the PSE

Philippine Stock Exchange, Inc. vs. Court of Appeals, G.R. No. 125469, October 27,1997

Doctrine of apparent authority

The authority of a corporate officer in dealing with third persons may be actual orapparent. The doctrine of "apparent authority," with special reference to banks, waslaid out in Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993,where it was held that: "Conformably, we have declared in countless decisions that theprincipal is liable for obligations contracted by the agent. The agent's apparentrepresentation yields to the principal's true representation and the contract isconsidered as entered into between the principal and the third person (citing NationalFood Authority vs. Intermediate Appellate Court, G.R. No. 75640, April 5, 1990)."Abank is liable for wrongful acts of its officers done in the interests of the bank or inthe course of dealing of the officers in their representative capacity but not for actsoutside the scope of their authority (9 C.J.S., P. 417). A bank holding out its officersand agents as worthy of confidence will not be permitted to profit by the frauds theymay thus be enabled to perpetrate in the apparent scope of their employment; nor willit be permitted to shirk its responsibility for such frauds, even though no benefit mayaccrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly, a bankingcorporation is liable to innocent third persons where the representation is made in the


course of its business by an agent acting within the general scope of his authority eventhough, in the particular case, the agent is secretly abusing his authority andattempting to perpetrate a fraud upon his principal or some other person, for his ownultimate benefit (McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR1021). "Application of these principles is especially necessary because banks have afiduciary relationship with the public and their stability depends on the confidence ofthe people in their honesty and efficiency. Such faith will be eroded where banks donot exercise strict care in the selection and supervision of its employees, resulting inprejudice to their depositors."

First Philippine International Bank vs. Court of Appeals, G.R. No. 115849, January 24,1996

Doctrine of apparent authority not applicable

New Durawood Co. vs. Court of Appeals, G.R. No. 111732, February 20, 1996

Apparent authority is derived not merely from practice. Its existence may beascertained through (1) the general manner in which the corporation holds out anofficer or agent as having the power to act or, in other words, the apparent authority toact in general, with which it clothes him; or (2) the acquiescence in his acts of aparticular nature, with actual or constructive knowledge thereof, whether within orbeyond the scope of his ordinary powers. It requires presentation of evidence ofsimilar act(s) executed either in its favor or in favor of other parties. It is not thequantity of similar acts which establishes apparent authority, but the vesting of acorporate officer with the power to bind the corporation.

People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals, G.R. No. 117847,October 7, 1998

Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No. 125778, June 10,2003

Board of trustees to be elected from among the members

Grace Christian High School vs. Court of Appeals, G.R. No. 108905, October 23, 1997

A corporation can act only through its board of directors.

The law is settled that contracts between a corporation and third persons must bemade by or under the authority of its board of directors and not by its stockholders.


Hence, the action of the stockholders in such matters is only advisory and not in anywise binding on the corporation.

Luzviminda Visayan vs. NLRC, G.R. No. 69999, April 30, 1991

Alberto Barreto vs. La Previsora Filipina, G.R. No. 34719, December 8, 1932

Authority of officers or agents is derived from the board of directors unlessconferred by corporate charter.

Whatever authority the officers or agents of a corporation may have is derived fromthe board of directors or other governing body, unless conferred by the charter of thecorporation. A corporate officer's power as an agent of the corporation must thereforebe sought from the statute, the charter, the by-laws, or in a delegation of authority tosuch officer, from the acts of the board of directors, formally expressed or impliedfrom a habit or custom of doing business.

Ignacio Vicente vs Ambrosio M. Geraldez, G.R. No. L-32473, July 31, 1973

The board of directors of a corporation is a creation of the stockholders. The boardof directors, or the majority thereof, controls and directs the affairs of the corporation;but in drawing to itself the power of the corporation, it occupies a position oftrusteeship in relation to the minority of the stock. The board shall exercise good faith,care, and diligence in the administration of the affairs of the corporation, and protectnot only the interest of the majority but also that of the minority of the stock. Wherethe majority of the board of directors wastes or dissipates the funds of the corporationor fraudulently disposes of its properties, or performs ultra vires acts, the court, in theexercise of its equity jurisdiction, and upon showing that intracorporate remedy isunavailing, will entertain a suit filed by the minority members of the board ofdirectors, for and in behalf of the corporation, to prevent waste and dissipation and thecommission of illegal acts and otherwise redress the injuries of the minoritystockholders against the wrongdoing of the majority. The action in such a case is saidto be brought derivatively in behalf of the corporation to protect the rights of theminority stockholders thereof.

Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008,December 4, 2009

Derivative Suit

It is well settled in this jurisdiction that where corporate directors are guilty of a


breach of trust not of mere error of judgment or abuse of discretion andintracorporate remedy is futile or useless, a stockholder may institute a suit in behalfof himself and other stockholders and for the benefit of the corporation, to bring abouta redress of the wrong inflicted directly upon the corporation and indirectly upon thestockholders.


A derivative suit must be differentiated from individual and representative or classsuits, thus: Suits by stockholders or members of a corporation based on wrongful orfraudulent acts of directors or other persons may be classified into individual suits,class suits, and derivative suits. Where a stockholder or member is denied the right ofinspection, his suit would be individual because the wrong is done to him personallyand not to the other stockholders or the corporation. Where the wrong is done to agroup of stockholders, as where preferred stockholders' rights are violated, a class orrepresentative suit will be proper for the protection of all stockholders belonging tothe same group. But where the acts complained of constitute a wrong to thecorporation itself, the cause of action belongs to the corporation and not to theindividual stockholder or member. Although in most every case of wrong to thecorporation, each stockholder is necessarily affected because the value of his interesttherein would be impaired, this fact of itself is not sufficient to give him an individualcause of action since the corporation is a person distinct and separate from him, andcan and should itself sue the wrongdoer. Otherwise, not only would the theory ofseparate entity be violated, but there would be multiplicity of suits as well as aviolation of the priority rights of creditors. Furthermore, there is the difficulty ofdetermining the amount of damages that should be paid to each individualstockholder.


However, in cases of mismanagement where the wrongful acts are committed bythe directors or trustees themselves, a stockholder or member may find that he has noredress because the former are vested by law with the right to decide whether or notthe corporation should sue, and they will never be willing to sue themselves. Thecorporation would thus be helpless to seek remedy. Because of the frequentoccurrence of such a situation, the common law gradually recognized the right of astockholder to sue on behalf of a corporation in what eventually became known as a"derivative suit." It has been proven to be an effective remedy of the minority against


the abuses of management. Thus, an individual stockholder is permitted to institute aderivative suit on behalf of the corporation wherein he holds stock in order to protector vindicate corporate rights, whenever officials of the corporation refuse to sue or arethe ones to be sued or hold the control of the corporation. In such actions, the suingstockholder is regarded as the nominal party, with the corporation as the party ininterest.


The power and the responsibility to decide whether the corporation should enterinto a contract that will bind the corporation are lodged in the board, subject to thearticles of incorporation, bylaws, or relevant provisions of law. In the absence ofauthority from the board of directors, no person, not even its officers, can validly binda corporation. However, just as a natural person may authorize another to do certainacts for and on his behalf, the board of directors may validly delegate some of itsfunctions and powers to its officers, committees or agents. The authority of theseindividuals to bind the corporation is generally derived from law, corporate bylaws orauthorization from the board, either expressly or impliedly by habit, custom oracquiescence in the general course of business.

Violeta Tudtud Banate, et al. vs. Phil. Countryside Rural Bank (Liloan, Cebu), Inc., et al.,G.R. No. 163825, July 13, 2010

The authority of a corporate officer or agent in dealing with third persons may beactual or apparent. Actual authority is either express or implied. The extent of anagent's express authority is to be measured by the power delegated to him by thecorporation, while the extent of his implied authority is measured by his prior actswhich have been ratified or approved, or their benefits accepted by his principal. Thedoctrine of "apparent authority," on the other hand, with special reference to banks,had long been recognized in this jurisdiction. The existence of apparent authority maybe ascertained through:

1) the general manner in which the corporation holds out an officer or agentas having the power to act, or in other words, the apparent authority to actin general, with which it clothes him; or

2) the acquiescence in his acts of a particular nature, with actual orconstructive knowledge thereof, within or beyond the scope of hisordinary powers.


Accordingly, the authority to act for and to bind a corporation may be presumedfrom acts of recognition in other instances when the power was exercised without anyobjection from its board or shareholders.

Violeta Tudtud Banate, et al. vs. Phil. Countryside Rural Bank (Liloan, Cebu), Inc., et al.,G.R. No. 163825, July 13, 2010

Sec. 24 - Election of Directors or Trustees

Distinction between "proxy solicitation" and "proxy validation"

. . . the distinction between "proxy solicitation" and "proxy validation" cannot bedismissed offhand. The right of a stockholder to vote by proxy is generally establishedby the Corporation Code, but it is the SRC which specifically regulates the form anduse of proxies, more particularly the procedure of proxy solicitation, primarily throughSection 20.


Participation of stockholders in the election of directors or trustees.

Under Section 5 (c) of Presidential Decree No. 902-A, in relation to the SRC, thejurisdiction of the regular trial courts with respect to election-related controversies isspecifically confined to "controversies in the election or appointment of directors,trustees, officers or managers of corporations, partnerships, or associations".Evidently, the jurisdiction of the regular courts over so-called election contests orcontroversies under Section 5 (c) does not extend to every potential subject that maybe voted on by shareholders, but only to the election of directors or trustees, in whichstockholders are authorized to participate under Section 24 of the Corporation Code.


To be eligible as director, legal title to stocks, not beneficial ownership thereto, ismaterial.

With the omission of the phrase "in his own right" the election of trustees and other


persons who in fact are not the beneficial owners of the shares registered in theirnames on the books of the corporation becomes formally legalized. Hence, this is aclear indication that in order to be eligible as a director, what is material is the legaltitle to, not beneficial ownership of, the stock as appearing on the books of thecorporation. 05plpecda

Ramon C. Lee Court of Appeals, G.R. No. 93695, February 4, 1992

Sec. 25 - Corporate Officers, Quorum

Corporate Officers

Officer distinguished from employee

Coverage of a corporate officer

Corporate Officers

Dily Dany Nacpil vs. International Broadcasting Corp., G.R. No. 144767, March 21,2002

Before a dismissal or removal could properly fall within the jurisdiction of theSEC, it has to be first established that the person removed or dismissed was acorporate officer. "Corporate officers" in the context of Presidential Decree No.902-A are those officers of the corporation who are given that character by theCorporation Code or by the corporation's by-laws. There are three specific officerswhom a corporation must have under Section 25 of the Corporation Code. These arethe president, secretary and the treasurer. The number of officers is not limited tothese three. A corporation may have such other officers as may be provided for by itsby-laws like, but not limited to, the vice-president, cashier, auditor or generalmanager. The number of corporate officers is thus limited by law and by thecorporation's by-laws.

Virgilio R. Garcia vs. Eastern Telecommunications Phil., Inc., et al., G.R. Nos. 173115 &173163-64, April 16, 2009

Officer distinguished from employee

Purificacion G. Tabang vs. NLRC, G.R. No. 121143, January 21, 1997


Coverage of a corporate officer

Bienvenido Ongkingco vs. NLRC, G.R. No. 119877, March 31, 1997

A greater number than the majority may be fixed by the articles or by-laws toconstitute a quorum.

The articles of incorporation or by-laws of the corporation may fix a greaternumber than the majority of the number of board members to constitute the quorumnecessary for the valid transaction of business. Any number less than the numberprovided in the articles or by-laws therein cannot constitute a quorum and any acttherein would not bind the corporation; all that the attending directors could do is toadjourn. 05plpecda

Rosita Pea vs. Court of Appeals, G.R. No. 91478, February 7, 1991

Sec. 29 - Vacancies in the Office of Director or Trustee

The underlying policy of the Corporation Code is that the business and affairs of acorporation must be governed by a board of directors whose members have stood forelection, 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 thelegitimacy of their decisions that bind the corporation's stockholders, be assured. Theshareholder vote is critical to the theory that legitimizes the exercise of power by thedirectors or officers over properties that they do not own.

This theory of delegated power of the board of directors similarly explains why,under Section 29 of the Corporation Code, in cases where the vacancy in thecorporation's board of directors is caused not by the expiration of a member's term, thesuccessor "so elected to fill in a vacancy shall be elected only for the unexpired termof the his predecessor in office". The law has authorized the remaining members ofthe board to fill in a vacancy only in specified instances, so as not to retard or impairthe corporation's operations; yet, in recognition of the stockholders' right to elect themembers of the board, it limited the period during which the successor shall serveonly to the "unexpired term of his predecessor in office".



It also bears noting that the vacancy referred to in Section 29 contemplates avacancy occurring within the director's term of office. When a vacancy is created bythe expiration of a term, logically, there is no more unexpired term to speak of. Hence,Section 29 declares that it shall be the corporation's stockholders who shall possessthe authority to fill in a vacancy caused by the expiration of a member's term.


Sec. 31 - Liability of Directors, Trustees or Officers

Doctrine of corporate opportunity

Section 31 lays down the "doctrine of corporate opportunity" and holds personallyliable corporate directors found guilty of gross negligence or bad faith in directing theaffairs of the corporation, which results in damage or injury to the corporation, itsstockholders or members, and other persons.

Manuel Luis S. Sanchez vs. Republic of the Phil., G.R. No. 172885, October 9, 2009

The director's wrongdoing must be a patently unlawful act, i.e. an act declaredunlawful by law.

For a wrongdoing to make a director personally liable for debts of the corporation,the wrongdoing approved or assented to by the director must be a patently unlawfulact. Mere failure to comply with the notice requirement of labor laws on companyclosure or dismissal of employees does not amount to a patently unlawful act. Patentlyunlawful acts are those declared unlawful by law which imposes penalties forcommission of such unlawful acts. There must be a law declaring the act unlawful andpenalizing the act.

Antonio C. Carag vs. NLRC, et al., G.R. No. 147590, April 2, 2007


Directors and officers are not liable for errors in judgment.

If the cause of the losses is merely error in business judgment, not amounting tobad faith or negligence, directors and/or officers are not liable. For them to be heldaccountable, the mismanagement and the resulting losses on account thereof are notthe only matters to be proven; it is likewise necessary to show that the directors and/orofficers acted in bad faith and with malice in doing the assailed acts. Bad faith doesnot simply connote bad judgment or negligence; it imports a dishonest purpose orsome moral obliquity and conscious doing of a wrong, a breach of a known dutythrough some motive or interest or ill-will partaking of the nature of fraud.

Filipinas Port Services, Inc., et al. vs. Victoriano S. Go, et al., G.R. No. 161886, March16, 200

When corporate officers become personally liable

The personal liability of corporate officers validly attaches only when (a) theyassent to a patently unlawful act of the corporation; or (b) they are guilty of bad faithor gross negligence in directing its affairs; or (c) they incur conflict of interest,resulting in damages to the corporation, its stockholders or other persons.

H.L. Carlos Construction, Inc. vs. Marina Properties Corp., et al., G.R. No. 147614,January 29, 2004

Article 212 (e) of the Labor Code, by itself, does not make a corporate officerpersonally liable for the debts of the corporation because Section 31 of theCorporation Code is still the governing law on personal liability of officers for thedebts of the corporation.

Armando David vs. National Federation of Labor Unions, et al., G.R. Nos. 148263 &148271-72, April 21, 2009

PEA-PTGWO, et al. vs. NLRC, et al., G.R. Nos. 170689 & 170705, March 17, 2009

Solidary liability of directors, officers, and employees

The general rule is that obligations incurred by the corporation, acting through itsdirectors, officers, and employees, are its sole liabilities. However, solidary liabilitymay be incurred, but only under the following exceptional circumstances: (1) Whendirectors and trustees or, in appropriate cases, the officers of a corporation: (a) vote


for or assent to patently unlawful acts of the corporation; (b) act in bad faith or withgross negligence in directing the corporate affairs; (c) are guilty of conflict of interestto the prejudice of the corporation, its stockholders or members, and other persons; (2)When a director or officer has consented to the issuance of watered stocks or who,having knowledge thereof, did not forthwith file with the corporate secretary hiswritten objection thereto; (3) When a director, trustee or officer has contractuallyagreed or stipulated to hold himself personally and solidarily liable with thecorporation; or (4) When a director, trustee or officer is made, by specific provision oflaw, personally liable for his corporate action.

Andrea Uy, et al. vs. Arlene Villanueva, et al., G.R. No. 157851, June 29, 2007


Liability of directors

Edsa Shangri-La Hotel and Resort, Inc., et al. vs. BF Corporation, G.R. Nos. 145842 &145873, June 27, 2008

Cebu Country Club, Inc., et al. vs. Ricardo F. Elizagaque, G.R. No. 160273, January 18,2008

National Food Authority vs. Court of Appeals, G.R. No. 96453, August 4, 1999

Elena F. Uichico vs. NLRC, G.R. No. 121434, June 2, 1997

REAHS Corp. vs. NLRC, G.R. No. 117473, April 15, 1997

Aurora Land Projects Corp. vs. NLRC, G.R. No. 114733, January 2, 1997

Benjamin A. Santos vs. National Labor Relations Commission, G.R. No. 101699, March13, 1996

MAM Realty Development Corporation vs. National Labor Relations Commission, G.R.No. 114787, June 2, 1995

Tramat Mercantile, Inc. vs. Court of Appeals, G.R. No. 111008, November 7, 1994

Businessday Information Systems and Services, Inc. vs. NLRC, G.R. No. 103575, April5, 1993

Section 31 makes a director personally liable for corporate debts if he willfully andknowingly votes for or assents to patently unlawful acts of the corporation. Section 31also makes a director personally liable if he is guilty of gross negligence or bad faithin directing the affairs of the corporation. The bad faith or wrongdoing of the director


must be established clearly and convincingly. Bad faith is never presumed.

Seaoil Petroleum Corp. vs. Autocorp Group, et al., G.R. No. 164326, October 17, 2008

A corporation is vested by law with a personality separate and distinct from thepeople comprising it. Ownership by a single or small group of stockholders of nearlyall of the capital stock of the corporation is not by itself a sufficient ground todisregard the separate corporate personality. Thus, obligations incurred by corporateofficers, acting as corporate agents, are direct accountabilities of the corporation theyrepresent.


The general rule is that obligations incurred by the corporation, acting through itsdirectors, officers, and employees, are its sole liabilities. However, solidary liabilitymay be incurred, but only under the following exceptional circumstances:

1. When directors and trustees or, in appropriate cases, the officers of acorporation: (a) vote for or assent to patently unlawful acts of the corporation;(b) act in bad faith or with gross negligence in directing the corporate affairs;(c) are guilty of conflict of interest to the prejudice of the corporation, itsstockholders or members, and other persons;

2. When a director or officer has consented to the issuance of watered stocks orwho, having knowledge thereof, did not forthwith file with the corporatesecretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated tohold himself personally and solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law,personally liable for his corporate action.


To hold a director or officer personally liable for corporate obligations, tworequisites must concur: (1) complainant must allege in the complaint that the directoror officer assented to patently unlawful acts of the corporation, or that the officer wasguilty of gross negligence or bad faith; and (2) complainant must clearly andconvincingly prove such unlawful acts, negligence or bad faith.

Irene Martel Francisco vs. Numeriano Mallen, Jr., G.R. No. 173169, September 22,


2010

Sec. 32 - Dealings of Directors, Trustees or Officers with the Corporation

Ana Maria A. Koruga vs. Teodoro O. Arcenas, G.R. Nos. 168332 and 169053, June 19,2009

Self-dealing director

Prime White Cement Corporation vs. Intermediate Appellate Court, G.R. No. 68555,March 19, 1993

Sec. 33 - Contracts Between Corporations with Interlocking Directors

The mere interlocking of directors and officers does not warrant piercing theseparate corporate personalities of the two corporations. Not only must there be ashowing that there was majority or complete control, but complete domination, notonly of finances but of policy and business practice in respect to the transactionattacked, so that the corporate entity as to this transaction had at the time no separatemind, will or existence of its own.

"G" Holdings, Inc. vs. NAMAWU, et al., G.R. No. 160236, October 16, 2009

Sec. 34 - Disloyalty of a Director

Ana Maria A. Koruga vs. Teodoro O. Arcenas, G.R. Nos. 168332 and 169053, June 19,2009

Doctrine of corporate opportunity

Corporate officers are not permitted to the use their position of trust and confidence


to further their interests. The doctrine of "corporate opportunity" is precisely arecognition by the courts that the fiduciary standards could not be upheld where thefiduciary was acting for two entities with competing interests. This doctrine restsfundamentally of the unfairness, in particular circumstances, of an officer or directortaking advantage of an opportunity for his own personal profit when the interest of thecorporation justly calls for protection.

John Gokongwei, Jr. vs. Securities and Exchange Commission, G.R. No. L-45911, April11, 1979

Corporation Code cured the lapse under Corporation Law involving directors'disloyalty to corporation.

True, at that time, the Corporation Law did not prohibit a director or any otherperson occupying a fiduciary position in the corporate hierarchy from engaging in aventure which competed with that of the corporation. But as a lawyer, privaterespondent should have known that while some acts may appear to be permittedthrough sheer lack of statutory prohibition, these acts are nevertheless circumscribedupon ethical and moral considerations. And had he turned to American jurisprudencewhich then, as now, wielded a persuasive influence on our law on corporations, hewould have known that it was unfair for him or for Porter, acting as fiduciary, to takeadvantage of an opportunity when the interest of the corporation justly calls forprotection. Parenthetically, this lapse in the old Corporation Law is now cured bysections 31 and 34 of the Corporation Code.

Erlinda L. Ponce vs. Valentino L. Legaspi and Court of Appeals, G.R. No. 79184, May 6,1992

In case of conflict of interests, a director cannot sacrifice the corporation to hisown advantage.

A director of a corporation holds a position of trust and as such, he owes a duty ofloyalty to his corporation. In case his interests conflict with those of the corporation,he cannot sacrifice the latter to his own advantage and benefit. As corporatemanagers, directors are committed to seek the maximum amount of profits for thecorporation. This trust relationship "is not a matter of statutory or technical law. Itsprings from the fact that directors have the control and guidance of corporate affairsand property and hence of the property interests of the stockholders."

Prime White Cement Corp. vs. Intermediate Appellate Court, G.R. No. 68555, March


19, 1993

Sec. 35 - Executive Committee

Under 35 of the Corporation Code of the Philippines, authority over corporatefunds is exercised by the Board of Directors who, in the absence of an appropriatedelegation of authority, are the only ones who can act for and in behalf of thecorporation.

People's Broadcasting (Bombo Radyo Phils., Inc.) vs. Secretary of the DOLE, et al.,G.R. No. 179652, May 8, 2009

Sec. 36 - Corporate Powers and Capacity

Sec. 36 (1) - Derivative suits

A derivative action is a suit by a shareholder to enforce a corporate cause of action.Under the Corporation Code, where a corporation is an injured party, its power to sueis lodged with its board of directors or trustees. But an individual stockholder may bepermitted to institute a derivative suit on behalf of the corporation in order to protector vindicate corporate rights whenever the officials of the corporation refuse to sue, orare the ones to be sued, or hold control of the corporation. In such actions, thecorporation is the real party-in-interest while the suing stockholder, on behalf of thecorporation, is only a nominal party.

Hi-Yield Realty, Inc. vs. Court of Appeals, et al., G.R. No. 168863, June 23, 2009

Requisites of a derivative suit

The following are the requisites before a derivative suit can be filed by astockholder:

a) the party bringing suit should be a shareholder as of the time of the


act or transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made ademand on the board of directors for the appropriate relief but the latter hasfailed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, thewrongdoing or harm having been, or being caused to the corporation and notto the particular stockholder bringing the suit.

Filipinas Port Services, Inc., et al. vs. Victoriano S. Go, et al., G.R. No. 161886, March16, 2007

Derivative suit distinguished from individual and representative or class suits.

A derivative suit must be differentiated from individual and representative or classsuits, thus: suits by stockholders or members of a corporation based on wrongful orfraudulent acts of directors or other persons may be classified into individual suits,class suits, and derivative suits. Where a stockholder or member is denied the right ofinspection, his suit would be individual because the wrong is done to him personallyand not to the other stockholders or the corporation. Where the wrong is done to agroup of stockholders, as where preferred stockholders' rights are violated, a class orrepresentative suit will be proper for the protection of all stockholders belonging tothe same group. But where the acts complained of constitute a wrong to thecorporation itself, the cause of action belongs to the corporation and not to theindividual stockholder or member. Although in most every case of wrong to thecorporation, each stockholder is necessarily affected because the value of his interesttherein would be impaired, this fact of itself is not sufficient to give him an individualcause of action since the corporation is a person distinct and separate from him, andcan and should itself sue the wrongdoer. Otherwise, not only would the theory ofseparate entity be violated, but there would be multiplicity of suits as well as aviolation of the priority rights of creditors. Furthermore, there is the difficulty ofdetermining the amount of damages that should be paid to each individualstockholder.


Basis of stockholder's right to institute a derivative suit.

A stockholder's right to institute a derivative suit is not based on any express


provision of the Corporation Code, or even the Securities Regulation Code, but isimpliedly recognized when the said laws make corporate directors or officers liablefor damages suffered by the corporation and its stockholders for violation of theirfiduciary duties. In effect, the suit is an action for specific performance of anobligation, owed by the corporation to the stockholders, to assist its rights of actionwhen the corporation has been put in default by the wrongful refusal of the directorsor management to adopt suitable measures for its protection. The basis of astockholder's suit is always one of equity. However, it cannot prosper without firstcomplying with the legal requisites for its institution.


Requirements for filing a derivative suit.

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-CorporateControversies (IRPICC) lays down the following requirements which a stockholdermust comply with in filing a derivative suit: "A stockholder or member may bring anaction in the name of a corporation or association, as the case may be, provided, that:(1) He was a stockholder or member at the time the acts or transactions subject of theaction occurred and at the time the action was filed; (2) he exerted all reasonableefforts, and alleges the same with particularity in the complaint, to exhaust allremedies available under the articles of incorporation, by-laws, laws or rulesgoverning the corporation or partnership to obtain the relief he desires; (3) Noappraisal rights are available for the act or acts complained of; and (4) The suit is nota nuisance or harassment suit.


Sec. 36 (7) - A corporation may sell or convey its real properties.

The property of a corporation, however, is not the property of the stockholders ormembers, and as such, may not be sold without express authority from the board ofdirectors. Physical acts, like the offering of the properties of the corporation for sale,or the acceptance of a counter-offer of prospective buyers of such properties and theexecution of the deed of sale covering such property, can be performed by thecorporation only by officers or agents duly authorized for the purpose by corporateby-laws or by specific acts of the board of directors. Absent such validdelegation/authorization, the rule is that the declarations of an individual director


relating to the affairs of the corporation, but not in the course of, or connected with,the performance of authorized duties of such director, are not binding on thecorporation.

Eduardo V. Lintonjua Jr., et al. vs. Eternit Corp., et al., G.R. No. 144805, June 8, 2006

Under these provisions, the power to purchase real property is vested in theboard of directors or trustees. While a corporation may appoint agents to negotiatefor the purchase of real property needed by the corporation, the final say will have tobe with the board, whose approval will finalize the transaction. A corporation canonly exercise its powers and transact its business through its board of directors andthrough its officers and agents when authorized by a board resolution or its by-laws.

Riosa v. Tabaco La Suerte Corp., G.R. No. 203786, October 23, 2013, citing SpousesFirme v. Bukal Enterprises and Development Corp., 460 Phil. 321 (2003)

Sec. 37 - Power to Extend or Shorten Corporate Term

Extension of Corporate term

Alhambra Cigar & Cigarette Manufacturing Co., Inc. vs. Securities & ExchangeCommission, G.R. No. L-23606, July 29, 1968

Sec. 38 - Power to Increase or Decrease Capital Stock; Incur, Create orIncrease Bonded Indebtedness

Requirements of Sec. 38 not complied with

MSCI-NACUSIP vs. NWPC, G.R. No. 125198, March 3, 1997

To validly increase its authorized capital stock, corporation must issue at least25% of such stock.


The corporation must issue at least twenty-five percent (25%) of the newly orcontemporaneously authorized capital stock in the course of complying with therequirements of the Corporation Code for increasing its authorized capital stock.

Nestle Philippines, Inc. vs. CA and SEC, G.R. No. 86738, November 13, 1991

Sec. 39 - Power to Deny Pre-emptive Right

Pre-emptive right

Datu Tagoranao Benito vs. Securities and Exchange Commission, G.R. No. L-56655,July 25, 1983

Sec. 40 - Sale or Other Disposition of Assets

Sale of assets

Islamic Directorate of the Phils. vs. Court of Appeals, G.R. No. 117897, May 14, 1997

Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

While the Corporation Code allows the transfer of all or substantially all theproperties and assets of a corporation, the transfer should not prejudice the creditorsof the assignor. The only way the transfer can proceed without prejudice to thecreditors is to hold the assignee liable for the obligations of the assignor. Theacquisition by the assignee of all or substantially all of the assets of the assignornecessarily includes the assumption of the assignor's liabilities, unless the creditorswho did not consent to the transfer choose to rescind the transfer on the ground offraud. To allow an assignor to transfer all its business, properties and assets withoutthe consent of its creditors and without requiring the assignee to assume the assignor'sobligations will defraud the creditors. The assignment will place the assignor's assetsbeyond the reach of its creditors.


Strategic Alliance Development Corp. vs. Radstock Securities Limited, et al., G.R. Nos.178158 & 180428, December 4, 2009

Sec. 41 - Power to Acquire Own Shares

The requirement of unrestricted retained earnings to cover the shares is based onthe trust fund doctrine which means that the capital stock, property and other assets ofa corporation are regarded as equity in trust for the payment of corporate creditors.The reason is that creditors of a corporation are preferred over the stockholders in thedistribution of corporate assets. There can be no distribution of assets among thestockholders without first paying corporate creditors. Hence, any disposition ofcorporate funds to the prejudice of creditors is null and void.

Boman Environmental Development Corporation vs. Court of Appeals, G.R. No. 77860,November 22, 1988

Sec. 42 - Power to Invest Corporate Funds in Another Corporation orBusiness or for Any Other Purpose

Ramon De La Rama vs. Ma-Ao Sugar Central Co., Inc., G.R. Nos. L-17504 andL-17506, February 28, 1969

Sec. 43 - Power to Declare Dividends

Trust fund doctrine

It is established doctrine that subscriptions to the capital of a corporation constitutea fund to which creditors have a right to look for satisfaction of their claims and thatthe assignee in insolvency can maintain an action upon any unpaid stock subscriptionin order to realized assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil.,


802.) A corporation has no power to release an original subscriber to its capital stockfrom the obligation of paying for his shares, without a valuable consideration for suchrelease; and as against creditors a reduction of the capital stock can take place only inthe manner and under the conditions prescribed by the statute or the charter or thearticles of incorporation. Moreover, strict compliance with the statutory regulations isnecessary (14 C. J., 198, 620).

Philippine Trust Co. vs. Marciano Rivera, G.R. No. 19761, January 29, 1923

Sec. 45 - Ultra Vires Acts of Corporations

Ultra vires defined

Ultra vires

Ultra vires defined

In legal parlance, "ultra vires" act refers to one which is not within the corporatepowers conferred by the Corporation Code or articles of incorporation or notnecessary or incidental in the exercise of the powers so conferred.

Lopez Realty, Inc. vs. Florentina Fontecha, G.R. No. 76801, August 11, 1995

A distinction should be made

Commercial Law - Corporation Code (Lex 2014)

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